Hello, in this lecture, we'll be taking a look at adjusting journal entries. So we are now on the adjusting process in a prior lecture, we took a look at the journal entries for the period. So that is over here and we ended up with this trial balance as of the end of the transaction for the month of May, in this case, now we're going to go to this tab. The adjusting tab is where we are at at this time. And we're going to start with the ending trial balance that we ended with in the journal entries tab. So these are the same numbers in the unadjusted trial balance that we have from the prior work.

And you can see from the formula that we're just basically pulling these numbers into this tab from the prior tab, we're going to take those numbers and we're going to adjust them in the adjusting column and come up to an adjusted trial balance. So instead of us posting these transactions to the general ledger in this piece, we're just going to post them to this adjusting worksheet so we can have a very quick glimpse as to Where we start, what the adjustment is and where we end up as we go. So first I want to talk about the general rules for the adjusting process, they're gonna be a bit different than the format of questions that I would go through when we are talking about the general journal entries. Because the adjusting process will be a bit different, we're going to do it as of the end of the time period.

Therefore, in this case, it's the end of the month. Our goal is to make the adjusted trial balance so that it is correct on an accrual basis, so that we can use it to make the financial statements as of that point in time the end of the month, the cutoff period, in this time frame, in that In so doing, what we're going to do is take a look at which accounts need to be adjusted to be more on an accrual basis. And the link the questions I would go through to do that would be and will be that we're gonna have one balance sheet account above the blue line because the blue line is the separating line between the balance sheet account and the income statement accounts. And we're going to have one income statement account down here below the Line, because these are the income statement accounts income and expenses and income statement accounts only go up.

If we go by those rules, we can find out which way the accounts are going to be going without even really knowing what is going on and why we're doing it. Then we'll of course talk more about why we're doing it. So I'm going to make this a little bit larger here so we can see a bit more of it. Note that we have something that is in balance at the beginning. This is the unadjusted trial balance, assets minus liabilities, equals owner's equity and also the debits minus the credits will equals zero indicated by the green zero and the bottom here. We're going to post the transactions into here to come up to our adjusted trial balance.

We can see the accounting equation here as well adding up assets liabilities, and those will be equal to liabilities plus the owner's equity in this section as well. Alright, so let's start off with a and once again, it's gonna be as a 531. So I'm going to put five 31 for all of these, because all these entries will be as of the end of the month insurance expired during May. So if we think about that, then there's gonna be one account above the blue line related to insurance. And we go through here and say, Hmm, what is related to insurance up here? How about prepaid insurance.

So I'm gonna highlight that, I'm going to make that green just to indicate that that's going to be one that we will be looking at, and make this a little bit smaller here. And then if we go down below, the blue line is going to be something related to insurance. And of course, that's going to be insurance expense in this case, so I'm going to go ahead and make that green. And we know that there's account below the blue line is an expense account, like all these expense accounts, they generally only go up, they all have debit balances, and how we're going to make it go up, we're going to do the same thing to it, which in this case, will be another debit. So I'm just going to copy this and say Copy that. I'm going to put it in so C five, right click and paste it 123 that's going to be our debit.

I'm not gonna put the amount in there yet, but I'm going to think about what the credit account would be. And that, of course, is going to be the other account that we looked at. And so the credit, if we're going to debit the insurance expense and put that on top, then we must be crediting prepaid insurance. So I'm going to copy that. And I'm going to paste it down here in the second half of our journal entry, right click hasted 123. And so C six, and you could type it in there.

I think it's a little bit faster to do this copying and pasting and that we know that we're going to basically debit insurance expense and credit prepaid insurance, again, without even knowing what we're doing and why we're doing it. So now let's talk about what we're doing and why we're doing it. So what is prepaid insurance? How did it get there? prepaid insurance is what we're going to tell our accounting department basically is every time you write a check for insurance, just credit cash, and then instead of debiting insurance expense, we want the accounting department to debit prepaid insurance. Why?

Because by definition, prepaid insurance is something that you pay before you use it oftentimes for more than a month in advance, so we might pay for a whole year's policy, before we will use the policy. Under the matching principle, we need to expense it as we use it. It is not practical for the accounting department necessarily to be on a perfect accrual basis because they would have to make an adjustment maybe even hourly, as the policy is being used. So in this case, we're going to make it correct as of the cutoff date, as of the end of the month. That's going to be part of the adjusting process, which we are doing now. So we have now gotten the information from the accounting department.

We've instructed them to put all insurance payments into prepaid insurance, then we're going to determine how much has expired. So in order to do that, we're going to look at the policy and see how much time has expired. We won't go into that calculation here. But just note that there could be two ways that we give the answer we could say this is what prepaid insurance should be as of the end of the time period or we could Let's say this is how much of the prepaid insurance has been used. In this case, the terminology says insurance expired. So that means that we're talking about how much has been used.

So that means we can just say that the 300 should be the expense. So I'm going to debit the 300. And I'm going to credit 300 for the same amount. If on the other hand, we had said that prepaid insurance as of the end of the period should be, so and so then in 1200, and we would have to take this account and see what we would need to do to it to bring it to the amount that was given. So just be careful when you look at the prepaid insurance, they could ask you in either of those ways. So if we post this, then let's see what happens.

I'll post the prepaid insurance. We're gonna go down here to cell i 22, or an i 22. I'm going to select equals and went to the 300. That's going to bring the account from zero up by 300 to 300. And it puts us out of balance brings net income down we To increase the expense, we're going to go over here to I nine, same thing equals, but now we're going to point to prepaid insurance. This is a debit, that's a credit, it's going to bring the prepaid insurance down to, in this case 1200.

