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

Supplies expense is \$801, and the journal entry is: Debit Supplies Expense \$801, Credit Supplies \$801.

Step 1: Determine the Used Supplies

First, find out how much of the supplies have been used up during the year. To do this, subtract the amount of supplies on hand at the end of the year (\\(374) from the initial balance of the supplies account (\\)1,175). \[ \text{Used Supplies} = \\(1,175 - \\)374 = \$801 \]

Step 2: Prepare the Adjusting Entry

Now, journalize the adjusting entry for the used supplies. To adjust for supplies used, you will decrease (credit) the Supplies account by \\(801 and increase (debit) the Supplies Expense account by the same amount. The journal entry will look like this: Debit Supplies Expense: \\)801Credit Supplies: \$801

Step 3: Explain the Adjusting Entry

The adjusting entry records the supplies expense for the year on the income statement, reflecting the decreases in supplies due to usage during the period. This helps match expenses with revenues in the correct period, which is one of the fundamental principles of accounting.

Key Concepts

Journal Entries

A journal entry is the first step in the accounting cycle. It represents a formal way of documenting a financial transaction. Each journal entry keeps a record of a transaction that involves a change in the company's financial statements.
For every business transaction, a journal entry must include:

• The date of the transaction
• The accounts affected
• The amounts to be debited and credited
• A brief description of the transaction

Journal entries are the building blocks of accounting, ensuring that every transaction is recorded in a systematic way.
They help in tracking the financial activities of a business, supporting in preparing financial statements like the balance sheet and income statement.

Adjusting Entries

Adjusting entries are crucial in accounting as they ensure that the revenues and expenses are recorded in the correct period. These entries are performed at the end of an accounting period after the preparation of the unadjusted trial balance.
The main purpose is to update the accounts to reflect the true financial situation of a business. Adjusting entries are necessary for any transactions that have occurred but are not yet recorded. Common types of adjusting entries include:

• Prepayments and Accruals: Such as prepaid insurance or accrued salary.
• Depreciation: Allocating the cost of a fixed asset over its useful life.
• Supplies: Adjusting for supplies that have been used up over time.

In our example exercise, the adjusting entry involves updating the supplies account and recognizing the supplies expense. This helps in matching the correct expenses with the revenues obtained in the same period.

Supplies Expense

Supplies expense refers to the cost associated with the consumption of supplies within a given accounting period. When supplies are purchased, they are initially logged as an asset, called 'Supplies' on the balance sheet, because they have future economic value.
As these supplies are used over time, the 'Supplies' account decreases, and the 'Supplies Expense' account increases. This transition reflects the understanding that supplies are gradually consumed, with the cost again matched to the relevant period's revenue, ensuring accurate financial reporting.

• To calculate the supplies expense, subtract the ending inventory (amount still on hand) from the initial inventory (amount at the beginning of the period).
• The amount consumed, now recorded as 'Supplies Expense', decreases the company's net income and provides a more accurate picture of the company's profit and loss.

Accurate recording and adjusting for supplies expenses help in maintaining the efficiency and reliability of the financial statements over time.