{"id":3084,"date":"2020-10-08T22:01:59","date_gmt":"2020-10-08T22:01:59","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=3084"},"modified":"2020-11-17T20:34:59","modified_gmt":"2020-11-17T20:34:59","slug":"adjusting-deferred-and-accrued-expense-items","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/adjusting-deferred-and-accrued-expense-items\/","title":{"raw":"Adjusting Deferred and Accrued Expense Items","rendered":"Adjusting Deferred and Accrued Expense Items"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Analyzing expense accounts and creating necessary adjustments<\/li>\r\n<\/ul>\r\n<\/div>\r\nJust as there are accrued and deferred revenues, there are accrued and deferred expenses. A deferred expense is something paid for but not used up (expensed) yet. An accrued expense is one we have incurred but not yet recorded for some reason.\r\n<h2>Deferred Expenses<\/h2>\r\nLet\u2019s take on deferred expenses first. One of the most common deferred expenses is supplies. Let\u2019s say MacroAuto buys a bunch of paint on account from SuppliesRUs at the beginning of December.\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec. 1<\/th>\r\n<td>Supplies<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">1,200.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec. 1<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">1,200.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec. 1<\/span><\/th>\r\n<td>To record purchase of paint supplies<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nActually, they\u2019ve been buying supplies all year long because they keep running out, but here\u2019s what the general ledger account looks like:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\">\r\n<div style=\"text-transform: uppercase;\">General Ledger<\/div>\r\n<div><span style=\"float: left;\">Account: Supplies<\/span><span style=\"float: right;\">Account No. 1210<\/span><\/div>\r\n<\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"8\"><\/td>\r\n<\/tr>\r\n<tr style=\"text-transform: uppercase;\">\r\n<th class=\"c\" colspan=\"2\" rowspan=\"2\" scope=\"col\">Date<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Item<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Post. Ref.<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Debit<\/th>\r\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Credit<\/th>\r\n<th class=\"c\" colspan=\"2\" scope=\"col\">Balance<\/th>\r\n<\/tr>\r\n<tr style=\"text-transform: uppercase;\">\r\n<th class=\"c\" scope=\"col\">Debit<\/th>\r\n<th class=\"c\" scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td class=\"l\">Bal fwd<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">1,650.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"l\">May<\/td>\r\n<td class=\"l\">6<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">1,000.00<\/td>\r\n<td><\/td>\r\n<td class=\"r\">2,650.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"l\">July<\/td>\r\n<td class=\"l\">15<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">2,500.00<\/td>\r\n<td><\/td>\r\n<td class=\"r\">5,150.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"l\">Oct<\/td>\r\n<td class=\"l\">10<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">1,420.00<\/td>\r\n<td><\/td>\r\n<td class=\"r\">6,570.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td class=\"l\">Dec<\/td>\r\n<td class=\"l\">1<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>1,200.00<\/td>\r\n<td><\/td>\r\n<td>7,770.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"8\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThey don\u2019t make a journal entry when they use a gallon or two of paint. They are only recording when they buy paint.\r\n\r\nSomeone has the job of counting the paint on hand at the end of each accounting period and putting a historical cost to it. In this case, it looks as if the company only produces financial statements at the end of the year because there are no adjustments to the supplies inventory during the year.\r\n\r\nAt the close of business on December 31, Sally, the supplies manager, counts the cans of paint and makes some kind of calculation about how much those cans cost. Let\u2019s say her end of year count is 65 cans of paint, and the last purchase was that December 1 purchase of 120 cans at $10 each. So, ending paints supplies \u201cinventory\u201d is $650 in her professional opinion. She fills out a little worksheet that you designed and puts in on your desk on her way out to her New Year\u2019s Eve party.\r\n\r\nIn January, as you are going through the unadjusted trial balance, line by line, one of the first asset accounts you come across after verifying that the checking account was accurate was supplies, which shows a balance of $7,700. You check Sally\u2019s note to you and see the actual balance was $650.\r\n\r\nThis account needs to be adjusted, and a quick look at the ledger account reveals that none of the supplies used up during the year were recorded as expenses. That\u2019s because this is a deferred expense. We pay for the supplies so we have them on hand when we need them, and then expense them as we use them. In this accounting system, however, we expense them when we get around to it, which is just before we create the financial statements.\r\n\r\nYou get out a scratch pad and do some math with some T accounts:\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012330\/Screen-Shot-2020-10-31-at-6.22.55-PM.png\"><img class=\"size-medium wp-image-4819 aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012330\/Screen-Shot-2020-10-31-at-6.22.55-PM-300x228.png\" alt=\"T account for Supplies. There is a debit balance before adjustment of 7,700 dollars. On the credit side, there is an adjusting journal entry of 7,050 dollars. There is a debit total of 650 dollars.\" width=\"300\" height=\"228\" \/><\/a>\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012504\/Screen-Shot-2020-10-31-at-6.19.31-PM.png\"><img class=\" wp-image-4820 aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012504\/Screen-Shot-2020-10-31-at-6.19.31-PM-293x300.png\" alt=\"T account for Supplies Expense. On the debit side, there is an adjusting journal entry of 7,050 dollars.