![]() A review of the details confirms that this account's balance of $1,200 is accurate as far as the payrolls that have been processed. ![]() Amounts are routinely entered into this account when the company's payroll records are processed. Wages Payable is a liability account that reports the amounts owed to employees as of the balance sheet date. The balance in Repairs & Maintenance Expense at the end of the accounting year will be closed and the next accounting year will begin with $0. The balance in the liability account Accounts Payable at the end of the year will carry forward to the next accounting year. The adjusting entry for Accounts Payable in general journal format is: The adjusting entry will involve the following accounts: The company will have to make an adjusting entry to record the expense and the liability on the December financial statements. To illustrate this, assume that a company had $1,000 of plumbing repairs done in late December, but the company has not yet received an invoice from the plumber. Similarly, the income statement must report all expenses that have been incurred-not merely the expenses that have been entered from a vendor's invoice. However, under the accrual basis of accounting the balance sheet must report all the amounts owed by the company-not just the amounts that have been entered into the accounting system from vendor invoices. A review of the details confirms that this account's balance of $2,500 is accurate as far as invoices received from vendors. Amounts are routinely entered into this account after a company has received and verified all of the following: (1) an invoice from the supplier, (2) goods or services have been received, and (3) compared the amounts to the company's purchase order. Interest Expense will be closed automatically at the end of each accounting year and will start the next accounting year with a $0 balance.Īccounts Payable is a liability account that reports the amounts owed to suppliers or vendors as of the balance sheet date. In the future months the amounts will be different. It is unusual that the amount shown for each of these accounts is the same. The adjusting journal entry for Interest Payable is: On the December 31 balance sheet the company must report that it owes $25 as of December 31 for interest. On the December income statement the company must report one month of interest expense of $25. On March 1 the company will be required to pay $75 of interest. If the loan specifies an annual interest rate of 6%, the loan will cost the company interest of $300 per year or $25 per month. Let's assume that the company borrowed the $5,000 on December 1 and agrees to make the first interest payment on March 1. Unless the interest is paid up to date, the company will always owe some interest to the lender. The reason is that each day that the company owes money it is incurring interest expense and an obligation to pay the interest. ![]() Accountants realize that if a company has a balance in Notes Payable, the company should be reporting some amount in Interest Expense and in Interest Payable. Interest Payable is a liability account that reports the amount of interest the company owes as of the balance sheet date. (It's common not to list accounts with $0 balances on balance sheets.) Therefore, no entry is needed for this account. (Any interest incurred but not yet paid as of the balance sheet date is reported in a separate liability account Interest Payable.) The accountant has verified that the amount of principal actually owed is the same as the amount appearing on the preliminary balance sheet. Notes Payable is a liability account that reports the amount of principal owed as of the balance sheet date. Accruals & Deferrals, Avoiding Adjusting EntriesĪdjusting Entries - Liability Accounts Notes Payable $5,000
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