Adjusting Entries – Examples
Let’s work with some examples. We are working with a one year accounting period that ends on 12/31/X2. Let’s use a three step process. Step 1 – Analyze the transaction. Step 2 – Record in the journal. Step 3 – Post to the ledger. Example 1: On 12/31/X2 (before the adjusting process), Supplies, an asset, has a balance of $2,500. Employees take a physical account of the supplies on hand. That physical count reveals that $1,200 of supplies remains. Step 1 ‐‐ The balance of Supplies before the adjusting entry is $2,500. Subtract the amount determined during the physical count ($1,200). The result ($1,300) represents the amount of supplies that have been used up – Supplies Expense. Assets – Supplies is decreased. Stockholders’ Equity – Supplies Expense is increased. Step 2 ‐‐ Debit Supplies Expense and credit Supplies for $1,300 (the amount that has been used up – the expense). Step 3 – After posting the AE to the Supplies account, ending balance of $1,200 is correct. This is an asset on the Balance Sheet. Supplies Expense has a $1,300 ending balance. This is an expense on the Income Statement. Example 2: On 8/31/X2, $4,800 was paid for a two‐year insurance policy. The journal entry on that day included a debit to Prepaid Insurance and a credit to Cash for $4,800. Step 1 – The cost of $4,800 is divided by the 24 months that the policy is effective. That results in $200 of insurance expense each month. On 12/31/X2, an adjustment is needed to record the expense that has been incurred (used up or expired) in the accounting period (4 months – Sept, Oct, Nov, and Dec). We are simply matching $200 each month that the insurance is in effect for each accounting period. The amount of insurance expense is $800. Assets – Prepaid Insurance is decreased. Stockholders’ Equity – Insurance Expense is increased. Step 2 ‐‐ Debit Insurance Expense and credit Prepaid Insurance for $800. Step 3 – After posting the AE to the Prepaid Insurance account, the...
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