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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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Classifying adjusting entries

The following accounts were taken from the unadjusted trial balance of Orion Co., a congressional lobbying firm. Indicate whether or not each account would normally require an adjusting entry. If the account normally requires an adjusting entry, use the following notation to indicate the type of adjustment:

AE—Accrued Expense

AR—Accrued Revenue

PE—Prepaid Expense

UR—Unearned Revenue

To illustrate, the answer for the first account follows:

Account Answer
Accounts Receivable Normally require s adjustment (AR ).
Cash  
Interest Expense  
Interest Receivable  
Johann Atkins, Capital  
Land  
Office Equipment  
Prepaid Rent  
Supplies  
Unearned Fees  
Wages Expense  

To determine

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).

Types of adjusting entries:

There are two types of adjusting entries, they are:

  • Accruals and,
  • Deferrals.

Deferrals:

Deferrals refer to the revenues that are collected in advance before the services are provided or sales are made to the customer, and the expenses are paid in advance before the expenses are incurred.

Deferrals are classified into two types.  They are prepaid expenses, and unearned revenues.

Prepaid expenses:  The expenses are paid in cash, before they are incurred.

Unearned revenue:  The cash is received, before the services are performed.

Accruals:

Accruals refer to the revenues that are generated from goods delivered or, service performed to the customer, but cash is not yet received from the customer, and the expenses are incurred, but cash is not yet paid.

Accruals are classified into two types.  They are accrued revenues, and accrued expenses.

Accrued revenues: Revenues are generated but not yet received in cash.

Accrued expenses: Expenses are incurred but not yet paid in cash.

To indicate: The types of adjustment and requirement of adjusting entry for the given accounts.

Explanation

Accounts receivable

In this case, Company O recognized the fees at the end of the accounting year. So, the necessary adjusting entry that the Company O should record to recognize the accrued revenue is as follows:

Date Description

Post

 Ref.

Debit

($)

Credit

($)

XXX Accounts receivable   XXXX  
         Fees earned     XXXX
  (To record the fees incurred at the end of the accounting year)      

Table (2)

Cash

In this case, cash is a permanent account (asset), and the business records the revenues and expenses on the income statement in the period in which cash is received or paid. So, there is no need to making adjusting entry at end of the accounting year.

JA’s capital

JA’s capital is a component of owner’s equity, and the amount of capital entered at the time of investment made by the owner.  In this case, there is no need to making adjusting entry, because the adjusting entries are required when the company recognized revenue and expenses at end of the accounting period.

Interest expense

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

Date Description

Post

 Ref.

Debit

($)

Credit

($)

XXX Interest expense   XXXX  
         Interest payable     XXXX
  (To record the interest expense at the end of the accounting year)      

Table (3)

Interest receivable

In this case, Company O recognized the interest revenue at the end of the accounting year.  So, the necessary adjusting entry that the Company O should record to recognize the accrued revenue is as follows:

Date Description

Post

 Ref.

Debit

($)

Credit

($)

XXX Interest expense   XXXX  
         Interest payable     XXXX
  (To record the interest expense at the end of the accounting year)      

Table (4)

Land

Land is an asset, and the amount of land entered at historical cost basis (original cost of asset).  In this case, there is no need to making adjusting entry, because the adjusting entries are required when the company recognized revenue and expenses at end of the accounting period.

Office equipment

Office equipment is an asset, and the amount of office equipment entered at historical cost basis (original cost of asset).  In this case, there is no need to making adjusting entry, because the adjusting entries are required when the company recognized revenue and expenses at end of the accounting period...

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