Page 130 - Accounting Principles (A Business Perspective)

3. Adjustments for financial reporting

Previous bal. 5,200*
Dec. 31 Adjustment 7 1,000*_
Bal. after adjustment 6,200
*This previous balance came from transactions discussed in Chapter 2.
(Dr.) Service Revenue (Cr.)
2010
Bal. before adjustment 10,700
Dec. 31 Adjustment
5—previously
unearned
revenue. 1,500
Dec. 31 Adjustment 7 1,000
Bal. after both adjustments 13200
The service revenue appears in the income statement; the asset, accounts receivable, appears in 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 employee salaries. At the end of the
accounting period, the company recognizes these obligations by preparing an adjusting entry including both a
liability and an expense. For this reason, we also call these obligations accrued expenses.

Salaries The recording of the payment of employee salaries usually involves 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 USD 3,600 of salaries on Friday, 2010 December 28, to cover the first four weeks of
December. The entry made at that time was:
2010
Dec. 28 Salaries Expense 3,600
Cash 3,600
Paid training employee salaries for the first four weeks of
December.
Assuming that the last day of December 2010 falls on a Monday, this expense account does not show salaries
earned by employees for the last day of the month. Nor does any account show the employer’s obligation to pay

these salaries. The T-accounts pertaining to salaries appear as follows before adjustment:
(Dr.) Salaries Expense (Cr) (Dr.) Salaries Payable (Cr)
2010 Dec. 3,600 2010 -0-
28 Dec. 28 Bal.
If salaries are USD 3,600 for four weeks, they are USD 900 per week. For a five-day workweek, daily salaries are
USD 180. MicroTrain makes the following adjusting entry on December 31 to accrue salaries for one day:
2010
Dec. 31 Salaries Expense 180
Salaries Payable 180
To accrue one day's salaries that were earned but not paid.
After adjustment, the two T-accounts involved appear as follows:
(Dr.) Salaries Expense (Cr)
2010
Dec. 28 Bal. 3,600
Dec. 31 Adjustment 8 180

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