The employees of Dew Drop Inn get paid every Friday for a 5-day workweek (Monday through Friday).The total payroll is $5,000 per day of work.If the accounting period ends on Thursday of a given week,what adjustment must be made to the company's accounting records?
A)Decrease Cash by $20,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
B)Increase Salaries payable by $20,000 and increase shareholders' equity by recognizing Salaries expense for the same amount.
C)Increase Salaries payable by $20,000 and decrease shareholders' equity by recognizing Salaries expense for the same amount.
D)No adjustment is necessary because there is no expense until the employees are paid on Friday.

Question

Quizplus · Accepted Answer

Since the employees are not paid until Friday, the company owes them $20,000 in salaries for the workweek that ends on Thursday. Therefore, the company should increase its Salaries payable by $20,000 to reflect this obligation, and decrease its Shareholders' equity by the same amount by recognizing Salaries expense. Option A is incorrect because it suggests decreasing Cash, which is not necessary since the company has not yet paid its employees. Option B is incorrect because it suggests increasing Salaries payable without decreasing Shareholders' equity, which would result in an overstatement of equity. Option D is incorrect because the expense should be recognized when the work is performed, not when the employees are paid.

The Employees of Dew Drop Inn Get Paid Every Friday