Chapter 3, Problem 15E

To determine

Adjusting Entries:

Adjusting entries are those entries which are recorded to update all the balances in the financial statements to show the true financial information and to maintain the records according to accrual basis principle

Accounting rules for journal entries:

• To Increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.

• To Decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Reversing Entries:

These are those entries which are made at the beginning of the financial year to enable smooth accounting process. These entries are recorded to nullify the effect of adjusting entries in the books of accounts.

To prepare: adjusting entries

Explanation of Solution

1.

a.

Accrued rent payable at the end of the year on October 31, 2017.

Date	Account title and explanation	PortRef	Debit($)	Credit($)
October 31	Rent expenses		2,800
	Rent payable			2,800
	(To adjust the rent expenses)

• Rent Expense is an expense account. Since expenses reduce equity, rent Expense account is debited.
• Rent Payable is a liability account. Since the expense is accrued, the liability to pay money has increased. So, credit rent Payable account.

b.

Accrued rent receivable at the end of the year on October 31, 2017.

Date	Account title and explanation	PortRef	Debit($)	Credit($)
October 31	Rent receivable		850
	Rent revenue			850
	(To adjust the accrued revenue)

• Rent Receivable is an asset account. Since the revenue is earned but not recorded, the asset has increased. So, debit, Rent receivable account.
• Rent Revenue is a revenue account. Since revenues increase equity, Rent revenue account is credited.

2.

a.

Payment of rent on November 5, 2017

Date	Account title and explanation	PortRef	Debit($)	Credit($)
November 5	Rent expenses		2,800
	Rent payable		2,800
	Cash			5,600
	(To adjust the payment of rent )

• Rent expenses account is an expenses account. Expenses account increases the expenses, these expenses has been paid, So, It will be debited.
• Accounts Payable is a liability account. Since the payment is made for accrued expense related to Accounts Payable, the liability has decreased. So, debit the Accounts payable account.
• Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the Cash account.

b.

Collection of the rent on November 8, 2017

Date	Account title and explanation	PortRef.	Debit($)	Credit($)
November 8	Cash		1,700
	Rent receivable			850
	Rent revenue			850
	(To adjust the collection of cash by rent)

• Cash is an asset account. Since the cash is received, the value of assets is increased. So, debit the cash account.
• Earlier rent receivable account was debited. Now rent receivable has been received by owner , so it will be credited.
• Rent revenue account is a revenue accounts, Revenue increases the assets of the company that is why it is credited.

3.

a.

Reversing entries of accrued rent expenses on November 1, 2017

Date	Account title and explanation	PortRef	Debit($)	Credit($)
November 1	Rent payable		2,800
	Rent expenses			2,800
	(To adjust the rent expenses)

• This adjusting entry is simply reversed. Rent payable earlier was credited. So now it will be debited.
• Rent expenses also simply reversed. Earlier, it was debited, now it will be credited.

Reversing entries of payment of the accrued rent expenses account on November 5, 2017.

Date	Account title and explanation	PortRef	Debit($)	Credit($)
November 5	Rent expenses		5,600
	Cash			5,600
	(To adjust the rent expenses)

• Rent expenses account is an expenses account which is earlier credited. So, now it will be debited.
• Cash is an asset account. Since the cash is paid, the value of assets is decreased. So, credit the Cash account.

b.

Reversing entries of accrued rent revenue on November 1, 2017

Date	Account title and explanation	PortRef	Debit($)	Credit($)
November 8	Rent revenue		850
	Rent receivable			850
	(To adjust the rent receivable)

• Rent revenue account is a revenue account which was early credited. So now it will be debited.
• Rent receivable is an assets account which is earlier debited. So now account receivable account will be credited.

Reversing entries of receiving accrued rent revenue on November 8, 2017

Date	Account title and explanation	PortRef	Debit($)	Credit($)
November 8	Cash		1,700
	Rent revenue			1,700
	(To adjust the rent expenses)

• Cash is an asset account. Since the cash is received, the value of assets is increased. So, debit the cash account.
• Rent revenue is an assets account. Revenue increases the value of the assets, so rent account will be credited.