Financial Accounting: An Integrated Statements Approach, 2nd Edition

108 Chapter 3 Accrual Accounting Concepts

Balance Sheet

Assets  Liabilities Stockholders’ Equity

Accts. Prepaid Office Notes Accts. Unearned Capital Retained

Cash Rec. Insur.Supp.Equip.LandPay.Pay.RevenueStockEarnings

7,730 1,900 8 ,400 240 8 ,500 12,000 16, 800 140 1, 800 11,000 9,030

1,100 1,100

7,730 1,900 7,300 240 8 ,500 12,000 16, 800 140 1, 800 11,000 7,930

Statement of Cash Flows

Statement of

Cash Flows

Income

Statement

Income Statement

a1.1,100 Insurance exp.

Balances

a1. Insurance expense

Balances

a1.

Adjustment 2 (Supplies). This adjustment recognizes the portion of the $240 of

supplies purchased during November that have been used. For November, $150 of the

supplies were used, leaving $90 of supplies remaining for use during the coming

months. Thus, after recording the adjustment, the accounting records should show

supplies expense of $150 for November and supplies on hand (an asset) of $90. The

second adjustment is recorded as shown below.

Adjustment 3 (Depreciation). This adjustment recognizes that fixed assets such as

office equipment lose their ability to provide service over time. This reduction in the abil-

ity of a fixed asset to provide service is called depreciation. However, it is difficult to ob-

jectively determine the physical decline in the ability of fixed assets to provide service.

For this reason, accountants estimate the amount of the cost of long-term assets that be-

comes expense over the asset’s useful life. In a later chapter, we will discuss methods of

estimating depreciation. In this chapter, we simply assume that the amount of November

depreciation for the office equipment is $160.

To maintain a record of the initial cost of a fixed asset for tax and other purposes,

the fixed asset (office equipment) is not reduced directly. Instead, an offsetting or con-

tra asset account, called accumulated depreciation, is included in the accounting equa-

tion. On the balance sheet, the accumulated depreciation will be subtracted from the

original cost of the fixed asset. Thus, the third adjustment is recorded as shown on the

next page.

Balance Sheet

Assets  Liabilities Stockholders’ Equity

Accts. Prepaid Office Notes Accts. Unearned Capital Retained

Cash Rec. Insur.Supp.Equip.LandPay.Pay.RevenueStockEarnings

7,730 1,900 7,300 240 8 ,500 12,000 16, 800 140 1, 800 11,000 7,930

 150  150

7,730 1,900 7,300 90 8 ,500 12,000 16, 800 140 1, 800 11,000 7,7 80

Statement of Cash Flows

Statement of

Cash Flows

Income

Statement

Income Statement

a2.150 Supplies exp.

Balances

a2. Supplies expense

Balances

a2.

Q.As of January 1, $450

of supplies are on hand.

During January, $1,250 of

supplies were purchased on

account, and on January

31, $175 of supplies are

on hand. What is the sup-

plies expense for January?

A.$1,525 ($450 

$1,250$175)