Prepare adjusting journal entries for the year ended (or date of) December 31, 2005, for each of these
separate situations. Assume that prepaid expenses are initially recorded in asset accounts. Also assume
that fees collected in advance of work are initially recorded as liabilities.
To prepare adjusting journal entries for the year ended December 31, 2005, for each of the separate situations provided, follow these steps:
1. Determine the appropriate adjusting entry type.
- Accrued expenses: Recognize expenses that have been incurred but not yet paid.
- Accrued revenues: Recognize revenues that have been earned but not yet collected.
- Prepaid expenses: Recognize expenses that have been paid but not yet incurred.
- Unearned revenues: Recognize revenues that have been collected but not yet earned.
2. Identify the specific situation and its impact on the accounting records.
3. Determine the amount to be adjusted by considering the passage of time or any relevant events.
4. Apply the appropriate adjusting entry formula to record the adjustment.
Here are examples of adjusting journal entries for each situation:
Situation 1: Accrued expenses
Assume $500 of unpaid salaries as of December 31, 2005.
Adjusting entry:
Debit Salary Expense $500
Credit Salary Payable $500
Situation 2: Accrued revenues
Assume $1,000 of consulting services provided but not yet billed as of December 31, 2005.
Adjusting entry:
Debit Accounts Receivable $1,000
Credit Consulting Revenue $1,000
Situation 3: Prepaid expenses
Assume $300 of insurance paid for the year, with five months remaining as of December 31, 2005.
Adjusting entry:
Debit Insurance Expense $60 ($300 divided by 12 months multiplied by 5 months)
Credit Prepaid Insurance $60
Situation 4: Unearned revenues
Assume $400 of fees collected in advance, with two-thirds of the work completed as of December 31, 2005.
Adjusting entry:
Debit Unearned Revenue $266.67 ($400 multiplied by 2/3)
Credit Consulting Revenue $266.67
These adjusting journal entries ensure that the financial statements reflect the correct and accurate financial position and performance at the end of the accounting period.