Question

Why is this adjusting journal entry prepared? What is the scenario that created this adjusting entry and why is there an adjustment needed?

1) Record depreciation expense
2) Adjust for supplies usage
3) Adjust prepaid insurance
4) Accrue wages earned but not yet paid
5) Unearned revenue
6) Interest payable

Answer 1

We are following the accrual based accounting so all the expenses which are incurred but not paid or adjusted at the end of period. Revenue earned but work not done is not shown as revenue and Advances paid for future payment are expenses of future so they can shown as prepaid expenses in current assets and adjusted the same in actual period of expenses.

1. Record Depreciation Expenses : This is a periodic expenses so at the end of each period we have to pass this entry.
2. Adjust the supply usage: Supplies are used as consumable and when this is used in that period only the expenses of the same is booked
3. Adjust Prepaid insurance: Prepaid insurance means advance paid for future expenses so against future payment we cannot book the expenses in current period. So this expenses can be deferred till that period and booked as per payment against the real period.
4. Accrue wages earned but not yet paid: Every time this is not possible for any company to make the payment at the end of the every month. Like wages of 31^st December is not possible to pay as on 31^st December. But the expenses is against for the month of December. So we can book the expenses in December and payment made of the same in next month.
5. Unearned Revenue : Revenue earned without the work done is called unearned revenue. So revenue will recorded in the month of work done against money received.
6. Interest Payable: Interest payable is also same as accrue wages , We cannot make payment at the end of the day of 31^st day of December but the interest expenses is against the last period. So expenses are booked for that particular period only and created a liability for the same and make the payment in next period.