Problem 10 - Accounting

Question

Xenon Realty Co. pays weekly salaries of \(\$ 15,600\) on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends (a) on Wednesday, (b) on Thursday.

Step-by-Step Solution

Answer

Adjust on Wednesday: \( \$9,360 \). Adjust on Thursday: \( \$12,480 \).

Step 1: Calculate Daily Salary

The weekly salary is \( \\(15,600 \) for a five-day week, so the daily salary is \( \frac{15,600}{5} = \\)3,120 \).

Step 2: Adjust for Period Ending on Wednesday

The period ending on Wednesday has three days (Monday, Tuesday, and Wednesday) that have been worked. Therefore, the salary expense that has accrued by Wednesday is \( 3 \times 3,120 = \\(9,360 \). The journal entry to record this on Wednesday will be: Debit Salaries Expense \( \\)9,360 \); Credit Salaries Payable \( \$9,360 \).

Step 3: Adjust for Period Ending on Thursday

The period ending on Thursday includes four worked days (Monday to Thursday). Therefore, the accrued salary expense by Thursday is \( 4 \times 3,120 = \\(12,480 \). The journal entry to record this on Thursday will be: Debit Salaries Expense \( \\)12,480 \); Credit Salaries Payable \( \$12,480 \).

Key Concepts

Salary Calculation

Employers pay their employees a salary based on the work performed within a specific period. Understanding how to calculate salaries is essential for both employees and employers. For instance, Xenon Realty Co. offers a weekly salary of \(15,600\) for a five-day workweek. To calculate the daily salary from a weekly salary, simply divide the total weekly pay by the number of days in the week. In this case:

• Weekly salary = \(15,600\)
• Number of work days in a week = 5
• Daily salary = \( \frac{15,600}{5} = 3,120\)

This figure represents the amount an employee earns each day. If, at any point, the accounting period ends mid-week, it is important to know the daily salary rate to accurately calculate and adjust for the accrued salaries up to that point.

Journalizing

Journalizing is an essential practice in accounting where all business transactions are recorded in the company's books. This involves making entries in the general journal, which is the initial point in the accounting cycle. When adjusting payroll at the end of an accounting period, the journal must reflect the salaries that have accrued but are yet to be paid.Consider the scenario at Xenon Realty Co., where the accounting period ends on a Wednesday. Three days of work have occurred, totaling an accrued salary expense of \(9,360\). To record this in the journal, the entry will look like:

• Debit Salaries Expense: \(9,360\)
• Credit Salaries Payable: \(9,360\)

The debit increases the salary expense account, reflecting that an expense has been incurred. The credit increases salaries payable, a liability account, which indicates that the company owes this amount to its employees. Journalizing these entries ensures that financial records are accurate and that the company’s financial position is correctly stated.

Accrued Expenses

Accrued expenses are costs that have been incurred but not yet paid by the end of the accounting period. Recording these expenses is crucial for understanding a company's financial obligations accurately. For salaries, accrual involves calculating how much employees have earned during part of a week that hasn't been paid by the end of the period.When the accounting period ends on parts of the week, as in Xenon Realty Co.'s case, the company must determine the accrued salaries for Monday through Wednesday or through Thursday:

• For Wednesday end: Accrued salaries = \(3 \times 3,120 = 9,360\)
• For Thursday end: Accrued salaries = \(4 \times 3,120 = 12,480\)

By recording accrued expenses such as these, businesses ensure that their financial statements properly reflect liabilities at the period's end. This practice aligns financial records with the matching principle, which dictates that expenses should be recognized in the same period that the related revenues were generated.