 Hello and welcome to the session in which you would look at bootcamp part two for the FAR CPA exam. In this session we will review adjusting entries. This is a series of my bootcamp FAR exam starting with how to analyze transaction using t-accounts using the accounting equation, how to journalize and post the ledger and how to prepare a trial balance. So in the prior session basically part one of five we looked at these steps and as a result we end up with this trial balance as of October 31st 2024. Now these numbers are giving to you but each of these numbers we build step by step until we get to this trial balance. So if you'd like to look at how we came up with this trial balance please look at the prior section. Now in this session I'm going to be referring this is what we did in the prior session but the numbers are giving to us here. In this session we're going to be going over the adjusting entries, how to prepare adjusting entries. It's extremely important to know how to prepare adjusting entries. There are four types of adjusting entries whether you are a CPA candidate or an intermediate accounting student you will need to be aware of, need to be comfortable with, need to know how these adjusting entries will affect the financial statements. I will help you whether you are an accounting student or a CPA candidate understand those adjusting entries. Whether you are an accounting student or a CPA candidate I encourage you to take a look at my website farhatlectures.com. I don't replace your CPA review course you keep it. My material is a useful addition to your CPA review course. I explain the material differently. I help you and explain the material in a different way than your CPA review course so it might click. As a result your CPA review course will make more sense. As a result you will pass the exam. Your risk is one month of subscription your potential gain is passing the exam. If not for anything take a look at my website to find out how well or not well your university doing on the CPA exam. I do have courses for other resources for other courses as well and my supplemental courses are aligned with your course whether you are taking back a Roger Wiley or Glyme they are aligned to go with your course. If you haven't connected with me on LinkedIn please do so. Take a look at my LinkedIn recommendation like this recording connect with me on Instagram, Facebook, Twitter and Reddit. So we're going to be working with the adjusting entries as of October 31st 2024. As I mentioned earlier we have four types of adjusting entries. I'm going to break them down into two main groups. We have the deferrals and we have the accruals. Under the deferrals we have prepaid expenses. Sometime we can call it in your textbook or in your review course might be might be called rather than prepaid it might be called deferred same thing. We have unearned revenue same exact thing. In your book it might be called deferred same exact thing. Under accrual we have accrued revenues and accrued expenses. In total we have four and if you know anything about me once we have a list of items I'm going to go over each item separately starting with prepaid expenses and I'm going to be working with this trial balance to adjust the prepaid accounts. Remember we are working as of October 31st 2024 starting with prepaid expenses one of four adjusting entries. First thing is what are prepaid expenses? Well prepaid expenses are any time you pay cash in advance of the expense. So before the expense was incurred you prepaid for the you prepaid for the expense and prepaid will benefit future period. What could be some examples of prepaid? Well you can prepay your insurance you can prepay your rent supplies is a form of prepaid any any prepaid account is a prepaid building an equipment is a form of a prepaid. Why because you would you you will buy those building an equipment and you will use them in the future where the expense takes place in the future you can prepay for your advertising simply put any expense can be prepaid. Now for our purposes first you need to identify you need to know which account need adjustments in form of prepaid I would say for our purposes we purchase some supplies we purchase prepaid rent and we have equipment so simply put in the real world or this is how it works we need to ask ourselves it seems we have three thousand of supplies ask the employees do we still have three thousand worth of supplies and if they say yes we still have three thousand worth of supplies no adjustment is needed if we have three thousand of supplies our trial balance showing three thousand then we have three thousand there is a good chance we don't have three thousand of supplies because this amount is when we at the beginning of the period or when we purchase the supplies at the end of the period we might have lost some supplies not lost use them or lost for that matter so if that supplies is consumed then we have to reduce our supplies therefore a typical prepaid will take the following journal entry when we adjust prepaid assuming it was recorded as a prepaid initially again assuming it was recorded as a prepaid initially which is the normal way in quote we reduce the prepaid and we increase the x the related expense and the best way to do it is to work an example right now we have a prepaid called supplies and we have three thousand in that prepaid let's see what happened after our employee counted the supplies after the employee counted the supplies at month end count they show we still have five hundred so right now we have three thousand that that number is incorrect that number should be five hundred this is the correct balance what does that mean it means i have to make an adjusting entry i have to reduce my supplies by two thousand five hundred i would reduce my supplies as a result i have to expense my supplies i will debit supplies expense so the entry will take place will take increase my expense reduce my asset supplies notice by twenty five hundred as a result i have the proper balance of five hundred what happened if i did not book this entry if i did not book this entry my assets will be overstated i will have more assets i will show three thousand well in fact i only have five hundred my expenses will always be understated by twenty five hundred as a result my profit will be overstated by twenty five hundred because i reported less expenses so notice how this adjusting entry affect the balance sheet and affect the income statement as well so we're done with this supplies basically the supplies it's going to go to twenty five hundred now we said prepaid rent is another form of prepaid