The credit to Salaries, therefore, serves two purposes, viz., that of showing the outstanding liability at the close of the current period, and that of effecting a reduction of what would be, without this credit, an overcharge to next period’s salaries. For example, if the total salary paid during the next period is $600, the balance of $528 is the amount applicable to that period, although the amount actually paid is $600.
Deferred Income.—Income received by the business during the present period which, however, belongs to the subsequent period is called “deferred income,” as for instance, rent received in advance from a tenant. As to the liability portion of items of this kind, it is indicated in a manner similar to the accrued expense items. In this case the journal entry is:
- Rent Income
- Rent Income (Deferred)
the effect being to decrease the amount of rent income for the current period and to show the portion belonging to the next period deferred to that period’s account.
Corrections.—When an error has been made in any entry on the books, it should not be erased or scratched out, because by so doing suspicion may be raised as to what was expunged. The wrong item should be ruled out and the correct item written above it or wherever it belongs. This applies particularly to books of original entry whose use as evidence has often been destroyed because many erasures appeared in them.
Another way of making a correction, when an amount has been posted to a wrong account, is first to cancel the wrong posting through a similar entry on the other side of the same account, and then to post it to the correct account. Cross-reference to the two accounts must be made.
When an amount has been posted to the wrong side of the correct account, e.g., $100 to the credit side of John Doe’s account, when it should have been posted to the debit side, the incorrect credit may be canceled by a debit of $100, and after this the original $100 should be entered on the debit side; or the cancellation and correction may be combined by entering $200 on the debit side. Better still, the incorrect posting may be ruled out and a correct posting made of the original entry whose wrong posting caused the error. Adequate cross-reference should be given so as to make the tracing of the items easy and to indicate exactly what was done.
As these entries are of a somewhat unusual nature, their exact purpose should be plainly indicated in the explanation columns. According to the methods mentioned above, the various correcting entries are made directly on the face of the ledger. It is often preferable, however, first to make the required correction entries in the journal with full explanation, and then to post them to the ledger.
Adjusting Entries Illustrated.—In order to indicate clearly the routine and method to be followed in summarizing the books at the close of the fiscal period, the formal adjusting and closing journal entries needed for the books of U. R. Smart will now be set up, the illustrative data being the same as were used for the work sheet in [Chapter XXVII] to which reference should be made. In connection with the work sheet it was stated that the adjustment columns of the work sheet are used as a guide to making the adjusting entries. As to sequence in the journal, these follow immediately, without break, the last current entry for the month. The adjusting entries for U. R. Smart are:
| Purchases | 30,000.00 | |
| Merchandise Inventory | 30,000.00 | |
| Merchandise Inventory | 26,500.00 | |
| Purchases | 26,500.00 | |
| Depreciation | 3,630.00 | |
| Depreciation Reserve Office Furniture and Fixtures | 280.00 | |
| Depreciation Reserve Store Furniture and Fixtures | 1,200.00 | |
| Depreciation Reserve Delivery Equipment | 750.00 | |
| Depreciation Reserve Buildings | 1,400.00 | |
| Bad Debts | 482.88 | |
| Reserve for Doubtful Accounts | 482.88 | |
| Interest Income (Accrued) | 150.00 | |
| Interest Income | 150.00 | |
| Insurance (Deferred) | 250.00 | |
| Insurance | 250.00 | |
| Advertising (Deferred) | 300.00 | |
| Advertising | 300.00 | |
| Printing and Stationery (Deferred) | 150.00 | |
| Printing and Stationery | 150.00 | |
| Selling Supplies and Expense (Deferred) | 200.00 | |
| Selling Supplies and Expense | 200.00 | |
| Taxes | 340.00 | |
| Taxes (Accrued) | 340.00 | |
| Salesmen’s Salaries | 175.00 | |
| Salesmen’s Salaries (Accrued) | 175.00 | |
| Interest Cost | 50.00 | |
| Interest Cost (Accrued) | 50.00 | |
| Special Police on Strike Duty | 150.00 | |
| Special Police on Strike Duty (Accrued) | 150.00 | |
| Office Salaries | 100.00 | |
| Office Salaries (Accrued) | 100.00 | |
| Sub-Rentals Income | 50.00 | |
| Sub-Rentals Income (Deferred) | 50.00 |