Question

The trial balance shows Supplies \(\$ 0\) and Supplies Expense \(\$ 1,500\). If \(\$ 800\) of supplies are on hand at the end of the period, the adjusting entry is: a. Debit Supplies \(\$ 800\) and credit Supplies Expense \(\$ 800\). b. Debit Supplies Expense \(\$ 800\) and credit Supplies \(\$ 800\). c. Debit Supplies \(\$ 700\) and credit Supplies Expense \(\$ 700\). d. Debit Supplies Expense \(\$ 700\) and credit Supplies \(\$ 700\).

Short answer

a. Debit Supplies $800 and credit Supplies Expense $800.

Step-by-step solution

Understand the Initial Situation

The trial balance indicates that Supplies are currently recorded as $0, and Supplies Expense is recorded as $1,500. This means that the supplies used during the period are completely expensed, but there are actually some supplies remaining at the end of the period.

Determine Supplies on Hand

It is given that $800 worth of supplies are still on hand at the end of the period. This means that these supplies have not been used and should not be expensed.

Calculate the Used Supplies

The supplies initially expensed were $1,500. Since $800 are still on hand, the used supplies amount to $1,500 - $800 = $700.

Prepare the Adjusting Entry

An entry is needed to correct the Supplies Expense and record the Supplies on hand. To adjust for the $800 worth of supplies on hand, Supplies (an asset account) should be debited $800, reversing some of the expense that was prematurely recorded, and Supplies Expense should be credited $800.

Identify the Correct Answer Choice

Based on step 4, the correct adjusting entry is a debit to Supplies for $800 and a credit to Supplies Expense for $800. This matches option 'a' from the given choices.

Key concepts

Trial Balance

The trial balance is an essential tool in the accounting process. It is a report that lists the balances of all general ledger accounts at a particular point in time. This helps to ensure that the total debits equal the total credits, which is crucial for the accuracy of the financial records. When the trial balance doesn't balance, it indicates a potential error in the recording of financial transactions. By reviewing the trial balance, accountants can verify the correctness of accounts before preparing financial statements.

• The trial balance aids in detecting errors.
• It is crucial for preparing financial statements like the balance sheet and income statement.
• It forms the foundation for identifying necessary adjustments to ensure accurate financial reporting.

Understanding the trial balance is key for making period-end adjustments, which brings us to the next concept.

Supplies Expense

Supplies expense is the cost associated with the use of supplies during an accounting period. It is key to track these expenses accurately since they represent the depletion of resources. When supplies are consumed, the cost is transferred from the asset account 'Supplies' to 'Supplies Expense'. This ensures that expenses are recorded in the period during which they are actually incurred.
Consider a company beginning with $1,500 recorded as supplies expense. If, at the end of the period, $800 worth of supplies remain, this implies that $700 of supplies were used. The exercise involves adjusting entries to reflect these actual figures in financial statements.

Asset Accounts

Asset accounts represent resources owned by a company that are expected to bring future economic benefits. In accounting, accuracy in asset accounts is crucial for providing a true picture of a company's financial position. Examples range from cash and inventory to equipment and supplies.
For supplies, initially recorded as an asset, it becomes vital to adjust the account at period-end to reflect the actual value remaining. This might involve adjusting the 'Supplies' account to correct for supplies still available, moving a portion back from 'Supplies Expense'. Such precision ensures that the asset account presents an accurate value, vital for stakeholders assessing the company's economic resources.

Period-End Adjustments

Period-end adjustments play a critical role in accounting. They are necessary to ensure that the financial records accurately reflect the company's performance and position by the end of an accounting period. These adjustments involve correcting or updating accounts to adhere to the accounting principles of revenue recognition and matching.
In the context of supplies, adjusting entries such as debiting the 'Supplies' account and crediting 'Supplies Expense' allow for correct reporting of unutilized supplies. Without such adjustments, the income statement and balance sheet may not present a true depiction of financial activities during the period.