a. In a mercantile system of accounting, revenues and expenses are recorded in the period, to which they relate. The payment or receipt against expenses and revenue does not affect the income statement. Thus income statement presents the actual income (loss) earned in the period. To arrive at the net income of the period, we do some adjustment entries in the year end to record all those revenues and expenses which are accrued but not paid or received. Similarly there may be some revenues and expenses which were paid in a prior period but they relate to the current period. So adjustment entries are required to adjust all these accruals and deferrals.
Here, the book-keeper has shown the expense on payment basis only. Expenses are not adjusted for accruals. Practically this is not possible to make payment of all the expenses in the same period so adjustments are required to arrive at actual results or correct net income. There is no provision for expenses which are accrued but remain unpaid. There is a fixed asset Truck but there is no depreciation for truck. Therefore, loan officer detected in the first instance that accounts had not been adjusted. b. Possibly, Rent, Wages or Utilities may have some amount accrued but not paid. This amount should be added to respective accounts and a liability against these accruals should be recorded.
Generally supplies are purchased in lots and then used as and when required. So supplies may have some part which is still in stock. So to arrive at correct supply expense, stock on hand should be deducted from the amount of supply purchased. Normally, Insurance is a prepaid expense which is adjusted at the end of periods and the balance remains as Prepaid Insurance. So insurance should also be adjusted. There could be some revenue which is earned but not billed. Service Revenue should be adjusted for such revenue.
There is a truck which is a depreciable fixed asset so depreciation should be adjusted against the accumulated depreciation for the period.
Accounts requiring adjustment
We need to indicate whether the following accounts normally require an adjusting entry:
A. a. Accumulated Depreciation Yes
b. Dividends No
c. Land No
d. Salaries Payable Yes
e. Supplies Yes
f. Unearned Rent Yes
B. a. Building Yes
b. Cash No
c. Interest Expense Yes
d. Miscellaneous Expense No
e. Capital Stock No
f. Prepaid Insurance Yes
1. Make the journal entries for adjustments in the books of PS M on July 31, 2016:
(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:
Prepaid insurance Account:
Accumulated depreciation - office equipment Account:
Wages payable Account:
Unearned revenue Account:
Fees earned Account:
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:
Hence, the total balance of trail balance is $42,340.