Accounting 1: Program #12 – “Adjusting Journal Entries”

Alright greetings, thank you for being here. A couple things real quick before we go over
the homework, to reiterate, I spend more time on those first two chapters than most instructors. We had ten lectures didn't we, and then you
took the test. One thing I wanted to point out is I don't
want you to get used to that time frame. We are not going to have ten more lectures
before your next test, okay. The time period now before your next test
will be not as great as the first go around. Does that make sense? But you know your syllabus dates
what chapters are on what tests. So you can kind of get a feel what the tests
are over. I will let you know chapter four is pretty
short, okay. So the test number two over chapters three
and four will come up a lot quicker than the first one did okay.

Will number two be over; I mean I know they
build on each other, but number two will be specifically on three and four. We will talk more about that later and on
this next test I will give you more of a review sheet. There are some things I will ask, for example
I like to ask what financial accounts are on. I like to ask you how you affect the change
in that account. Like how do you affect accounts payable and
those sorts of things? But it's not going to be totally comprehensive. But you're right it builds on itself so, alright
I want to go over the homework. But before we do that I'm going to go over
a few slides here, just as kind of a refresher of what we talked about last class period. Last class period we began adjusting journal
entries.

So this is going to be more of a difficult
section for some people. This is the great thing about this class,
for you face to facers, for you folks at home if you need to re watch these lectures you
can re watch these lectures. If you think I'm great and entertaining the
first time you should see me the second time. Alright so let's go to the slides right now. We talked about how we do not use the cash
basis of accounting because it's not generally an accepted accounting principal. We use the acrool basis of accounting.

The acrool basis of accounting, things aren't
hinged on when cash comes in or goes out. We recognize revenues when they are earned. When are they earned; when the product or
service has been provided. And we want to recognize expenses when they
are incurred. Okay, we went through some examples; we talked
through the revenue recognition principals, I just went through that. The matching principal states that we should
attempt to match the expenses to the same time period in which they helped create revenue.

We talked about an adjusted journal entry. And it is a type of journal entry that is
adjusted to bring an asset or liability account to its proper amount and to recognize a revenue
or expense. Okay, we talked about AJE's are always made
on the last day of the period. Okay, some companies do statements every moth
and thus they do AJE's at the end of every month. Some companies just do annual statements,
and thus they do AJE's on the last day of the year. The cash account will never be a part of the
adjusting journals.

And then we talked about the five types of
journal entries. One other thing that we talked about when
switching over to the LMO is that every AJE, every AJE will affect revenue or expense, and an asset or a liability. One from this side and one from that side. Remember that? And we talked about how every AJE is either
going to credit a revenue account or its going to debit an expense account. Okay, now id that kind of help you when you
were doing your homework? Okay, I want to go through that homework,
I did not give you any book homework.

Instead I wanted you to work through these
worksheets I gave you, which you folks at home can find on angel under the lessons tab
for the appropriate chapter. So let's take a look at the prepaid assets
AJE worksheet. Let's just look through the first one; the
prepaid insurance account has a 4700 debit balance before adjustments. An examination of an insurance policy shows
that $900 of unexpired insurance is remaining. Okay, now they tell us the beginning balance
and they tell us how much is remaining. We need to figure out how much was used up,
how much of the asset was used up and how much, needs to be recorded.

Thirty eight hundred bucks right? And thus the AJE is there circled in the yellow. Okay, does that make sense? If you put the date you can just put it over
here to the left. Now I want you to contrast that with the next
one I have. Company B and this is totally separate from
company A. company B the prepaid insurance account has a 5890 balance before adjustment.

An examined nation of insurance policy shows
that one thousand forty of insurance have expired. Do you see the different wording there? I'm not telling you the ending balance; I'm
telling you how much is expired. So how much of the asset was used up and how
much is exempt? One thousand forty and that's your JE. Now I'm not trying to trick you, I'm just
saying that in the real world people are going to come at you with questions, with different
wordings right? And I want you to understand the concepts
to deal with that wording.

So we always want to know how much of the
asset is used up. Company C, on September one 2011 we prepaid
twenty four thousand for two years of rent. We debited prepaid rent and credited cash. Now of course that's not an AJE, that's just
a journal entry. Now how much of the asset was used up, now
here we kind of got to figure out this a little bit.

