Chapter 5
The Accounting Cycle: Adjustments
114
March 1
March 31
April 30
Adjustment Period
(One Month)
Transactions FromRaina's Perspective
Receive payment
from tenant
Date of Adjustment
Adjustment
Adjustment
Adjustment
Date of Adjustment
May 31
Date of Adjustment
DR $6,600 Cash (asset)
CR $6,600 Unearned
Revenue (liability)
DR $2,200 Unearned
Revenue (liability)
CR $2,200 Rent Revenue
(income statement)
DR $2,200 Unearned
Revenue (liability)
CR $2,200 Rent Revenue
(income statement)
DR $2,200 Unearned
Revenue (liability)
CR $2,200 Rent Revenue
(income statement)
Recognize earned rent
revenue for March
Recognize earned rent
revenue for April
Recognize earned rent
revenue for May
______________
FIGURE 5.11
Prepaid expenses
Similar to unearned revenue, accounting for prepaid expenses involves making adjustments for
amounts used. Recall that when a prepaid expense is recognized as an actual expense, prepaid
expenses (an asset) decreases and the expense (an income statement account) increases.This is the
adjusting entry for prepaid expenses.
Prepaid rent
We can apply this to the example of Raina Property Management which was illustrated in the
unearned revenue section.Now examine the financial impact of the transactions from the perspective
of the tenant who paid Raina three months of rent at $2,200 per month in advance. On March 1,
the tenant would have recorded a cash payment to Raina for $6,600 as a prepayment for rent, as
shown in Figure 5.12.
If the tenant also uses a monthly accounting period, then it will adjust the prepaid rent at the end
of each month. In this case, the tenant is adjusting based on what has been used (one month) on
March 31. The adjustment will decrease the prepaid rent account and increase rent expense on
OWNER’S CAPITAL
BALANCE SHEET
LIABILITIES
OWNER’S EQUITY
ACCOUNTS
PAYABLE
UNEARNED
REVENUE
BANK LOAN
INCOME STATEMENT
EXPENSES
SERVICE REVENUE
DEPRECIATION
INSURANCE
INTEREST
SALARIES
RENT
TELEPHONE
No change in owner’s equity
ASSETS
CASH
OFFICE
SUPPLIES
PREPAID
EXPENSES
ACCOUNTS
RECEIVABLE
-$6,600 CR
+$6,600 DR
journal
Page 1
date
2016
account title and explanation Pr debit credit
Mar 1 Prepaid Rent
6,600
Cash
6,600
Pay cash for 3 months rent
____________
FIGURE 5.12
