Video Transcript: Adjustments for Accrued Items

Hello and welcome back now we're going to talk about adjustments for the  accrued items. Accrued items require two types of adjusting entries, assets and  revenue adjustments and liability and expense adjustments. The first group  asset and revenue adjustments involve accrued assets. The second group  liability expense adjustments involves accrued liabilities. Accrued assets are  assets such as interest receivable or accounts receivable. They have not been  recorded by the end of the accounting period. These assets represent rights to  receive future payments that are not due at the balance sheet date to present an accurate picture of the affairs of the business on the balance sheet. Firms  recognize that these rights at the end of an accounting period by preparing and  adjusting entry to correct the account balances, to indicate the dual nature of  these adjustments the record, Oh, I'm sorry. Start over. I'm sorry. To present an  accurate picture of the affairs of the business on the balance sheet, firms  recognize these rights at the end of an accounting period by preparing and  adjusting entry to correct the account balances. To indicate the dual nature of  these adjustments, they record a related revenue in addition to the asset, we  also call these adjustments accrued revenues. Because of revenues must be  recorded interest. Revenue can consist of saving the savings accounts literally  earn interest moment by moment, rarely if payment of the interest made on the  last day of the accounting period. Thus, the accounting records normally do not  show the interest revenue earned, which affects the total assets owned by the  investor, unless the company makes an adjusting entry. The adjusting entry at  the end of the accounting period debits the receivable account and credits a  revenue account to record the interest earned and the asset owned. For  example, assume Microtrain company has some money in a savings account on December 31 the money on deposit has earned one month's interest of $600  although the company has not yet received the interest an entry must show the  amount of interest earned by December 31 as well as the amount of the asset  interest receivable. So the entry to record the accrue of a revenue. So on  December 31 you know that you're going to receive the $600 but not until the  next month. However you want it to reflect in December's total, so you have an  accurate picture of the revenues or expenses for that month. So here you know  you're going to receive the $600 in interest. So just like your accounts receivable people that owe you money for merchandise you sold to them, same with the  interest. You're going to debit an interest receivable account because it's money  that's owed to you in the future, and you're going to credit an interest revenue  account because it's money owed to you, and it's also a revenue, okay? And  these are the account balances in the General General Ledger, the interest  receivable account and the interest income account, again, you debit one and  credit the other. Microtrain reports the $600 debit balance in the interest  receivable as an asset on the balance sheet. This asset accumulates gradually  with the passage of time, the $600 credit balance in the interest revenue is the 

interest earned during the month. Recall that in the recording of revenue under  accrual basis accounting. It does not matter whether the company collects the  actual cash during the year or not. It reports the interest revenue earned during  the accounting period on the income statement. A company may perform  services for customers in one accounting period while it bills for the services in  another accounting period, these are called unbilled training fees. Microtrain  company performed $1,000 of training services on account for a client at the  end of December, since it takes time to do the paperwork, Microtrain will bill the  client for the services in January, the. Necessary. Adjusting entry in these on  December 31 is as follows, so you can see, the journal entry is accounts  receivable, as for the service fees receivable, and then your debit, I'm sorry,  credit the service revenue for $1,000 after posting the adjusting entry, the T  accounts appear as follows, so you have your accounts receivable and then you have your revenue. The service revenue appears in the income statement, the  asset accounts receivable appears on the balance sheet. Accrued liabilities are  liabilities not yet recorded at the end of an accounting period. They represent  obligations to make payments not legally due at the balance sheet date, such as an employee salaries. At the end of the accounting period, the company  recognizes these obligations by preparing and adjusting entry, including both the liability and the expense. For this reason, we also call these obligations accrued  expenses. The recording of the payment of employee salaries usually involve a  debit to an expense account and a credit to cash, unless a company pays  salaries on the last day of the accounting period. For a pay period ending on  that date, it must make an adjusting entry to record any salaries incurred but not yet paid. Microtrain company paid $3,600 of salary on Friday, December 28  2010 to cover the first four weeks of December the following entry of salaries,  expense is debited 3600 and cash of 3600 is credited, assuming that the last  day of December falls on a Monday, this expense account does not show  salaries earned by employees for the last day of the month, nor does an account show the employer's obligation to pay these salaries. The key account  performance pertaining to salaries appear as follows before the adjustments. So as you can see, you have your salary expense of 3600 on December 28 which  is not the full end of the month, and salaries payable of zero. So if salaries are  3600 for four weeks, they are $900 per week for a five day work week daily  salaries are $180 Microtrain makes the following adjustment entry on December 31 to accrue salaries for one day. So for the month of December, you still owe  $180 to your employees. Okay, so you will have a salary expense of 180 and a  salary payable of 180 and then your description, you're just accruing the one  day salary that were earned but not yet paid. After adjustments, the 2t accounts  involved appears following, okay? So as you can see, her salary expense on  December 28 3600 December 31 you're adjusting entry for the $180 to accrue  for the one day of salary earned by your employees. So for a total salary 

expense of 3780 for the month. Okay, and then your salaries payable, you have  $180 payable. Now how? So if you fail to recognize number one consumption of the benefits of an asset, what effect is it going to have on the net income and the balance sheet. Okay? So if you fail to recognize the consumption of the benefits  

of an asset, it's going to overstate your net income, and it's going to overstate  your assets and your retained earnings on your balance sheet. And then number two, earning over previous unearned revenues, if you fail to recognize that, it's  going to understate your net income, and it's going to overstate liabilities and  understate retained earnings. And then for your accrual of assets, you're going  to understate net income, and then the effect on the balance sheet, it's going to  understate assets and understate retained earnings, and then for your accrual of liabilities, your from then the net effect on the income statement, it's going to  overstate your net income. And it's going to understate the liabilities on your  balance sheet and overstate the retained earnings on your balance sheet. So  this is why it's very important to make sure that you accrue or you defer,  depending on the situation, say, for salary or prepaid expenses, so that it affects  the full month. The debit in the adjusting journal entry brings the month salary  expense up to its correct $3,780 amount for Income Statement purposes, the  credit salaries payable records, $180 salary liability to employees. The balance  sheet shows salaries payable as a liability. Another example of a liability  expense adjustment is when a company incurs interest on a note payable, the  debit would be to the interest expense, while the credit would be to the interest  payable.