\" width=\"227\" height=\"232\" \/><\/a>\r\n\r\nAnd from this analysis, you write the journal entry:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec. 31<\/th>\r\n<td>Supplies Expense<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">7,050.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Supplies<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">7,050.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\r\n<td>To record the cost of supplies used up<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe credit to the asset account called supplies reduces the balance from $7,700 which is the total of everything we bought during the year to $650 which is what we had left at the end of the year. The difference of $7,050 is the cost of supplies we used up. We are inferring from the idea that if we bought it and it wasn\u2019t on hand at the end of the year, then we used it up. Some of it could have been spilled, or even stolen. But in any case, the amount no longer in our possession is $7,050 and we are calling that an expense\u2014a cost of doing business. The $650 that was left in the closet on December 31, was the historical cost of the asset on that date, and that\u2019s what we will report on the balance sheet.\r\n\r\nhttps:\/\/youtu.be\/hPq1Mv2gIec\r\n<h2>Accrued Expenses<\/h2>\r\nLet\u2019s move on to accruing expenses that haven\u2019t been recorded yet. A common example of an accrued expense is wages employees earned (in this case in December) but haven\u2019t been paid.\r\n\r\n<img class=\"alignright wp-image-3323\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12214657\/tim-mossholder-Ue_mZo_jqB8-unsplash-1024x683.jpg\" alt=\"An asian man sitting in front of a computer\" width=\"400\" height=\"267\" \/>An accountant records unpaid salaries as a liability and an expense because the company has incurred an expense. The recording of the payment of employee salaries usually involves a debit to an expense account and a credit to cash. Unless a company pays salaries on the last day of the accounting period for a pay period ending on that date, it must make an adjusting entry to record any salaries incurred but not yet paid.\r\n\r\nLet\u2019s say that MacroAuto pays its employees on the 10th and the 25th of each month. The December 10 paycheck was for November 16\u201330, and the December 25 check was for December 1\u201315. This system means that employee earnings for December 16\u201331 will be paid on January 10 of the next year. As we are analyzing accounts, we know what the paycheck system will be, and so we know we have to add (accrue) wages for the end of December.\r\n\r\nFortunately, by the time we are doing this analysis, it\u2019s already January 10 and so we know how much to accrue. Let\u2019s say the amount of the January 10 payroll was $15,000. Let\u2019s make a simple version of the actual entry because (a) it can get complicated and (b) this entry will be covered in more detail in the section on current liabilities.\r\n\r\nHere\u2019s a simple version of the journal entry:\r\n<table class=\"fin-table gridded\"><caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\r\n<thead>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"col\">Date<\/th>\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Post. Ref.<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>20--<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Dec. 31<\/th>\r\n<td>Wage Expense<\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">15,000.00<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Wages Payable<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\">15,000.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\r\n<td>To record December wages paid in January<\/td>\r\n<td><\/td>\r\n<td class=\"r\"><\/td>\r\n<td class=\"r\"><\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td colspan=\"5\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe debit Wage Expense to record the December wages in December, even though they haven\u2019t been paid as of that date, because they were incurred in December and match December revenue. Wages Payable is a liability\u2014it shows that as of December 31 we had incurred an expense and hadn\u2019t parted with the cash yet. It is a debt we owe workers.\r\n\r\nhttps:\/\/youtu.be\/ONkJXfvrAkc\r\n\r\nAnd there you have it. You\u2019ve covered deferred and accrued revenues as well as deferred and accrued expenses, and now the only adjusting journal entries left are those occasional corrections that have to be made for various reasons. Before we address those corrections, assess your understanding of what we\u2019ve covered so far.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice question<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23384\r\n\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23385\r\n\r\n[ohm_question]202374-203081[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Analyzing expense accounts and creating necessary adjustments<\/li>\n<\/ul>\n<\/div>\n<p>Just as there are accrued and deferred revenues, there are accrued and deferred expenses. A deferred expense is something paid for but not used up (expensed) yet. An accrued expense is one we have incurred but not yet recorded for some reason.<\/p>\n<h2>Deferred Expenses<\/h2>\n<p>Let\u2019s take on deferred expenses first. One of the most common deferred expenses is supplies. Let\u2019s say MacroAuto buys a bunch of paint on account from SuppliesRUs at the beginning of December.<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec. 1<\/th>\n<td>Supplies<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">1,200.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec. 1<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Accounts Payable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">1,200.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec. 1<\/span><\/th>\n<td>To record purchase of paint supplies<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Actually, they\u2019ve been buying supplies all year long because they keep running out, but here\u2019s what the general ledger account looks like:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\">\n<\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"8\"><\/td>\n<\/tr>\n<tr style=\"text-transform: uppercase;\">\n<th class=\"c\" colspan=\"2\" rowspan=\"2\" scope=\"col\">Date<\/th>\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Item<\/th>\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Post. Ref.