Video Transcripts: Adjustments for Deferred Items

Hello and welcome back now we're going to illustrate adjustments for deferred  items. Here, we will discuss the two types of adjustments for deferred items,  assets, expense adjustments and liability and revenue adjustments in the  expense slash expense group, you learn how to prepare adjusting entries for  prepared prepaid expenses and depreciation. In a liability revenue group, you  learn how to prepare adjusting entries for unearned revenues. Microtrain  company must make several asset expense adjustments for the prepaid  expenses. A prepaid expense is an expense of waiting assignment to expense  such as prepaid insurance, prepaid rent and supplies on hand. Note that the  nature of these three adjustments is the same when a company pays an  insurance policy premium in advance, the purchase creates the asset prepaid  insurance. This advance payment is an asset because the company will receive  insurance coverage in the future with the passage of time. However, the asset  gradually expires. The portion that has expired becomes an expense. Microtrain  company purchased for cash and asset policy on its trucks for the period  December 1, 2010 through November 30, 2011 the journal entry made on  December one to record the purchase of the entry was, as you can see, on  December one, prepaid insurance, which is your asset for $2,400 and your  cash, which is a credit for $2,400 and that's for a one year period. The two  accounts relating to insurance are prepaid insurance and insurance expense.  After posting this entry, the prepaid insurance account has a 2400 debit balance  on December one. The insurance expense account has a zero balance on  December one because no time has elapsed to use any of the policy benefit.  And here you can see so in both accounts, prepaid insurance is at 24 and  insurance expense at zero. By December 31 2010 one month of the year  covered by the policy has expired. Therefore, part of the service potential or  benefit obtained from the asset has expired. The asset now provides less future  services or benefits than when the company acquired it. We recognize this  reduction by treating the cost of the services received from the asset as an  expense for the Microtrain company. Example, the service received was one  month of insurance coverage, since the policy provides the same service for  every month of its one year life. We assign an equal amount, which is $200 of  cost to each month. Thus Microtrain charges 1/12 of the annual premium to  interest expense on December 31 2010 the adjusting journal entry is okay. So  what, in essence, what you're going to do, you're going, you're going to, again,  divide it into equal payments. 200 is equal payment for the cost. So for this first  month, insurance expense is $200 and going to take away prepaid insurance of  $200 so you're just moving them around. You're taking the part that was used up and putting it into the expense account where it belongs now, okay, and then  your your entry to description is to record insurance expense for December.  After posting the two journal entries, the accounts in the T account format  appear as follows, okay, so you have your two accounts. So you have your 

prepaid insurance account and your insurance expense account. Okay, it's just  going to show you you purchased on December 1, the insurance for 2400 and  now you've decreased that prepaid amount by 200 and you've increased the  expense by 200 in practice, accountants do not use T accounts. Instead, they  use three column ledger accounts that have the advantage of showing a  balance after each transaction, after posting the preceding two entries, the three column ledger account will appear as follows. Before I show you that, though, in  reality, software packages are used. We use that packet work, okay? So  therefore, when we record an entry, it's all done behind the scenes. Okay, so  you really are not posting manually to the journal and manually to the the ledger. It's all being done for you. Time, it seems, in the software package. So here you  can see you have your prepaid insurance, and it's just you have your date, your  explanation, and whether it's a debit or credit, and what balance it holds before  this adjusting entry was made, the entire 2000 $100 insurance payment made  on December 1 was a prepaid expense for 12 months of protection. So on  December 31 one month of protection had passed, and an adjusting entry  transferred 200 of the $2,400 to insurance expense on the income statement for the year ended December 31 2010 Microtrain reports one month of insurance  expense to $200 as one of the expenses it incurred in generating that year's  revenue. It reports the remaining amount of the prepaid expense, $2,200 as an  asset on the balance sheet, again, keeping everything in balance, the $2,200  prepaid expense result represents 11 months of insurance protection that  remains As a future benefit. Prepaid rent is another example of the gradual  consumption of a previously recorded asset. Assume a company pays rent in  advance to cover more than one accounting period on the date it pays the rent,  the company debits the free payment to the prepaid rent account. The company  has not yet received benefits resulting from this expenditure. Thus, the  expenditure creates an asset. We measure an expense similarly to insurance  expense. Generally, the rental contract specifies the amount of rent per unit of  time. If the prepayment covers a three month rental, we charge 1/3 of the rental  to each month. Notice that the amount charged is the same each month, even  though some months have more days than the other months. For example,  Microtrain company paid $1,200 rent in advance on December 28 to cover a  three month period beginning on that date, the entry for that would be prepaid  rent of a debit of $1,200 and cash as a credit for to $1,200 the two accounts  relating to rent are prepaid rent and rent expense. After this entry is posted, the  prepaid rent account has a $1,200 balance, and the rent expense has a zero  balance because no part of the rent period has yet elapsed. On December 31  Microtrain must prepare an adjusting entry since 1/3 of the period covered by  the prepaid rent has elapsed. It charges 1/3 of the $1,200 of prepaid rent to  expenses. So you can see 1/3 of 1200 is $400 so we're going to record rent  expense for December, and we're going to adjust it from the prepaid rent for a 