They paid twenty four thousand for two years
of rent right? And how many months is two years? Twenty four months right? So basically what are they paying per month? Okay, so on September first they gave us twenty
four thousand dollars for two years of rent. Which is twenty four times one thousand. At December thirty first of 2011, how many
months have we provided them occupancy? Four right? So four times one thousand that is how we
came up with four thousand. Or there are other ways we could have said
it, you could have said it is twelve thousand dollars a year and we provided occupancy for
one third of a year which is four thousand. I want you to understand how we got that four
thousand. Okay, any questions on that first worksheet? If not lets go to the second worksheet. Which was on office supplies AJE's okay, alright. The office supplies account had a three hundred
debit balance on December thirty first 2010. No office supplies were purchased during the
year. December thirty one of the 2001 account showed
110 of supplies available. How much of the asset is used up and thus
needs to be expensed.

Did you get one ninety? Okay, and if you want you can do a little
T account. We had three hundred to begin with, we had
purchasing so I put three hundred there and then they gave us the ending amount of 110
right? So how much was used up? Said another way
you could say a restaurant had three hundred bottles of beer in its refrigerator. At the end of the night they counted only
a hundred and ten bottles remaining so how many bottles of beer did they sell during
that day? One hundred and ninety right? So we want to know how much is used up as
an expense, and this is the journal entry. Debit supplies expense, credit office supplies. Make sense? Same situation for company E
and then we did an inventory account and found six fifty remaining. We used up twenty two fifty. Last situation on this worksheet. We started with a four thousand dollar balance,
during 2011 they purchased office supplies for ninety four hundred.

And that was added to the office supplied
account thus we used up then thousand forty and thus that is our journal entry or adjusting
journal entry more specifically. Cool, questions on that? Alright lets go to the
depreciation adjusting journal entries worksheet. We started talking about depreciation last
time. Ok the first one is pretty easy isn't it? The company needs to record 13,500 of depreciation
expense for the year. What amount needs to be recorded as depreciation
expense for the year; 13,500. Now the journal entry is we debit depreciation
expense and we credit this new account called accumulated depreciation. I remember as a student I learned this word
DEAD right, dead right, I still remember that twenty years later. What type of account is accumulated appreciation? What type of balance does it have; credit
balance. What type of financial statement does it go
on? Where do assets go? Balance sheet contrasts that should go on
the balance sheet too. Now this is where you might want to use your
flash card, if you use your flash cards. How many people have not yet used their flash
cards? Don't raise your hands, alright I'll be angry
at you.

If you haven't made them by now you'll have
to. But for those of you who have your flash cards,
this is a good chance to add one. Okay, because I like to ask that stuff on
the test. Alright um let's go to the next one. The company has one fixed asset, they purchased
it on January one 2011. The asset had a cost of 44,000 and an estimated
life of five years. The salvage value is estimated to be zero
at the end of the five years. So we figure out how much depreciation by
taking the cost minus the residual or salvage value of zero. Divided by the estimated life of five years,
that's 8800 dollars a year right? And I told you at the top here that they only
do AJE's annually so our journal entry is this right here. Last the company has only one fixed asset,
they purchased on January the second of 2011. The asset had a cost of thirty two thousand
and an estimated life of seven years, the salvage value is estimated to be 4000 at the
end of the seven years.

Does it matter that we purchased it on January
the second; no. just round, round to how many months okay. So the cost was thirty two thousand and the
salvage value was four thousand, the estimated life is seven years. Four thousand per year, are you with me? Okay, any questions? Now let me ask you a question. On that last AJE, let's go back to it. This is the journal entry we made on December
thirty first 2011. Are we saying that its market value has declined
by four thousand in that first year? No we are not! Once again to reiterate, depreciation entries
are not made to try to write things down to reflect their market value. Okay, that is not why we do depreciation. We do depreciation to spread the expense over
a reasonable amount of time. Okay, are you with me? Now let's talk about why we use a contract
account instead of crediting or decreasing equipment account or whatever. Alright I want you to understand it's a little
different with fixed assets and long term assets.

Okay, let's take a look at the second depreciation
entry that we made on that, company H. okay, now they had one fixed asset, they purchased
it in January one of 201, it had a cost of forty four thousand, and estimated life of
five years, a zero salvage value was estimated. So we make this adjusting journal entry right? Now we are going to make that at December
thirty first 2012, December thirty first 2013, December thirty first 2014, and 2015. Would you agree? And the way that that is going to look on
the balance sheet, lets remind ourselves. Let's do a partial balance sheet at twelve
thirty one, eleven. Cool? You are going to have um, let's just say its
equipment. Equipment and its cost is what? Forty four thousand? And then we are going to say less that contra
asset of accumulated depreciation, which at this point is eighty eight hundred. And that gives you what we call the book value. Forty four thousand minus eighty eight hundred
is, I think it is thirty five two. Somebody verify that please. Is it thirty five two hundred, okay now do
you see where we are going to make this entry again at twelve thirty one twelve and this
is now going to be two times eighty eight hundred.

