Hello, welcome back to this lecture. My name is Justin from think numbers. And we're going to now apply the adjusting entries to the case study for for the short film automotive case study. So, what adjusting entries are, as we've seen in the last lecture are these are period end adjustments that are used for accrual accounting purposes to reflect the correct revenue that is earned and any costs that are incurred, or any assets that are consumed. These need to be adjusted to reflect the true profitability at the end of the period, as well as the true position that's on the balance sheet. So let's go through this case study.
So the first requirement, as part of this case study is that we need to factor in the amortization on the heightened that we purchased. So the way that we actually work this out is if you recall from earlier lectures, we looked at one of the adjusting entries as a contra asset. And what the contra asset was doing is it's actually reducing the book value of the $3,000 that we actually purchase for the patent to what its actual book value is over a period of time and what amortization actually does is it very similar concept to straight line depreciation. And what that is, is you take the cost of the actual The, the purchase for the intangible asset and you divided by the useful life, in which case for amortized items, we're just going to use it as an assumed time period. Now there are there are some guidelines you can go off under accounting standards.
However, we're just going to just more conceptually understand how this works. So in this case, we're going to assume that this $3,000 Payton is going to last us for you And we then want to then work it down to a monthly basis. So we can divide it by 12. Again. And so we're going to get 60 show $62 50 per month will need to be amortized. And what we're actually going to do is we've incurred an expense, because it's an amortization expense.
And the other side of this is a contra asset for the accumulated amortization. And that is actually an asset account. And that will actually reduce the book value of the intangible asset account by $62 50. This month, originally it was $3,000. It is now 3000, less the $62 50 as its book value. And over a long period of time, this will eventually be written down to zero, so there'll be zero left on the intangibles in terms of book value, you'll still have the patient sitting in the intangible account, the accumulated accumulated amortization, which is a separate account, we'll have to eventually have the full $3,000 sitting in that account.
So that's the first adjusting entry. The second adjusting entry is for the depreciation on property, plant and equipment. And in this case, this is actually broken into two transactions. Because if you recall back to I'll go back to our worksheets. Where she made two acquisitions, there was transaction number three was for $5,000. So that was the actual painting and the fixing up with the shop.
And then we also bought a crane lifter on transaction of the fifth day for $10,000. So each of them has a slightly different acquisition date. So the first month will actually be provided slightly differently, because there's different days for that particular month. But just conceptually, just to get the idea of this. The very first transaction we purchase a $5,000 worth of carpet and painting. We're going to assume that this video ticular class of asset has a seven year useful life, we're not going to assume that there's any scrap value or residual value in this.
And we're going to take the $5,000, we're going to divide it by seven, we're going to divide it by four months. And then to actually get this particular amount for this month, we're actually going to pro rata based on 28 days because we're going to assume that this was purchased on the third day of the month, and there was a further 28 days left of the month. So we're going to actually take off almost three days, I guess three days effectively, to reduce this amount slightly. So next month, when the depreciation comes through, it will be a slightly higher amount. And again, it's the same concept as amortization. But this is on the tangible assets, we're going to pick the particular reference number and we're going to debit our depreciation expense, which will go to our profit and loss statement as an expense which will reduce owner's equity, and then the other side will reduce the contra asset or trip Reduce the asset account by $75 27.
For the actual for that for that particular month. The second part of it is the $10,000. And this is again, it's a very, it's exactly the same sort of concept as the first depreciation. But just the time period is slightly different. In this case, we're going to assume that this particular crane lifter has got a longer slightly longer useful life of 10 years versus seven years. And it's going to be provided on a 16 days left of the month as opposed to 28 days.
And so the calculation for that first month is slightly different. And you can see that's why I've split them up into two transactions in in practice. A lot of software will actually do this for you where you put the asset amount into the accounting software you you can select the class of asset because property plant equipment can actually have a number of subclasses such as like software, hardware, computer hardware, pools, furniture, fittings, etc, etc. So, according to the different class subclass will determine more the useful life but there's also different accounting policies, you could have to determine what is your useful life. But they must be in compliance with with the different standards that exist around the world, especially the international reporting standards, if you're reporting externally, and so the accounting software generally will calculate a lot of this for you. So a lot of these journals are not necessarily having to do this manually.