and we need to ask ourselves do we still have this much of prepaid and the answer is most likely not okay most likely not we have twelve thousand of prepaid rent we purchased this prepaid rent on october 15th guess what and we purchased it for one year therefore if we take twelve thousand divided by twelve our prepaid are consumed at a thousand dollar per month however since we bought it on october 15th we're gonna have to reduce it we have to split this one thousand and half because since october the 15th we consumed five hundred dollars what does that mean it means we have to credit our prepaid five hundred now the prepaid balance is eleven thousand five hundred and we have to debit our rent expense five hundred so simply put our expenses are increased our prepaid are reduced now the new prepaid balance minus five hundred is eleven thousand five hundred and this is the supplies was minus twenty five hundred and the remaining is five hundred okay so this is how we adjusted our prepaid rent so we're done with supplies done with prepaid and we'll do the same thing whether we have more prepaid or not equipment as i told you property plant and equipment are a form of prepaid but remember property plant and equipment how do we consume them well we really don't consume them we use them up they benefit our business property plant and equipment they get depreciated so what's going to happen part of this nine thousand it's going to be turned into a depreciation expense for the purpose of this session since i'm teaching you how to prepare adjustments i'm i'm going to be giving you the depreciation amount but you're going to have to learn eventually how we come up with this number so i'm going to say estimated depreciation happens to be 250 what does that mean it means now you have to record an expense called depreciation expense for 250 therefore you debit depreciation expense 250 what do you credit well for property plant and equipment you don't credit the account itself we're going to create a sub-account called accumulated depreciation equipment this account is a contra asset it serve to exist it serve it exists to serve the equipment account therefore you're going to still have the equipment reported at nine thousand on the balance sheet you're going to deduct accumulated depreciation it's going to reduce it by 250 and that's going to give us 8750 and this is called the book value of the equipment same concept if you did not book this entry your expenses will be understated you will have less expenses as a result your profit will be higher and your asset will be shown at nine thousand while your asset should be shown at book value 8750 your assets are overstated so it's very important to understand how prepaid expenses work it doesn't matter now which prepaid expense are you dealing with when you adjust the prepaid assuming it was recorded initially as a prepaid you reduce the prepaid and you increase the expense now why am i saying initially recorded as a prepaid because some prepaid what some companies do they first initially they record everything in expenses then they make an adjustment take it out of expenses whatever not used and put it into prepaid well that's the story for a different lecture okay but this is what we have here we have to in this session since we're learning the basics you have to know the basics and eventually when you are faced with that exception which is the alternative method you'll be able to do it now let me show you from a trial balance perspective what happened to each account these are the unadjusted balances this is the adjusted column and these are the adjusted balances again we dealt with three account supplies prepaid and equipment supplies was 3 000 we credited supplies the adjusted balance 500 prepaid equipment was 12 000 we reduced it by 500 the adjusted balance is 11 500 equipment we did not have accumulated depreciation we credited accumulated depreciation now the balance is 250 and for every credit we have a debit we debit that supplies expense we debit the rent expense we debit the depreciation expense and those are their balances because they did not have any existing prior balance the next adjustment is unearned revenue this is adjustment two or four what is unearned revenue unearned revenue is when you are receiving the cash in advance of performing the service so you receive the cash in advance of the revenue that's how it works somebody pay you but you did not do the work yet you're gonna have to do the work in the future in the real world uh when you subscribe for a magazine when you buy when you buy your airline ticket when you pay for your hotel these are all unearned revenue for the seller and what happened is until they perform the service they cannot look at as revenue so let's take a look at our trial balance and see if we have an unearned revenue it looks here that we have 4 000 of unearned revenue somebody paid us 4 000 in advance how do we adjust unearned revenue unearned revenue it's always going to go down once we adjust it because we already have the unearned revenue so we have 4 000 and unearned revenue unearned revenue will go down and as a result revenue will go up so as a result we're going to earn this revenue okay so what what adam did this is adam company earned one fourth of the 4 000 one fourth means earned a thousand one fourth of two thousand is a thousand so what does that mean it means i'm gonna debit unearned revenue a thousand i'm gonna credit my revenue a thousand so this is the journal entry now how much unearned revenue do i have left the balance is three thousand the three thousand is the balance which is as a result of reducing the unearned revenue from four to three so simply put it's gonna go from four minus one thousand the unearned revenue will be three notice what happened if we did not book this entry if we did not book this entry we will have less revenues a thousand dollar less and we will have more liabilities of a thousand because our liabilities went down we would have more liabilities so we really want to make sure we book our unearned revenue if we have unearned revenue we want to record it as revenue if we want to look good right and that's what we want to do from a from the trial balance notice we had 4 000 of unearned revenue we're gonna debit unearned revenue a thousand the remaining balance the adjusted balance is straight and what's gonna happen i had only 10 000 of revenue i'm gonna add a thousand to it from the unearned revenue now my revenue is 11 000 11 000 the third type of adjusting entries are called accrued revenues this is three or four first we need to know what are