<\/th>\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Debit<\/th>\n<th class=\"c\" rowspan=\"2\" scope=\"col\">Credit<\/th>\n<th class=\"c\" colspan=\"2\" scope=\"col\">Balance<\/th>\n<\/tr>\n<tr style=\"text-transform: uppercase;\">\n<th class=\"c\" scope=\"col\">Debit<\/th>\n<th class=\"c\" scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td class=\"l\">Bal fwd<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">1,650.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td class=\"l\">May<\/td>\n<td class=\"l\">6<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">1,000.00<\/td>\n<td><\/td>\n<td class=\"r\">2,650.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td class=\"l\">July<\/td>\n<td class=\"l\">15<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">2,500.00<\/td>\n<td><\/td>\n<td class=\"r\">5,150.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td class=\"l\">Oct<\/td>\n<td class=\"l\">10<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">1,420.00<\/td>\n<td><\/td>\n<td class=\"r\">6,570.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td class=\"l\">Dec<\/td>\n<td class=\"l\">1<\/td>\n<td><\/td>\n<td><\/td>\n<td>1,200.00<\/td>\n<td><\/td>\n<td>7,770.00<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr aria-hidden=\"true\">\n<td colspan=\"8\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>They don\u2019t make a journal entry when they use a gallon or two of paint. They are only recording when they buy paint.<\/p>\n<p>Someone has the job of counting the paint on hand at the end of each accounting period and putting a historical cost to it. In this case, it looks as if the company only produces financial statements at the end of the year because there are no adjustments to the supplies inventory during the year.<\/p>\n<p>At the close of business on December 31, Sally, the supplies manager, counts the cans of paint and makes some kind of calculation about how much those cans cost. Let\u2019s say her end of year count is 65 cans of paint, and the last purchase was that December 1 purchase of 120 cans at $10 each. So, ending paints supplies \u201cinventory\u201d is $650 in her professional opinion. She fills out a little worksheet that you designed and puts in on your desk on her way out to her New Year\u2019s Eve party.<\/p>\n<p>In January, as you are going through the unadjusted trial balance, line by line, one of the first asset accounts you come across after verifying that the checking account was accurate was supplies, which shows a balance of $7,700. You check Sally\u2019s note to you and see the actual balance was $650.<\/p>\n<p>This account needs to be adjusted, and a quick look at the ledger account reveals that none of the supplies used up during the year were recorded as expenses. That\u2019s because this is a deferred expense. We pay for the supplies so we have them on hand when we need them, and then expense them as we use them. In this accounting system, however, we expense them when we get around to it, which is just before we create the financial statements.<\/p>\n<p>You get out a scratch pad and do some math with some T accounts:<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012330\/Screen-Shot-2020-10-31-at-6.22.55-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-4819 aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012330\/Screen-Shot-2020-10-31-at-6.22.55-PM-300x228.png\" alt=\"T account for Supplies. There is a debit balance before adjustment of 7,700 dollars. On the credit side, there is an adjusting journal entry of 7,050 dollars. There is a debit total of 650 dollars.\" width=\"300\" height=\"228\" \/><\/a><\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012504\/Screen-Shot-2020-10-31-at-6.19.31-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-4820 aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/01012504\/Screen-Shot-2020-10-31-at-6.19.31-PM-293x300.png\" alt=\"T account for Supplies Expense. On the debit side, there is an adjusting journal entry of 7,050 dollars.\" width=\"227\" height=\"232\" \/><\/a><\/p>\n<p>And from this analysis, you write the journal entry:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec. 31<\/th>\n<td>Supplies Expense<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">7,050.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Supplies<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">7,050.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\n<td>To record the cost of supplies used up<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The credit to the asset account called supplies reduces the balance from $7,700 which is the total of everything we bought during the year to $650 which is what we had left at the end of the year. The difference of $7,050 is the cost of supplies we used up. We are inferring from the idea that if we bought it and it wasn\u2019t on hand at the end of the year, then we used it up. Some of it could have been spilled, or even stolen. But in any case, the amount no longer in our possession is $7,050 and we are calling that an expense\u2014a cost of doing business. The $650 that was left in the closet on December 31, was the historical cost of the asset on that date, and that\u2019s what we will report on the balance sheet.<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"Adjusting Entries for Prepaid Expenses (Financial Accounting Tutorial #20)\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/hPq1Mv2gIec?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<h2>Accrued Expenses<\/h2>\n<p>Let\u2019s move on to accruing expenses that haven\u2019t been recorded yet. A common example of an accrued expense is wages employees earned (in this case in December) but haven\u2019t been paid.