If you happen to be the audit staff of the auditing firm, what adjusting entry would you prepare?
Understand the Problem
The question is asking for the adjusting entry that should be prepared after discovering a discrepancy between the actual physical inventory count and the inventory recorded in stock cards. It requires an understanding of accounting principles, particularly related to inventory adjustments.
Answer
The adjusting entry is: ```plaintext Debit Inventory ₱40,000 Credit Inventory Adjustment ₱40,000 ```
Answer for screen readers
The adjusting entry to prepare is:
Debit Inventory ₱40,000
Credit Inventory Adjustment ₱40,000
Steps to Solve
- Identify the discrepancy The actual physical inventory count is ₱850,000 and the inventory per stock cards is ₱810,000. The difference is calculated as follows:
$$ \text{Difference} = \text{Actual Count} - \text{Inventory per Stock Cards} $$
This results in a difference of ₱40,000.
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Determine the type of adjustment Since the physical count is greater than the inventory per stock cards, it suggests that there is an understatement in the inventory recorded. The company needs to increase the inventory value.
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Prepare the adjusting entry The adjusting entry to correct the inventory on the books will involve debiting the Inventory account and crediting a Loss account (or an appropriate adjustment account, depending on the company's accounts) for the discrepancy amount. The entry is:
Debit Inventory ₱40,000
Credit Inventory Adjustment ₱40,000
The adjusting entry to prepare is:
Debit Inventory ₱40,000
Credit Inventory Adjustment ₱40,000
More Information
This entry adjusts the accounting records to reflect the actual inventory on hand, ensuring accurate financial reporting. Proper inventory management is crucial as it affects both the balance sheet and the income statement.
Tips
- Ignoring the type of entry needed: Make sure to identify whether to increase or decrease inventory.
- Incorrectly calculating the difference: Double-check the actual versus recorded amounts before making adjustments.
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