Adjusting Entries Practice — Accruals, Deferrals, and Trial Balance
Purpose: Practice deciding what belongs in the current accounting period, writing the debit and credit, and tracing the effect into financial statements. This original HyNote practice guide builds on introductory financial accounting; it is not an official textbook assessment or an answer key to a course assignment.
Scope: Simplified accrual-basis accounting for a service corporation, using US-style account names and dollars. We use the asset method for prepaid expenses and the liability method for customer advances. Other initial-recording methods can require different adjustments. The exercises omit income taxes, sales taxes, inventory, complex revenue contracts, impairment, and advanced reporting rules. Depreciation uses the stated straight-line assumptions.
How to study: Read PART 1, then solve a short example in PARTS 2–4 with the solution covered. Attempt the complete case in PART 5 before opening PART 6. The new problems in PART 7 have answers in Appendix A. Use the quiz for additional application and the flashcards for recall. These exercises support learning; they do not establish readiness for a professional examination.
Notation: DR = debit; CR = credit. Debit and credit mean accounting sides, not good and bad. Every journal entry below has equal total debits and credits.
Background reading: OpenStax’s adjustment concepts, common adjustments, adjusted trial balance, and financial statements. These links are references for the concepts; all companies, data, explanations, and practice questions here are original teaching material. For a wider course review, use Wharton Introduction to Financial Accounting Notes.
PART 1 — DECIDE WHAT NEEDS ADJUSTING
1.1 Recognition comes before cash timing
Under accrual accounting, a service business recognizes revenue as it earns it and recognizes expenses as resources are consumed or obligations arise in the period. Cash can move before, during, or after that recognition. Receiving cash in advance does not by itself establish earned revenue; paying cash in advance does not by itself establish that the whole payment is this period’s expense.
The routine period-end adjustments in this guide update accruals, deferrals, and depreciation without a new cash receipt or payment. A cash payment, a cash receipt, or a correction to a mistaken cash balance is classified separately here. This is a useful rule for these introductory exercises, not a claim that every real-world use of the phrase “adjusting journal entry” has the same narrow scope.
1.2 The four timing patterns
| Pattern | What happens first? | What needs recognition now? | Typical period-end entry |
|---|
| Prepaid expense | Cash paid; an asset recorded | Resource consumed | DR Expense; CR Prepaid Asset |
| Unearned revenue | Cash received; a liability recorded | Service earned | DR Unearned Revenue; CR Revenue |
| Accrued revenue | Service performed before cash collection | Earned amount receivable | DR Receivable; CR Revenue |
| Accrued expense | Expense incurred before cash payment | Expense and obligation | DR Expense; CR Payable |
Depreciation is cost allocation for a long-lived asset: DR Depreciation Expense; CR Accumulated Depreciation. The credit preserves the asset’s historical cost in its own account. It is not an estimate of cash saved for replacement or a direct measurement of market-price changes.
1.3 A reliable five-step method
- Set the cutoff. Identify the reporting date and the period being measured.
- Read what is already recorded. Identify the unadjusted balance and any adjustments already posted. Distinguish an amount earned or used from an amount still unearned or unused.
- Calculate what belongs to this period. Use elapsed coverage, a physical count, work completed, days owed, or the stated allocation method.
- Write and post the entry. Name the accounts and directions, check DR = CR, and calculate the new balances.
- Explain the result. State the effects on assets, liabilities, revenue, expenses, and net income. Check the accounting equation and the period’s assumptions.
Never use an unexplained plug to force a trial balance to agree. An equal trial balance checks arithmetic agreement between debit and credit balances; it can still contain omitted entries, wrong-account postings, and wrong-period amounts.
1.4 Normal balances and different stages
Assets, expenses, and dividends normally increase with a debit. Liabilities, common stock, retained earnings, and revenue normally increase with a credit. A decrease uses the opposite side. A contra-asset such as Accumulated Depreciation normally has a credit balance and reduces the related asset’s net carrying amount.