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-3323\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/12214657\/tim-mossholder-Ue_mZo_jqB8-unsplash-1024x683.jpg\" alt=\"An asian man sitting in front of a computer\" width=\"400\" height=\"267\" \/>An accountant records unpaid salaries as a liability and an expense because the company has incurred an expense. The recording of the payment of employee salaries usually involves a debit to an expense account and a credit to cash. Unless a company pays salaries on the last day of the accounting period for a pay period ending on that date, it must make an adjusting entry to record any salaries incurred but not yet paid.<\/p>\n<p>Let\u2019s say that MacroAuto pays its employees on the 10th and the 25th of each month. The December 10 paycheck was for November 16\u201330, and the December 25 check was for December 1\u201315. This system means that employee earnings for December 16\u201331 will be paid on January 10 of the next year. As we are analyzing accounts, we know what the paycheck system will be, and so we know we have to add (accrue) wages for the end of December.<\/p>\n<p>Fortunately, by the time we are doing this analysis, it\u2019s already January 10 and so we know how much to accrue. Let\u2019s say the amount of the January 10 payroll was $15,000. Let\u2019s make a simple version of the actual entry because (a) it can get complicated and (b) this entry will be covered in more detail in the section on current liabilities.<\/p>\n<p>Here\u2019s a simple version of the journal entry:<\/p>\n<table class=\"fin-table gridded\">\n<caption class=\"u-clearfix\"><span style=\"text-transform: uppercase;\">Journal<\/span><span style=\"float: right;\">Page 101<\/span><\/caption>\n<thead>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<tr>\n<th scope=\"col\">Date<\/th>\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Post. Ref.<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>20&#8211;<\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Dec. 31<\/th>\n<td>Wage Expense<\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">15,000.00<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Wages Payable<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\">15,000.00<\/td>\n<\/tr>\n<tr>\n<th><span class=\"u-sr-only\">Dec. 31<\/span><\/th>\n<td>To record December wages paid in January<\/td>\n<td><\/td>\n<td class=\"r\"><\/td>\n<td class=\"r\"><\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td colspan=\"5\"><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>We debit Wage Expense to record the December wages in December, even though they haven\u2019t been paid as of that date, because they were incurred in December and match December revenue. Wages Payable is a liability\u2014it shows that as of December 31 we had incurred an expense and hadn\u2019t parted with the cash yet. It is a debt we owe workers.<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-2\" title=\"Adjusting Entries for Accrued Expenses (Financial Accounting Tutorial #19)\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/ONkJXfvrAkc?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>And there you have it. You\u2019ve covered deferred and accrued revenues as well as deferred and accrued expenses, and now the only adjusting journal entries left are those occasional corrections that have to be made for various reasons. Before we address those corrections, assess your understanding of what we\u2019ve covered so far.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice question<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23384\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23384&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23384\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"lumen_assessment_23385\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23385&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23385\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<p><iframe loading=\"lazy\" id=\"ohm202374\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=202374-203081&theme=oea&iframe_resize_id=ohm202374&show_question_numbers\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-3084\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Adjusting Deferred and Accrued Expense Items. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgia State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Adjusting Entries for Prepaid Expenses. <strong>Authored by<\/strong>: Note Pirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/hPq1Mv2gIec\">https:\/\/youtu.be\/hPq1Mv2gIec<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><li>Adjusting Entries for Accrued Expenses. <strong>Authored by<\/strong>: Note Pirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/ONkJXfvrAkc\">https:\/\/youtu.be\/ONkJXfvrAkc<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube license<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":17,"menu_order":7,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Adjusting Deferred and Accrued Expense Items\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University\",\"organization\":\"Endeavour International Corporation\",\"url\":\"\",\"project\":\"The Global Text Project\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Adjusting Entries for Prepaid Expenses\",\"author\":\"Note Pirate\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/hPq1Mv2gIec\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"},{\"type\":\"copyrighted_video\",\"description\":\"Adjusting Entries for Accrued Expenses\",\"author\":\"Note Pirate\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/ONkJXfvrAkc\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube license\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-3084","chapter","type-chapter","status-publish","hentry"],"part":67,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3084","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/17"}],"version-history":[{"count":17,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3084\/revisions"}],"predecessor-version":[{"id":6048,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3084\/revisions\/6048"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/67"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3084\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=3084"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=3084"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=3084"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=3084"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}