Problem 3 - Accounting

Question

The balance in the supplies account, before adjustment at the end of the year, is \(\$ 1,175\). Journalize the adjusting entry required if the amount of supplies on hand at the end of the year is \(\$ 374\).

Step-by-Step Solution

Answer

Debit Supplies Expense $801; Credit Supplies $801.

Step 1: Determine Supplies Used

Calculate the amount of supplies used during the year by subtracting the value of supplies on hand at the end of the year from the initial balance of the supplies account.\[\text{Supplies Used} = \text{ ext{Initial Balance}} - \text{ ext{Ending Balance}} = 1175 - 374\]The amount of supplies used is \(\$ 801\).

Step 2: Formulate Adjusting Entry

Prepare the journal entry to record the adjustment for supplies used. This involves debiting the 'Supplies Expense' account and crediting the 'Supplies' account with the value of used supplies.\[\text{Debit: Supplies Expense} \quad \\(801\]\[\text{Credit: Supplies} \quad \\)801\]This journal entry reduces the supplies account and records the expense.

Key Concepts

Supplies Account Adjustment

In accounting, adjusting entries are made to ensure that financial statements accurately reflect a company's financial status. One common adjustment involves the supplies account. At the end of an accounting period, you need to adjust for supplies that have been used but not yet recorded as an expense. Here, the balance in the supplies account before adjustment is $1,175. This represents all the purchased supplies, regardless of whether they are used or not. At year-end, you must count the supplies still on hand, in this case, $374, to determine what portion has been used. This discrepancy between the account balance and the stock on hand calls for a supplies account adjustment. Such adjustments correct the balances in your financial records, ensuring they represent the actual economic activity and resources of a firm.

Adjusting Journal Entry

An adjusting journal entry is a crucial part of closing an accounting period. It ensures that all income and expenses are recorded in the correct accounting period. To prepare an adjusting journal entry for supplies, you will need to acknowledge the difference between the amount initially recorded and what remains at the end.

• You begin by identifying the supplies used, as indicated by the difference between the initial and ending balance on hand.
• Then, make a journal entry to reflect this usage:
  • Debit the 'Supplies Expense' account to increase expenses.
  • Credit the 'Supplies' account to decrease the asset balance.

This entry shifts the cost of supplies used from an asset (supplies) to an expense account, reflecting true usage.

Calculating Supplies Used

In order to adjust your supplies account accurately, you first need to calculate the supplies used during the accounting period. Use this simple formula:\[\text{Supplies Used} = \text{Initial Balance} - \text{Ending Balance}\]For instance, if your initial supplies balance was \(1,175, and by the period's close you have \)374 worth of supplies left, your calculation would be:\[1175 - 374 = 801\]The result, $801, represents the cost of the supplies that were used during the year. This amount will guide the adjustment needed in your accounting records, converting part of your asset into expense and giving an accurate representation of resource consumption.

Debit and Credit Journal Entries

Once you've determined how much of your supplies have been used, it's time to create journal entries to reflect this consumption accurately. Journal entries for accounting adjustments generally follow the rule of debit and credit.

• Debit: The first line of your journal entry should debit the 'Supplies Expense' account. By debiting, you are increasing the expenses, showing that resources were consumed to generate revenue.
• Credit: The second line of your journal entry should credit the 'Supplies' account. By crediting, you are decreasing the asset balance, representing that part of the supplies you had at the beginning is no longer an asset but rather an expense.

This practice of using debits and credits ensures that the accounting equation remains balanced, keeping your financial reports accurate.