The Adjustment Process Illustrated

Accountants prepare a trial balance both before and after making adjusting entries. Reexamine the Greener Landscape Group's unadjusted trial balance for April 30, 20X2.


Account

Debit

Credit

100

Cash

$ 6,355

110

Accounts Receivable

150

140

Supplies

50

145

Prepaid Insurance

1,200

150

Equipment

3,000

155

Vehicles

15,000

200

Accounts Payable

$ 50

250

Unearned Revenue

270

280

Notes Payable

10,000

300

J. Green, Capital

15,000

350

J. Green, Drawing

50

400

Lawn Cutting Revenue

750

500

Wages Expense

200

510

Gas Expense

30

520

Advertising Expense

35

$26,070

$26,070

Consider eight adjusting entries recorded in Mr. Green's general journal and posted to his general ledger accounts. Then, see the adjusted trial balance, which shows the balance of all accounts after the adjusting entries are journalized and posted to the general ledger accounts.

Adjustment A: During the afternoon of April 30, Mr. Green cuts one lawn, and he agrees to mail the customer a bill for $50, which he does on May 2. In accordance with the revenue recognition principle, Mr. Green makes an adjusting entry in April to increase (debit) accounts receivable for $50 and to increase (credit) lawn cutting revenue for $50.

 

 

Adjustment B: Mr. Green's $10,000 note payable, which he signed on April 2, carries a 10.2% interest rate. Interest calculations usually exclude the day that loans occur and include the day that loans are paid off. Therefore, Mr. Green uses the formula below to calculate how much interest expense accrued during the final twenty‐eight days of April.

 

 

Since the matching principle requires that expenses be reported in the accounting period to which they apply, Mr. Green makes an adjusting entry to increase (debit) interest expense for $79 and to increase (credit) interest payable for $79.

 

 

Adjustment C: Mr. Green's part‐time employee earns $80 during the last four days of April but will not be paid until May 10. This requires an adjusting entry that increases (debits) wages expense for $80 and that increases (credits) wages payable for $80.

 

 

Adjustment D: On April 20 Mr. Green received a $270 prepayment for six future visits. Assuming Mr. Green completed one of these visits in April, he must make a $45 adjusting entry to decrease (debit) unearned revenue and to increase (credit) lawn cutting revenue.

 

 

Adjustment E: Mr. Green discovers that he used $25 worth of office supplies during April. He therefore makes a $25 adjusting entry to increase (debit) supplies expense and to decrease (credit) supplies.

 

 

Adjustment F: Mr. Green must record the expiration of one twelfth of his company's insurance policy. Since the annual premium is $1,200, he makes a $100 adjusting entry to increase (debit) insurance expense and to decrease (credit) prepaid insurance.

 

 

Adjustment G: If depreciation expense on Mr. Green's $15,000 truck is $200 each month, he makes a $200 adjusting entry to increase (debit) an expense account (depreciation expense–vehicles) and to increase (credit) a contra‐asset account (accumulated depreciation–vehicles).

 

 

The truck's net book value is now $14,800, which is calculated by subtracting the $200 credit balance in the accumulated depreciation–vehicles account from the $15,000 debit balance in the vehicles account. Many accountants calculate the depreciation of long‐lived assets to the nearest month. Had Mr. Green purchased the truck on April 16 or later, he might not make this adjusting entry until the end of May.

Adjustment H: If depreciation expense on Mr. Green's equipment is $35 each month, he makes a $35 adjusting entry to increase (debit) depreciation expense–equipment and to increase (credit) accumulated depreciation–equipment.

 

 

After journalizing and posting all of the adjusting entries, Mr. Green prepares an adjusted trial balance. The Greener Landscape Group's adjusted trial balance for April 30,20X2 appears below.

The Greener Landscape Group Adjusted Trial Balance April 30,20X2

Account

Debit

Credit

100

Cash

$ 6,355

110

Accounts Receivable

200

140

Supplies

25

145

Prepaid Insurance

1,100

150

Equipment

3,000

151

Accumulated Depreciation–Equipment

$ 35

155

Vehicles

15,000

156

Accumulated Depreciation–Vehicles

200

200

Accounts Payable

50

210

Wages Payable

80

220

Interest Payable

79

250

Unearned Revenue

225

280

Notes Payable

10,000

300

J. Green, Capital

15,000

350

J. Green, Drawing

50

400

Lawn Cutting Revenue

845

500

Wages Expense

280

510

Gas Expense

30

520

Advertising Expense

35

530

Interest Expense

79

540

Supplies Expense

25

545

Insurance Expense

100

551

Depreciation Expense–Equipment

35

556

Depreciation Expense–Vehicles

200

$26,514

$26,514