Journal Entries
Adjusting Entries
Making special entries at period end for items like bad debt or prepaid rent.
Questions use scenarios with prepaid rent, prepaid insurance, depreciation, accrued salaries, and bad debts. Calculation questions provide purchase date, annual cost, and useful life. Error-detection questions describe a missing entry and ask which financial statement line is misstated.
What the exam tests
Quantitative Adjustment Calculation
Calculate the exact dollar amount for an adjusting entry, such as partial-year depreciation for a machine purchased mid-year.
Journal Entry Selection
Identify the correct debit and credit accounts for an end-of-period adjustment (e.g., debit Rent Expense, credit Prepaid Rent for the portion used).
Ending Balance Determination
Calculate the remaining account balance after an adjustment has been made, such as the balance in Prepaid Insurance at year-end.
Method-Specific Adjustments
Apply the correct accounting method: direct write-off (debit Bad Debt Expense, credit A/R) vs. allowance method (debit Bad Debt Expense, credit Allowance for Doubtful Accounts).
Impact Analysis (Error Detection)
Identify whether an omitted adjusting entry causes an account balance to be overstated or understated on the financial statements.
Debit/Credit Logic for Adjustments
Key rules
- ›Adjusting entries always involve one balance sheet account and one income statement account.
- ›Using up a prepaid asset: Debit Expense, Credit Prepaid Asset (e.g., Debit Rent Expense, Credit Prepaid Rent).
- ›Accruing an unrecorded expense: Debit Expense, Credit Payable.
- ›Accruing unearned revenue earned: Debit Unearned Revenue, Credit Revenue.
Common traps
- !Debiting the asset account instead of the expense account when recording usage of a prepaid item.
Multi-Step Procedural Logic
Key rules
- ›Determine what the account balance SHOULD be at period end.
- ›Compare to the CURRENT balance.
- ›The difference is the adjusting entry amount.
Common traps
- !Using the original cost instead of the adjusted target when the account already has a partial balance.
Arithmetical Accuracy (Time-Based Calculations)
Key rules
- ›Monthly expense = annual cost ÷ 12.
- ›Partial-year depreciation: calculate full-year depreciation, then multiply by the fraction of the year the asset was held.
- ›Remaining prepaid balance = original prepaid − (monthly rate × months used).
Common traps
- !Using months remaining instead of months used when calculating the expense.
Interpretive Data Reading
Key rules
- ›Extract: purchase date, period-end date, residual value, useful life, and existing account balance from the scenario.
- ›Identify whether the question asks for the adjustment amount or the resulting ending balance.
Common traps
- !Confusing the adjustment amount with the ending balance. They are different numbers.
Impact Analysis Logic
Key rules
- ›A missing expense adjustment → Expense understated, Net Income overstated, Equity overstated.
- ›A missing asset reduction → Asset overstated, Equity overstated.
- ›A missing liability accrual → Liability understated, Equity overstated.
Common traps
- !Naming the wrong account type as the misstated one. Trace through the accounting equation methodically.
Try one
MBM Corporation purchased a new machine on July 1st for $84,000. The equipment has a useful life of 20 years and a residual value of $6,000. Using the straight-line method, calculate the dollar amount for the depreciation adjusting entry at the end of the current year (December 31).
Annual depreciation = ($84,000 - $6,000) / 20 years = $3,900. The machine was held for 6 months (July through December), so the adjustment is $3,900 × (6/12) = $1,950.
Practice these skills offline.
Download GovReady and drill every topic with instant feedback. No internet required.
Download on the App Store