Summary
Highlights
The video introduces adjusting entries as journal entries made at the end of an accounting period to allocate income and expenditures to the correct period. It then discusses three types of accounting periods: calendar year (January 1 to December 31), fiscal year (any 12-month period not ending in December), and natural business year (ending during the 'slack season').
The seven types of adjusting entries are listed: prepaid expense, unearned revenue, accrued revenue, accrued expense, depreciation expense, and doubtful accounts/bad debts. The presenter emphasizes the importance of understanding account types, debits, and credits before proceeding with examples.
Prepaid expenses are assets representing expenses paid in advance. An example is given for Josie Company purchasing one-year warehouse insurance for 36,000 on June 1, 2019. The adjustment on December 31, 2019, involves calculating the expired portion (7 months out of 12) to be recognized as an expense. The computation is 36,000 * (7/12) = 21,000. The adjusting entry debits Insurance Expense and credits Prepaid Insurance for 21,000.
Another example for prepaid expenses involves JJ Company signing a one-year warehouse lease for 300,000 on March 1, 2019. To adjust on December 31, 2019, the expired rent (10 months out of 12) is calculated: 300,000 * (10/12) = 250,000. The adjusting entry debits Rent Expense and credits Prepaid Rent for 250,000.
Unearned revenue is a liability where a company receives payment before providing goods or services. An example shows Josie Company receiving an advance payment of 6,000 for four months of consultancy services on October 1, 2019. By December 31, three months of service have been rendered. The earned portion is calculated as 6,000 * (3/4) = 4,500. The adjusting entry debits Unearned Consultancy Revenue and credits Consultancy Revenue for 4,500.
A final example for unearned revenue involves LOL Company collecting 120,000 for a six-month rental fee on December 1, 2018. By December 31, one month of the rental period passed. The earned portion is calculated as 120,000 * (1/6) = 20,000. The adjusting entry debits Unearned Rent Revenue and credits Rent Revenue for 20,000. This concludes the first part of adjusting entries.