Adjusting Entries

B. Prepaid expenses will always require and adjustment when they are used as time goes by. Receivables and payables will be collected and paid in the future; however, this is not an adjustment, it is a regular transaction. Sales are typically recorded automatically by the accounting system when the goods are provided.

B. Total wage expense for the period must equal the total amount worked/incurred during the period. How much is paid does not matter. The amount incurred is $18,000 work performed this period and $1,000 employees earned in the current period.

B. Interest earned is an increase in revenue, which increased owner’s equity. Interest earned is in exchange for an asset which increases (cash or accounts receivable). Liabilities are not impacted when interest is earned because interest is not collected before it is earned.

A. Prepaid rent must be adjusted at the end of each period for the amount that was used during that period. An adjustment would have been made for the first year. The adjustment made at the end of the second year is for what is used in the second year only. The adjustment will decrease the asset and increase an expense for the amount of the asset used (d.).

C. The adjustment for depreciation expense increases the expense, which decreases net income and increases a contra asset, which decreases assets. If this entry is not made, assets will be too high (overstated) and expenses will be too low (understated).

a.  Insurance expense 

Using an asset is an expense.  The expense must be recorded in the period it is used not the period it is paid.

b.  Interest receivable – debit     and Interest revenue – credit   

Notes receivable is recorded when the company provides money in exchange for earning interest.  A receivable is recorded if the cash for interest has not yet been collected. If cash is collected, not adjustment is necessary because the revenue is recorded when the cash is collected.  

You must use the account interest receivable because notes receivable is for the principle only

c.  Interest expense – debit   and Interest payable – credit

Notes payable is recorded when the company borrows money in exchange for paying interest.  The service provided is the use of the money which is an expense called interest expense. When the expense has not yet been paid, it is owed, and the liability must also be recorded.

d.  Depreciation expense – debit   and Accumulated Depreciation – credit

Using a long-term asset is an expense called depreciation expense.  Any time a company is using long term assets to produce revenue they must make the adjustment to record depreciation expense.  Accumulated depreciation is always the credit. 

e.  Sales or Service Revenue – credit

This adjustment must be made when the company has provided the goods or services and it has not yet recorded this in the accounting records. The entry to record the revenue is usually recorded automatically in the accounting records when the goods are shipped, however, if it does not get recorded for some reason, you must make an adjustment.  The credit to service revenue usually must be made because you forgot to invoice a customer for services performed.

f.  Supplies expense 

Using an asset is an expense.  As supplies are used during the period nothing is recorded because cash is not paid as they are used.  An adjustment must be made to show what is used during this period.

g.  Income Tax expense – debit and
Income Tax payable  – credit

Taxes are accessed as income is earned and paid at a later date.   
The expense must be recorded in the same period the revenues are earned.

h.  Interest receivable – debit    and   
Interest Revenue – credit

Investments in bonds are made for the purpose of earning interest from excess cash.  The earnings process is revenue. If the revenue has not yet been collected an entry to record the revenue must be made and a receivable is also recorded.

a.   Rent Expense
             Prepaid Rent Expense

Rent was paid for prior to using the facility or equipment.  As time passes and the service is provided an expense must be recorded and the asset decreased because future benefit is less.

b.   Supplies
             Supplies Expense

Supplies were purchased during the period and recorded as an expense assuming all supplies would be used during the period.  At the end of the period it was determined some supplies were still left. The expense must be reduced for the supplies not yet used and the additional asset the company still has must be recorded.   In this case, the company recorded too much expense and must take some back for the asset not yet used.  

c.   Revenue
             Unearned Revenue

Revenues were recorded when cash was received assuming the revenues would be earned by the end of the period.  Some were not yet earned this period and must be taken out of revenues and recorded as unearned revenues.

d.   Interest Expense
             Interest Payable

The company has a note payable that incurs interest.  The amount incurred during this period that has not been paid must be recorded.  The amount is determined by principle x rate x time.

e.   Depreciation Expense
             Accumulated Depreciation

The company is using long term assets (P/P/E) to produce revenue.  The expense must be recorded in the same period the revenue is recorded (matching).

f.   Accounts Receivable
             Service Fees

A service was provided to a customer and the company forgot to invoice the customer.  This adjustment is recorded when it is discovered that a service was provided and not yet recorded.

g.   Interest Receivable
             Interest Revenue

The company loaned money to another party and is charging interest for the use of the money.   Interest is earned which is a revenue that must be recorded and a receivable is recorded when the cash has not yet been collected.   

h.  Rent Receivable
             Rent Revenue

The company is providing the use of an asset to another company and the service has been provided and the other company has not yet paid. 

a.  Supplies                                 6,000
            Supplies Expense                  6,000

The asset supplies must equal what the company really has.  The account shows $12,000 so another $6,000 must be added to get to the $18,000 the company really has.   Not enough assets means too much expense was recorded and the expense must be decreased.

b.  Insurance Expense               4,000
            Prepaid Insurance                   4,000

The balance in the asset prepaid insurance must be the amount that the company still has paid ahead of time.  This is $4,000, so the balance of $8,000 must be decreased by $4,000 to get to the $4,000 left. The amount used this period is also an expense. Using an asset always is an expense.

c.  Depreciation Expense 10,000
            Accumulated Depreciation 10,000

There is not amount for depreciation expense yet so this must be recorded.  
The company has P/P/E so they will have an adjustment for depreciation.

d.  Interest Expense                       267
            Interest Payable                         267

interest incurred is calculated:  principle x rate x time = interest expense
10,000 x .08 x 4/12 = $266.67 round to $267

You know no interest has been paid this period yet because there is no balance for interest expense yet.  You must record the entire amount incurred this period.  

e.   Salaries Expense                   3,000
            Salaries Payable                       3,000

Incurred means an expense occurred when the service was provided to the company.  This expense must be recorded in the period incurred; you can not wait to record the expense when it is paid later.  The unadjusted salary expense amount of $4,000 has been incurred and paid and you will must add to the expense the other $3,000 incurred that has not yet been paid.

f. Unearned revenues                   5,000
            Revenues                                     5,000

The current balance in unearned revenues is 6,000 and this must be 1,000, the amount that is still owed.  To get the balance in unearned revenue to $1,000 that you now owe you must decrease unearned revenues by $5,000.  Revenue that is no longer unearned is earned and revenue must also be increased.