| Course | MAT 200 Principles of Accounting I |
|---|---|
| Module | Module 4 |
| Paper type | Adjusting entries paper |
| Length | About 1,011 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | Business Administration |
| Updated | October 2026 |
Free sample paper for MAT 200 Module 4
From a $7,550 Profit to a $750 Loss: What Five Adjusting Entries Reveal About a Bike Shop's First Two Months
Student Name
Business Administration Program, Aspen University
MAT 200: Principles of Accounting I
Instructor Name
Month Day, Year
From a $7,550 Profit to a $750 Loss: What Five Adjusting Entries Reveal About a Bike Shop's First Two Months
At the end of May, Prairie Spoke Cycles' trial balance from Module 3 shows revenue of $32,700 and expenses of $25,150, an apparent profit of $7,550 for the shop's first two months. Sam Whitaker was pleased. But the bookkeeper, Lena Ortiz, explained that the trial balance did not yet reflect several things that had happened: two months of the prepaid rent had been used, the e-bikes and tools had worn, wages had been earned but not yet paid, a rental group had paid in advance for June and a repair job had been done but not billed. This paper prepares those adjustments and explains what they show.
Why Adjustments Are Needed
Under accrual accounting, a sale counts in the month the shop does the work, and a cost counts in the month it helps produce that sale. Most transactions are recorded when they happen, but some changes occur gradually or without a new document: rent paid in advance is used up day by day, equipment wears out, employees earn wages before payday. Adjusting entries record these changes at the end of each period so that the statements reflect the period's actual activity.
The Five Adjustments
Depreciation spreads the cost of the e-bikes and tools over the years they will be used. With a four-year life and no expected resale value, the shop uses $1,000 of their cost each month. The rental group's $1,800 was recorded as revenue when received, but the rentals happen in June; until then, the shop owes the group the service, so the amount is a liability.
| Adjustment | Type | Entry | Amount |
|---|---|---|---|
| Two months of the $6,000 three-month rent used | Prepaid expense | Debit Rent Expense; credit Prepaid Rent | 4,000 |
| E-bikes and tools, $48,000, four-year life | Depreciation | Debit Depreciation Expense; credit Accumulated Depreciation | 2,000 |
| Wages earned May 28 to 31, paid in June | Accrued expense | Debit Wages Expense; credit Wages Payable | 900 |
| Rental group paid $1,800 in May for June rentals | Unearned revenue | Debit Rental Revenue; credit Unearned Rental Revenue | 1,800 |
| Repair work for the cycling club done in May, not yet billed | Accrued revenue | Debit Accounts Receivable; credit Sales and Service Revenue | 400 |
Before and After
On the balance sheet, prepaid rent falls to $2,000, equipment is shown net of $2,000 accumulated depreciation, accounts receivable rises to $900 and two new liabilities appear: wages payable of $900 and unearned rental revenue of $1,800.
| Before adjustments | Adjustments | After adjustments | |
|---|---|---|---|
| Revenue | 32,700 | -1,800 + 400 | 31,300 |
| Expenses | 25,150 | +4,000 + 2,000 + 900 | 32,050 |
| Net income (loss) | 7,550 | (750) |
Why Accrual Figures Matter
Dechow (1994) studied whether earnings or cash flows better measure a firm's performance. Over short measurement intervals, earnings were more strongly associated with stock returns than cash flows, because accruals adjust for timing and matching problems in cash flows. Cash flow was the weakest guide for businesses whose inventory, receivables and equipment were shifting quickly, which describes most new ventures. Prairie Spoke is such a firm: its cash flows in April and May were dominated by buying inventory and equipment.
Where Accruals Need Care
Sloan (1996) split profit into its cash and accrual pieces and found the accrual piece less durable: earnings driven mainly by accruals were less likely to continue in later years. Accruals rest on estimates, and estimates can be wrong. Barth et al. (2001) found that separating earnings into cash flow and individual accrual components improved predictions of future cash flows, showing that accruals carry useful information about the future when properly measured.
For Prairie Spoke, these findings mean that the depreciation estimate, based on a guessed four-year life, deserves review once Sam sees how the rental fleet holds up.
The Adjusted Trial Balance
Lena then rebuilt the trial balance with the adjustments included. Total debits and credits each rose from $191,600 to $194,900. On the debit side, rent expense, depreciation, extra wages and the repair receivable add $7,300, while prepaid rent falls by $4,000. On the credit side, accumulated depreciation, wages payable, unearned rental revenue and the extra repair revenue add $5,100, while rental revenue falls by $1,800. Both sides grow by the same $3,300, so the books still balance. The adjusted trial balance is the starting point for the financial statements in Module 5.
