Double-entry Accounting System

4.18. Analysis of interest receivable and revenue adjusting entry

Adjustment No. 4: On August 1, 20X6 Huske's Consultants loaned $3,000 to Jak Building Company. In return, Huske's Consultants received a one-year, 8% note (see Event No. 10). In this connection, Huske's Consultants should record $100 = $3,000 x 8% x (5 months ÷ 12 months) as interest revenue for the year ending December 31, 20X6. The adjustment acts to increase assets and equity. The increase in assets (Interest Receivable) is recorded as a debit, and the increase in equity (Interest Revenue) is recorded as a credit:

Illustration 36: Effect of interest revenue in T accounts

Assets

=

Liabilities

+

 Equity

Interest Receivable

 

 

 

Interest Revenue

Debit
(A4) +100

 

 

 

 

 

 

Credit
+ Revenue
[+ Equity]
(A4) +100

This is an asset source transaction:

Illustration 37: Effect of interest revenue in the horizontal model

Assets

=

Liabilities

+

Equity

Rev.

-

Exp.

=

Net Inc.

Cash Flow

100

=

n/a

+

100

100

-

n/a

=

100

n/a

 

4.19. Analysis of fixed assets depreciation adjusting entry

Adjustment No. 5: On August 1, 20X6 office equipment costing $2,000 was purchased (see Event No. 11). The useful life of these assets is expected to be 2 years with a salvage value of $400. Huske's Consultants has to recognize the office equipment cost used during 20X6 as a depreciation expense. The amount to be recorded is $800 = ($2,000 - $400) ÷ 2 years. The adjustment acts to decrease assets and equity. The decrease in assets (Accumulated Depreciation) is recorded as a credit, and the decrease in equity (by increasing Depreciation Expense) is recorded as a debit:

Illustration 38: Effect of depreciation expense in T accounts

Assets

=

Liabilities

+

 Equity

Accumulated Depreciation

 

 

 

Depreciation Expense

 

Credit
+ Acc. Depr.
[ - Assets]
(A5) - 800

 

 

 

 

Debit
+ Expense
[ - Equity]
(A5) - 800

 

This is an asset use transaction:

Illustration 39: Effect of depreciation expense in the horizontal model

Assets

=

Liabilities

+

Equity

Rev.

-

Exp.

=

Net Inc.

Cash Flow

(800)

=

n/a

+

(800)

n/a

-

(800)

=

(800)

n/a

 

4.20. Analysis of salaries payable and expense adjusting entry

Adjustment No. 6: At the end of the period, Huske's Consultants accrued $600 salaries that will be paid to employees in the next accounting period (20X7). The adjustment acts to increase liabilities and decrease equity. The increase in liabilities (Salaries Payable) is recorded as a credit, and the decrease in equity (by increasing Salaries Expense) is recorded as a debit:

Illustration 40: Effect of salaries expense in T accounts

Assets

=

Liabilities

+

 Equity

 

 

Salaries Payable

 

Salaries Expense

 

 

 

 

Credit
(A6) +600

 

Debit
+ Expense
[ - Equity]
(A6) - 600

 

This is a claims exchange transaction:

Illustration 41: Effect of salaries expense in the horizontal model

Assets

=

Liabilities

+

Equity

Rev.

-

Exp.

=

Net Inc.

Cash Flow

n/a

=

600

+

(600)

n/a

-

(600)

=

(600)

n/a

 

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