Key Accounting Principles Volume 1, 4th Edition - Textbook - page 121

Chapter 5
The Accounting Cycle: Adjustments
121
2
One month of the prepaid insurance has been used. Since the balance of $1,200 represents a
one-year policy, $100 ($1,200 ÷ 12 months) must be adjusted as an expense.
3
Based on the records of MP Consulting, $200 worth of the unearned revenue had been earned
by the end of the month.This amount must be recognized as revenue.
4
All the equipment that MP Consulting owns has an estimated useful life of four years and
an estimated residual value of $1,100. Using the depreciation calculation shown earlier,
depreciation for the month is calculated as
Depreciation = $8,300 – $1,100
4 Years
× 1
12 = $150 per month
5
On January 2, MP Consulting began a two-month contract with a client.The contract covers
work for the months of January and February. On February 29, 2016, the contract will be
completed and MP Consulting will bill the client $2,000. An adjusting entry must be made
on January 31 to accrue the revenue earned during the month of January. MP Consulting will
create an adjusting entry showing revenue of $1,000 earned during the month.
Before recording the adjustments in the general journal, it can be helpful to see the impact of
the adjustments and to ensure that the accounts will still balance after adjustments are made. To
assist in this process, a
worksheet
can be used to display the trial balance before the adjustments
are made and a trial balance after the adjustments are made.The original trial balance is called the
unadjusted trial balance
because these values represent account balances before adjustments are
made.The trial balance after the adjustments are made is called the
adjusted trial balance
.
The worksheet shown in Figure 5.22 shows the unadjusted trial balance at the end of January.Beside
this trial balance is a set of debit and credit columns for the adjustments.The five adjustments are
numbered to illustrate step-by-step how they are recorded. It is important to ensure the debit and
credit columns of the adjustments column balance, otherwise the adjusted trial balance will not
balance.
The last set of debit and credit columns is the adjusted trial balance.The amounts in the adjustment
columns are added or subtracted from the original balances and placed in the adjusted trial balance
columns.This shows what the ledger balances will be after the adjustments are made. If the debit
and credit columns balance, then the financial statements can be prepared.
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