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BUS 251Ch 3

Adjusting entries, one at a time.

Ten short steps: why accrual accounting needs adjustments, the four kinds, each entry with its T-accounts, what goes wrong if you forget one, and the adjusted trial balance. Then practise with worked solutions.

Part 1 · Why we adjust · Step 1 of 10

Accrual accounting puts income in the month it is earned

Net income by month, cash basis
$0
Jan
−$1,200
Feb
$0
Mar
$0
Apr
$9,000
May
Work done (revenue earned)
·
3,000
3,000
3,000
·
Cash from the customer
·
·
·
·
9,000
Cash paid for the licence
·
1,200
·
·
·
A studio does a $9,000 design job in February, March and April, using a $1,200 software licence it paid for on February 1. The cash basis counts income when cash moves. The accrual basis, which IFRS and ASPE require, records revenue when it is earned and expenses when they are incurred. Adjusting entries are how the books get from cash timing to accrual timing at the end of each period.
Try it: Switch between the two bases, then change when the customer pays. On the accrual basis the bars never move: the work did not change.
Basis
The customer pays
Total, Jan–May
$7,800
February
−$1,200
April
$0
Cash basis: February shows a $1,200 loss and March and April show nothing, although the team worked all three months. May gets all $9,000.
Accrual basis: revenue when earned, expenses when incurred
Each expense is matched with the revenue it helped to earn, in the same period.
Cash basis: revenue when cash comes in, expenses when cash goes out
Simple, but profit jumps around with payment dates. Not allowed for IFRS or ASPE statements.
Same total either way: $9,000 − $1,200 = $7,800
Only the timing differs between the two bases.
Practise

Practise like it is the midterm

Answer first, then check. Fresh numbers writes a new question of the same type every time, so you can drill one kind of adjustment until it is routine.

Score
0 / 0
Cash vs accrualQuestion 1 of 19
On November 20, a landscaping company receives $6,000 for a job it will do in January. On the accrual basis, when is the $6,000 recorded as revenue?

Midterm coming up and journal entries still feel shaky?

Bring your practice problems. We work through them together until every type feels routine.

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