At Ask Me Help Desk you can ask questions in any topic and have them
answered for free by our experts. To ask questions or participate in
answering them you must register for a free account. By registering you
will be able to:
Get free answers from experts in any of our 300+
topics.
During October, the Wilson Company incurred the following costs. For each of the items, identify whether the Wilson Company would record it as an asset or an expense for October. List the dollar amount and explain your reasoning.
a. At the beginning of the month, the company paid $600 to an insurance agency for a two-year comprehensive insurance policy on the company’s building.
b. The company purchased office supplies costing $970 on credit from Bailey’s Office Supplies.
c. The company paid the telephone company $110 for telephone service during October.
d. The owner withdrew $1,200 for personal use.
e. The company found that of the $970 of office supplies purchased in item b. above, only $900 remained at October 31.
Well, I won't tell you which are assets and which are expenses, but I think I can help you anyway.
First, what is an asset? An asset is something the company has which has value. Think of assets as something that if times got tough, the company could sell for money. If you are a baker, your oven is an asset. So, out of your list, what could the company sell if it needed money really, really bad?
An expense is something a company has to shell out money for which they cannot get anything back for. Putting gas in a company car is an expense.
I hope that helps. FYI, I'm not an accountant, but I did quite well in the classes I took. If you come up with your answers, I'll be happy to let you know if you are right or wrong.
This is what I came up with, but I am not sure about (e).
a. At the beginning of the month, the company paid $600 to an insurance agency for a two-year comprehensive insurance policy on the company’s building.
Asset: $600- An insurance policy is a prepaid expense; therefore, it is a current asset.
b. The company purchased office supplies costing $970 on credit from Bailey’s Office Supplies.
Expense: $970- With the owner purchasing the supplies on credit, it is an account payable. The business is a debtor. The purchaser has legal obligation to make payments rather than receive payments. Accounts payable are current liabilities.
c. The company paid the telephone company $110 for telephone service during October.
Asset: $110- The company is paying in advance a service for the business; therefore, it is a prepaid expense.
d. The owner withdrew $1,200 for personal use.
Asset: This transaction is a decrease in cash, which is a current asset.
e. The company found that of the $970 of office supplies purchased in item b. above, only $900 remained at October 31.
Ok, you showed that you put a good effort into answering it on your own, which is more than what some on this site do!
I think you nailed it for "A"
"B" - Check in your text, but usually office supplies are considered assets because if times get really tough they can be sold/returned. Check your text and see what it says about when office supplies are bought on credit though, because I might be wrong.
"C" - When you pay your cell phone bill, you've paid for the month that just passed, not the month to come, right? Same thing here. The bill isn't being prepaid (unless your book says that and you didn't post it that way).
"D" - The cash account is an asset, yes, but the owner has debited the cash account. It's not owed, so it isn't a liability, but he took it, so it's not an asset anymore. I would call that an expense; similar to a payroll expense.
"E" - They have used up $70 of their office supplies, which means their assets have reduced by $70. Go back to my baker; if the baker has 6lbs of butter (an asset) and uses 3lbs, he's reduced his assets. It's the same thing with the office supplies. So at the end of the month they have $900 in assets for office supplies. I THINK (look it up) you might record consumed office supplies as an expense, because they are no longer there.
I wish I could tell you with 100% certainty one way or another for each one, but it's been a few years since I took accounting.... Your text should have examples of similar situations, the trick is to find the similarity and apply it!
Linear Mode
