Example of adjustments for deferred items, Accounting Basics

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Q. Example of Adjustments for deferred items?

A real physical inventory a count of the supplies on hand at the end of the month showed only USD 900 of supplies on hand. Therefore the company must have used USD 500 of supplies in December. An adjusting journal entry conveys the two accounts pertaining to supplies to their proper balances. The adjusting entry is familiar with the reduction in the asset (Supplies on Hand) and the recording of an expense (Supplies Expense) by transferring USD 500 from the asset to the expense. As-per to the physical inventory the asset balance should be USD 900 and the expense balance USD 500. Thus Micro Train makes the following adjusting entry

1087_Example of Adjustments for deferred items.png


Subsequent to posting this adjusting entry the T-accounts appear as follows

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The entry to record the utilization of supplies could be made when the supplies are issued from the storeroom. But such careful accounting for small items every time they are issued is usually too costly a procedure. Accountants formulate adjusting entries for supplies on hand like for any other prepaid expense before preparing financial statements. Supplies expense show in the income statement. "Supplies on hand" are an asset in the balance sheet.

Occasionally companies buy assets relating to rent, insurance and supplies knowing that they will use them up before the end of the current accounting period usually one month or one year. If consequently an expense account is usually debited at the time of purchase rather than debiting an asset account. This procedure evades having to make an adjusting entry at the end of the accounting period. Occasionally as well a company debits an expense even though the asset will benefit more than the current period. After that at the end of the accounting period the firm's adjusting entry transfers some of the cost from the expense to the asset. For example suppose that on January 1 a company paid USD 1200 rent to cover a three-year period and debited the USD 1200 to Rent Expense. At the end of the year it transmits USD 800 from Rent Expense to Prepaid Rent. To make simpler our approach we will consistently debit the asset when the asset will benefit more than the current accounting period.


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