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Adjusting entries On March 31, the following data were accumulated to assist the accountant in preparing the adjusting entries for Potomac Realty: The supplies account balance on March 31 is $5,620. The supplies on hand on March 31 are $1,290. The unearned rent account balance on March 31 is $5,000 representing the receipt of an advance payment on March 1 of four months’ rent from tenants. Wages accrued but not paid at March 31 are $2,290. Fees accrued but unbilled at March 31 are $16,825. Depreciation of office equipment is $4,600. Instructions 1. Journalize the adjusting entries required at March 31. 2. Briefly explain the difference between adjusting entries and entries that would be made to correct errors.

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Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663

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Chapter
Section
BuyFindarrow_forward

Financial And Managerial Accounting

15th Edition
WARREN + 1 other
Publisher: Cengage Learning,
ISBN: 9781337902663
Chapter 3, Problem 1PA
Textbook Problem
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Adjusting entries

On March 31, the following data were accumulated to assist the accountant in preparing the adjusting entries for Potomac Realty:

  • The supplies account balance on March 31 is $5,620. The supplies on hand on March 31 are $1,290.
  • The unearned rent account balance on March 31 is $5,000 representing the receipt of an advance payment on March 1 of four months’ rent from tenants.
  • Wages accrued but not paid at March 31 are $2,290.
  • Fees accrued but unbilled at March 31 are $16,825.
  • Depreciation of office equipment is $4,600.

Instructions

  1. 1. Journalize the adjusting entries required at March 31.
  2. 2. Briefly explain the difference between adjusting entries and entries that would be made to correct errors.

1.

To determine

Record the adjusting entries for the given transactions on March 31.

Explanation of Solution

Adjusting Entries

Adjusting entries indicates those entries, which are passed in the books of accounts at the end of one accounting period. These entries are passed in the books of accounts as per the revenue recognition principle and the expenses recognition principle to adjust the revenue, and the expenses of a business in the period of their occurrence.

Rule of Debit and Credit:

  • • Debit - Increase in all assets, expenses & dividends, and decrease in all liabilities and stockholders’ equity.
  • • Credit - Increase in all liabilities and stockholders’ equity, and decrease in all assets & expenses.

The following entry shows the adjusting entry for supplies on March 31.

DateAccount Titles and ExplanationDebit ($)Credit ($)
March 31Supplies Expense (1)4,330
        Supplies 4,330
(To record the supplies expense at the end of the accounting period)

Table (1)

The impact on the accounting equation for the above referred adjusting entry is as follows:

{Assets-$4,330}=Liabilities+{Stockholders' Equity-$4,330}

  • • Supplies expense is a component of stockholders’ equity, and it decreased the stockholders’ equity by $4,330. So debit supplies expense by $4,330.
  • • Supplies are an asset for the business, and it is decreased by $4,330. So credit supplies by $4,330.

Working Note:

Calculation of fees earned for the accounting period

(Suppliesexpensefortheyear)=(Amountofsuppliesbeforeadjustment)-(Amountofsuppliesonhand)=$5,620-$1,290=$4,330 (1)

The following entry shows the adjusting entry for unearned rent on March 31.

DateAccount Titles and ExplanationDebit ($)Credit ($)
March 31Unearned Rent1,250
        Rent Revenue (2)1,250
(To record the revenue earned from rent at the end of the accounting period.)

                                                     Table (2)

The impact on the accounting equation for the above referred adjusting entry is as follows:

Assets={Liabilities-$1,250}+{Stockholders'equity+$1,250}

  • • Unearned Rent is a liability, and it is decreased by $1,250. So debit unearned rent by $1,250.
  • • Rent revenue is a component of Stockholders ‘equity, and it is increased by $1,250

2.

To determine

Explain the difference between the adjusting entries and correcting entries

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Chapter 3 Solutions

Financial And Managerial Accounting
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