Quiz 3: The Adjusting Process


Ethics and professional conduct in business: Accrual accounting method is a systematic approach. To prepare financial statements this method is generally followed. S R Company first maintained their accounts on cash basis. Later, after rejection of loan application it was replaced to accrual basis. But the company again applied for loan to another bank and declared that it had not been rejected previously for credit. It was an unethical attempt and also a misconduct as well as suppression of true fact from the part of the company. Secondly, in the financial statement accounts receivable included $30,000 owing to commission on property. It was correct because according to the accrual concept, income or expenditure should be recognized whenever there incurred. So the title to the property transferred beyond the current period is not an issue. Since commission on property incurred in the current period, it should be recorded in the financial statement. Therefore, while making the financial statement, the company adopted a fair way and put correct information in the statement to get it sanctioned for bank loan.

1. Make the journal entries for adjustments in the books of PS M on July 31, 2016: img Explanation(s): (A) At the end of the accounting period any unearned fees that have been earned require an adjusting entry. In this case, under the contract anything over 80 hours is paid at $40.00 per hour and that is debited as cash, also debited is the amount of 3600 for the month is moved from unearned revenue; the total amount of the fees is credited to fees earned as revenue. (B) At the end of the accounting period the supplies account must be adjusted to bring the account up to date to the supplies left on hand. Supplies Expense is debited as the expense occurs and supplies is credited to deduct the amount of supplies used bringing the account up to date with the amount of supplies left on hand. Supplies expense = Supplies account - supplies left on hand Supplies expense = 1,020 - 275 Supplies expense = $745 (C) At the end of the accounting period any prepaid expenses that have been used (expired) during the period requires an adjusting entry. In this case prepaid insurance would be credited to deduct the used (expired) insurance and insurance expense would be debited as the expense occurs. (D) At the end of the accounting period any depreciable assets require an adjusting entry to depreciate the asset(s). In this case depreciation expense- equipment is debited as the expense occurs and accumulated depreciation- equipment is credited to add the depreciation of the equipment. (F) At the end of the accounting period any wages that have been accrued but not paid require and adjusting entry. In this case wages expense is debited as the expense occurs and wages payable is credited to add these accrued wages to until they are paid. 2. Post the adjusting entries in affected accounts: Cash Account: img Supplies Account: img Prepaid insurance Account: img Accumulated depreciation - office equipment Account: img Wages payable Account: img Unearned revenue Account: img Fees earned Account: img Wages Account: img Supplies Account: img Insurance Account: img Depreciation Account: img 3. Make an adjusted trail balance: Preparation of a trial balance means prepare a book, which Contains balances of transactions, occurred during a particular Period. It includes organization's assets, liabilities, owners' equity, revenue, and expenses. A trial balance is calculated to verify that the sum of the debit is equal to the sum of the credits. After making the adjustment entries, prepare an adjusted trial balance. After all the adjustments are made the adjusted trial balance would appear as: img Hence, the total balance of trail balance is $42,340.

(1) Under the cash basis of accounting expenses and revenues are reported on the income statement as they are received. Therefore the only thing that matters is when the money is paid or received. The accrual basis of accounting requires companies to recognize the revenue or expense as they are actually earned throughout the year. Therefore companies must set up prepaid and unearned accounts to record the receipt of the cash but don't recognize until it has been earned.

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