Assets – Supplies is decreased. Stockholders' Equity – Supplies Expense is increased.
Step 2 -- Debit Supplies Expense and credit Supplies for $1,300 (the amount that has been used up – the expense).
Step 3 – After posting the AE to the Supplies account, ending balance of $1,200 is correct. This is an asset on the Balance Sheet.
Supplies Expense has a $1,300 ending balance. This is an expense on the Income Statement.
Example 2: On 8/31/X2, $4,800 was paid for a two-year insurance policy. The journal entry on that day included a debit to Prepaid Insurance and a credit toCash for $4,800.
Step 1 – The cost of $4,800 is divided by the 24 months that the policy is effective. That results in $200 of insurance expense each month. On 12/31/X2, an adjustment is needed to record the expense that has been incurred (used up or expired) in the accounting period (4 months – Sept, Oct, Nov, and Dec). We are simply matching $200 each month that the insurance is in effect for each accounting period. The amount of insurance expense is $800.
Assets – Prepaid Insurance is decreased. Stockholders' Equity – Insurance Expense is increased.
Step 2 -- Debit Insurance Expense and credit Prepaid Insurance for $800.
Step 3 – After posting the AE to the Prepaid Insurance account, the ending balance of $4,000 is correct. This is an asset on the Balance Sheet.
Insurance Expense is increased with the $800 debit. This is an expense on the Income Statement.
Example 3: On 4/1/X2, the company acquired $240,000 of equipment for cash. The entry on that date is a debit to Equipment and a credit to Cash for $240,000.
Management expects to use the equipment for 8 years, thus the estimated useful life is 8 year. At the end of 8 years, the equipment will have no salvage value. Straight line depreciation is used. Depreciable cost (cost less salvage value) is divided by the estimated.
useful life. Remember that depreciation is the allocation of the cost of the asset over its estimated useful life.