The usual sequence here is: unadjusted trial balance → adjusting entries → adjusted trial balance → income statement → statement of retained earnings → balance sheet → closing entries. The adjusted trial balance is still before closing. It retains revenue, expense, and dividends balances. The ending retained earnings used in the balance sheet is calculated from beginning retained earnings plus net income minus dividends; it is not obtained by treating dividends as an expense.
PART 2 — PRACTICE DEFERRALS
2.1 Prepaid coverage: separate payment from consumption
Worked example 1 — Insurance. A business pays $5,400 on September 1 for nine months of equal insurance coverage beginning that day. It initially debits Prepaid Insurance and credits Cash. No insurance expense has yet been posted. For a December 31 year-end, four full months have expired: September through December. The monthly amount is $5,400/9 = $600; current expense is $2,400, leaving a $3,000 prepaid asset.
| December 31 adjustment | Debit ($) | Credit ($) |
|---|
| Insurance Expense | 2,400 | — |
| Prepaid Insurance | — | 2,400 |
The adjustment decreases assets and net income by $2,400. Cash is unchanged at the adjustment date because the payment was already recorded. If $1,200 of that same four-month expense had already been posted, the additional adjustment would be only $1,200. Do not record the full cumulative requirement twice.
2.2 Supplies: expense the amount used
Worked example 2 — A physical count. Supplies has a $2,700 unadjusted debit balance, including purchases already posted during the period. A count finds $650 unused. The amount consumed is $2,700 − $650 = $2,050. Record DR Supplies Expense $2,050; CR Supplies $2,050. The asset ends at the physical count of $650.
If instead the problem gives beginning supplies and purchases separately, add them first to find supplies available. Check whether purchases are already included in a stated unadjusted account balance; adding them twice overstates usage. The remaining asset and the expense are different quantities.
2.3 Customer advances: recognize only the earned portion
Worked example 3 — An advance for services. A customer pays $8,400 in advance. The business initially records Cash and Unearned Service Revenue. By the reporting date, $3,200 of the promised service has been provided. Record DR Unearned Service Revenue $3,200; CR Service Revenue $3,200. The remaining liability is $5,200.
This entry reduces a liability and increases revenue and net income; it does not increase cash or create a new receivable. For these exercises, “earned” is based on the service completion information given. Do not assume equal monthly recognition for a contract unless the facts support that pattern.
Quick check: If the $3,200 entry is omitted, the liability is too high and revenue and net income are too low by $3,200. Assets are unchanged by that omission relative to the correctly adjusted balances.
PART 3 — PRACTICE ACCRUALS
3.1 Revenue earned but not yet billed
Worked example 4 — An unbilled project. A studio completes $2,750 of agreed services by December 31. It will invoice and collect in January. Nothing has yet been recorded. The December entry is DR Accounts Receivable $2,750; CR Service Revenue $2,750. Both assets and net income increase by $2,750.
When the receivable is later collected, the entry is DR Cash; CR Accounts Receivable. That collection does not create the same revenue a second time. If the service had already been invoiced and recorded, the year-end review should not accrue it again.
3.2 Payroll incurred but unpaid
Worked example 5 — Days owed. Five employees each earn $140 per working day. At year-end, two earned days per employee remain unpaid and unrecorded. The accrual is 5 × $140 × 2 = $1,400. Record DR Salaries Expense $1,400; CR Salaries Payable $1,400.
A later payment of that accrued amount debits Salaries Payable and credits Cash. If the later payment also includes work performed in the new period, split the payment between the old payable and the new period’s expense. This prevents recognizing the old expense twice or charging the new period for the whole payment.
3.3 Interest uses a rate and a time period
Worked example 6 — A loan accrual. A $15,000 note bears simple interest at 8% per year and has been outstanding for two full months at year-end. No interest has been recorded. Under the stated monthly convention, interest = $15,000 × 0.08 × 2/12 = $200. Record DR Interest Expense $200; CR Interest Payable $200. Notes Payable remains $15,000.