Which is seventeen six I think, right? Pretty soon do you see at twelve thirty one
fifteen, that will be forty four thousand. Do you see that? What will that look like on the balance sheet? At twelve thirty one of fifteen. Well it is going to be equipment of forty
four thousand, thus accumulated depreciation of forty four thousand. And that is going to be zero isn't it? And that is the way it will look on the balance
sheet for the company. Equipment of forty four thousand plus accumulated
depreciation of forty four thousand equals the book value of zero. Now here is where we use a contra asset.

If we decreased the asset itself and did not
use a contra account, then on the BS or balance sheet it would just say this equipment, zero. Don't you think that this, knowing that this
is going to show up, isn't that a lot more informative for the reader? Do you see what I am saying? Okay, this is the library building that you
guys are sitting in, right? This is one of the oldest buildings on campus,
it is fully depreciated. Okay, it is fully depreciated. That means it is probably on our books at
like, I don't know how much it costs to make.

Let's say fifteen million, accumulated depreciation,
depreciated value, zero. Does that mean that this building is worth
zero? Could you go offer the board of trustees ten
buck and they would jump at the offer? No! We are not trying to – we don't depreciate
to market value, because everybody's view of what market value is, is totally different. Are you with me? It is totally different. Because fixed assets are a little different
than prepaid assets and office supplies. Okay, because we didn't use contra assets
there did we? When you have an insurance policy that goes
for six months, at the very end what is that insurance policy worth? It is worth zero, it is worth nothing.

Right, it's kind of like your best buy card. If you have a five hundred dollar gift card,
when you have used up that five hundred what is that card worth? Nothing and you throw it away, it is worthless. Same thing, if you do office supplies then
they are all gone. They are all gone, it is zero. However if I have a vehicle, going back to
the LMO, if I have a vehicle that I paid forty four thousand dollars on January one of 2011
and December thirty first of 2015 rolls around, it is fully depreciated. Is that vehicle worth nothing? No, now we are not trying to reflect market
value on the balance sheet. But this lets the reader know we have a piece
of equipment that we paid forty four thousand for, it's fully depreciated. We still have that piece of equipment. Does that make sense guys? It helps the reader know that we have a piece
of equipment. Its fully depreciated, the book value is zero
but we do have that equipment.

And we will keep using it, I drove a car to
work today that is 19 years old, older than some of you. And if I was a business, that thing has been
fully depreciated and has a book value of zero but does it still have value to Dave
Krug? Yes it is a sweet ride baby. And I drive that to work and if something
happened to it, I would have to buy a new car, I would be bummed right? So that is why we use a contra asset account. Do you understand? And the lay people who don't understand this
aren't luck enough to take accounting classes. Balance sheets are not meant to reflect assets
at market value because that is just simply too subjective. Are you with me? Okay good. Alright, okay we have gone through all of
the homework have we not? Any questions on that? Okay, there are five types of adjusting journal
entries going back to the slides.

And we have gone through category one and
category two right? Categories three four and five we go a lot
quicker, okay. So let's talk about those last three categories,
alright. We went through this we went through that,
went through that little review here, okay. Now let's go to this one. Adjusting for unearned revenue, and we have
kind of already done this analysis. This is discussed when we sometimes receive
money in advance regarding the product or services. And we have to record it as unearned revenue,
and what type of account is unearned revenue? It's a liability, what happens when we provide
those services? We earn that revenue, we decrease that liability. Let's look at an example, on October one,
2011 ox university sold one thousand season tickets to its twenty home basketball games
for one hundred dollars each. Now they made the following entry when they
recorded this, this is not the AJE, we know that because it's not the last day of the
period and there is cash involved.

But when they got that, one hundred dollars
time one thousand. They got cash at one hundred thousand and
the credited a liability, are you with me? Now it is the year end, and they have played
eight of those twenty regular home games. So what percentage of that money have they
earned? What is eight divided by twenty? Its forty percent isn't it? Isn't eight divided by twenty forty percent? Yeah it is, so what is forty percent of one
hundred thousand, its forty thousand. They can thus reduce or debit that unearned
revenue by forty thousand and book it as revenue.

Do you see how at this point in your learning
how if you don't know your normal account balances, you have got a rough road don't
you? Because let's look at that journal entry again,
what I'm basically asking is how do we decrease unearned revenue? We debit it, how do we increase basketball
revenue? We credit it. Right? Do you see how that is forty thousand though? Because we have satisfied eight over twenty
or forty percent of that one hundred thousand dollars.

