Here is the solution for Problem 4-5A

Problem 4-5A

You probably asked that question before and maybe you didn’t, why do we need to perform adjustment on Supplies?

The shortest answer to the question is figure the supplies that were used-up during the period. For example, we want to know how much materials were left in the storage area, so we can determine the amount of materials used during the period. A concrete example, at the beginning of the year Company A had five boxes of pencils in storage. At the end of the period, there were only three boxes left. That means a total of two boxes of pencils where used-up.

beginning : 5 boxes
ending : 3 boxes
-------------------
balance : 2 boxes

If the cost of a box is $10, the adjustment would be made as follows:

1. Office Supplies will have a debit balance of $50.
2. In Office Supplies Expense, a debit entry is made amount of $20.
3. In Office Supplies, a credit entry is made amount of $20.

Here is the solution to exercise 4-2.

Exercise 4-2

Exercise 4-2 was about adjusting entries relating to the following:

1. Supplies Used
2. Insurance Expired
3. Depreciation of Office Equipment and Office Furniture
4. Unpaid Salaries

In the class, Tim had to explain and highlight the method these two accounts were calculated and reported.

For Accumulated Depreciation, the depreciation amount per month is calculated and pro-rated for the period. For example, if the monthly depreciation amount is calculated at $10, each month will have a $10 depreciation cost, as a result the accumulated depreciation for the six month period is now $60. See  Period 1 of Accumulated Depreciation in the figure below.

For the second period, the beginning Accumulated Depreciation is now pegged at $60, add another $60 for the current period and the ending Accumulated Depreciation is now at $120.

For Depreciation Expense, we do not accumulate over the periods, rather the account is zeroed or emptied after closing, this will insure the previous balance do not carry over to the next period.

It is very important to know the difference, expenses are only reported in the period they were incurred. On the other hand, Accumulated Depreciation has a running total that carries over to the next period.

The solution to problem 4-4A is now available.

Click this line to see the solution.

What is new in 4-4A are the following accounts:

1. Prepaid Insurance.
2. Accumulated Depreciation.

Prepaid Insurance is considered an Asset and is amortized for N periods. Reporting this account simply takes about one line in the Balance  Sheet. Accumulated Depreciation, on the other hand, is a contra-account to an asset, as it is meant to be used to show the amount of depreciation over a range of periods. Reporting an asset with Accumulated Depreciation takes about two lines in the Balance Sheet, the value of the asset is stated first followed by the depeciation amount. A total is carried over to the next column.

A solution to problem 3-3A is now posted.

See worksheet 3-3A for details

The Trial Balance amount is $25,100.

Book Reference: Paradigm College Accounting

The basic accounting equation has two sides, namely debit and credit. Each side increases and decreases depending on the transaction.

For example, Cash increases on the debit side, and conversely it decreases on the credit side. A side that increases often will have a positive value and that is called the normal balance. In our example, the Cash account has a normal balance on the debit side, because increases are placed on the debit side.

Another example, Owner’s Equity increase on the credit and decrease on the debit. A positive value is found on the credit, hence the normal balance for Owner’s Equity is credit normal balance.

For this entry, I’ll try to explain the basic accounting equation in relation to debit-credit.

First, I’m going to define the basic definition, which basically state that for a given business entity, the basic accounting equation is:

Assets = Liabilities + Owner’s Equity

And is derived from:

assets = claims on assets

Assets are items that have monetary value and are owned by the business. By definition, Assets are placed on the left side of the Accounting equation. A term has been assigned describing the left side, known as debit.

Claims on Assets define the claims on every item of the Asset. For example, capital is an item that is known to be assigned to the owner, while payables are claims of others against an Asset. By definition, this side is placed at the right side of the Accounting equation known as credit side.

debit = credit

The equation above has the following meanings:

1. The left side is denoted by the term debit.
2. The right side is denoted by the term credit.
3. The two sides of the equation are equal.

assets = debit

In our basic accounting equation, the element known as Asset is assigned to debit. The equation shown above simply means that all assets are placed on the debit side, left side of the basic accounting equation.

claims on assets = credit

On the right side of the basic accounting equation, we find credit. This simply means that all claims on assets are to be placed on the right side of the equation, known as credit side. To illustrate it, we state claims on assets is equal to credit.

Secondly, At this point, the term Claims on Assets will be covered in detail, showing the two parts. The credit side of the equation has two items, namely: Liabilities and Owner’s Equity.

Liabilities are items owed, they are normally items that were borrowed from other businesses that must be covered or paid sometime in the future.

Owner’s Equity are items belonging to the owner of the business. They are items such as money, equipment, etc that are/were added by the owner to the business.

Example:

1) Mark invested money into the business, worth $25,000.

2) Mark added office equipment, by adding his personal laptop computer worth $1,200.

See worksheet solution here.

Directions: Following is an alphabetical list of the accounts and their balances for Mogren Company on July 31, 20xx. Prepare a trial balance in correct order and form.

Solution: see worksheet here.