Speedy Company's weekly payroll of $250 is paid on Fridays (five-day work week). Assume that the last day of the month falls on Thursday. Which of the following is the required month-end adjusting entry?

a. Increase Salaries Expense $50 and increase Salaries Payable $50b. Increase Salaries Expense $200 and increase Salaries Payable $200c. Increase Salaries Payable $200 and increase Cash $200d. Increase Salaries Expense $250 and increase Cash $250

Correct answer is B, increase in salaries expense $200 and increase in salaries payable $200

Explanation:

Based on matching principle, all expenses incurred whether paid or not must be recognized. Last day of the month falls on Thursday but the payroll is paid on every Friday. Therefore, the book must recognize a 4-day salaries expense and salaries payable incurred from Monday to Thursday which is to be paid on Friday. The computation of it is $250 / 5 days of the week x 4 days (Monday - Thursday) = $200.

Entry:

Debit salaries expense $200

Credit salaries payable $200

As a result, there will be an increase of salaries expense in the amount of $200 and also an increase in salaries payable at $200.