credit of $400 after posting this adjusting entry, the T accounts appears as  follows. So as you can see, in the prepaid rent account, it started with $1,200  and we're going to credit 400 leaving 80 an $800 balance as a debit balance.  And then we're going to debit rent expense with a ending balance of $400 in the  rent expense. The $400 Rent Expense appears in the income statement for the  year ended December 3120, 10 Microtrain reports the remaining $800 of  prepaid rent as an asset on a balance sheet. Thus their adjusting entries have  accomplished their purpose of maintaining the accuracy of the financial  statements. Supplies on hand almost every business uses supplies in its  operation. It may classify supplies simply as supplies, or more specifically as  office supplies, which include paper stationary floppy disk, pencils, selling  supplies, gum, tape, string, paper, bags, whatever you would use in shipping out your supplies or training supplies, transparency, training, doc manuals.  Frequently, companies buy supplies in bulk. These supplies are an asset until  the company uses them. This asset may be called supplies on hand or. Supplies inventory, even though these terms indicate a prepaid expense, the firm does  not use prepaid in the Assets title. So for instance, if you on December 4,  Microtrain purchases supplies for $1,400 and it will record as a debit supplies on hand. Again, like I said, the prepaid is not in that title. It's known that this is a  bulk supply of supplies, okay? And then the cash is credited for $1,400  Microtrain's two accounts relating to supplies are supplies on hand, and supplies expense, after this entry is posted, the supplies on hand account shows a debit  balance of 1400 and supplies expense has a zero balance, an actual physical  inventory account of supplies on hand. At the end of the month showed only  $900 of supplies on hand, thus the company must have used $500 of supplies in December. An adjusting journal entry brings the two accounts pertaining to  supplies to their proper balances. The adjusting entry recognizes the reduction  in asset and the recording of an expense by transferring the $500 from asset to  expense according to the physical inventory, the asset balance should be $900  and the expense balance 500 so Microtrain makes the following adjustments the inventory. As you can see, supplies expense for 500 and then supplies on hand  is being credited for $500 after posting the adjusting entry, this is how your  accounts are going to appear again. Your supplies on hand, you have your  balance of 1400 and your adjustment of five gives you a total of nine. And your  supplied expense is being debited for the first time of $500 the entry to record  the use of supplies could be made when the supplies are issued from the  storeroom. However, such careful accounting for small items each time they are  issued is usually too costly a procedure accountants make adjusting entries for  supplies on hand like any other prepaid expense before preparing financial  statements, supplies expense appears in the income statement, and supplies on hand is an asset on the balance sheet.