Use the annual rate as a decimal and the correct fraction of a year. Do not use 8 instead of 0.08 or divide the principal by the number of months. If a problem specifies a day-count basis, use that basis consistently; these month-based cases do not assume a universal banking convention. A utility expense incurred but not yet recorded follows the same expense/payable logic, using the amount attributable to the period.
PART 4 — ALLOCATE COST AND EXPLAIN ERRORS
4.1 Straight-line depreciation
Worked example 7 — A partial year. Equipment costs $32,000, has an estimated residual value of $2,000 and a five-year useful life, and is available for use for three full months in the current period. The stated policy is straight-line depreciation by full months. Annual depreciation = ($32,000 − $2,000)/5 = $6,000. This period’s charge is $6,000 × 3/12 = $1,500.
Record DR Depreciation Expense $1,500; CR Accumulated Depreciation—Equipment $1,500. If accumulated depreciation before this adjustment is $4,500, it ends at $6,000. Net equipment is $32,000 − $6,000 = $26,000. The equipment cost account remains $32,000. The residual value is deducted when calculating depreciable cost; it is not deducted again when subtracting accumulated depreciation from historical cost.
The charge lowers total assets, after deducting accumulated depreciation, and income without a cash payment at the adjustment date. Net book value is not necessarily a selling price. The method is a cost-allocation assumption, and a different stated policy can produce different timing.
4.2 Error direction: compare with the correct balances
The following table describes omitting the required adjustment, with no compensating errors and no income-tax effects. “Equity” includes the current period’s earnings in the financial statements, even though the retained earnings ledger has not yet been closed.
| Omitted adjustment | Assets | Liabilities | Net income and ending equity |
|---|
| Expired prepaid expense | Too high | Unchanged | Too high |
| Supplies consumed | Too high | Unchanged | Too high |
| Unearned amount now earned | Unchanged | Too high | Too low |
| Earned unbilled revenue | Too low | Unchanged | Too low |
| Incurred unpaid expense | Unchanged | Too low | Too high |
| Depreciation | Too high, net of the contra-asset | Unchanged | Too high |
Worked example 8 — Trace an omitted accrual. If an unrecorded $900 utility expense is omitted, Utilities Expense and Utilities Payable are each understated by $900. Net income and ending equity are overstated by $900. Cash and other assets are unchanged relative to the correctly adjusted result. Both sides of the missing entry are absent, so an otherwise balanced trial balance can still agree.
Write the effect in words before choosing an option. “A payable was omitted” means liabilities are too low; it does not mean a missing debit necessarily makes assets too low. Avoid guessing from the word “debit” alone.
PART 5 — TRY THE COMPLETE CASE
5.1 Harbor Learning Studio: the facts
Harbor Learning Studio, Inc. is a fictional service corporation. Prepare the quarter ended December 31, 2026. All figures below are invented teaching data in dollars. The unadjusted balances already include ordinary transactions for the quarter; no period-end adjustments for the listed items have been recorded. Beginning retained earnings is $8,000, and dividends of $1,500 were declared, paid, and recorded during the quarter. No other equity changes or income taxes apply.
Unadjusted trial balance — December 31, 2026
| Account | Debit ($) | Credit ($) |
|---|
| Cash | 24,000 | — |
| Accounts Receivable | 6,000 | — |
| Supplies | 2,400 | — |
| Prepaid Insurance | 4,800 | — |
| Equipment | 36,000 | — |
| Accumulated Depreciation—Equipment | — | 6,000 |
| Accounts Payable | — | 3,500 |
| Unearned Service Revenue | — | 7,200 |
| Notes Payable | — | 12,000 |
| Common Stock | — | 30,000 |
| Retained Earnings | — | 8,000 |
| Dividends | 1,500 | — |
| Service Revenue | — | 24,800 |
| Salaries Expense | 9,600 | — |
| Rent Expense | 6,000 | — |
| Utilities Expense | 1,200 | — |
| Total | 91,500 | 91,500 |
Additional information:
- A — Insurance: The $4,800 prepaid balance is an equal six-month policy beginning October 1. Nothing has yet been expensed for this coverage.
