Categories of Adjusting Entries: Prepaid Rent, continued
Take a look at the computations:
To determine how much will be removed from the prepaid rent account, let us compute how much rent is spent each month:
One year prepaid rent $12,000 divided by 12 months = $1,000/month
At the end of December 31, 2009, the expired portion of the $12,000 is $1,000 multiplied by 2 months (November 1 to December 31) or $2,000.
Therefore, at the end of the period, December 31, 2009, Prepaid Rent has a remaining balance of $10,000.
The effect of the deduction will create another account while prepaid rent will be reduced by $2,000:
Prepaid Rent - $10,000
Rent Expense - $2,000
It is practical for Jowen to buy office supplies in bulk. On September 1, 2009, the business bought $5,000 worth of office supplies. On that date, an asset account of Unused Supplies of $5,000 was created. On December 31, 2009, after the physical count, only $2,000 in unused supplies is counted; therefore, supplies worth $3,000 have been used. To deduct $3,000 from $5,000, $3,000 is placed at the right side of the asset account “Unused Offices." Unused supplies will have a new balance of $2,000. Since $3,000 is an expense, we will create another account named "Used Supplies" and we will place $3,000 on its left side.
To summarize the above adjustment, two accounts are adjusted or created:
Unused Supplies $2,000 and Used Supplies $3,000
Depreciation of Property and Equipment
A Property and Equipment account is created in the accounting books when the company acquires buildings, computers, service vehicles, and office furniture. These assets help generate income to the business, therefore, aside from wearing out, a portion of these assets should be charged to expenses because of the usage. They are subject, then, to depreciation.
Aside from the factors to be considered in making adjusting entries mentioned earlier, the accountant needs information on the number of years the company will use the asset and the salvage value, if any.
Say, for example, Jowen purchased office furniture worth $100,000 on September 1, 2009, which has an estimated life of 5 years and can be sold for $20,000 (salvage value) after its estimated life.
To compute the monthly depreciation and the depreciation expense for Jowen:
Cost of furniture minus salvage value divided by the number of estimated years of life divided by 12 months multiplied by 4 months (September 1 to December 12, 2009)
$100,000 - $20,000 divided by 5 years divided by 12 months multiplied by 4 months equals $5,333.33
The total depreciation expense from September 1 to December 31, 2009 is $5,333.33. Two accounts are created from this adjustment: depreciation expense of $5,333.33 which is included in the operating expenses and $5,333.33 accumulated depreciation for office furniture which is deducted from the Office Furniture account (an asset account).
Revenues Received in Advance of Revenues
There are times when a company receives cash for services or goods even before services are rendered or goods are delivered. In this case, the entity has the obligation to perform the service or to deliver the goods because the advanced payment received is already an obligation on the part of the entity.
Jowen, aside from selling goods, is also engaged in advertising. For example, the entity received $24,000 on October 1, 2009, representing a 12-month advertising contract from Abella Woodcraft, Incorporated. Jowen recognizes $24,000 as a liability on the date it is received; therefore an Unearned Advertising Income account is created on October 1, 2009. Let us remember that contrary to the asset account, which is placed at the left side, Unearned Advertising Income, a liability account, is placed at the right side of the account “Unearned Advertising Income." At the end of 2009, only three months' income is earned from the $24,000 or a total of $6,000.
To adjust $24,000, it is necessary to deduct $6,000 (representing the earned portion) from $24,000 to reflect the true amount of obligation remained on December 31, 2009. To deduct the $6,000 from $24,000, $6,000 is placed at the left side of the account “Unearned Advertising Income" so at the end of the period, Unearned Advertising Income has an outstanding balance of $18,000 and $6,000 representing advertising income is added to the advertising income previously recorded.
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