On December 31, an adjusting journal entry is made because it is the end of an accounting period and MicroTrain has not used all of the insurance they paid for. MicroTrain will record an adjusting entry for 1 month of insurance expense ($2,400 ÷ 12 months) because the policy began December 1 and the year-end is December 31. The following table shows how to record this adjusting entry in the journal:DebitCreditDec. 31Insurance Expense200Prepaid Insurance200To record insurance expense for December.Before this adjusting entry was made, the entire $2,400 insurance payment made on December 1, was a prepaid expense for 12 months of protection. So on December 31, one month of protection had passed, and an adjusting entry transferred $200 of the $2,400 ($2,400 ÷ 12 = $200) to Insurance Expense.After journal entries have been adjusted, they must be posted to the ledgers again, the three-column ledger accounts appear as follows:Prepaid InsuranceDateExplanationDebitCreditBalanceDec.1Purchased on Account2,4002,40031Adjustment2002,200Insurance ExpenseDateExplanationDebitCreditBalanceDec.31Adjustment200200Note that we are cycling through the second and third steps of the accounting equation again. Onthe income statement for the year ended December 31, MicroTrain reports one month of insurance expense, $200, as one of the expenses it incurred in generating that year's revenues. Itreports the remaining amount of the prepaid expense, $2,200, as an asset on the balance sheet. The $2,200 prepaid expense represents 11 months of insurance protection that remains as a future benefit.
Example 3—Asset / Expense Adjusting Entry for SuppliesWhen a company purchases supplies in bulk, it is recorded as an asset until the supplies are used. An adjusting entry is used to record the amount of supplies used (supplies expense) during the period. To determine the amount of supplies used during the period, a physical count is madeof the supplies remaining or on hand. We can use the following formula for supplies expense:Beginning supplies + supplies purchases during the period – physical count of suppliesremainingNote: Beginning supplies + supplies purchased = the Supplies balance in the Unadjusted Trial Balance.MicroTrain has a beginning supplies balance of $500 and purchased $8,000 in supplies during theperiod. A physical count of supplies on December 31 shows we have $1,500 remaining on hand. The supplies expense for the period will be $7,000 ($500 beginning balance + $8,000 in supplies purchased – $1,500 remaining), and the adjusting entry will be:DebitCreditDec. 31Supplies Expense7,000Supplies7,000To record supplies expense.Before this adjusting entry was made, the supplies asset account had a balance of $8,500. After the adjusting entry, the account balance is $1,500 and matches the amount of supplies from the physical count.