- B — Supplies: A December 31 count finds $900 still unused. The unadjusted balance includes all purchases already recorded.
- C — Customer advance: $3,000 of the service represented by Unearned Service Revenue has now been performed.
- D — Unbilled work: An additional $4,500 of services has been completed but has not been billed or recorded.
- E — Payroll: Salaries of $1,800 have been incurred but not paid or recorded.
- F — Utilities: Another $600 of utility cost relates to this quarter but has not been recorded or paid.
- G — Interest: The $12,000 note has been outstanding for all three months of the quarter at 6% annual simple interest. No interest is recorded. Use three-twelfths of a year.
- H — Depreciation: Equipment has cost $36,000, estimated residual value $6,000, and a five-year useful life. It was available for use for the whole quarter; use straight-line allocation by full months. The $6,000 accumulated depreciation balance relates to earlier periods.
5.2 Your tasks before seeing the solution
- Write the eight adjusting journal entries with dates, accounts, and amounts. Check each entry separately for equal debits and credits.
- Post them to the account balances and prepare the adjusted trial balance.
- Prepare an income statement, a statement of retained earnings, and a balance sheet. Show equipment cost and accumulated depreciation separately.
- Explain why cash does not change when these eight adjustments are posted, and why a balanced trial balance alone cannot prove the accounts are complete.
Stop here and attempt the case before opening PART 6. If stuck, identify the type of adjustment and the required ending asset, liability, revenue, or expense. The cash-flow statement is outside this case: complete period cash-flow information is not supplied.
PART 6 — WORK THROUGH THE COMPLETE SOLUTION
6.1 The eight journal entries
All entries are dated December 31, 2026. The amount column applies to both the debit and the credit shown.
| ID | Debit | Credit | Amount ($) |
|---|
| A | Insurance Expense | Prepaid Insurance | 2,400 |
| B | Supplies Expense | Supplies | 1,500 |
| C | Unearned Service Revenue | Service Revenue | 3,000 |
| D | Accounts Receivable | Service Revenue | 4,500 |
| E | Salaries Expense | Salaries Payable | 1,800 |
| F | Utilities Expense | Utilities Payable | 600 |
| G | Interest Expense | Interest Payable | 180 |
| H | Depreciation Expense | Accumulated Depreciation—Equipment | 1,500 |
A uses $4,800/6 × 3 = $2,400. B uses $2,400 − $900 = $1,500. C transfers only the $3,000 earned, not the entire advance. D adds work not previously recorded. E and F recognize the stated unpaid costs. G uses $12,000 × 0.06 × 3/12 = $180. H uses ($36,000 − $6,000)/5 × 3/12 = $1,500.
The entries total $15,480 of debits and $15,480 of credits. Equal totals are a check, but the account choice, period, and amount of each entry still need justification.
6.2 Post before preparing the trial balance
For an asset with a normal debit balance, a credit adjustment reduces it: Prepaid Insurance ends at $4,800 − $2,400 = $2,400 and Supplies ends at $900. Accounts Receivable increases from $6,000 to $10,500. Unearned Service Revenue decreases from a $7,200 credit balance to $4,200. Accumulated Depreciation increases from a $6,000 credit balance to $7,500; Equipment remains $36,000.
Service Revenue becomes $24,800 + $3,000 + $4,500 = $32,300. Salaries Expense becomes $11,400 and Utilities Expense becomes $1,800. The other new expense and payable accounts are added to the ledger. Cash stays $24,000 because none of the eight entries uses it.
