Under accrual accounting, Tiana Limited purchased supplies costing $20,000 with cash on 1st January 20XY and supplies costing $8,000 on credit. The supplies were recorded as an asset. On 31st December 20XY, $13,000 of the supplies are still left on hand and unused. If Tiana Limited makes the appropriate end of year adjustments, the accounts for the financial year ending 31st December 20XY should reflect:

Question

Under accrual accounting, Tiana Limited purchased supplies costing $20,000 with cash on 1st January 20XY and supplies costing $8,000 on credit. The supplies were recorded as an asset.  On 31st December 20XY, $13,000 of the supplies are still left on hand and unused.  If Tiana Limited makes the appropriate end of year adjustments, the accounts for the financial year ending 31st December 20XY should reflect:

BlackTom AI · Accepted Answer

To begin, restate the scenario to unpack the accounting treatment being asked.
- Tiana Limited buys supplies costing 20,000 in cash on 1 January and 8,000 on credit, for a total of 28,000 supplies purchased during the year. The supplies account was recorded as an asset.
- At year-end (31 December 20XY), 13,000 worth of supplies remain unused and on hand.
- Under accrual accounting, we must match expenses to the period in which they are used, so we adjust the accounts to reflect the consumption of supplies as an expense, with the unused portion remaining as an asset (inventory or supplies on hand).

Step-by-step evaluation of the situation:
1) Calculate total supplies consumed during the year: total purchases (28,000) minus ending supplies on hand (13,000) equals 15,000. This represents the amount of supplies that were used (and therefore expensed) during the year.
2) Determine the year-end adjustment: since the supplies asset balance needs to reflect only the on-hand amount, we debit (increase) Supplies Expense by 15,000 and credit (decrease) Supplies Asset by 15,000 to remove the cost of used supplies from assets and recognize it as an expense.
3) Confirm the ending balances after adjustment: Supplies on hand remains 13,000 (asset); Supplies Expense is 15,000 for the year.

Now evaluate the given option:
- Option: 'Supplies expense’ of 15,000.
  Why this is correct: It matches the calculation of supplies used during the year (28,000 purchased minus 13,000 on hand = 15,000). Recording 15,000 as an expense aligns with accrual accounting’s matching principle, recognizing the consumption of supplies as an expense in the current period while reducing the asset by the same amount.

Addressing potential alternative options (even though none are provided here):
- If the option suggested a higher or lower expense, it would misstate either the amount consumed or fail to adjust the asset balance correctly. For example, expensing 28,000 would overstate expenses and understate assets, while expensing 0 would understate expenses and overstate assets.
- If the ending on-hand amount were different, the expense would change accordingly (expense = total purchases - ending on-hand). Any mismatch would indicate an incorrect application of the accrual principle.

In summary, the correct end-of-year adjustment under accrual accounting is to recognize a supplies expense of 15,000 and to reflect 13,000 of supplies still on hand as a current asset.

BUSMGT 713 Quiz 5.1

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