Video summary

10 Common Adjusting Journal Entries

Main summary

Key takeaways

Educational

Main ideas & concepts covered

  • Purpose of adjusting journal entries: They are “the heart and soul” of a month-end close, correcting the general ledger so reported balances reflect economic activity under the accrual basis of accounting.

Debits vs. credits refresher

  • Debits always equal credits in any journal entry (no exceptions).
  • Assets: increase with a debit, decrease with a credit.
  • Liabilities and owners’ equity: increase with a credit, decrease with a debit.
  • Revenue / other income increase retained earnings → therefore they behave like equity (increase with credit).
  • Expenses / COGS / operating / other expenses decrease retained earnings → behave opposite (increase with debit).

Accrual vs. cash basis

  • Under accrual accounting, companies record transactions based on when they occur (earned/consumed/incurred), so more adjusting entries are needed.
  • Under cash basis, income/expenses are largely based on cash received/paid (and the speaker notes this is not GAAP-compliant).

What a journal entry is

  • A record containing debits and credits to adjust the general ledger.
  • Can include one or multiple debits/credits per entry.
  • The video then lists and exemplifies 10 common adjusting journal entries used in month-end close.

Methodology / instruction-style content (10 adjusting journal entries)

1) Prepaid expenses (unconsumed benefit already paid for)

  • Definition: Expense paid but not yet consumed.

At the time of payment

  • Debit: Prepaid expenses (asset)
  • Credit: Cash

When consumed (over time / when the benefit is used)

  • Debit: Expense account (e.g., Conferences)
  • Credit: Prepaid expenses

2) Deferred revenue (unfulfilled obligation / prepayment received)

  • Definition: Cash received for goods/services you owe to the customer.

When customer prepays

  • Debit: Cash or Accounts receivable (asset)
  • Credit: Deferred revenue (liability)

As you deliver service each month (e.g., subscriptions over 12 months)

  • Move a portion from liability to revenue:
    • Debit: Deferred revenue
    • Credit: Revenue (for that earned portion)
  • Example logic given: take 1/12 each month of the contract value.

3) Accrued expenses (incurred but not yet paid; often before bill received)

  • Definition: Expenses consumed/incurred but not yet paid; may not have a bill yet (often not recorded as accounts payable yet).

At month-end estimate (before bill arrives)

  • Debit: Consulting fees / accounting fees (expense)
  • Credit: Accrued expenses

When the actual bill arrives in the next month

  • Record normally:
    • Debit: Consulting fees / accounting fees
    • Credit: Accounts payable
  • Reverse the prior month’s estimate:
    • Debit: Accrued expenses
    • Credit: Consulting fees / accounting fees
  • Purpose of reversal: Prevent double-counting; ensure the expense lands in the correct period if the estimate was right.

4) Accrued interest (interest expense incurred but not paid yet)

When interest accrues (before payment)

  • Debit: Interest expense
  • Credit: Accrued interest

When paid

  • Debit: Accrued interest
  • Credit: Cash

5) Accrued payroll (pay earned but not yet paid by month-end)

  • Scenario: Payroll occurs biweekly or twice monthly; expense must reflect the correct period.

At month-end estimate

  • Debit: Payroll expense
  • Credit: Accrued payroll

When payroll is paid

  • Debit: Accrued payroll
  • Credit: Cash

6) Inventory (moving costs through stages; then recognizing COGS)

Inventory types/stages

  • Raw materials (inputs)
  • Work in process (WIP) (partially assembled)
  • Finished goods (ready to sell)

As materials are purchased

  • Debit: Raw materials
  • Credit: Cash

Converting raw materials → WIP

  • Debit: Work in process
  • Credit: Raw materials

Converting WIP → finished goods

  • Debit: Finished goods
  • Credit: Work in process

When finished goods are sold (COGS entry)

  • Debit: Cost of goods sold (COGS)
  • Credit: Finished goods

7) Security deposits (tenant; refundable vs. forfeited portion)

When depositing with landlord

  • Debit: Security deposit (asset)
  • Credit: Cash

When deposit is returned

  • Debit: Cash
  • Credit: Security deposit

If not fully returned

  • Debit: an expense account (example given: “beer pong expense”)
  • (Implied offset would be reduction of the security deposit/claim for the forfeited portion.)

8) Intercompany balances (eliminations/plugging between parent/subsidiary)

  • Context: When one company owns another, you must consolidate; intercompany transactions create balances that must be eliminated.
  • Example given: Company A pays money that is actually an expense for Company B.

Company A’s entry

  • Debit: Due from subsidiary (or due from parent, depending on direction)
  • Credit: Cash

Company B’s entry

  • Debit: Hero expense (speaker’s example)
  • Credit: Due to parent

During consolidation

  • The due-to and due-from balances cancel out.

9) Depreciation (allocating fixed asset cost over useful life)

  • Buying equipment is described as context (not an adjusting entry itself):
    • Debit: Equipment (fixed asset)
    • Credit: Cash

At period-end (straight-line example)

  • Debit: Depreciation expense

  • Credit: Accumulated depreciation (contra-asset)

  • Net effect: Accumulated depreciation offsets the fixed asset’s cost to show net book value.

  • Salvage value mention (if applicable): [ (purchase\ price - salvage\ value) / useful\ life ]

10) Amortization (allocating intangible asset cost over useful life)

  • Definition: Like depreciation, but for intangible assets (e.g., patents).

At period-end

  • Debit: Amortization expense

  • Credit: Accumulated amortization (contra-asset)

  • Concept: Accumulated amortization offsets the carrying value of the intangible asset.

Speakers / sources featured

  • Josh (CFO Guy) — the presenter/voice of the video.

Original video