But in saying that it's it's always good to know the theory. Okay, so the next adjusting entry is for the actual prepayment account. So if you recall that we actually we originally purchased the $8,000 up front for the prepayment, however, a month has already passed, we've actually consumed some of that, that prepaid rent, and so we actually need to make an adjustment to actually reduce the And so what we're actually then going to do is now the six months left on that $8,000. So all we've done is we're going to reduce the prepaid rent. So it's actually reducing the asset. And we're actually now incurring an actual expense for the rent.
And this is one six of the $8,000. Because that actually represents one month that is now passed. For this particular we're just gonna assume that this is for the period of July. The next transaction is for wages. And we actually got a bit more information after we completed this month that we need to accrue wages for the final week of this particular month because it was paid in the first week of the next month. And so what we've done is we've taken up an expense because which will reduce owner's equity, because we've actually incurred an actual cost for that particular week.
And we're going to accrue it because it It hasn't yet been paid, but it will need to be paid. But it does relate to that particular accounting period. So therefore, we're actually going to take a liability for it as well. So we're going to debit out wages expense, and we're going to credit accrued wages. And finally, we're actually going to do a we've done stocktake at the end of this month. And we've actually found that we originally had and if we go back to how much supplies we actually had, we actually ended up by the end of the month on a trial balance.
Or in the worksheet method, we had $25,000 I got a trial balance the same thing here with $25,000 worth of supplies. And we ended up with $17,000 when we did the stop date. So what that actually means is $8,000 has actually been reduced off the inventory balance. So therefore that supplies account needs to be reduced when assets decreases we credited. And this will go to your profit and loss because you've actually now incurred the actual, we've actually incurred the cost because we've solved some of the inventory probably used it as part of the repairs for when we were servicing some of the customers vehicles. And so this is this is a method of inventory, taking up the cost, because the revenues already booked during the month now we're actually taking up the cost.
In practice, this is this is a method of how you can record inventory. There is another method where you actually take up that you actually take it out of stock every single time you make the sale. We're not actually going to cover that in the scope of this course. We're just going to keep this quite simple and just explain it that you're going to reduce inventory at the end of the period by doing a stocktake and the difference will go into your profit and loss. Okay, so what we'll do now is we'll translate this into the trial balance. And once you make these adjustments, and then we'll end up with an adjusted trial balance.
So okay, so what we're going to do is we're going to first take up the amortization expense. And this gets debited for $62 50. And the credit side is going to be accumulated amortization. So we'll put that in the justment column here. And you can see that my formulas are to get an adjusted trial balance of taking everything that was in the trial balance on the debit and credit side. And it's just adding any changes to these adjustments.
So you can see when I add that debit and credit, this equals each other, and therefore the adjusted trial balance also is in balance as well. So second transaction is the depreciation expense. In this case, I'm going to take out Both the depreciation so we've got the $75 25. So 27 plus we've got the $43 for the second depreciation transaction, and this is also going to go to the accumulated depreciation account. That's for the first depreciation transaction and for the second transaction, and again, we're still in balance, right? The fourth transaction is now the prepayment, so we're going to reduce the prepayment by $1,333 33.
Sorry, I don't need to put a minus on there. And then we take out the actual Rent Expense as 1333. Again, we're balancing everything is I just need to actually adjusted slightly is that is that the actual closing balance now of prepaid rent is only $6,666 67. Okay, so therefore still in balance, which is great. And final note, we still got two more to go. So wages expense, we're going to need to take that $3,000 as an adjustment and the other side will be coming out of crude wages, which we now which didn't exist in the past which now will does exist now.
And then finally, for supplies, we're going to have to take a credit for $8,000. I think I'm gonna have to adjust this as well is that $17,000 and you can see, at this stage, we're not balancing it to put the other side of the transaction and the supply side pencil before $1,000 and we can see at this stage we have a perfectly balanced adjusted trial balance. We've also got the adjustments which the debit side equals the credit side we've obviously factored in all of the transactions. And now we're at the point where we've got an adjusted trial balance. Everything is been accounted for on an asset and liabilities and owner's equity. We've got all the adjustments in so really the next stage is to be preparing our balance sheet and profit and loss statement, which we'll be doing in the next lecture.