Quiz 5: Adjustments and the Worksheet
TO: Mr. T FROM: Mr. A DATE: January 10 th 2014 SUBJECT: Effect of omission of adjustment entries on financial statements. Adjusting entries are an important aspect of closing the books of accounts at the year end. Its omission will affect the financial statement in as much the same way as omission of a transaction. Thus, its importance cannot be under-estimated. In summary, the effect on present level of profit is tabulated here. Below, there is a detailed explanation of why and how important each of the non-incorporated adjustments are. Both the net income and asset balance will be over-stated by $52,300. Effect of omitting Rent adjustment : Rent was paid in July 2013 for a year. As the books are being closed at December end, the part of rent which has to be accrued in the present financial year has to be identified as an expense. In the present scenario no rent expense has been identified. The amount to be identified is: The adjusting journal entry will be: Thus, this omission will over-state both the assets and the profits by $21,000. Effect of omitting Supplies adjustment : Supplies of $18,000 as per Trial Balance is the physical value of the asset purchased during the year. However, the supplies already consumed need to be expensed in the books. If this is not done the assets and profits will be overstated. The amount to be identified is: The adjusting journal entry will be: Effect of omitting Depreciation adjustment : The value of building exists correctly in the Trial balance. However, depreciation needs to be provided for the current period as well. The building was purchased 3 years back and has a useful life of 25 years and has to be depreciated over this period. Depreciation amount: The adjusting journal entry will be: Depreciation being an expense has to appear in the Income Statement and if omitted will overstate profit by $16,800. Also, Accumulated Depreciation - Building appears on the balance sheet and it omission will result in over-estimation of book value of building.
Depreciation: Depreciation is a process of allocating the total cost of an asset to an expense over assets useful life. Depreciation is non-cash expenditure it reduces the value of the assets due to various reasons like age of the asset, obsolescence, or wear and tear. The original cost of the property, plant, and equipment is given at $28,915m. In 2009, DP has reported $1,251m worth of depreciation expense. Thus, depreciation percentage:
Assets under straight line depreciation are depreciated on the basis of cost of the asset less any salvage value apportioned over the useful life of the asset. The machinery in the question has a cost of $30,000, no salvage value and an estimated life of 10 years or 120 months. Calculate Depreciation: Depreciation being an asset-use expense should be recorded against the asset. However, accounting conventions require long-term assets to be shown at cost in the Balance Sheet until disposed-off or fully depreciated. For such assets, depreciation adjustments have to be made in a contra account. The machinery depreciation under review will be adjusted as per following: • Charge Depreciation Expense Account by $250. • Credit contra expense account i.e. 'Accumulated Depreciation - Equipment' Account by $250. • Transfer Depreciation Expense Account balance to Profit and Loss statement. Prepare journal entry: