4.3 Record and Post the Common Types of Adjusting Entries
Recording Adjusting Entries
Adjusting entries are recorded in the same way as regular journal entries, but they are made at the end of the period after all regular transactions are recorded.
Step-by-Step Process
- Identify accounts that need adjustment
- Calculate the adjustment amount
- Determine debit and credit
- Prepare journal entry
- Post to ledger accounts
Comprehensive Example: Complete Adjustment Process
Let's work through a complete example for Marie's restaurant at the end of November 2024.
Unadjusted Trial Balance (Before Adjustments)
Le Petit Bistro
Unadjusted Trial Balance
November 30, 2024
Account Debit Credit
─────────────────────────────────────────────────
510000 Cash €15,000
410000 Accounts Receivable 3,000
321000 Inventory 5,000
460000 Prepaid Insurance 1,200
223000 Equipment 30,000
400000 Accounts Payable €8,000
430000 VAT Payable 500
470000 Unearned Revenue 3,000
101000 Share Capital 20,000
104000 Retained Earnings 5,000
701000 Service Revenue 12,000
620000 Salaries Expense 8,000
612000 Rent Expense 2,400
615000 Utilities Expense 1,500
─────────────────────────────────────────────────
Totals €66,100 €48,500
Note: The trial balance doesn't balance because we haven't made adjustments yet. This is normal—adjustments will balance it.
Information for Adjustments
- Prepaid Insurance: €1,200 paid for 12 months on January 1. €100 per month expires.
- Equipment: Cost €30,000, 5-year useful life, straight-line depreciation. €500 per month.
- Unearned Revenue: €3,000 received for 3 months of catering (November, December, January). €1,000 earned in November.
- Accrued Salaries: Employees worked last week of November (€1,500) but won't be paid until December 5.
- Accrued Interest: €20,000 loan at 6% annual interest. €100 interest accrued for November.
- Supplies on Hand: Inventory shows €5,000, but €1,000 was used during November.
Adjusting Entry 1: Prepaid Insurance
Calculation: €1,200 ÷ 12 months = €100/month Amount used in November: €100
Date: 2024-11-30
613000 Insurance Expense €100
460000 Prepaid Insurance €100
To record insurance expense for November
Adjusting Entry 2: Depreciation
Calculation: €30,000 ÷ 60 months = €500/month Depreciation for November: €500
Date: 2024-11-30
640000 Depreciation Expense €500
241000 Accumulated Depreciation - Equipment €500
To record monthly depreciation on equipment
Adjusting Entry 3: Unearned Revenue
Calculation: €3,000 ÷ 3 months = €1,000/month Revenue earned in November: €1,000
Date: 2024-11-30
470000 Unearned Revenue €1,000
701000 Service Revenue €1,000
To record revenue earned in November
Adjusting Entry 4: Accrued Salaries
Amount: €1,500
Date: 2024-11-30
620000 Salaries Expense €1,500
440000 Salaries Payable €1,500
To record accrued salaries for last week of November
Adjusting Entry 5: Accrued Interest
Calculation: €20,000 × 6% ÷ 12 = €100/month Interest for November: €100
Date: 2024-11-30
660000 Interest Expense €100
450000 Interest Payable €100
To record accrued interest for November
Adjusting Entry 6: Supplies Used
Calculation: €1,000 of supplies used Note: This assumes supplies are tracked separately or part of inventory
Date: 2024-11-30
619000 Supplies Expense €1,000
321000 Inventory (or 300000 Supplies) €1,000
To record supplies used during November
Posting Adjusting Entries to T-Accounts
Let's post these adjusting entries to T-accounts:
Prepaid Insurance
Prepaid Insurance (460000)
─────────────────────────────
Nov 01 Balance €1,200 │
│ Nov 30 Adj1 €100
─────────────────────────────
Balance €1,100
Insurance Expense
Insurance Expense (613000)
─────────────────────────────
Nov 30 Adj1 €100 │
─────────────────────────────
Balance €100
Equipment and Accumulated Depreciation
Equipment (223000)
─────────────────────────────
Nov 01 Balance €30,000 │
─────────────────────────────
Balance €30,000
Accumulated Depreciation - Equipment (241000)
─────────────────────────────
│ Nov 30 Adj2 €500
─────────────────────────────
│ Balance €500
Unearned Revenue
Unearned Revenue (470000)
─────────────────────────────
Nov 30 Adj3 €1,000 │ Nov 01 Balance €3,000
─────────────────────────────
│ Balance €2,000
Service Revenue
Service Revenue (701000)
─────────────────────────────
│ Nov 01-30 Revenue €12,000
│ Nov 30 Adj3 €1,000
─────────────────────────────
│ Balance €13,000
Salaries Expense and Salaries Payable
Salaries Expense (620000)
─────────────────────────────
Nov 01-30 Paid €8,000 │
Nov 30 Adj4 €1,500 │
─────────────────────────────
Balance €9,500
Salaries Payable (440000)
─────────────────────────────
│ Nov 30 Adj4 €1,500
─────────────────────────────
│ Balance €1,500
Interest Expense and Interest Payable
Interest Expense (660000)
─────────────────────────────
Nov 30 Adj5 €100 │
─────────────────────────────
Balance €100
Interest Payable (450000)
─────────────────────────────
│ Nov 30 Adj5 €100
─────────────────────────────
│ Balance €100
Luxembourg Compliance Note
When posting adjusting entries in Luxembourg:
- Use proper PCN account numbers
- Maintain clear audit trail
- Document calculations
- Retain all adjusting entries for 10 years
- Ensure entries are made before filing financial statements
Think It Through
Why is it important to post adjusting entries to T-accounts before preparing the adjusted trial balance? What would happen if adjusting entries were not posted?