Adjusting Entry to record Expenses on Fixed Assets

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Financial Statement Analysis-FIN621

Lesson-7

ACCOUNTING CYCLE/PROCESS

(Continued)

e) Making adjusting entries: These are the Entries required for those transactions which affect

revenues or expenses of more than one accounting period.

Immediate recording of every event in some cases is not practical e.g. raw material,

office supplies, depreciation. Journal entries of such expenses are recorded at the end of accounting

period and are called adjusting entries. Regular journal entries (chronological) are recorded in blue and

adjusting entries are recorded in red.

Adjusting Entry to record Expenses on Fixed Assets

The expenditure use to acquire Fixed Assets is spread over a number of Accounting periods.

The spreading of that expenditure over a number of Accounting periods is called Expense for

that period.

Adjusting entry is also required to record Prepaid Costs.

Expenses are the expired portion of Assets.

Office supplies and Raw material are treated at the end of Accounting period.

The balance of Office supplies & Raw materials is calculated as follows:

Opening balance

Add: Purchases

Less: Closing balance

Prepaid Costs are initially taken as Asset.

Pre paid costs, if consumed entirely during Accounting period are charged directly to expense

Types of Adjusting Entries

Entries to distribute expenditure benefiting more than one accounting period

e.g.

fixed assets, pre-paid costs (if for more than one year). Pre-paid costs are initially taken

as Asset and corresponding portion for an accounting period is reduced there from. In

the case of office supplies, raw materials, the formula is: - opening balance + purchases-

closing balance. This would give the amount/extent of official supplies, raw materials

consumed during the accounting period. It must also be noted that pre paid costs, if

consumed entirely during accounting period, are charged directly to expense.

Fixed assets are those which are used for more than one Accounting period.

ii)

Entries to distribute un-earned revenue i.e. revenue collected in advance (deferred

revenue). It is first recorded as liability, and is gradually reduced in the subsequent

accounting period.

iii)

Entries to record accrued expenses e.g. unpaid salaries, interest payable, to be paid in

the subsequent accounting period.

iv)

Entries to record accrued revenues. These are first recorded as Assets i.e. Revenue

Receivable. For example if rendering of services/delivery of goods is spread over a

number of accounting periods, and billing is to be done at the completion of rendering

services or delivering goods, then corresponding adjusting entry for each accounting

period is made for Revenue Receivable, but not yet earned.

Financial Statement Analysis-FIN621

Khizr Property dealer

Trial Balance

For the month of July 2006

Particulars

Rs.

Cash

22,500

Accounts Receivable

9,500

Land

130,000

Building

36,000

Office Equipment

5,400

Accounts Payable

23,400

Khizr, Capital (owner's equity)

180,000

Total

203,400

Adjusted entries are all related to accrual accounting, as would be seen from the very description of each

adjusting entry given above.

f) Preparing adjusted trial balance:

This is the sixth step in Accounting Cycle. In this, we take into account the adjusting entries made

earlier in step 5 (e).

Adjusting entries are journalized and posted, i.e. recorded in journal and posted in ledger.

Accumulated depreciation would double after second month, in the example of adjusted trial

balance given above. In the above example, estimated life of building is taken as 20 years and that

of office equipment as 10 years, which makes the monthly figure of the use of these assets as

Rs.150 and Rs.45 respectively. Other transactions during August 2006 changed balances of cash,

A/Cs Receivable, A/Cs payable. Reverting to the earlier reference about invisible expenses of

Rs.195, in the Income Statement, these were depreciation expenses of building amounting to Rs.150

and depreciation expenses of office equipment amounting to Rs.45.

The adjusting entries which are recorded in Journal at the end of Accounting period are adjusted in,

Adjusted Trial Balance.

Khizr Property Dealer

Adjusted Trial Balance

August 31,2006

Particulars

Dr.

Cr.

Cash.

16,105

Accounts Receivable.

18,504

Land.

130,000

Building.

36,000

Accumulated depreciation: building.

150

Office equipment.

5,400

Accumulated Dep: office equipment.

Accounts Payable.

23,814

Owner's equity.

180,000

Sales commission earned.

10,640

Financial Statement Analysis-FIN621

Advertising expenses.

645

Salaries expenses.

7,400

Telephone expenses.

400

Depreciation expenses: building.

150

Depreciation expenses: office equipment.

214,649

The above is adjusted trial balance as on August 31, 2006.

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