accrued revenues well accrued revenues are revenues performed but not recorded so we did the work but we did not record the work well guess what if we did the work it's revenue therefore we have to report it as revenue so other example could be any work done but not yet recorded you did the work for someone you did not record as revenue it's time to record the revenue so how do you record accrued revenue very simple you're gonna record the revenue you're gonna increase the revenue but obviously you did not get paid you're gonna increase an account receivable so every time you adjust revenues i'm sorry every time you adjust accrued revenues and accrued means record this is the accrual what do you do you're gonna debit a receivable credit a revenue well let's take a look at this adam ink performed four thousand dollar of work not yet build so we did the work we were busy we did not build the client it's it's the end of october we told our accountant look we did the work we did not build the client record four thousand of revenue and obviously build them as well for that matter so what we do is we debit account receivable and we credit consulting revenues so simply put we're gonna add another four thousand to account receivable and we're gonna add another four thousand to our revenue otherwise our revenues are understated and our assets account receivable are understated so from a trial balance perspective account receivable here was four thousand we're gonna add to it four thousand and we're gonna end up with eight okay we're gonna end up with eight thousand of account receivable revenues was ten thousand we added a thousand then we added four now account receipt revenue is fifteen thousand the adjusted balance the fourth type of adjusting entries are called accrued expenses accrued expenses sounds like accrued revenues but rather than revenues they are expenses what are they expenses incurred but not yet recorded just like we have revenues that we did not record we might have expenses that we did not record examples could be salaries interest expense any expense that you know you have to account for but you have not yet it's the end of the period if it's related to that period you book that accrued expense so simply put you're gonna increase an expense when you book accrued expense but since you're not paying it now you're gonna increase a liability so if you debit rent expense you credit rent payable if you debit salaries expense you credit salaries salaries payable if you debit xyz expense you credit xyz payable okay so this is this is basically you have to find out what expenses that you have you accrued so for example the assistant earned a thousand dollar worth of salaries but not yet paid and at the end of october so the assistant that worked with adam at his consulting company earned a thousand but adam did not pay this individual by the end of the month well if not we have to debit salaries expense a thousand credit salaries payable a thousand why because we have to accrue this expense we have to accrue otherwise our expenses are understated and our liabilities are understated simply put we are responsible for a thousand dollar for that assistant i hope this makes sense another example will be interest incurred as of october on the notes payable you remember we we borrowed money on the notes payable is a hundred dollar what does that mean it means because we had a loan at the bank by the end of the month the loan accrued interest interest is an expense we did not pay the interest yet but we have to record the interest expense remember it's a matching principle we have to match the expense to that period therefore same concept we're gonna debit interest expense credit the related payable interest payable so accrued expenses you would always increase an expense and increase a payable the related payable to that expense why because you are recording an expense not yet paid eventually you will pay it once you pay it you would reduce the payable and you would reduce the cash once you pay that expense let's take a look at this at at the trial balance now we debited interest expense a hundred dollar we credited interest payable we did not have interest payable now we have 100 of interest payable we did not have interest expense now we have 100 of interest expense and also we accrued what else did we accrue we accrue wages we accrue the thousand dollar worth of wages we debited wages and we credited salaries and wages payable okay now wages expense total is 6 000 let's take a look at the complete adjusted trial balance now now we move everything to the to the end now we are ready to complete the adjusted adjusted balance 68 000 we did not adjust cash eventually we'll get to that our account receivable went from four to eight because we added another four thousand supplies went from three thousand to five hundred prepaid one from twelve thousand to eleven thousand five hundred equipment stayed the same not really but we we reduced it by accumulated depreciation the notes is still the same accounts payable the same unearned service revenue was four thousand we reduced it to three by debit and a thousand so on and so forth for example our salaries expense were five we added a thousand now it's a six service revenue worth 10 we added five now it's 15 the few things i want to i hopefully you notice as we are going through this adjusting entries would always affect an income statement account and a balance sheet account so if you look at any of these entries for example if we take the four thousand we debited account receivable credited revenue account receivable it's a balance sheet account revenue is an income statement so you're always affecting either a balance sheet or an income statement and always you are increasing either a revenue or an expense so you're affecting a revenue or an expense usually if it's the proper entries they're both going up okay if if we're going through we're not doing we're not using the alternative method now this is the adjusted trial balance is of october 31st in the next session i'm going to say this is the adjusted trial balance that we prepared in this session and based on this adjusted trial balance we are ready to prepare our financial statements so on the next session what i'm going to do i'm going to start to prepare financial statements based on this adjusted trial balance now you know how to prepare this at the end of this recording i'm going to remind you whether you are an accounting student or a CPA candidate farhatlectures.com can help supplement your CPA exam preparation i am in 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