The entries required at the end of an accounting period to record internal transactions are called adjusting entries. In a broad sense they may be said to be corrections to the ledger. But the necessity for bringing the ledger up-to-date is a planned part of the “accounting entries” is therefore more appropriate than “correcting entries.”
The illustrations of adjusting entries that follow are based on the ledger of XYZ, Company. T accounts are used for illustrative purposes and the adjusting entries, which are presented directly in the accounts, appear in bold face type to differentiate them from items that were posted during the month.
Supplies and Prepaid Expenses
According to XYZ, Company‘s trial balance as we presented above in the trial balance section, the balance in the supplies account on 30th June is $750. Some of these supplies (paper, ink, etc.) have been sued during the month and some are still in stock at the end of the month. If the amount of either is known, the other can be readily determined. It is more economical to determine the cost of the supplies on hand at the end of the month and to assume that the remainder has been used than it is to keep a record of those used from day to day. Assuming that the inventory of supplies on 30th June is determined to be $230, the amount to be transferred from the asset account to the expense account is computed as follows:
Supplies available (balance on account)…………. $750
Supplies on hand (inventory)……………………... $230
Supplies used (amount of adjustment)…………… $520
Increases in expense accounts are recorded as debits and decrease in asset accounts are recorded as credit. Hence the adjusting entry required is a debit to Supplies Expense of $520 and a credit to Supplies of $520. After the adjustment, the asset account has a debit balance of $230 and the expense account has a debit balance of $520.
SUPPLIES SUPPLIES EXPENSE
______________________ ____________________Jun. 2 400 Jun. 30 520 Jun. 30 520
20 350
Prepaid Rent is another mixed account that needs to be adjusted at the end of the accounting period. The debit balance in this account represents in part an expense of the current period and in part a prepayment of expense of future periods. The portion that is expense should be transferred to the expense account, Rent Expense.
The debit of $600 in the prepaid rent account illustrated below represents payment of rent of three months, June, July and August. At the end of June, the rent expense account should be increased (debited) and the prepaid rent account should be decreased (credited) for $200, the rental for none month. The two accounts appear as follows after the adjusting entry has been recorded:
PREPAID RENT RENT EXPENSES
_____________________________ ___________________________Jun. 2 600 Jun. 30 200 Jun. 30 200
The prepaid rent account now has debit balance of $400, which is an asset; the rent expense account has a debit balance of $200, which is an expense.
If adjustments for these prepayments were not made, assets and capital would be both overstated on the balance sheet for 30th June and net profit would be overstated on the profit and loss account for the month of June.
Fixed Assets
As was explained earlier, all fixed assets except land depreciate. The adjusting entry to record depreciation is similar to those illustrated in the preceding section in that there is a transfer from an asset account to an expense account. The amount to be transferred to expenses, however, must be based on an estimate rather than on verifiable fact, as in the case of expiration of rent and other prepaid expenses. Because of this and the desire to present both the original cost and the accumulated depreciation on the balance sheet, the reduction of the asset is credited to an account titled, Accumulated Depreciation.
The adjusting entry to record depreciation for June is illustrated in the T accounts below. The estimated amount of depreciation for the month is $50
OFFICE EQUIPMENT ACCUMULATED DEPRECIATION
________________________________ ________________________________Jun. 2 4,200 Jun. 30 50
3 1,800
DEPRECIATION EXPENSE
________________________________ Jun. 30 50
The accumulated depreciation account is called a contra asset account. The increase of $50 in the account represents a subtraction from the cost recorded in the corresponding asset account. The asset account and the related contra account are component parts of the asset, the difference between the two balances being customarily referred to as the written down value or book value of the asset.
The balance in both the asset and contra asset account, together with the written down value may be presented on the balance sheet in the following manner.
Fixed assets:
Office equipment----------------------$5,000
Less accumulated depreciation----------50 $5,950
Accrued Expenses (Liabilities)
As has been explained, it is customary to pay for some type of services and commodities, such as insurance and supplies, before they are used. It is also not unusual for services or commodities to be used before payment has been made for them. An example f this type of situation, which is known as an accrual, is services performed by employees but not paid during the period. The salary expense accrues day by day but payment is made usually in the beginning of the following month.
If salaries or wages are paid in the month following that to which they related, there is an expense and a liability that must be recorded in the accounts by an adjusting entry.
The salary of part time employees of XYZ Company for the month of June amounted to $708, which was paid to them on 1st July. This amount is an expense of June and it should, therefore, be debited to salary expense account for that month. It is also a liability as on 30th June and it should therefore be credited to accrued salaries account. The two accounts appear as follows after the adjusting entry has been recorded:
ACCRUED SALARIES SALARY EXPENSE
_______________________________ _____________________________ Jun. 30 708 Jun. 30 708
The debit balance of $708 in salary expense account is the actual expense for the month, and the credit balance of the same amount in accrued salaries account is the liability for salaries owed to employees as on 30th June. If the accrual is overlooked when preparing the profit and loss account and balance sheet as at the end of June, the net profit reported on the profit and loss account would be overstated; and on the balance sheet, liabilities would be understated and capital overstated.Xbox 360 12 Month Live Gold Card
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