Basic Concepts of Accounting and Adjustment Journal Entries

Business Accounting
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Introduction
The following assignment will help us understand the basic concepts of accounting. We have
been provided with the trial balance and few adjustments that are require to be entered in the
books. We have passed these journals, made the revised trial balance in order to update the
information. using the updated trial balance we have made the income statement and balance
sheet with the said information.
Adjustment Journal Entries
Adjustment journal entries are those entries that translate an entity's accounting basis into
accrual basis of accounting. It is basically an entry made before issuing it to the financial
statements of an entity. Let us understand this through an example. Suppose the company
takes up a loan on December 1 with an obligation of paying first interest on March 1.
However, the books of account close on December 31. Now, for the preparation of income
statement of December and for the balance sheet as on December 31, it is important for the
company to show all the expenses incurring in the month of December whether paid or not.
The interest obligation might arise on the company on March 1, but it is already owning a
liability of an interest expense of December to be paid to bank. This is where an adjusting
entry is made so that the interest expenses of December is included in the income statement
and the due interest as on December 31 is included in the December balance sheet. The
adjusting entry to be passed would require debiting of interest expense and crediting of
interest payable with the amount of interest for the month of December. This interest expense
would be recorded in the income statement while the interest payable would be reflected in
the balance sheet (Piper, 2015).
We need adjusting entries for the following reasons :
 For recording of incomes that has been earned but not received, also called accrued
income.
 For recording of expense that has been incurred but not paid by the company, also
called expenses payable (Siciliano, 2015).
 Where a company has made advanced payments, such excessive payment that
accounts for the next year, are required to be recorded as prepaid expenses.
 In case of vice versa, where a company has received advanced payments, such
excessive receiving of money is recorded as a liability because until and unless the
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goods or services aren't delivered, revenues cannot be recorded. So, as soon as the
delivery is made, the liability is cancelled and the same amount is reported as revenue.
Following are the adjustment journal entries:
Journal
Particulars Debit Credit
Interest Expense 17,720
Interest Payable 17,720
(Being unpaid interest accounted for)
Supplies Expense 1,328
Supplies 1,328
(Being consumption of supplies recorded in the books)
Insurance Expense 2,832
Prepaid Insurance 2,832
(Being consumption of prepaid insurance recorded in the books)
Depreciation Expense – Furniture 8,000
Acc. Depreciation. – Furniture 8,000
(Being depreciation on furniture charged)
Depreciation Expense - Office Equipment 16,000
Acc. Depreciation - Office Equipment 16,000
(Being depreciation on office equipment charged)
Depreciation Expense - Store Equipment 13,000
Acc. Depreciation - Store Equipment 13,000
(Being depreciation on store equipment charged)
Depreciation Expense – Automobile 17,000
Acc. Depreciation – Automobile 17,000
(Being depreciation on automobile charged)
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Revenue 11,075
Unearned revenue 11,075
(Being unearned revenue accounted for)
Working note for calculation of depreciation:
Calculation of depreciation expense
Furniture
Carrying Amount 44,300
Less: Residual Value 4,300
40,000
Life of the Asset 5
Depreciation per year 8,000
Office Equipment
Carrying Amount 88,600
Less: Residual Value 8,600
80,000
Life of the Asset 5
Depreciation per year 16,000
Store Equipment
Carrying Amount 1,32,900
Less: Residual Value 2,900
1,30,000
Life of the Asset 10
Depreciation per year 13,000
Automobile
Carrying Amount 1,77,200
Less: Residual Value 7,200
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