adjusting entry example

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A company that buys Equipment for $20,000 with an estimated life of 5 years and a salvage value of $5,000 must depreciate the $15,000 over 5 years for an annualized depreciation of $3,000 per year. Some companies may go as far as depreciating monthly, which would result in a monthly adjustment of $250 for the depreciation of this equipment. The adjustment would require a debit of $250 in the income statement expense account called Depreciation Expense, and a credit of $250 in the balance sheet contra-asset account called Accumulated Depreciation.

What Is an Adjusting Journal Entry?

The straight-line method allocates the depreciable cost equally over the asset’s estimated useful life. However, crediting the Plant and Equipment asset account is incorrect. Instead, a contra account called accumulated depreciation must be credited. The depreciation expense appears on the income statement like any other expense.

A company provided services to a customer on the last day of the year but did not have time to prepare an invoice to send. If no adjusting entry is required, then answer with none required. Supplies on hand at the beginning of the accounting period were $5,000.

Illustration of Prepaid Insurance

The asset cost minus accumulated depreciation is known as the book value (or “net book value”) of the asset. For example, at December 31, 20X2, the net book value of the truck is $50,000, consisting of $150,000 cost less $100,000 of accumulated depreciation. By the end of the asset’s life, its cost has been fully depreciated and its net book value has been reduced to zero. Customarily the asset could then be removed from the accounts, presuming it is then fully used up and retired. In the illustration for insurance, the adjustment was applied at the end of December, but the rent adjustment occurred at the end of March. What was not stated in the first illustration was an assumption that financial statements were only being prepared at the end of the year, in which case the adjustments were only needed at that time.