Question

Weez Ltd began operations on 1 July 2020, with monthly accounting periods. When it purchased supplies during July, Weez Ltd debited Supplies Expense, yet at the end of July, a material amount of supplies remained on hand, and their dollar amount was estimated. You, the newly hired accountant, have been assigned to prepare the suggested adjusting journal entry. Required: Prepare a residual analysis justifying the necessary adjusting journal entry, including the accounts to be debited and credited. Format your answer by copying and pasting the following bold face into the answer box provided; however, please do not use bold face in your answer itself. Please do not exceed 200 words. Effect on assets and explanation: Effect on liabilities and explanation: Effect on equity and explanation: Account to debit and account to credit: Edit Insert Format Tools Table 12pt Paragraph BI U A р O words

Answer 1

The correct accounting entry on Supply purchases should have been :

Supplies.....................DR

Accounts Payable.......CR

But instead of passing the above the following entry was passed:

Supplies Expenses........DR

Accounts Payable..........CR

The impact of this incorrect entry

Supplies Closing Inventory:

The value of closing inventory of Supplies in books will be under valued.Hence the situation that books shows no INventory whereas physically there is stock available.

Impact on Liabilities:

No impact on Accounta Payable as the debit head was incorrectly recorded as is clear from the entries provided above.

Impact in Equity:

Since the value of asset (Inventory) is undervalued the Equity too would be undervalued to the extent as the inflated expense of supplies recorded would pull the Earnings down for the period and hence the Equity.

Correction Entry :

The following correction entry is to be passed:

Supplies....................DR

Supplies Expenses...CR