Adjusting entries examples

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Unformatted text preview: le and a credit to Service Revenue. Interest is not recorded until time has passed – interest has been earned. On 12/31/X2, the client now owes interest, but cash is not due until maturity date. The company has earned interest for 3 months (Oct, Nov, and Dec). The computation is Principal times Rate times Time ‐‐ $15,000 times 6% (or .06) equals $900 times 3/12 equals $225. Assets – Interest Receivableis decreased. Stockholders’ Equity – Interest Revenue is increased. Step 2 ‐‐ Debit Interest Receivable and credit Interest Revenue for $225. Step 3 – After posting the AE to Interest Receivable, the ending balance of $225 is correct. This is an asset on the Balance Sheet. Interest Revenue goes to the Income Statement. Example 7: 12/31/X2 is on Tuesday. There are 3 employees who are each paid $120 per day (disregard employment taxes – these will be covered later). The work week is Monday through Friday and payday is every Friday. The next payday is 1/3/X3. On 12/31/X2, the employees have worked two days (Monday and Tuesday). The accounting period has ended but payday is on Friday (1/3/X3). An adjusting entry is needed to record the salaries expense for 12/30 and 12/31. This matches the expense to the proper accounting period. It also recognizes the liability on 12/31 (two days of salaries that will be paid on 1/3/X3). Computation ‐‐ $120 per day times 3 employees times 2 days equals $720. Accounts Affected: Liabilities – Salaries Payable is increased. Stockholders’ Equity – Salaries Expense is increased. The 12/31/X2 adjusting entry is a debit to Salaries Expense and a credit to Salaries Payable for $720 Step 3 – After posting the credit, Salaries Payable has the correct ending balance. This will appear as a liability on the Balance Sheet. Salaries Expense goes to the Income Statement. The regular entry on payday – 1/3/X3 is: Salaries Expense ($120 per day times 3 employees times 3 days) $1,080 Salaries Payable 720 Cash ($120 per day times 3 employees times 5 days) 1,800 This regular entry decreases the liability that was created on 12/31/X2. It records the salaries expense for the three days in the new accounting period (Wed, Thurs, and Fri). It also records the cash that is paid to the employees for 5 days (Mon ‐ Fri. We have had an opportunity to work with adjusting entries – Practice. We have worked with the three step process for adjustment – analyzing, recording, and posting – Confidence Builder Accountants must analyze account balances and events to determine which adjustments are needed. This results in a compliance with both the matching and revenue recognition principles. After the adjusting entries have been posted to the ledger accounts, correct financial statements can be prepared....
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This note was uploaded on 09/26/2013 for the course ACCOUNTING 201 taught by Professor Malu during the Fall '12 term at Ateneo de Manila University.

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