Accounting: Adjusting Entries for Supplies

10 Questions

What is the primary objective of adjusting the accounts at the end of a fiscal period?

To provide an accurate financial position by matching revenues and expenses

What is the purpose of an adjusting entry?

To assign revenues and expenses to the correct accounting period

In the Supplies account example, what is the likely reason for no entries being made to record the usage of supplies?

The normal routine was to debit the Supplies account without adjusting for usage

What type of accounting is employed when recording revenues and expenses when they happen, regardless of cash receipt or payment?

Accrual accounting

What would be the effect of not making adjusting entries for supplies used during the year?

The Supplies account would be overstated

Why is it essential to adjust the accounts at the end of a fiscal period?

To ensure accurate financial reporting

What is the purpose of adjusting entries in relation to prepaid expenses?

To allocate the prepaid expense to the correct period

What is the impact of not making adjusting entries for unearned revenue?

Revenue would be overstated

What is the primary reason for making adjusting entries for inventory?

To allocate the cost of inventory to the correct period

What is the purpose of adjusting entries in relation to accounts payable?

To allocate the accounts payable to the correct period

Study Notes

Adjusting Entries for Supplies

The Supplies account balance at the end of the year may be inaccurate, as it does not account for the supplies used during the year.
To determine the accurate value, an inventory of supplies is taken to determine the remaining amount.
Assuming the remaining supplies value is $3,000 at year-end, the Supplies account needs to be credited by $12,000 to reach the correct value.
The corresponding debit is to a new account called Supplies Expense, which appears on the Income Statement.

Prepaid Expenses

Prepaid expenses are items paid for in advance, with benefits extending into the future (e.g., insurance and rent).
Unearned revenue is a credit to the Unearned Revenue account.

The Worksheet and Adjusting Entries

The Worksheet shows adjustments for Unearned Revenue.
After making all adjustments, the Adjustments column is ruled and totaled.
Balance Sheet accounts are transferred to the Balance Sheet column, accounting for any adjustments.
Income Statement accounts are transferred to the Income Statement column, accounting for any adjustments.
The Income Statement and Balance Sheet columns are ruled and totaled.
Net Income is calculated as Revenue minus Expenses.

Accrual Accounting

Accounting clerks do not wait for cash receipt or payment before recording revenue and expenses.
Accrual Accounting records revenues and expenses when they occur, regardless of cash receipt or payment.

Adjusting the Accounts

The senior accountant's action at the end of the fiscal period is called adjusting the accounts.
An adjusting entry assigns revenue or expense to the appropriate accounting period, bringing the balance sheet account to its true value.