 Hello and this lecture will be taking a look at adjusting journal entries so we are now on the adjusting process. In the prior lecture we took a look at the journal entries for the period so that is over here and we end up with this trial balance as of the end of the transactions 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 could 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 going to 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 and 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 questions I would go through to do that would be and will be that we're going to have one balance sheet account above the blue line because the blue line is the separating line between the balance sheet accounts and the income statement accounts and we're going to have one income statement account down here below the blue 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 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 debit minus the credits will equal 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 all right so let's start off with a and once again it's going to be as of 531 so I'm going to put 531 for all of these because all of these entries will be as of the end of the month insurance expired during May so if we think about that then there's going to 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 going to 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 there's 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 c5 right click and paste it one two three that's going to be our debit I'm not going to 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 paste it one two three and sell uh c6 and you could type it in there I think it's a little bit faster to do this copy 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 uh 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 we 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 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 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 uh so-and-so then in 1200s 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 going to go down here to sell i22 we're an i22 i'm going to select equals and point 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 increase the expense we're going to go over here to i9 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 all right 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 b 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 their the adjusting process supplies on hand on may 31st are 750 all right so first we're just going to go through our 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 balance in front of you at all times and then even if it's not the related trial balance to the problem can still be useful then there's going to be a count below the blue line on the income statement related to supplies hmm 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 they do not have brackets they only go up 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 c8 right click paste it one two three 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 going to put it on the bottom in c9 c9 is right there right click and paste it one two three 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 counselor effect is which way it's going to go just by thinking through that series of questions for the adjusting process now let's think about why we're doing this and what the amount should be and if we think about hmm supplies how did 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 supply as 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 will fix it by counting the supplies and this will be similar to inventory at a later time seeing how much we have been used and then 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 8800 so that means that we need to reduce this amount by 8100 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 going to put that same formula in here so i'm going to put equals and do that same calculation we did in the calculator of 8850 minus 750 enter that's the 81 it's going to be the same debit and credit so i'm going to just put negative 81 for the credit 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 cell i20 we can say equals and then go point to that 8100 that's going to bring the balance 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 i7 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 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 a 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 all right 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 C at this time depreciation of office equipment all right 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 i bet 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 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 my cursor and see 11 right click paste it 123 again 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 if we go through that series of questions now let's talk about what depreciation is and what is depreciation here a cumulative 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 will 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 slow 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 forklift 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 talk about the methods to calculate that depreciation at a later time but the most obvious method will be a straight line method which means we'll take that cost we'll divide it by the useful life of the forklift and then we will expense it over that useful life but we won't go into that calculation any more detail than that at this point they're going to have to give us the number at this point so we have the 330 that is what the depreciation expense is determined to be so then you would think well why don't we decrease the value of the forklift with a credit by 330 and the reason we don't do that notice that we did do that in supplies we said hey supplies went down we'll just write down supplies from this to that why don't we write down the forklift from this to whatever it is after the decline in value and the reason is because we want to tell a reader two things we want to tell a reader hey we bought the forklift for this amount we you know at the end of the year there's still one forklift it's not like supplies and not like I counted supplies and there's less than one forklift but we do know that it went down in value and we need to represent that so we want to tell you by making this new account that this is the estimate of the value that we're assuming it went down by so this is just an estimate we're telling our reader hey it's just an estimate that it went down by we still have one forklift that's what it cost we're assuming it went by down by this month that's why this is going to be a contra asset we're going to call this a contra account a contra asset meaning that all assets have debit balances this asset has a credit balance it's contra to the norm