Adjustments are necessary before preparation of financial statements. There are five that need to be completed for Hay and Barnabas. Each adjustment has an effect on the accounting equation. The following will show the affects of each transaction reflected in the T accounts for each. The first consideration is the equipment that was purchased for eight hundred and forty thousand on January 1, 2003. According to the information provided the equipment has a life span of 12 years. The depreciation is seventy thousand or 840,000/ 12. Adjustments to accumulated depreciation and depreciation expense are required. In this case the adjustment increases both accounts.
Equipment Depreciation expense
During the year interest has been accruing on the bonds payable. The interest will affect accrued interest payable and interest expense. The 20,000 will increase both accounts. Accrued interest payable will reflect an increase and interest expense will reflect a decrease.
Payable Interest Expense
As of December 1, 2003, there remains seven thousand dollars of unexpired insurance. The adjustments will affect cash and unexpired insurance. The unexpired insurance increases or is debited and cash decreases or credited.
Cash Unexpired Insurance
On December 1, 2003 one hundred and forty thousand was paid to cover the rent for the next four months. This payment covers the rent until March 31, 2004. This prepayment is an asset for Hay and Barnabas. The transaction will affect only asset accounts. Cash will again decrease (credit) and increase prepaid rent (debit). (Horngren, Sundem, Elliott, Philbrick, 2006, p.105)