Problem 3 1a: Identifying Adjusting Entries With Explanation
Problem 3 1a Identifying Adjusting Entries With Explanations Lo C3 P1
Problem 3 1a Identifying adjusting entries with explanations LO C3, P1 For each of the following entries, enter the letter of the explanation that most closely describes it in the space beside each entry. (You can use letters more than once.) A. To record receipt of unearned revenue. B. To record this period's earning of prior unearned revenue. C. To record payment of an accrued expense. D. To record receipt of an accrued revenue. E. To record an accrued expense. F. To record an accrued revenue. G. To record this period's use of a prepaid expense. H. To record payment of a prepaid expense. I. To record this period's depreciation expense.
Journal Entries:
- Interest Expense 1,000; Interest Payable 1,000
- Depreciation Expense 4,000; Accumulated Depreciation 4,000
- Unearned Professional Fees 3,000; Professional Fees Earned 3,000
- Insurance Expense 4,200; Prepaid Insurance 4,200
- Salaries Payable 1,400; Cash 1,400
- Prepaid Rent 4,500; Cash 4,500
- Salaries Expense 6,000; Salaries Payable 6,000
- Interest Receivable 5,000; Interest Revenue 5,000
- Cash 9,000; Accounts Receivable 9,000
- Cash 7,500; Unearned Professional Fees 7,500
- Cash 2,000; Interest Receivable 2,000
- Rent Expense 2,000; Prepaid Rent 2,000
Paper For Above instruction
Introduction
Accurate financial reporting depends on the correct recognition of revenues and expenses within the appropriate period. Adjusting entries are essential at the end of an accounting period to ensure that the financial statements reflect the true financial position and performance of a business. This paper aims to analyze various adjusting journal entries provided, assign the most appropriate explanations, and discuss the nature and necessity of these adjustments in financial accounting.
Analysis of Adjusting Entries and Their Explanations
Each journal entry presented corresponds to specific accounting events requiring adjustment to accurately reflect the company's financial position. Assigning the correct explanations from options A through I involves understanding the nature of each transaction.
1. Interest Expense 1,000; Interest Payable 1,000
This entry recognizes interest expense incurred but not yet paid by the period's end, indicating accrued interest. The appropriate explanation is E: To record an accrued expense, as interest represents an expense accruing over time.
2. Depreciation Expense 4,000; Accumulated Depreciation 4,000
This entry accounts for depreciation expense for the period, reflecting the allocation of the cost of long-term assets over their useful lives. The suitable explanation is I: To record this period's depreciation expense.
3. Unearned Professional Fees 3,000; Professional Fees Earned 3,000
This entry recognizes revenue previously received in unearned form now earned by providing services, thus adjusting for revenue recognition. Explanation B: To record this period's earning of prior unearned revenue fits best here.
4. Insurance Expense 4,200; Prepaid Insurance 4,200
This adjustment reflects the expiration of prepaid insurance coverage during the period, recognizing insurance expense accordingly. Explanation G: To record this period's use of a prepaid expense applies.
5. Salaries Payable 1,400; Cash 1,400
This entry records payment of salaries owed at period-end, thus reducing liabilities and cash. Explanation C: To record payment of an accrued expense matches this transaction.
6. Prepaid Rent 4,500; Cash 4,500
This reflects payment of rent for the period, which was initially recorded as prepaid. Since it involves a cash outflow for an asset, the proper explanation is H: To record payment of a prepaid expense.
7. Salaries Expense 6,000; Salaries Payable 6,000
This entry captures accrued salaries expense not yet paid but incurred by the period's end, corresponding with explanation E: To record an accrued expense.
8. Interest Receivable 5,000; Interest Revenue 5,000
This transaction recognizes accrued interest revenue earned but not yet received, fitting explanation D: To record receipt of an accrued revenue.
9. Cash 9,000; Accounts Receivable 9,000
This pertains to collection of accounts receivable, converting receivables into cash. Since it involves receiving cash for services already billed, explanation D: To record receipt of an accrued revenue applies, although more precisely it’s a collection of receivables.
10. Cash 7,500; Unearned Professional Fees 7,500
This indicates initial receipt of unearned revenue, which will be earned over time, matching explanation A: To record receipt of unearned revenue.
11. Cash 2,000; Interest Receivable 2,000
This signifies receipt of interest that was previously accrued, aligning with explanation D.
12. Rent Expense 2,000; Prepaid Rent 2,000
This entry reduces prepaid rent to expense as the benefit is utilized during the period, fitting explanation G.
Discussion
Adjusting entries serve to align forecasted revenues and expenses with the period they are incurred, ensuring compliance with the matching principle and revenue recognition standards. For example, accrued expenses like interest and salaries (entries 1 and 7) reflect obligations incurred but unpaid at period-end, necessitating accruals to present liabilities accurately. Conversely, revenue recognition adjustments, such as entries 3 and 8, ensure revenues are acknowledged when earned, not when cash is received.
The adjustments for prepaid expenses (entries 4, 6, and 12) involve recognizing expenses proportional to the benefits consumed during the period. Depreciation entries (2 and 3) allocate the cost of long-term assets systematically, matching expense recognition with asset usage over time.
Furthermore, unearned revenue adjustments (entries 3 and 10) transition received payments from liabilities to earned income as services are rendered. The collection of receivables (entries 9 and 11) reflects cash inflows while still maintaining accurate records of earned but unpaid revenues.
Overall, these adjusting entries uphold the integrity of financial statements, providing stakeholders with a truthful picture of the company's financial health. Properly applying these adjustments complies with Generally Accepted Accounting Principles (GAAP) and enhances transparency and comparability within financial reporting.
Conclusion
Correct classification and understanding of adjusting entries play a pivotal role in accurate financial reporting. Each adjustment ensures that the financial statements faithfully depict the company's revenues, expenses, assets, and liabilities at the end of the accounting period. The assignment of explanations aligned with the transactions reinforces foundational accounting principles such as accrual accounting, matching, and revenue recognition, ensuring comprehensive and reliable financial documentation.
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