Estimates in the Adjustments
Not every adjustment is equally certain. The rent, wages, unearned revenue and repair adjustments rest on documents: the lease, the time sheets, the rental group's receipt and the work order. Depreciation rests on an estimate of how long the e-bikes and tools will last. If rental bikes wear out in three years rather than four, monthly depreciation would be $1,333 rather than $1,000, and the shop's loss would be larger. Sloan's finding that accruals are less persistent applies most to estimates like these.
What the Owner and the Bank Should Conclude
The adjusted loss is not a crisis, and it is worth explaining to the bank in a short note with the statements. Start-up months are often unprofitable, and two months of rent and depreciation fell on a period of low sales before the summer riding season. But the unadjusted profit would have overstated the shop's performance by $8,300, and the bank, reading the quarterly statements, needs the adjusted figures to judge whether the loan is safe. June should look different: the rental group's $1,800 will become revenue as the rides happen, summer sales are typically the strongest of the year, and the start-up costs that weighed on April and May will not recur. Sam can now track whether that recovery happens using monthly adjusted statements rather than the cash in the bank account.
Conclusion
Five adjusting entries turn a $7,550 profit into a $750 loss by recording what the trial balance missed. Dechow shows why accrual figures better measure performance, Sloan shows why they need care and Barth, Cram and Nelson show that they help predict the cash the shop will generate. Sam now has a truer picture of the shop's first two months.
References
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76(1), 27-58. https://doi.org/10.2308/accr.2001.76.1.27
Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3-42. https://doi.org/10.1016/0165-4101(94)90016-7
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review, 71(3), 289-315. https://doi.org/10.2308/tar-9608042309
MAT 200 Module 4 instructions, in plain terms
MAT 200 Module 4 usually covers adjusting entries, and students are often asked to prepare adjustments for a business and explain their effect on the financial statements. Follow your course's Module 4 instructions; the shop and its figures are invented. Explain why adjustments are needed under accrual accounting. Identify the types of adjustments: prepaid expenses, depreciation, unearned revenue, accrued revenue and accrued expenses. Prepare each entry with its reasoning. Show the effect on income and the balance sheet. Interpret the result for users, and say which adjustments rest on estimates. Cite sources in APA 7 form.
How this MAT 200 Module 4 example is built
The shop's trial balance from Module 3 shows a profit of $7,550 for April and May, but it ignores rent used, wear on the e-bikes, wages earned but unpaid, a rental group's prepayment for June and an unbilled repair job. Dechow's Journal of Accounting and Economics article reported that over short windows, share prices moved more closely with reported profit than with cash flow, since accruals smooth out lumpy timing. Sloan's Accounting Review article showed that earnings driven by accruals were less likely to persist than earnings driven by cash flows. Barth, Cram and Nelson's Accounting Review article found that disaggregating earnings into cash flow and accrual components improved predictions of future cash flows. The table records rent expense of $4,000, depreciation of $2,000, accrued wages of $900, unearned rental revenue of $1,800 and accrued repair revenue of $400. Adjusted results show a $750 loss.
MAT 200 Module 4 rubric: what earns full marks
Adjusting entries papers earn credit when each entry is correct, the reasoning is explained and the effect on income is shown. This example prepares all five common types of adjustment, shows that together they turn a profit into a loss and uses Dechow, Sloan and Barth, Cram and Nelson to explain why accrual figures matter and where they need care. The before and after comparison makes the stakes clear, and the interpretation explains what the owner and bank should take from the result. Showing balance sheet effects alongside income effects completes the picture. Telling apart the entries backed by a lease or time sheet and the ones resting on a guess, like useful life, shows judgment about how reliable each figure is.
Common MAT 200 Module 4 mistakes, and how to avoid them
Adjustments papers often miss one side of an entry or confuse unearned revenue with accrued revenue. Unearned revenue is cash received before it is earned, a liability; accrued revenue is earned before it is billed, an asset. Another weakness is forgetting depreciation, which reduces income without any cash leaving. Explain the reasoning behind each entry. Trace each entry into the profit figure and into the list of assets and liabilities. Interpret what the adjusted figures mean. Finally, note which adjustments rest on estimates, such as useful life. Prepare an adjusted trial balance to show the books still balance after the entries.
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MAT 200 Module 4 questions, answered
What does MAT 200 Module 4 usually ask for?
Aspen's MAT 200 usually covers adjusting entries in this module, so preparing adjustments and explaining their effect on the statements is typical. Read your classroom prompt.
Why are adjusting entries needed?
Under accrual accounting, revenues and expenses must be recorded in the periods they belong to, and some events, such as using up prepaid rent, happen without a new transaction.
Are accrual earnings better than cash flows?
Dechow found that accrual-based earnings were more closely associated with firm performance than cash flows over short periods, because accruals fix timing problems.
Where can I find a free MAT 200 Module 4 sample paper?
The example above prepares five adjusting entries for a bike shop and shows how they change its profit.
What is the difference between unearned and accrued revenue?
Unearned revenue is cash received before the work is done, a liability; accrued revenue is earned before it is billed or paid, an asset.