LU6: Adjusting entries

Question 1

Purpose of Adjusting Entries

Answer 1

Bringing the general ledger up to date to comply with the revenue recognition principle and the matching principle about items that are not included in the day to day transactions.

Question 2

Day-to-day transactions

Answer 2

Day to day transactions do not take into account items such as consumption of inventories, estimates of deprecation or unpaid payrolls. Therefore, adjustments must be made trough “adjusting entries” in a general journal; made in two-column journal and posted separately in the general ledger.

Question 3

Cost of Sales

Answer 3

The issues from the storeroom increase “cost of food sales” and reduces the “food inventory”.

Question 4

Employee meals

Answer 4

the storeroom issues include food served to both guests and employees, but the COS account should only show food served to guests. Therefore, an adjustment is necessary, showing the amount of money spent on employee meals. “employee meals expense” thus increases and “COS expense” decreases.

Question 5

Supplies used (asset method)

Answer 5

Increases the “supplies expense” and reduces the “supplies inventory” .

Question 6

Prepaid Insurance

Answer 6

Company X buys €1.200 euros in dec 2018 for a year starting from jan 2019. after jan 2019 €100 of the prepaid insurance expired, therefore “prepaid insurance” is reduced and “insurance expense” increased.

Question 7

Depreciation

Answer 7

The cost of a long lived assets is allocated over its useful life, called depreciation. The depreciation for a vehicle this month was €500. In the adjusting entries it is recored by increasing “depreciation expense” and increasing the “accumulated depreciation” contra-asset account.

Question 8

China, glassware, silver;

Answer 8

Replacements of china, glassware and silver are charged to expense, however the initial purchase has been charged to an asset account. This group also depreciates over its useful life. However no accumulated depreciation account is used. Instead “china, glassware and silver expense” is increased and the asset account is reduced.

Question 9

Payroll

Answer 9

A business will always have unpaid payroll at the end of any week or month, as the workweek and payday are different. Therefore, a payroll adjusting entry might be required to comply with the matching principle (recording expenses during the month in which they occurred). thus, “payroll expense increases” and “accrued payroll” liability account increases.

Question 10

Payroll taxes

Answer 10

Payroll taxes are often levied on the employer, with payment due the following month or later date. The adjusting entry is recorded by increasing the “payroll taxes” expense, and increasing the “accrued payroll taxes” liability account.