Question

Office Supplies

Faberton, Inc. purchases office supplies once a month and prepares monthly financial statements. The asset account Office Supplies on Hand has a balance of $1,550 on May 1. Purchases of supplies during May amount to $1,100. Supplies on hand at May 31 amount to $920.

Required:

1. Identify and analyze the effect of the adjustment on May 31.

Activity
Accounts
Statement(s)

How does this entry affect the accounting equation?
If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

–

Expenses

=

Income

2. What will be the effect on net income for May if this adjustment is not recorded?
Net income for the month of May would be    by $ if this adjustment were not recognized because expenses would be  .

Answer 1

1.

Activity	Operating
Accounts	Office supplies on hand decreases, office supplies expense increase
Statements	Balance sheet and income statement

Asset Office supplies on hand Balance sheet Income statement = Liability + Equity Revenue - Expense = Net income -1,730 = No effect + Retained earnings -1,730 - Office supplies expense 1,730 = -1,730 Revenue : expie Supplies expense 1.720 Note: Adjusting entry amount = 1,550+1,100-920 = 1,730

2.

Net income for the month of May would be overstated by $1,730, if this adjustment were not recognized because expenses would be understated.