Adjustment For Accrued Salaries For North Slope Realty Co

Adjustment For Accrued Salariesobj3north Slope Realty Co Pays Weekly

North Slope Realty Co. pays weekly salaries of $7,900 on Friday for a five-day week ending on that day. The task is to determine the necessary adjusting journal entries at the end of the accounting period when it ends on different days of the week, specifically Wednesday and Thursday.

The core concept involves accruing salaries that have been earned by employees but have not yet been paid by the accounting period's end. As the company pays salaries weekly, any employee work performed but not yet paid by the end of the period necessitates an accrual to match expenses with the period in which they were incurred, following the matching principle in accounting.

Adjustment for Salaries at Different Period Ends

Scenario (a): End of Period on Wednesday

Since North Slope Realty Co. pays weekly salaries of $7,900 for a five-day workweek ending on Friday, the daily salary expense can be calculated as follows:

  • Daily salary expense = $7,900 / 5 days = $1,580

Given that the period ends on Wednesday, the salaries earned from Monday through Wednesday must be accrued because these employees have worked but not yet been paid. The accrued amount is:

  • Number of days accrued = 3 days (Monday, Tuesday, Wednesday)
  • Accrued salaries = 3 days x $1,580/day = $4,740

The adjusting journal entry on Wednesday would be:

  • Debit: Salaries Expense $4,740
  • Credit: Salaries Payable $4,740

This entry increases expenses and liabilities, accurately reflecting the obligation to pay for the services employees have already provided.

Scenario (b): End of Period on Thursday

In this case, the period ends on Thursday. The accrued salaries are from Monday through Thursday, totaling four days:

  • Accrued salaries = 4 days x $1,580/day = $6,320

The journal entry on Thursday at period end would be:

  • Debit: Salaries Expense $6,320
  • Credit: Salaries Payable $6,320

This adjustment similarly recognizes the liability for salaries earned but unpaid, ensuring expenses are properly matched to the period.

Classification of Items as Accruals and Deferrals

Understanding the classification of various financial items is crucial for accurate financial statement preparation. The items are classified into four categories: deferred expense, deferred revenue, accrued expense, and accrued revenue.

1. Subscriptions received in advance by a magazine publisher

These are payments received before the service is performed or the magazine is delivered. They represent an obligation to provide future services or goods, thus classified as deferred revenue (unearned revenue).

2. A three-year premium paid on a fire insurance policy

The premium covers future periods; thus, the payment is a long-term prepaid expense, classified as deferred expense (prepaid expense).

3. Fees received but not yet earned

If a company receives payment for services it has not yet performed, this is classified as deferred revenue (unearned revenue).

4. Fees earned but not yet received

This situation involves revenue that has been earned but not yet collected; it qualifies as accrued revenue (accrued asset).

5. Utilities owed but not yet paid

Utilities that have been incurred but not paid are considered accrued expenses (accrued liabilities).

6. Supplies on hand

Supplies purchased but not yet used or consumed are classified as deferred expense (prepaid expense).

7. Salary owed but not yet paid

Employee salaries that have been earned but not paid are classified as accrued expense (accrued liability).

8. Taxes owed but payable in the following period

Taxes accrued but not yet paid are classified as accrued expense (accrued liability).

Conclusion

Proper adjustment for accrued salaries, like in North Slope Realty Co.'s case, ensures that financial statements accurately reflect obligations and expenses incurred during the period, enabling fair presentation of the company's financial position. Classifying other items as deferred or accrued vital to complying with accounting principles like matching and revenue recognition, aiding decision-making, and maintaining regulatory compliance.

References

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  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Intermediate Accounting (16th ed.). Wiley.
  • Boynton, W. C., & Johnson, R. N. (2019). Modern Auditing & Assurance Services. Cengage Learning.
  • Lev, B., & Gu, F. (2021). Financial Statement Analysis and Security Valuation. CFA Institute Investment Series.
  • Gibson, C. H. (2019). Financial Reporting & Analysis. Cengage Learning.
  • Accounting Standards Codification (ASC). (2020). FASB. Financial Accounting Standards Board.
  • Lasher, W. (2018). Financial Accounting with International Financial Reporting Standards. SAGE Publications.
  • Weil, R. L., Schipper, K., & Francis, J. (2017). Financial Accounting: A User Perspective. Pearson.
  • Zimmerman, J. L. (2020). Accounting for Decision Making and Control. McGraw-Hill Education.
  • Hilton, R. W., & Platt, D. E. (2016). Managerial Accounting:Creating Value in a Dynamic Business Environment. McGraw-Hill Education.

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