Lecture Illustartions - Topic 4

Lecture Illustartions - Topic 4 - Financial Accounting and...

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Financial Accounting and Analysis Topic 4 – Lecture Illustrations Lecture Illustration 1 Refer to the Trial Balance for Wong Pty Ltd discussed in Lecture 2. An accounting period of 1 month is used; adjusting entries will be dated 31 October. Wong Pty Ltd Trial Balance as at 31 October 2010 No. Account Title Debit Credit 100 Cash 15,200 110 Advertising Supplies 2,500 112 Prepaid Insurance 600 130 Office Equipment 5,000 200 Accounts Payable 2,500 213 Revenue Received in Advance 1,200 230 Bank Loan 5,000 300 Share Capital 10,000 310 Retained Earnings - 320 Dividends 500 400 Service Revenue 10,000 500 Salaries Expense 4,000 510 Rent Expense 900 $28,700 $28,700 1. Supplies Advertising Supplies of $2,500, originally recorded as an asset Supplies on hand 31 October: $1,000 Thus the cost of supplies used is $1,500 ($2,500 - $1,000) Journal entry: Oct 31 Spplies expense 1500 Adv supplies 1500 General Ledger entry: Advertising Supplies No. 110 Oct 5 Accounts Payable 200 2,500 Oct 31 Supplies Ex 1500 1000 Advertising Supplies Expense No. 505 Oct 31 Advertising Supplies 1500 Financial Accounting and Analysis - Lecture Illustration – Topic 4 Page 1 of 6 Reprinted with permission of John Wiley & Sons, Inc.
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The asset account Advertising Supplies now shows a debit balance of $1,000, which is equal to the cost of supplies on hand at balance date. Advertising Supplies Expense shows a debit balance of $1,500, which equals the cost of supplies used in October. If the adjusting entry was not made, October expenses would be understated and profit overstated by $1,500. Both assets and equity would be overstated by $1,500 in the 31 October statement of financial position. 2. Insurance Insurance paid for 1 year in advance: $600 Insurance for October $600/12 = $50 Journal entry: Oct 31 Insurrance EX 50 Prepaid Insurrance 50 General ledger: Prepaid Insurance No. 112 Oct 4 Bank 100 600 Oct 31 Insurance Expense No. 515 Oct 31
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