Okay, questions? Let's go to our next category. This is accrued expenses. These last two categories the categories occurs
after we make the adjusting journal entries. This is costs that are incurred in the period
but we haven't played them, let's look at an example, its best to illustrate with an
example. Let's say Barton Inc. Company pays its employees every Friday. Now a year in, twelve thirty one eleven falls
on a Wednesday. As of twelve thirty one eleven the employees
have earned salaries of two fifty for Monday through Wednesday of that week. Okay, now we are not going to pay him until
Friday January two of 2012, we are not paying them early, but at twelve thirty one eleven
do we owe them some money? Yes we do, and do you see how for a company
like sprint this could be a big, big amount of money.

So even though we do not have to pay them
on twelve thirty one eleven and even though we are not going to pay them on twelve thirty
one eleven, we need to show and adjusting journal entry so that we properly get that
liability of forty seven two fifty on our books. And we need to book that expense in the proper
period. If we don't make that adjusting journal entry
then our liabilities are understated and our expenses are understated. Thus our net income is overstated. This is a pretty big chunk of money isn't
it? This is one of the main adjusting journal
entries that when I go in with a client I go in and I make sure they are making. Or else their financial statements are distorted. So at twelve forty seven two fifty this company
owes so even though they don't have to pay it they have to make that reflected that liability
in the books and they have to make that an expense.

They have to match it to 2011, make sense? Sometimes you'll see this with interest too. You'll say a company owes interest at this
amount at year end. And so you would debit interest expense and
interest amount even though they don't have to pay it you would have to put the liability
under expenses, cool? Last category, this is accrued revenue, this
is the opposite. This is when we earn revenue; we are not going
to receive it early. But we need to at least book it, let's look
at an example. Smith and jones CPA's had thirty one thousand
of work completed at December thirty one 2011.

Now we haven't built them but we need to make
an adjusting journal entry necessary on December thirty one 2011 to reflect that we have an
asset of accounts receivable on the books. Okay and we have revenue that we want to match
to 2011. That's when we earned it. So this is the journal entry, this is the
adjusting journal entry that we would make, does that make sense? Okay, that's the five categories. And what I want to do now is I want to spend
time, switching over to the LMO and I'm going to give you three new worksheets.

Okay, one is for unearned revenue, one is
for accrued expense, and one is for accrued revenues. Okay, for you folks at home again these are
on your lessons tab. On your hand outs okay. So we have three worksheets, again we have
three key questions and three AJE's that let you analyze each situation separately. But we are going to spend some time working
on those in class right now. Okay, so let's roll the music. Ill hand those out and let's go ahead and
work on those together, you folks at home do the same okay.

Okay folks we are going to come up here before
class is over, I don't expect all of you to be done but what we are going to do is this,
and I'm going to say this for the face to facers and the folks at home. I'm going to show the answers real quick,
you are probably not done, so what I want you to do is have a separate sheet of paper
and jot these down real quick. Okay, no go ahead and show the LMO but I'm
going to keep talking. Okay, go ahead and show the LMO but I'm going
to keep talking. Okay, now don't just copy these down on the
worksheet itself. I want you guys to work through these and
do them. But I want you to have the answers so you
can check them when you are done okay. So just write these down on a separate sheet
of paper and then I want you to complete these three worksheets as part of your homework,
not all of your homework but part of your homework.

Okay, so those are the answers to the first
worksheet. Now we will walk through thee in more depth. Next class period, alright. Let me show you the answers to the next one. Right now just copy the answers down. And I pray I haven't made a mistake because
I just did it real quick myself. Alright, we will talk through the how's and
whys and all of that at the beginning of the next class period. But I want you to have the answers. Okay, so write quickly. Okay, the last one, the answers to the last
one the accrued revenues. That's the answers to the third worksheet. So I hope you wrote those on a separate sheet
of paper. And we will go through those next time, but
let me write down your homework assignment. Okay, let me write down your complete homework
assignment.

I hope you guys are doing your homework, you
guys will not and cannot learn this stuff just by watching me do it. You guys have got to learn it, you guys have
got to learn it by doing it. Okay, so let me tell you your complete homework. Finish the three handouts that I gave you. Okay, then I also want you to do quick study
three point two and three point three. I want you to do exercise 3.5 and then I want
you to do exercise 3.4 but I only want you to do C. okay, exercise three four, C only
okay. So that is your entire homework, finish your
hand outs, do quick study three two and three, three.

Do exercise three five and then do exercise
3.4 C and do them in that order, that's why I give you them in that order okay. Alright folks you guys are doing good, let's
see you later. Bye bye..

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