Adjusting entries

Learning goals

• Calculate and record supplies, prepaid insurance, and depreciation adjustments.
• Record simple accrued revenue and accrued expense adjustments.
• Use contra assets and carrying amount correctly.
• Complete an adjustment checklist and reasonableness proof.

Prerequisite check

Explain why an adjustment normally affects one income-statement account and one balance-sheet account. Give one example.

Vocabulary

• Supplies on hand: unused supplies that remain an asset at the reporting date.
• Depreciation: systematic allocation of a tangible asset's depreciable amount over its useful life.
• Accumulated Depreciation: contra asset that collects depreciation recorded to date.
• Carrying amount/net book value: asset cost minus accumulated depreciation.
• Useful life: period over which the asset is expected to provide benefit under the stated estimate.
• Residual value: estimated value remaining at the end of useful life under the problem assumptions.

Core idea

An adjustment is driven by ending evidence, not a target. Counts establish supplies remaining. Coverage dates establish prepaid insurance remaining. A stated depreciation policy allocates equipment cost. Time records and completed work establish accruals.

Older Ontario BAF3M materials may use “amortization” for tangible equipment. This library uses the currently common classroom label depreciation; follow the label a local test supplies.

Why this treatment makes sense

Crediting Equipment directly would erase part of its original cost from the account. A separate Accumulated Depreciation contra account preserves cost while showing how much allocation has accumulated. This creates a traceable carrying amount.

A repeatable method

Complete SPADE:

1. S — Supplies: ledger balance − count = used.
2. P — Prepaids: recorded asset − unexpired portion = expense.
3. A — Accruals: earned/incurred amount not recorded.
4. D — Depreciation: apply the stated method, useful life, residual value, and time fraction.
5. E — Evidence/effects: attach support and state what omission would do.

Worked example

At December 31, Portage Photo Services has:

1. Supplies ledger balance $800; physical count $260. Supplies used = $800 − $260 = $540.
2. Prepaid Insurance $2,400 for 12 months beginning December 1. One month expired = $200.
3. Equipment cost $12,000, residual value $0, useful life 5 years, straight-line, owned all year. Annual depreciation = ($12,000 − $0) ÷ 5 = $2,400.
4. Wages earned but unpaid $450.

Adjustments:

Ending asset checks: Supplies $260; Prepaid Insurance $2,200; Equipment cost $12,000 less Accumulated Depreciation $2,400 = carrying amount $9,600. Total added expense is $3,590, so omission would overstate net income by $3,590.

Journal, ledger, and statement connection

Adjustments are dated at period-end and posted like other journal entries. Expense debits reach the income statement; adjusted asset/contra-asset and payable balances reach the balance sheet. The adjusted trial balance, not the unadjusted version, becomes the statement source.

Common mistakes

• Expensing supplies remaining instead of supplies used.
• Crediting Cash in an adjustment for a payment already recorded.
• Crediting Equipment instead of Accumulated Depreciation when the course uses a contra account.
• Treating Accumulated Depreciation as a liability.
• Ignoring residual value or partial-year instructions.
• Assuming an estimate can be changed merely to reach profit.

Guided practice

Prepare the adjustment and ending balance.

1. Supplies unadjusted $1,250; count $430.
2. Prepaid rent $4,800 covers six months; two months expired.
3. Equipment $18,000, residual $3,000, five-year straight-line life; one full year.
4. $720 service revenue earned but unrecorded.

Independent practice

At June 30, Meadow App Support reports Supplies $960 with $310 on hand; Prepaid Insurance $1,800 covering nine months from April 1; Equipment $24,000, $4,000 residual, four-year straight-line life, owned for six months; and unpaid wages $1,100.

Prepare all adjustments, calculate asset ending balances, and state the combined net-income effect.

Self-check and solutions

Guided practice:

1. Used $820: Dr Supplies Expense $820 / Cr Supplies $820; ending Supplies $430.
2. Monthly $800; expired $1,600: Dr Rent Expense $1,600 / Cr Prepaid Rent $1,600; ending $3,200.
3. ($18,000 − $3,000) ÷ 5 = $3,000: Dr Depreciation Expense $3,000 / Cr Accumulated Depreciation $3,000; carrying amount $15,000 after one year.
4. Dr Accounts Receivable $720 / Cr Service Revenue $720.

Independent practice: Supplies used $650. Insurance monthly $200; three months expired = $600, ending prepaid $1,200. Annual depreciation = ($24,000 − $4,000) ÷ 4 = $5,000; six months = $2,500; carrying amount $21,500. Wages accrual $1,100. Entries debit the related expenses and credit Supplies, Prepaid Insurance, Accumulated Depreciation, and Wages Payable. Expenses rise $650 + $600 + $2,500 + $1,100 = $4,850, so net income falls $4,850.

Retrieval practice

Recreate SPADE. Explain the difference between Equipment, Accumulated Depreciation, Depreciation Expense, and carrying amount.

Exam-style application

Supplies has a $1,700 unadjusted debit balance. A student records Dr Supplies Expense $500 / Cr Supplies $500 because $500 remains. The count is reliable. Diagnose and correct.

Answer outline: The student expensed the ending amount instead of the used amount. Used = $1,700 − $500 = $1,200. If the wrong $500 entry has not posted, replace it with Dr Supplies Expense $1,200 / Cr Supplies $1,200. If it posted, add Dr Supplies Expense $700 / Cr Supplies $700. Ending Supplies becomes $500.

Lesson summary

Adjust from reliable ending evidence. Preserve asset cost where required, show contra accounts clearly, and prove both the ending balance and statement effect.