Question

On December 31, the following data were accumulated for preparing the adjusting entries for Bellingham Realty:

•	The supplies account balance on December 31 is $5,925, the supplies on hand on December 31 are $1,275.
•	The unearned rent account balance on December 31 is $5,200 representing the receipt of an advance payment on December 1 of four months’ rent from tenants.
•	Wages accrued but not paid at December 31 are $2,320.
•	Fees earned but unbilled at December 31 are $18,220.
•	Depreciation of office equipment is $4,350.

	Required:
1.	Journalize the adjusting entries required at December 31. Refer to the Chart of Accounts for exact wording of account titles.
2.	What is the difference between adjusting entries and correcting entries?

Answer 1

1. Adjusting entries are passed as follows:

Working notes:

Supplies expense is debited as increase in expenses reduces owner's equity.

Rent revenue for December is only recognized in the current year. Rent received in advance is recorded in the unearned rent account in the current year as it is a liability. This is recognized next year when it is earned.

Wages are accrued but not paid, since they are accrued this year, they need to recognized in the same year. Increase in expenses are debited.

Fees earned are not received. As such, accounts receivable account is created, thereby increasing assets. Increase in assets is debited.

Depreciation is an expense and increase in expenses are debited.

2. Points of difference between adjusting entry and correcting entry:

• Since corporations follow accrual accounting system, which means revenue and expenses are recorded as and when they are earned or incurred irrespective of when they are received or paid; they need to post adjusting entries to reflect accrual system.

  Correcting entries, on the other hand, are passed to rectify any errors made in the journal entries passed earlier.

• Adjusting entries should essentially include one account from income statement and one from balance sheet (there can be more as well, one from each is mandatory). Correcting entries can have various combinations of accounts from income statement and balance sheet.

• Some of the examples of adjusting entries are recording prepaid expenses, liabilities that are earned but not paid and income earned but not received. Examples of correcting entries include rectifying incorrect amounts posted previously and corrections with respect to posting correct amount in incorrect account.