Question

The trial balance of Woods Company includes the following balance sheet accounts. Identify the accounts that might require adjustment. For each account that requires adjustment, indicate (1) the type of adjusting entry and (2) the related account in the adjusting entry.
Account Type of Adjustment Related Account
(a) Accounts Receivable Prepaid ExpensesAccrued RevenuesNot requiredAccrued ExpensesUnearned Revenues Interest ExpenseInsurance ExpenseService RevenueNot requiredDepreciation Expense
(b) Prepaid Insurance Unearned RevenuesAccrued RevenuesPrepaid ExpensesNot requiredAccrued Expenses Service RevenueInsurance ExpenseNot requiredDepreciation ExpenseInterest Expense
(c) Equipment Accrued RevenuesNot requiredPrepaid ExpensesAccrued ExpensesUnearned Revenues Interest ExpenseService RevenueDepreciation ExpenseInsurance ExpenseNot required
(d) Accumulated Depreciation's Equipment Prepaid ExpensesAccrued RevenuesNot requiredAccrued ExpensesUnearned Revenues Depreciation ExpenseService RevenueNot requiredInsurance ExpenseInterest Expense
(e) Notes Payable Not requiredUnearned RevenuesAccrued ExpensesAccrued RevenuesPrepaid Expenses Interest ExpenseNot requiredInsurance ExpenseService RevenueDepreciation Expense
(f) Interest Payable Prepaid ExpensesNot requiredAccrued RevenuesUnearned RevenuesAccrued Expenses Insurance ExpenseNot requiredDepreciation ExpenseInterest ExpenseService Revenue
(g) Unearned Service Revenue Unearned RevenuesPrepaid ExpensesAccrued ExpensesAccrued RevenuesNot required Not requiredDepreciation ExpenseService RevenueInterest ExpenseInsurance Expense

Answer 1

Answer:

Woods Company

Accounts Requiring Adjustment, Type of Adjusting Entry, and the Related Account:

 Account                         Type of Adjustment           Related Account

a) Account receivable  Accrued revenue              Service revenue

b) Prepaid insurance  Prepaid expense              Insurance expense

c) Equipment                   Not required                      Not required  

d) Accumulated depreciation Accrued expense       Depreciation expense

e) Notes Payable             Not required                      Not required

f) Interest Payable          Accrued expense              Interest expense

g) Unearned service revenue Unearned revenue Service revenue

Explanation:

End of period adjustments are made to accounts in order to bring them in line with the accrual concept and matching principle of accounting.  These principles require that expenses and revenues for the period are matched in order to determine the appropriate profit generated for the period.  The implication is that transactions are recorded when they are incurred and not when cash is exchanged.  For example, if rent expense is incurred for the year and payment is made in the following year, the expense must be recognized in the current year.  The same applies to revenue.