Issues: From the Hydromaint, Inc. Jerry bumped into an expense on the income statement labeled other salaries. This expense had an original entry of debt on the salary expenses account and a credit to the cash account. The issue raised is the possibility of the company to set aside cash specifically for other salaries.
Maintenance Contracts is also another issue identified where the deferred asset was debited instead of an asset. The issue is there is nothing deferred asset because it is either the maintenance service is provided or not provided. Upon the expiration of the contract, the maintenance expense was debited and prepaid maintenance contract is credited.
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The last issue is that Jerry paid for the wages payable but in the journal entries nothing was written down or providing any of the financial statements. The issue is after the wages payable were settled, they did not record in any of the journal entries.
Rules: According to FASB, while recognizing salaries in the financial statements, all nature of salaries are treated and recorded in this respective account. Therefore, other salary account does not exist. Further, the salaries are can be expensed as they occur or on an accrual basis and not adjusted as other salaries account. The rules cost centers are very clear that the expense balances from various activities will be deleted off of the general journal and all the activity incurred will be adjusted to the income statement. The major categories of wages are administrative and selling functions expenses which are expenses recorded on the income statement. Other salary expenses incurred by employees in the production process are included in the cost of goods sold. Therefore, to ascertain the recording of other salary account expenses, Jerry should trace the source of it from administration and selling or production. However, there will be significant changes in the gross and net profit of the company. The basic reason is that other salary had already been recognized and debited in the income statement and credit on the cash account in the balance sheet.
FASB requires that the wages payable to be recognized as a liability owed to the employees. These wages accumulate throughout the period until the employees are paid. In the income statement, they should be recognized as the accrued expense and wages payable at the time of reporting. Even though they have not been paid at the end of the period, they should be reported properly. When closing the financial period, Jerry should the following adjustments relating to the wages payable in the financial statements
Further, if the wages will be paid in February the subsequent year, the wages payable account would be debited and deduct the cash by crediting the cash account.
FASB codification requires the treatment of the maintenance contracts in the financial statements as balances under the accrual basis. Further, the conventional requirements of prudence concept are that where the net inflow of economic benefits from these contracts is probable, the revenue and cost should be recognized to the extent of contract completion. The journal entries show no amortization of maintenance contract cost which had been prepaid. The relevant adjustment for this correction should debt the prepaid cost and credit the cash. This would have been the initial journal entry at the end of the accounting period. Between the months February-December, the entries should be debit on maintenance expense with the amount that set for the months. Then, credit the prepaid cost for the maintenance contract to decrease the amortized amount. This adjustment accounts for the period that the contract cost has technically been used.
