Problem 3-1A Adjusting Entries On October 31, 2012, the following data were accu

Question

Problem 3-1A Adjusting Entries

On October 31, 2012, the following data were accumulated to assist the accountant in preparing the adjusting entries for Dependable Realty:

The supplies account balance on October 31 is $3,975. The supplies on hand on October 31 are $1,050. The unearned rent account balance on October 31 is $11,000, representing the receipt of an advance payment on October 1 of four months' rent from tenants. Wages accrued but not paid at October 31 are $2,500. Fees accrued but unbilled at October 31 are $4,900. Depreciation of office equipment is $1,100.

Explanation / Answer

In each case you have to decide what is in the account, what should be in the account, then debit or credit the account to change its current balance to the correct amount. The information for this is given and you know that you need a corresponding credit or debit, so the only thing you have to decide is which other account you have to include in the entry. a. The office supplies account has a debit balance of $3,975, but you have only $1,050 of supplies on hand. Obviously, the correct balance for the account is 1,050, There is only one way to adjust the account. You have to credit it 2,925. How do we get that number? Horrors! You have to subtract two numbers. Now you also need a debit for the same amount. So far your entry is 75% complete which is worth 75% of the grade. To earn the A, you have to provide the name of the account to be debited. But you can get a C (75% credit) without knowing anything because all the information was given to you. Now what happened to the supplies you had but no longer have? Obviously they were used up, and using up of an asset is an expense. What's a good name for that expense? Wage expense? Depreciation expense? Supplies expense? Rent expense? This is really hard, isn't it? Notice that the entry contains one permanent account and one temporary account, and the account you have to supply is almost never Cash (Unless you are adjusting the cash account). This is true of every adjusting entry. b. Unearned rent is a liability. You collected the money in advance so you owe rent services for four months. One month has passed so you earned 1/4 of the rent. How much rent services do you still owe? You have to reduce the liability account with a debit, and that means you have to credit something. What do you credit when you earn rent revenue. Oops! I gave it away. c. You owe some wages. What is in the wages payable account? Looks like nothing. What should be in the wages payable account? This is really hard, isn't it? But what do you debit when you credit wages payable? You got the service from your employees. What happens when you use up a service? Services can't be stored for future use, so they become expenses right away. If you first decide what is happening, what is taking place in a business, what is the situation that exists now, then it is not to hard to decide how you can make the accounts reflect what to report for assets, liabilities, revenues, and expenses. Accounting is a demanding subject. You have to do it to learn it. You can't learn it by reading about it. But reasoning through a given situation works better than trying to memorize something without understanding it.

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