During a company's first yearof operations, the asset account, Office Supplies, was debited for $3,900 for the purchases of supplies. At year-end, a physical count of the supplies on hand revealed that $1,625 of unused supplies were available for future use. How will the related adjusting entry affect the company's financial statements?
A)Expenses will increase, and assets will decrease by $2,275.
B)Assets and expenses will both increase by $1,625.
C)Expenses and assetswill both increase by $2,275.
D)The related adjusting entry has no effect on net income or the accounting equation.

Question

Quizplus · Accepted Answer

The adjusting entry will decrease the Office Supplies asset account by the amount of unused supplies, which is $1,625. This is because the company has already recorded the full purchase price of $3,900 as an asset, but only $1,625 worth of supplies were actually used in the first year.

At the same time, the unused supplies represent an expense that the company has incurred but not yet recorded. Therefore, an expense account (such as Supplies Expense or Office Expense) will need to be debited for $1,625 to recognize this expense.

Overall, these adjustments will result in a decrease of $1,625 to assets and an increase of $1,625 to expenses. This means that the correct answer is A, where expenses will increase, and assets will decrease by $2,275.

The adjustment will also affect the company's net income for the first year, as the additional expense will reduce the amount of profit that the company has made. However, the exact impact will depend on other factors such as revenues and other expenses, so we can't say exactly how the adjusting entry will affect net income without further information.

During a Company's First Yearof Operations, the Asset Account, Office