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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjusting entries

On March 31, 2016, the following data were accumulated to assist the accountant in preparing the adjusting entries for Potomac Realty:

  1. a. The supplies account balance on March 31 is $5,620 The supplies on hand on March 31 are $1,290.
  2. b. 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.
  3. c. Wages accrued but not paid at March 31 are $2,290.
  4. d. Fees accrued but unbilled at March 31 are $16,825.
  5. e. Depreciation of office equipment is $4,600.

Instructions

  1. 1. Journalize the adjusting entries required at March 31, 2016.
  2. 2. Briefly explain the difference between adjusting entries and entries that would be made to correct errors.

1.

To determine

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.

To record: The adjusting entries for the given transactions on March 31, 2016.

Explanation
  1. a. The following entry shows the adjusting entry for supplies on March 31, 2016.
  2. b.  
Date Account Titles and Explanation Debit ($) Credit ($)
March 31, 2016 Supplies Expense (1) 4,330
       Supplies4,330
(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(A)$4,330}={Liabilities(L)+Equities(E)$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:

Calculate the amount of fees earned for the accounting period

(Suppliesexpensefor the year)=(Amountof suppliesbefore adjustment)(Amount of supplieson hand)=$5,620$1,290=$4,330 (1)

b. The following entry shows the adjusting entry for unearned rent on March 31, 2016.

Date Account Titles and Explanation Debit ($) Credit ($)
March 31, 2016 Unearned Rent 1,250
       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(A)}={Liabilities(L)+Equities(E)$1,250+$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. So credit rent revenue by $1,250.

Working Notes:

Calculate the rent revenue to be recorded at the end of the accounting period:

RentRevenue=UnearnedrentReceivedforthe period×(Numberofmonthsexpired)=$5,0004×(1)=$1,250 (2)

c

2.

To determine

To explain: The difference between the adjusting entries and correcting entries

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