Adjusting Entries for Liability Account Types:
Adjusting entries for liability accounts include account payable, unearned revenue, note payable and payroll payable, so we will discuss these accounts as follows.
1. Accounts Payable (AP)/Trade Payable
Accounts Payable is a liability account that reports the amounts owed to suppliers or vendors at balance sheet date.
Under the accrual basis of accounting, expenses are matched with the related revenues or are reported when the expense occurs, not when the cash is paid. The balance sheet must report all the amounts owed by the company—not just the amounts recorded into the accounting system from vendor invoices. Similarly, the income statement must report all incurred expenses —not merely the expenses recorded from vendor invoices.
| Adjusting date for expenses/asset : | |
| Dr. Expense/asset (1) | xxx |
| Cr. Accounts payable | xxx |
(1)
– If company uses services, so it is expense.
– If company purchases inventory, so it is asset/inventory.
Question:
Assume that a company had $2,000 of building repairs done in 2 December 2017, but the company has not yet received an invoice from the repairer. Balance sheet date is at 31 December 2017.
Required:
Make adjusting entry.
Solution:
The company will make an adjusting entry to record the expense and the liability on the 31 December 2017. The adjusting entry will involve the following accounts:
| Adjusting date at 31 December 2017 : | |
| Dr. Repair and Maintenance Expense | 2,000 |
| Cr. Accounts payable | 2,000 |
2. Unearned Revenues
Unearned Revenues is a liability account because the amounts are received by company from customers but have not yet been earned by the company. Company received cash from customers in advance, but perform job for customers at next time. When company performed or completed job for customers, so unearned revenues (liability) will be transferred to revenue in income statement.
Related entries are as follows:
| Received cash date: | |
| Dr. Cash | xxx |
| Cr. Unearned Revenue | xxx |
| Adjusting date when company performed or completed job for customers: | |
| Dr. Unearned Revenue | xxx |
| Cr. Service Revenues/Income | xxx |
Question:
On December 1, 2017, BBB Company collected from NNN Company a total of $30,000 as rental fee for three months starting December 1. Balance sheet date is at 31 December 2017.
Required:
Make entry and adjustment.
Solution:
| Received date December 1, 2017: | |
| Dr. Cash | 30,000 |
| Cr. Unearned Rent income | 30,000 |
| Adjusting date:
On December 31, 2016, the end of the accounting period, 1/3 of the rent received has already been earned ( $30,000/3=$10,000) |
|
| Dr. Unearned Rent income | 10,000 |
| Cr. Rent income | 10,000 |
3. Notes Payable (NP)
Note Payable (NP) is a liability account at balance sheet date. Any interest incurred from note payable may not be paid yet, so interest payable is reported in a separate liability account at balance sheet date with interest expense in income statement. Journal entries are as follows:
| Borrowing date: | |
| Dr. Cash | xxx |
| Cr. Note Payable | xxx |
| Adjusting date for interest expenses : | |
| Dr. Interest expense | xxx |
| Cr. Interest payable | xxx |
In some cases, if accounts payable are due date to pay vendors, but company cannot pay on time, so accounts payable (AP) from vendors or suppliers may be transferred to note payable (NP). Accounts payable (AP) are no interest charge but note payable (NP) are interest charge. For this case, Journal entries are as follows:
| Transferred AP date to NP: | |
| Dr. Account Payable | xxx |
| Cr. Note Payable | xxx |
| Adjusting date for interest expenses : | |
| Dr. Interest expense | xxx |
| Cr. Interest payable | xxx |
Question:
For example, let’s assume that the company borrowed the $12,000 on November 1, 2017 and agrees to make the first interest payment on June 1, 2018. If the loan specifies an annual interest rate of 10%, balance sheet date is at 31 December, 2017.
Required:
Make journal entry and adjustment.
Solution:
Total interest cost per year will be paid on June 1, 2018 = $12,000 x 10% = $1,200.
Balance sheet date is at 31 December,2017, so interest expenses incurred 2 months will be adjusted ( $1,200/12 x 2 =$200).
| 1 November, 2017: | |
| Dr. Cash | 12,000 |
| Cr. Note Payable | 12,000 |
| 31 December, 2017: Adjusting entry for 2 month interest expenses | |
| Dr. Interest expense | 200 |
| Cr. Interest payable | 200 |
4. Wages and salary Payable/Payroll payable
Wages Payable is a liability account that reports the amounts owed to employees at balance sheet date. Under the accrual basis of accounting, expenses are matched with the related revenues or are reported when the expense occurs, not when the cash is paid.
| Adjusting date for payroll : | |
| Dr. Payroll expense | xxx |
| Cr. Payroll payable | xxx |
Question:
The wages of $20,000 earned by the employees on December 2017 will be included in the payroll processing for a week, so wages will be paid on January 7 2018.
Required:
Make adjusting entry at 31 December 2017.
Solution:
Under the accrual basis of accounting, the income statement and balance sheet at 31 December 2017 must include the wage expense and wage payable (payroll) respectively. The following adjusting entry is required as of December 31:
| Adjusting date at 31 December 2017: | |
| Dr. Payroll expense | 20,000 |
| Cr. Payroll payable | 20,000 |