Adjusting Entry Workflow
Key Takeaways
- Start every FAR adjusting-entry task by identifying the required ending balance before calculating the journal entry.
- Timing differences such as deposits in transit usually reconcile balances but do not automatically create book entries.
- Allowance, accrual, deferral, and depreciation entries are solved by comparing the unadjusted trial balance to supporting evidence.
- A complete workpaper shows the source fact, required balance, unadjusted balance, adjustment, and debit-credit entry.
- No-entry conclusions are valid only when the source item affects another reconciliation side or was already recorded correctly.
Adjusting Entry Workflow
Financial Accounting and Reporting (FAR) task-based simulations often look like a pile of invoices, bank notices, aging schedules, and trial balance lines, but the job is usually narrow: decide whether the books need an adjusting entry and compute the amount. FAR runs 4 hours and is scored 0 to 99 with a passing score of 75; the task-based simulations (TBS) carry 50 percent of the score, and you face 7 of them, so roughly 20 minutes each. Treat every prompt like a month-end close file, not a memory test, because partial credit lives inside the entry, not the narrative.
The Four-Step Close Routine
Use the same sequence every time so you do not improvise under time pressure:
- Identify the account and the assertion at risk: existence, completeness, valuation, cutoff, or classification.
- Read the source document only for facts that change the required financial statement balance; ignore decoy facts.
- Compute the required ending balance before looking for the entry amount.
- Compare the required balance to the unadjusted trial balance and write the debit-credit entry that closes the gap.
The third step prevents most errors. If the required allowance is $11,800 and the unadjusted allowance already carries a $4,500 credit, the adjustment is not $11,800. It is the $7,300 credit needed to reach the required ending balance. Candidates who post the full required balance double-count an amount already on the books.
Mini Workpaper: Year-End Adjustments
Client: North Pier Supply, December 31, 2026. Ignore income taxes. The controller gives you this unadjusted trial balance extract and supporting notes.
| Account | Unadjusted balance | Exhibit fact | Required adjustment | Entry |
|---|---|---|---|---|
| Supplies | Dr 9,600 | Physical count shows 2,100 on hand | 7,500 expense | Dr Supplies expense, Cr Supplies |
| Prepaid insurance | Dr 24,000 | 12-month policy started July 1 | 12,000 expense | Dr Insurance expense, Cr Prepaid insurance |
| Unearned service revenue | Cr 18,000 | 40 percent of service obligation completed | 7,200 revenue | Dr Unearned revenue, Cr Service revenue |
| Wages payable | 0 | Earned but unpaid wages are 8,400 | 8,400 liability | Dr Wages expense, Cr Wages payable |
| Allowance for credit losses | Cr 4,500 | Aging requires ending allowance of 11,800 | 7,300 expense | Dr Bad debt expense, Cr Allowance |
This is a complete simulation workpaper because each adjustment ties to an account, a source fact, a required balance or usage amount, and an entry. The prepaid insurance line is a classic half-year trap: a 12-month policy bought July 1 means six months expired, so $24,000 multiplied by 6/12 equals $12,000 expense, leaving $12,000 prepaid. Do not combine all debits and credits into one compound entry unless the response grid asks for a single combined entry. Separate entries make review easier and reduce sign mistakes.
Journal Entry Review Grid
| Entry type | Debit usually increases | Credit usually increases | Common trap |
|---|---|---|---|
| Accrued expense | Expense | Liability | Missing expenses incurred but not paid |
| Accrued revenue | Receivable or contract asset | Revenue | Recording only when cash arrives |
| Deferral expense | Expense | Asset | Expensing the full prepaid asset twice |
| Deferral revenue | Liability | Revenue | Recognizing all customer advances as revenue |
| Valuation allowance | Expense | Contra asset | Using required ending balance as the entry amount |
No-Entry Discipline
A FAR workbook should include no-entry decisions because the exam tests judgment, not reflexive posting. A deposit in transit belongs on the bank side of a bank reconciliation and usually needs no book entry because the cash receipt was already recorded by the company. An outstanding check is also a bank-side timing difference. By contrast, a bank service charge, a nonsufficient funds (NSF) customer check, bank interest credited, or a bank collection of a note belongs on the book side and usually requires an entry because the company has not yet recorded it.
Close Checklist
Before entering the answer, ask five questions:
- Is this a recognition issue, a measurement issue, or only a classification issue?
- Did I compute the required ending balance first?
- Is the existing balance a debit or a credit?
- Does the entry preserve the normal account balance after posting?
- Would the financial statements be misstated if no entry were recorded?
On exam day, the best adjusting entry is not the fanciest one. It is the entry that can be traced from exhibit fact to required balance to debit and credit without a hidden assumption.
Worked Accrual Example
Suppose North Pier signed a 6 percent, $100,000 note payable on October 1, 2026, with interest paid annually. By December 31, three months of interest have accrued: $100,000 times 6 percent times 3/12 equals $1,500. Required ending interest payable is $1,500, the unadjusted balance is zero, so the entry is debit interest expense $1,500 and credit interest payable $1,500. The trap is using the full annual $6,000; only the portion economically earned through year-end is accrued.
Always anchor accruals to the fraction of the period elapsed, not the contractual annual figure, and confirm whether any interest was already paid and recorded during the period before booking the accrual.
A company has an allowance for credit losses with a $3,200 debit balance before adjustment. The aging schedule requires an ending allowance of $19,700. What adjusting entry should be recorded?
On December 31, a company has $15,000 of unearned revenue. It determines that 60 percent of the related service has been performed by year-end. Which entry is correct?
Prepaid insurance has an unadjusted debit balance of $24,000, representing a 12-month policy that began on July 1. At December 31, what adjusting entry is required?