LESSON 4 - 1 Lesson4 Adjusting Journal Entries Lets look...

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Lesson 4 Adjusting Journal Entries Let’s look again at the last three Journal Entries in the “Comprehensive Example” that you saw in Lesson 3. All three of these journals were recorded on the last day of the month, January 31, 2008, as reproduced below: Rent Expense 1,000 Prepaid Rent 1,000 Office Supplies Expense 400 Office Supplies 400 Depreciation Expense 500 Accumulated Depreciation-Truck 500 These Journal Entries all involve the expensing or “using up” a portion of an asset that had been previously purchased, that is, these journals recognize expensing or “using up” Prepaid Expenses . No specific event, such as the receipt of an invoice from a supplier, receipt of an electric utility bill, or payment in cash for a liability debit, triggered these journals. Rather, AAA just reaching the end of the reporting period, and AAA’s accountants realize that some of its Prepaid Expenses had been “used up” as a result of normal operations of the business during that period. Having reached the end of the month, the AAA accountants know they need to analyze all of the company’s Prepaid Expenses and determine how much of each of these assets was expensed (“used up”) during the period. For each asset that has been expended during the period just ended, the accountants will enter an Adjusting Journal Entry that in effect reduces the Prepaid Assets’ value as shown in the Balance Sheet at the end of the period by the amounts the assets have been “used up”; and increases the expenses shown in the Income Statement for the period by the same amount (that is, the dollar amount of the assets “used up”). In Journal Entry form, this “decrease in assets” and corresponding “increase in expenses” is recorded by: 1) Debiting the appropriate Expense Accounts to recognize the increase in expenses due to the expensing of the prepaid assets, and 2) Crediting the prepaid assets to decrease these assets by the amount that they have been expended. Methods for determining how much of an asset was used up (expensed) can vary. For example, AAA determined $1,000 of Prepaid Rent had been expended by reviewing its office building rental contract and seeing that monthly rent was $1,000; whereas, AAA determined the value of Office Supplies “used up” by physically counting and valuing the 1
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Office Supplies on January 31, and then subtracting this ending amount from the beginning amount of Office Supplies ($2,000 - $1,600); and AAA determined the expensed amount of the delivery truck by yet another method, that is, by using a depreciation method that systematically allocates the cost of the truck over its estimated useful life. Because Prepaid Expenses normally result in accountants at the end of every period needing to make Adjusting Journal Entries that record the amounts of the prepaid expenses “used up” and corresponding expenses, we say “Prepaid Expenses give rise to Adjusting Journal Entries.” But exactly why do accountants make adjusting journal entries for the “using up” of
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This note was uploaded on 07/16/2010 for the course ACCT 2302 taught by Professor Dr.winking during the Spring '10 term at Tulane.

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LESSON 4 - 1 Lesson4 Adjusting Journal Entries Lets look...

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