Ouellette & Associates began operations on January 1, 2017. Its fiscal year end is December 31 and it prepares financial statements and adjusts its accounts annually. Selected transactions for 2017 follow:
1. On January 10, bought office supplies for $3,290 cash. A physical count at December 31, 2017, revealed $950 of supplies still on hand.
2. Paid cash for a $3,696, one-year insurance policy on February 1, 2017. The policy came into effect on this date.
3. On March 31, purchased equipment for $21,072 cash. The equipment has an estimated eight-year useful life.
4. Leased a truck on September 1 for a one-year period for $540 per month. Paid the full lease cost of $6,480 in cash.
5. On October 15, received a $1,749 advance cash payment from a client for accounting services expected to be provided in the future. As at December 31, one third of these services had not been performed.
6. On November 1, rented out unneeded office space for a six-month period starting on this date, and received a $1,794 cheque for the first three months' rent.
Instructions
(a) Prepare journal entries to record transactions 1 to 6. All prepaid costs should be recorded in asset accounts. All revenue collected in advance of providing services should be recorded as liabilities.
(b) An adjusting entry at December 31, 2017, is required for each of these transactions. Using the format shown in E3-3, prepare the following: 1. A basic analysis and a debit-credit analysis of the required adjustment. 2. The adjusting journal entry.
TAKING IT FURTHER
Explain two generally accepted accounting principles that relate to adjusting the accounts.