So we brought the insurance down by the amount that we consumed in this time period being the month in this case. Alright, so I'm going to ungreen these and take a look at the second transactions go through the same set of questions and same process. So be it's also going to be on 531. So if you want to put B in here, that would be okay too. But just recognize they're all going to be as of 531. Because this is the adjusting process.

Supplies on hand on May 31 are 750. All right. So first, we're just going to go through questions. What's going to be the account above the blue line related to supplies? Not a trick question. Supplies possibly could be the one.

So I'm going to say okay, let's make that green. We're going to deal with that account. Note that having the trial balance In front of you is handy, I would have a trial bounce point of view at all times. And then even if it's not the related drop down to the problem can still be useful, then there's going to be account below the blue line on the income statement related to supplies. How about supplies expense, those look like the two accounts that will be affected. And then if we look down here, these are expense accounts, they all have debit balances represented by the fact that they do not have brackets, they only go up, and therefore we're going to make this expense account go up by doing the same thing to it, which in this case would be another debit.

So I'm going to copy that. I'm going to put that in cell C eight, right click, paste it 123 like so. And then again, I'm not going to put the amount yet. I'm just going to think about next what the other account will be, which of course will be supplies. If we debit the expense, we're going to credit the supplies. We're going to represent that by putting the credit on the bottom.

So I'm going to copy this I'm gonna put it on the bottom and see 99 is right there. Right click and paste it 123 And then we have to think about the amount. So once again, we can kind of think about, we can see what we're going to do, which accounts are affected which way it's going to go just by thinking through that series of questions for the adjusting process. Now think about why we're doing this and what the amount should be. And if we think about supplies, how does it get there? Well, when again, when we talk about the accounting department over here in the adjusting process, we tell the accounting department if in my case, if we're a CPA firm, every time we buy paper, in this case, we want the accounting department to record it not to supplies expense, but they're going to credit cash or accounts payable and debit supplies the asset, why because if supplies is significant, we should be expensing it as we use it.

So we're going to set the system up for them to just post it into supplies the asset, we then on the adjusting process once a month we'll fix it by counting the supplies and this will be similar to inventory at a later time seeing how much we have been used. have been writing down the supplies to how much has been used. So in this case, we see that on hand, there are supplies of 8850. And we counted it to be 750 minus 750. So that means that we have used eight 1100. So that means that we need to reduce this amount by 1100, that's going to be the amount of the transaction in order to get the result to be 750.

So let's see if that's the case. If it doesn't happen if this number doesn't turn out to be 750. After we're done, we made a mistake. So we're going to go here, I'm gonna put that same formula in here. So I'm gonna put equals and do that same calculation we did in the calculator of 850 minus 750, enter, that's the eight one it's going to be the same debit and credit. So I'm gonna just put negative 814 the credits, gonna hit enter, that'll put the brackets around it, then we can go ahead and post this out.

So I'm going to go scroll down here. We are now in so I 20 we can say equals, and then go point to that 8100, that's going to bring the benefits up from zero to 8100 puts us out of balance brings net income down by the amount of the supplies that we have used. We're going to go over here to the supplies asset in I seven equals, and then scroll down and point to that 8100 and enter. That's a debit. This is a credit brings it down to 750, which is what we wanted it to be. Now supplies is going to be an introduction to inventory, we're going to do inventory in a similar type of fashion and in that we'll count the inventory and and see how much we have used over a certain time period.

Also, of course, many companies may just expense supplies if they are in material. So putting it on as an asset and then expensing it will take more time. If supplies is not material and it's a smaller small company or something It may very well be that supplies are just being expensed as they are purchased. But it is a good practice of the accrual method to go through this practice. It's also a good practice in order to be an intro to inventory, which we'll talk about at a later time. Alright, so I'm going to unhighlight these so we can go down to the next item and do the same series of questions.

And 531. We're going to go down to see at this time, depreciation of office equipment, alright, so there's going to be an account above the blue line related to depreciation and here's one that has depreciation in it accumulated depreciation long word, but we're just going to say okay, but that one's going to be one that should be affected here. Then there's going to be an account below the blue line on the income statement related to depreciation. How about depreciation expense, so again, just kind of by the wording we can say those two are affected. We know that these are expenses we can see that they all have debit balances, expenses only go up. Therefore we're going to make depreciation expense.

Let's go up by doing the same thing to it, which in this case would be another debit. So I'm going to copy that on my cursor and see 11 right click Paste it 123. Okay, I'm not going to put the amount in there yet, what we want to do is just see what the other account what's going to be the credit account, it's going to go on the bottom. And that of course will be accumulated depreciation. So if we debit the expense, we're going to have to credit the other account. I'm going to copy this and paste it underneath paste it 123 so we can see which accounts will be affected which where they will be going without really knowing what depreciation is at all to go through that series of questions.

Now let's talk about what depreciation is. And what is depreciation here accumulated depreciation up on the balance sheet is in the asset section. You'll notice it's green but it's got like a negative or it's got a credit balance in it. So what happens with depreciation is that we are buying equipment equipment being something that would be large, say like a forklift or something like that. When we buy the forklift Then we don't just expense it as we purchase it. Because the forklift will affect the future.

We'll be using it throughout the future. So for example, if we bought this forklift for 14,000, and we expensed it, then that would make net income look very low in the year of purchase, because it would be a large expense. And in the following year, the net income might be a lot higher by the fact that we're using the same forklifts, but we purchased it last year. So theoretically, that doesn't make a lot of sense because the forklift is being used in both years. So we want to be able to match net income from year to year. We don't want the forklift being purchased in one year, to make one year look really bad in the next year really good.

Even though the forklift is being used in the both years. It makes more sense for us to match the forklift usage or the cost allocated to that usage in the year in which it is being used. So that's going to be the idea of depreciation. So, we're going to