In this lecture, we will delve into the concept of adjusting entries with a focus on those related to supplies. Adjusting entries are crucial for accurately representing a company’s financial position at the end of a reporting period, typically the end of a month or year. These entries abide by standard journal entry rules, but they also have their own unique characteristics. Let’s explore how to approach adjusting entries with a practical example related to supplies.

Identifying Adjusting Entry Characteristics: Adjusting entries possess distinct characteristics that help us understand and apply them correctly. They are made at the conclusion of an accounting period, usually a month or year. In terms of the trial balance, these entries involve an account located above the Owner’s Capital account on the balance sheet and below the equity section on the income statement. For instance, we will consider supplies as the focus of our adjusting entry.

Understanding the Supplies Adjustment: Supplies, such as materials, office items, or equipment, are typically recorded as an asset on the balance sheet when acquired. Suppose a company initially recorded supplies worth \$3,009.75 as an asset. However, as the reporting period concludes, a physical count of supplies reveals a value of \$1,050.

Calculating the Adjustment: To align the recorded value with the actual count, an adjustment is required. This adjustment is calculated by taking the difference between the initial recorded value and the actual count: \$3,009.75 – \$1,050 = \$2,009.25. This adjustment amount of \$2,009.25 needs to be reflected in the financial statements.

Recording the Adjusting Entry: Given that supplies is a debit balance account, the adjustment entry involves a credit entry. We will credit the supplies account by \$2,009.25 to account for the adjustment. This entry brings the supplies account balance down to the actual count of \$1,050.

Impact on Financial Statements: As we make the adjusting entry, we observe how it affects various components of the financial statements. The supplies expense, an expense account, will be debited by \$2,009.25, causing it to rise from \$0 to \$2,009.25. Simultaneously, the supplies asset account will be credited by \$2,009.25, reducing it from \$3,009.75 to \$1,050, matching the physical count.

Implications for Equity: This adjustment also influences the equity section. The increase in supplies expense reduces net income. Consequently, the Owner’s Capital account, a component of equity, is lowered. This decrease in net income has a cascading effect on the entire equity section.

Conclusion: Understanding adjusting entries is essential for maintaining accurate financial records. When dealing with supplies, an adjusting entry helps align the recorded value with the actual count, ensuring that financial statements accurately reflect the company’s position. By following the principles of adjusting entries and recognizing their distinctive characteristics, accountants can present a more precise picture of a company’s financial health.