Adjusting Entries for Asset Account Types
Adjusting entries for asset accounts include account receivable, cash, fixed asset, office supply and prepaid expenses, so we will discuss these accounts as follows.
1. Accounts Receivable/Trade Receivable
Accrual Basis of Accounting:
Under the accrual basis of accounting, the balance sheet must report all the amounts the company has an absolute right to receive economic benefit or cash, not just the amounts that have been billed or paid on a sales invoice. Also, the income statement should report all revenues that have been earned, not just the revenues that have been billed or paid.
For example, it is valued $5,000 of job has been performed and earned as of December 31 but won’t be billed until January 05.
| Adjusting Entry: | |
| Dr. Accounts Receivable | 5,000 |
| Cr. Service Revenue | 5,000 |
Allowance for Doubtful Accounts and Bad debt:
This transaction may occur because some customers’ accounts receivable may not be corrected or bad debt. Allowance for doubtful account is contra account of account receivable.
Let’s assume that a review of the accounts receivable indicates that approximately $1,000 of the receivables will not be collectible, but we do not know specific customers who do not pay debt.
| Adjusting Entry: | |
| Dr. Bad Debt Expense | 1,000 |
| Cr. Allowance for Doubtful Accounts | 1,000 |
When company knows specific customers who do not pay debt or accounts receivable, so we will not use allowance for doubtful account.
Let’s assume that a review of the accounts receivable indicates that accounts receivable, Mr. A, $1,000 will not be collectible.
| Adjusting Entry: | |
| Dr. Bad Debt Expense | 1,000 |
| Cr. Accounts receivable, Mr. A | 1,000 |
2. Cash Account
If the bank statement included a service charge and a check printing charge and they were not entered into the company’s accounting record yet, so those amounts must be recorded into the Cash account. Please see Bank Reconciliation Procedure to adjust cash account at balance sheet.
For example, bank charge in bank statement of $100 is not recorded into the company’s record yet.
| Adjusting entry: | |
| Dr. Bank charge | 100 |
| Cr. Cash at bank | 100 |
3. Fixed Assets
The long-term assets will not last indefinitely, so it will depreciate these assets. Land lasts indefinitely, and then land is no deprecation.
Accumulated depreciation is contra asset account of fixed asset that will use with depreciation expense (expense account).
For example, company bought a car of $20,000 on 1 January with useful life of 5 years.
| 1 January: | |
| Dr. Fixed Asset, Car | $20,000 |
| Cr. Cash | $20,000 |
| Adjusting entry at 31 December : | |
| $20,000/5 = $4,000 | |
| Dr. Depreciation expense -Car | $4,000 |
| Cr. Accumulated Depreciation-Car | $4,000 |
4. Office Supplies
Office supplies are current asset when company buys to use and office supplies will decrease when they have been used during the current accounting period, so the balance in supplies expense will increase during the year as the account is debited. The remaining balance in the office supplies asset at the end of the accounting year will carry over to the next accounting year.
For example, company buys office supplies of $2,000 on 10 November, and at end of year, office supplies remain $500.
| 10 November: | |
| Dr. Office Supplies | $2,000 |
| Cr. Cash | $2,000 |
| Adjusting entry at 31 December : | |
| Dr. Office supplies expense | $1,500 |
| Cr. Office Supplies ($2,000-$500=$1,500) | $1,500 |
5. Prepaid expenses
Prepaid expenses include prepaid insurance, prepaid rent etc. The prepaid expenses have been paid in advance. The decrease in the amount prepaid was the amount being used or expiring during the current accounting period as expense. The remaining balance of prepaid expenses at the end of the accounting year will carry over to the next accounting year.
For example, the prepaid Insurance is $3,000. This amount has been paid in advance by the company on 1 December for insurance coverage that will expire next three months. If review of the payments for insurance shows that $1,000 of the insurance payments ($3,000) will expire after the balance sheet date, then the remaining balance in prepaid Insurance should be $2,000.
| 1 December: | |
| Dr. Prepaid insurance | $3,000 |
| Cr. Cash | $3,000 |
| Adjusting entry at 31 December : | |
| $3,000-$2,000=$1,000 or $3,000/3=$1,000 | |
| Dr. Insurance expense | $1,000 |
| Cr. Prepaid insurance | $1,000 |