Adjusted trial balance — December 31, 2026, before closing
| Account | Debit ($) | Credit ($) |
|---|
| Cash | 24,000 | — |
| Accounts Receivable | 10,500 | — |
| Supplies | 900 | — |
| Prepaid Insurance | 2,400 | — |
| Equipment | 36,000 | — |
| Accumulated Depreciation—Equipment | — | 7,500 |
| Accounts Payable | — | 3,500 |
| Unearned Service Revenue | — | 4,200 |
| Notes Payable | — | 12,000 |
| Common Stock | — | 30,000 |
| Retained Earnings | — | 8,000 |
| Dividends | 1,500 | — |
| Service Revenue | — | 32,300 |
| Salaries Expense | 11,400 | — |
| Rent Expense | 6,000 | — |
| Utilities Expense | 1,800 | — |
| Insurance Expense | 2,400 | — |
| Supplies Expense | 1,500 | — |
| Salaries Payable | — | 1,800 |
| Utilities Payable | — | 600 |
| Interest Expense | 180 | — |
| Interest Payable | — | 180 |
| Depreciation Expense | 1,500 | — |
| Total | 100,080 | 100,080 |
The adjusted total is $100,080 on each side. It is not the original $91,500 plus all $15,480 of adjustments: some entries increase one account while reducing another normal balance on the same trial-balance side. Post each account first, then total the balances. Do not add the journal-entry total mechanically to the old trial balance.
6.3 Income statement for the quarter
| Item | Amount ($) |
|---|
| Service Revenue | 32,300 |
| Salaries Expense | 11,400 |
| Rent Expense | 6,000 |
| Utilities Expense | 1,800 |
| Insurance Expense | 2,400 |
| Supplies Expense | 1,500 |
| Depreciation Expense | 1,500 |
| Interest Expense | 180 |
| Total expenses | 24,780 |
| Net income | 7,520 |
Revenue less expenses is $7,520. Dividends are an owner distribution, so they do not appear among expenses. Net income is not cash received: some revenue was accrued and some cash collected earlier is now being earned.
6.4 Statement of retained earnings for the quarter
| Item | Amount ($) |
|---|
| Beginning retained earnings | 8,000 |
| Add net income | 7,520 |
| Less dividends | (1,500) |
| Ending retained earnings | 14,020 |
The adjusted trial balance still shows the pre-closing Retained Earnings ledger balance of $8,000. The statement computes $14,020 by incorporating this quarter’s income and dividends. Closing entries subsequently transfer temporary-account balances into retained earnings. Using $8,000 directly in the final balance sheet would omit that roll-forward.
6.5 Balance sheet at December 31
| Assets | Amount ($) |
|---|
| Cash | 24,000 |
| Accounts Receivable | 10,500 |
| Supplies | 900 |
| Prepaid Insurance | 2,400 |
| Equipment, at cost | 36,000 |
| Less accumulated depreciation | (7,500) |
| Total assets | 66,300 |
| Liabilities and stockholders’ equity | Amount ($) |
|---|
| Accounts Payable | 3,500 |
| Unearned Service Revenue | 4,200 |
| Notes Payable | 12,000 |
| Salaries Payable | 1,800 |
| Utilities Payable | 600 |
| Interest Payable | 180 |
| Total liabilities | 22,280 |
| Common Stock | 30,000 |
| Retained Earnings, ending | 14,020 |
| Total equity | 44,020 |
| Total liabilities and equity | 66,300 |
The case balances: $66,300 = $22,280 + $44,020. The adjusted trial-balance total of $100,080 is not total assets: the trial balance also includes expenses, dividends, revenue, and other balances. Do not use the total of its debit column as an asset total.
6.6 Check the direction of the overall change
Unadjusted income would have been $24,800 − $16,800 = $8,000. Adjustments add $7,500 of revenue and $7,980 of expense, giving $8,000 + $7,500 − $7,980 = $7,520. Therefore the adjustments lower income by $480 overall, even though some individual adjustments increase it.
