 Hello and welcome to this session in which we would look at an exercise that deals with the four types of adjustments Which are two will be the furls and two accruals Adjusting entries give students many problems and this is where students start to get lost in a typical intermediate or a financial accounting course The first thing I want to show you is this we have four types of adjustments two are considered the furls and Two are considers accruals. Okay, so as I go through each adjustment I'm going to explain to you whether this is a deferral or an accrual the furl will have we could defer expenses We could have the furl of expenses. We could have the furls of revenues We could have accrual of expenses and accrual of Revenues as well. So those are the four types. So one two three Four so it's very important to understand what which Adjustments am I dealing with is this a deferral or an accrual if it's a deferral Is this a deferral expense or an accrual expense? Why this is important because once you know whether it's a deferral or an accrual whether it's an expense or a revenue then you should be able to Determine the adjusting entry very very easily Okay, let's start to take a look at Examples that illustrate those concept Adam corporation rented a storage space to LSC on November 1st for three months for a total cash of 36,000 received in advance Okay, so first let's prepare the entry on November 1st year one and we are assuming our year end is December 31st So if we received 3600 of cash in advance, what do we do? We're gonna debit cash. So this is start with the easy part start with cash Now this cash is received in advance. Well, it means we have not earned it yet because we did not provide the rental Service the rental capacity to the tenant Therefore what we credit is something called unearned rent revenue. Now, this is the entry that took place on November 1st This is not the adjusting entry. This is what happens on November 1st now prepare the Prepare the appropriate journal entries assuming year end is December 31st. Well if year end December 31st What does that mean? It means from November. So on a timeline. This is what happens. We got the cash here This is November 1st and For the the tenant stayed for November and stayed for December as a result We earned two month worth of rent. Well, how much is two month worth of rent? Well, if they paid us 3600 for three months, we could assume that each month is 1200 so on December 31st, we have to make an adjusting entry What type of an adjusting entry is this? What type of an adjusting entry? Well, what happened in this situation? We received the cash Before the revenue. So what did we do with the revenue? We deferred the revenue. So this is a deferral of revenue Why because we received the cash first notice on November 1st. We received the cash We're gonna record the revenue later What type of adjusting entry do we do when we have a deferral revenue? Well, we're gonna debit the unearned revenue We're gonna reduce the unearned revenue, which is this is a liability And we're gonna turn it into actual rent revenue of 2400 from a T account perspective This is what this is what you are looking at. So this is the unearned Just write it a little bit better if I can this is unearned Revenue I started with 3600 on November 1st now I debited this balance 2400 because I earned 2400 my remaining balance is 1200 so you might be asked what's the remaining balance for the unearned revenue as of December 31st? Well, you would say the answer is the unearned Revenue balance is 1200 if you are asked what is the journal entry the journal entry is you have to debit unearned revenue and turn it into revenue 2400 then a month later February 1st. We're gonna have to earn the remaining 1200 we're gonna debit unearned rent revenue 1200 thus bringing it down to zero and credit rent revenue 1200 to earn the revenue So what we dealt with is something called The furlough of revenue and the furlough of revenue we debit the unearned revenue and we credit revenue Assuming this is what we did initially assuming we debit that cash credited unearned revenue So we are adjusting unearned revenue Before we proceed any further I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website farhatlectures.com I don't replace your CPA review course nor your accounting course My motto is helping CPA candidate an accounting student one at a time How by providing you with resources that's gonna help you do better lectures multiple choice through false exercises Also on my website you can find out how well your university doing on the CPA exam My CPA resources are aligned with your becker, Wiley, Roger and Gleam So it's very easy to go back and forth between my material and your CPA review course I also give you access to 1500 previously released AI CPA questions with detailed solution If you have not connected with me on LinkedIn, please do so take a look at my LinkedIn recommendation Like this recording on YouTube subscribe share it with other connect with me on Instagram Facebook I'm trying to grow my Instagram followers Twitter and Reddit. Let's take a look at the second example Adam company weekly payroll paid on Fridays for total of 10,000 simply put Adam company every week They pay 10,000 worth of payroll and they paid on Friday the employee work a five-day work week So they work from Monday through Friday, and they get paid on Friday. Let's assume December 31st falls on a Wednesday Okay, let's see what we are looking at from a map perspective from a map perspective. It looks something like this This is the last week of the year So this is Wednesday December 31st, so this is where the year ends Now the employee will be paid. So this will be January 1st, and this will be January 2nd The employee will be paid here Okay, so what happened is this the employee worked Monday They work Tuesday, and they work Wednesday. So they work three days, but for those three days They were not paid why because they will not be paid until the next period, which is starting January 2nd So what do we have to do? Well, the company will have to accrue will have to accrue three days worth of expenses Three days of salary expenses