Hay And Barnabas Company: Adjustments And Classifications

Hay and Barnabas Company: Adjustments and Classifications

Adjustments are necessary before preparation of financial statements. There are five that need to be completed for Hay and Barnabas. Each adjustment has an effect on the accounting equation. The following will show the affects of each transaction reflected in the T accounts for each. The first consideration is the equipment that was purchased for eight hundred and forty thousand on January 1, 2003. According to the information provided the equipment has a life span of 12 years. The depreciation is seventy thousand or 840,000/ 12. Adjustments to accumulated depreciation and depreciation expense are required. In this case the adjustment increases both accounts.

Accumulated Depreciation,

Equipment Depreciation expense

70,000 70,000

During the year interest has been accruing on the bonds payable. The interest will affect accrued interest payable and interest expense. The 20,000 will increase both accounts. Accrued interest payable will reflect an increase and interest expense will reflect a decrease.

Accrued Interest

Payable Interest Expense

20,000 20,000

As of December 1, 2003, there remains seven thousand dollars of unexpired insurance. The adjustments will affect cash and unexpired insurance. The unexpired insurance increases or is debited and cash decreases or credited.

Cash Unexpired Insurance

7,000 7,000

On December 1, 2003 one hundred and forty thousand was paid to cover the rent for the next four months. This payment covers the rent until March 31, 2004. This prepayment is an asset for Hay and Barnabas. The transaction will affect only asset accounts. Cash will again decrease (credit) and increase prepaid rent (debit). (Horngren, Sundem, Elliott, Philbrick, 2006, p.105)

Cash Prepaid Rent

140,000 140,000

However, at the end of December part of the prepaid rent has expired. The total amount of rent prepaid was 140,000 divided by the months it covered, four equals 35,000. The transaction affects prepaid rent and rent expenses. Prepaid rent will decrease and rent expense increases. Furthermore, this increase in rent expense will cause a decrease in stockholder's equity when compiling the balance sheet.

Prepaid Rent Rent Expense

140,000 35,000 35,000

The last adjusting entry involves earned wages that have not been paid. As of the end of December twenty eight thousand in wages have been earned by the employees of Hay and Barnabas but remain unpaid. This transaction affects accrued wages payable and wages expense. Accrued wages payable is a liability and wage expense is a stockholder's