What is adjusting entry?

Prepare the adjusting entry and reversing entry?

• When the accounts of Constantine Inc. are examined, the adjusting data listed below are uncovered on December 31, the end of an annual fiscal period. 1. The prepaid insurance account shows a debit of $6,000, representing the cost of a 2-year fire insurance policy dated August 1 of the current year. 2. On November 1, Rental Revenue was credited for $2,400, representing revenue from a subrental for a 3-month period beginning on that date. 3. Purchase of advertising materials for $800 during the year was recorded in the Advertising Expense account. On December 31, advertising materials of $290 are on hand. 4. Interest of $770 has accrued on notes payable. Instructions Prepare the following in general journal form. (a) The adjusting entry for each item. (b) The reversing entry for each item where appropriate.

• Answer:

  1. It is a 24 month policy so you have to divide the total by 24. This will give you the monthly value, multiply that by how many months you used the in the current year (Aug, Sep, Oct, Nov, Dec). Then Credit the Pre-Paid Ins and Debit Ins Exp. 2. Here again you want to find out the monthly value of your Rental Revenue (2400 divided by three months). Since you only earned two months of revenue you have to allocate the remainder to Unearned Revenue. Debit Revenue and Credit Unearned Revenue. 3. You originally had 800 in materials and at the end of the year there was 290 left. Find out the difference and Credit Materials and Debit Materials Exp. 4. You have accrued an expense (liability). Debit $770 in Interest Expense and Credit Interest Payable. As far as the reversals go, only reverse your accruals. Therefore if it does not involve money that has moved, deferral, don't reverse. Review your text.