Three days So if we pay 10,000 per week over five days each day the employee get paid $2,000 well $2,000 times 3 then we're gonna have to accrue salary expense of $6,000 we're gonna have to accrue salary expense of $6,000 we debit salary expense We credit salaries payable. What type of adjusting entry is this? This is as I just told you accrued expense It's an accrual. It's an accrued expense or sometimes it's called accrued liability It doesn't really matter. It means we recorded an expense. We recorded a liability that will be paid later When is that later January 2nd? Let's go ahead and get paid on January 2nd We're gonna pay the employees not get paid. We're the company. We're gonna pay the employees Well, what's gonna happen is we're gonna when we pay them. We're gonna have to remove the sly ability We're gonna have to remove the sly ability we're gonna have to record a January 1st and January 2nd which amount to 4,000 worth of expenses and we're gonna pay them $6,000 in cash. We're gonna pay them. I'm sorry $10,000 in cash So the $10,000 in cash will pay off the liability from December 31st and would record 4,000 of expense in year two and 6,000 of expense in year one simply put the total paid is 10,000 the total expense is 10,000 All what we did in this period is 6,000 was recorded in year one 4,000 was recorded in year two, but the total expense is 10,000 and this is an accrued expense and an accrued expense the typical entry is you debit and expense You credit the related liability what I mean by this if you debit salaries expense You debit a credit salary spable if you debit rent expense you credit rent payable if you debit XYZ expense You will credit XYZ payable Let's take a look at this third Example on October 1st Adam accepted $12,000 four month 10% note receivable for a sale This is on October 1st. So what happened is we make a sale. We made a sale and we accepted a note We're gonna debit notes receivable 12,000 credit sales revenue 10 12,000 not 10,000 12,000. So this is what happened October 1st now the note has a 10% interest and We will not be paid this note until four months later What's gonna happen is this from October till December the note will accrue interest It means we earned interest how much interest are we going to accrue? We're gonna take 12,000 times 10% times 312 And if my math is right, this is gonna give us $300 of accrual of accrued interest revenue interest that we received But we're not gonna be paid for it on December 31st, but we have to record as revenue Therefore we debit interest receivable $300. We credit interest revenue $300. This is an accrual But accrual revenue an accrual revenue you always debit receivable Credit a revenue and this is what I explained in my lesson, but this is basically a review Now here comes February 1st when we actually get paid when the customer paid us the full amount How much is the customer going to pay us? Well, the customer owe us $12,000 times 10% times 412 and that's gonna give us $400 $400 of interest So the the customer will pay 12,000 plus 400 of interest the customer will pay 12,400 12,000 is for the note itself and 400 for the interest now We have to record one month worth of revenue from January 1st of February 1st That's worth $100 because if we take 12,000 times 10% times 112 that's gonna give us $100 We're gonna have to record an additional $100 in interest revenue We're gonna remove the $300 of interest receivable here this interest receivable now we we got paid for that so that's that's gone and We remove the note itself of $12,000. So this is the entry that will take place on February 1st on February 1st. So notice what happened in total notice what happened in total We recorded interest revenue of 400 here because the interest receivable debit the interest receivable credit makes it zero So simply put we received cash of 12th and the notes receivable credit 12,000 Debit 12,000 is gone. So basically here's what's left in this whole entry after all things said and done is this We debited cash 12,400 credited sales revenue 12,000 Credited interest revenue a total of 400. That's all what's left So we make a sale for 12,000 and we received and we earned 400 of interest revenue Everything else is the receivables the notes receivables and the interest receivable are basically cancelled each other Let's take a look at the foot and by the way, this is as I said, it's an accrual revenue Let's take a look at this fourth type of adjusting entry on This Adam company purchase $500 worth of supplies on December 1st December 1st we debit supplies we credit cash for 500. That's that's basically what we do a physical count a Physical count of the supplies on December 31st reveals that 200 of the supplies remain on hand So we have 500 worth of supplies. So we started with 500 Then when we did the count we still have 200 left now be careful what you are being told here is how much left It means you have to determine how much was consumed. How much was consumed was 300. So what do you have to do you have to? Record the consumption of 300 what do you do you debit supplies expense of 300 and you credit supplies and this is called The type of the adjusting entry. This is called either you want to call it at the furrow expense or Prepaid sometimes they call the prepaid expense in your textbook. It's the same thing Simply put we paid for the expense first then we expensed it later We paid for the supplies on December We didn't expense it till December 31st when we consume it This is at the furrow and at the furrow expense typically we debit an expense and Credit the related asset. So notice here. We debit it supplies expense. We credit it supplies There's one type of prepaid expense. That's a little bit different It's called depreciation expense and we'll discuss this in a separate recording or in a separate example What should you do now go to farhat lectures comm subscribe work multiple choice questions additional resources That's gonna help you do better on your exam on your CPA exam It's gonna it's gonna help you in your accounting career. Don't shortchange yourself invest in yourself The CPA exam is worth it. Good luck study hard and of course stay