Adjusting entries Selected account balances before adjustment for Intuit Realty at November 30, the end of the current year, follow: Debits Credits Accounts Receivable $ 75,000 Equipment 250,000 Accumulated Depreciation—Equipment $ 12,000 Prepaid Rent 12,000 Supplies 3,170 Wages Payable — Unearned Fees 10,000 Fees Earned 400,000 Wages Expense 140,000 Rent Expense — Depreciation Expense — Supplies Expense — Data needed for year-end adjustments are as follows: Supplies on hand at November 30, $550. Wages accrued but not paid at November 30, $2,000. Depreciation of equipment during year, $1,675. Unearned fees at November 30, $4,000. Rent expired during year, $8,500. Unbilled fees at November 30, $5,380 Instructions 1. Journalize the six adjusting entries required at November 30, based on the data presented. 2. What would be the effect on the income statement if the adjustments for equipment depreciation and unearned fees were omitted at the end of the year? 3. What would be the effect on the balance sheet if the adjustments for equipment deprecia­tion and unearned fees were omitted at the end of the year? 4. What would be the effect on the “Net increase or decrease in cash” on the statement of cash flows if the adjustments for equipment depreciation and unearned fees were omitted at the end of the year?

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Accrual basis of accounting:

Accrual basis of accounting refers to recognizing the financial transactions during the period in which the event occurs, even if the cash is not exchanged.

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

To prepare: The adjusting entries in the books of Company IR at the end of the year.

An adjusting entry for Supplies expenses:

In this case, Company IR recognized the supplies expenses at the end of the year. So, the necessary adjusting entry that the Company IR should record to recognize the supplies expense is as follows:

Table (1)

Working note:

Calculate the value of supplies expense

Supplies expense = (The amount of supplies begining of the year)−(The amount of supplies on hand at the end of the year)=($3,170–$550)=$2,620 (1)

• Supplies expense decreased the value of stockholders’ equity by $2,620; hence debit the supplies expenses for $2,620.
• Supplies are an asset, and it decreased the value of asset by $2,620, hence credit the supplies for $2,620.  

An adjusting entry for depreciation expenses:

In this case, Company IR recognized the depreciation expenses at the end of the year. So, the necessary adjusting entry that the Company IR should record to recognize the accrued expense is as follows:

Table (2)

• Depreciation expense decreased the value of stockholders’ equity by $1,675; hence debit the depreciation expenses for $1,675.
• Accumulated depreciation is a contra-asset account, and it decreased the value of asset by $1,675, hence credit the accumulated depreciation for $1,675.  

An adjusting entry for rent expenses:

In this case, Company IR recognized the rent expenses at the end of the year. So, the necessary adjusting entry that the Company IR should record to recognize the prepaid expense is as follows:

Table (3)

• Rent expense decreased the value of stockholders’ equity by $8,500; hence debit the rent expenses for $8,500.
• Prepaid rent is an asset, and it decreased the value of asset by $6,000, hence credit the prepaid rent for $8,500

The effects on the income statement, if adjusting entries are not recorded.

The effects on the balance sheet, if adjusting entries are not recorded.

The effects on the “net increase or decrease in cash” on the statement of cash flow, if adjusting entries are not recorded.