Compared with the unadjusted position, total assets (after deducting accumulated depreciation) fall $900: receivables increase $4,500 while insurance, supplies, and net equipment decrease by $2,400, $1,500, and $1,500. Liabilities fall a net $420: the $3,000 reduction in unearned revenue exceeds the $2,580 in new payables. Thus the accounting equation also checks the changes: −$900 = −$420 + (−$480). Equal debit and credit balances are one check; independent statement and change reconciliations provide additional checks.
PART 7 — CHECK YOUR LEARNING WITH NEW DATA
7.1 Checkpoint: avoid double recognition
A $7,200 insurance policy covers twelve equal months beginning April 1. Prepare September 30 accounts. The initial payment was recorded as an asset, and $1,800 of this policy’s expense has already been posted. No other changes affect the policy. Find total expense required to date, the additional adjustment, and ending Prepaid Insurance.
7.2 Checkpoint: combine different adjustment types
A company has $1,100 of unrecorded earned revenue and $450 of unrecorded unpaid salaries at year-end. Write both entries. What is the combined effect on assets, liabilities, and net income? If the two entries are omitted, would a balanced trial balance necessarily become unequal?
7.3 Checkpoint: link income to equity
Beginning retained earnings is $9,000. Adjusted revenue is $18,600, adjusted expenses total $12,400, and dividends are $1,200. Calculate net income and ending retained earnings. Explain which retained earnings amount belongs on the balance sheet and why the adjusted trial balance can still show the beginning balance before closing.
Use Appendix A to check your reasoning after attempting the questions. In the Quiz, Q1–7 emphasize recognition and deferrals; Q8–11 accruals and subsequent payment; Q12–18 depreciation and error effects; Q19–20 checks and statement links; Q21–25 revisit the complete case. Try explaining the debit, credit, and reporting effect before selecting an answer. Getting one amount right is not enough if the period or account is wrong.
APPENDIX A — CHECKPOINT ANSWERS
A.1 Insurance already partly expensed
April through September is six full months. Required expense is $7,200/12 × 6 = $3,600. Since $1,800 has already been recognized, post an additional DR Insurance Expense $1,800; CR Prepaid Insurance $1,800. Before that additional entry, the asset balance is $7,200 − $1,800 = $5,400; afterward it is $3,600. The total expense and the remaining asset happen to be equal here, but that is not a general rule.
Self-check: count coverage months, subtract expense already recorded for this same coverage, and reconcile original cost = total recognized expense + remaining prepaid balance. Do not expense a second $3,600.
A.2 Two accruals and one equation
Record DR Accounts Receivable $1,100; CR Service Revenue $1,100. Then record DR Salaries Expense $450; CR Salaries Payable $450. The combined effect is assets +$1,100, liabilities +$450, and net income and equity +$650. The equation checks: $1,100 = $450 + $650. Cash is unchanged at recognition.
Omitting both entries removes equal debits and credits, so an otherwise balanced trial balance can remain equal. Nevertheless, assets and liabilities are too low, and net income is understated by $650 relative to the correct result.
A.3 Roll retained earnings forward
Net income = $18,600 − $12,400 = $6,200. Ending retained earnings = $9,000 + $6,200 − $1,200 = $14,000. Use $14,000 in the period-end balance sheet. Before closing, the adjusted trial balance still contains the separate revenue, expense, and dividends balances and can show $9,000 in the Retained Earnings account. After closing, that ledger balance reflects $14,000 under these assumptions.
Self-check: dividends reduce retained earnings but not net income. An adjusted trial balance and a post-closing trial balance are different stages. If you can select an entry, calculate the additional amount, post the balance, and explain its financial-statement effect without looking at the solution, you are making progress on the core skills of this practice pack.
These are original HyNote accounting practice notes and invented teaching cases based on introductory accrual-accounting concepts, with public OpenStax Chapter 4 readings linked for background. They are not official OpenStax materials, a course transcript, or an official assignment answer key, and no endorsement is implied. The exercises use the stated asset/liability recording methods and simplified US-style service-corporation assumptions. They do not cover every reporting, tax, or professional-exam requirement. All journal entries, question wording, company data, and worked solutions in this pack are original.
