Question

What is the purpose of adjusting entries? Given the following situation, please prepare the adjusting journal entries for the end of the period. Please also prepare the T-Accounts.

6/12/18 – Company X paid $3,500 for cleaning supplies.

6/30/18 – Company X has $2,000 of cleaning supplies left.

6/1/18 – Company Y paid $2,400 for 12 months of insurance.

12/31/18 – Company Y needs to adjust the amount of insurance (both expense and amount remaining as a prepaid.

12/31/18 – Company Z realizes that it owes employees $3,500 in wages not yet paid or recorded.

8/1/18 – Student H moves into an apartment in South Side (despite all of the best advice from parents, teachers, and friends). Student H pays for the entire 12 months of rent in advance.  The annual rent is $7,200.  What are the journal entries that Student H and the landlord should record on 12/31/18?

Answer 1

Adjusting entries: The purpose of adjusting entries is to prepare and present an organizations financial records on accrual basis. The adjusting entries thus are used to record expenses incurred but not yet paid, incomes earned but not received, deferment of expenses paid in advance and incomes received in advance and for allocating the cost of an asset over its useful life.  

Company X:

Date	Account Titles and Explanation	Debit	Credit
6/30/18	Cleaning supplies expense ($3500 - $2000)	1500
	Cleaning supplies		1500
	(To record supplies expense)

Company Y:

Date	Account Titles and Explanation	Debit	Credit
12/31/18	Insurance expense ($2400 x 7/12)	1400
	Prepaid insurance		1400
	(To record insurance expense)

Note: For the above adjusting entry it is assumed that at the time of payment the entire amount was debited to prepaid insurance. In case it was debited to insurance expense, the adjusting entry will be debiting prepaid insurance and crediting insurance expense by $2400 x 5/12 = $1000.

Company Z:

Date	Account Titles and Explanation	Debit	Credit
12/31/18	Wages expense	3500
	Wages payable		3500
	(To record wages accrued but not paid)

Student H:

Date	Account Titles and Explanation	Debit	Credit
12/31/18	Prepaid rent ($7200 x 7/12)	4200
	Rent expense		4200
	(To record prepaid rent)

Note: It is assumed that at the time of payment entire amount was recorded as rent expense.

Landlord:

Date	Account Titles and Explanation	Debit	Credit
12/31/18	Rent revenue	4200
	Unearned rent revenue		4200
	(To record unearned rent revenue)

Note: It is assumed that at the time of receipt entire amount was recorded as rent revenue.