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

(a) Debit Salary Expense: $9,360; Credit Salary Payable: $9,360. (b) Debit Salary Expense: $12,480; Credit Salary Payable: $12,480.

Step 1: Understanding the Problem

Xenon Realty Co. pays its employees a salary of $15,600 each Friday for work done from Monday to Friday. We need to journalize the adjusting entries for salaries if the accounting period ends before Friday - specifically on Wednesday or Thursday.

Step 2: Calculate Daily Salary

The weekly salary of \(15,600 is for five days. To find the daily salary, divide \)15,600 by 5.\[\text{Daily Salary} = \frac{15,600}{5} = 3,120\]

Step 3: Journalize Adjusting Entry for Wednesday

If the period ends on Wednesday, we need to account for salaries from Monday to Wednesday (3 days).\[\text{Salaries for 3 days} = 3,120 \times 3 = 9,360\]Journal Entry:Debit: Salary Expense \(9,360Credit: Salary Payable \)9,360

Step 4: Journalize Adjusting Entry for Thursday

If the period ends on Thursday, we need to account for salaries from Monday to Thursday (4 days).\[\text{Salaries for 4 days} = 3,120 \times 4 = 12,480\]Journal Entry:Debit: Salary Expense \(12,480Credit: Salary Payable \)12,480

Key Concepts

The Accounting Period

An accounting period is a specific timeframe used by businesses to organize their financial activities. It's crucial for accurately reporting financial performance and position. This period could be monthly, quarterly, or annually, depending on the business's needs and regulatory requirements.

Understanding the accounting period is important because it allows for the consistent application of accounting principles across similar time frames, making financial statements comparable. Moreover, it helps in timing the recognition of revenues and expenses, which is key to accurate financial reporting.

• Monthly periods are used for frequent reporting and analysis.
• Quarterly periods help focus on seasonal trends and manage funds efficiently.
• Annual periods provide a comprehensive overview of the year's financial health.

When preparing adjusting entries, like in the Xenon Realty Co. example, it's essential to know when the accounting period ends, so salaries and other expenses are recorded in the correct period, ensuring accurate reflection of the business's financial status.

Understanding Salary Expense

Salary expense is the cost a company incurs to compensate its employees for their work during a particular period. It is usually one of the largest expenses for any business.

Recognizing salary expense accurately ensures that the financial statements present a true picture of the company's expenses and liabilities. This is achieved by making adjusting entries at the end of an accounting period. These entries ensure salaries are recorded in the period in which they are incurred, even if they haven't been paid yet. For Xenon Realty Co., salary expense adjustments were necessary because the accounting period ended before the payroll date.

• Salaries must be accounted for each day an employee works to achieve accurate financial reporting.
• Failure to correctly journalize salary expenses can mislead stakeholders regarding the financial health of the business.

Properly journalizing salary expenses ensures all financial data reflect the true financial performance of the business during the period in question.

The Role of Journal Entries

Journal entries are records of all financial transactions a company makes. They are part of the double-entry bookkeeping system, where each transaction affects at least two accounts – one with a debit and another with a credit.

These entries are crucial for maintaining accurate financial books and are used to prepare all subsequent financial statements. Adjusting entries, like the ones discussed for Xenon Realty Co., correct income and expense accounts before preparing financial statements at the end of an accounting period. This ensures revenue and expenses are matched to the period they pertain to, regardless of whether they have been paid or received.

• Every journal entry must have at least one debit and one credit entry to keep the books balanced.
• Details such as the date, the accounts impacted, and the amount must be included for clarity and accuracy.

Preparing journal entries diligently ensures that all financial data remain accurate and comply with accounting principles, providing a reliable basis for managerial decision-making and financial reporting.