How to Adjust the Accounts Payable to Offset Retained Earnings
Accounts payable and retained earnings are balance sheet accounts. The retained earnings account accumulates net income minus dividend payments. Companies record credit purchases of supplies and services in the accounts payable account. Adjusting entries correct errors and omissions detected while preparing the financial statements for the current period. Adjustments are also necessary to correct errors in prior-period statements. There is an offsetting entry to retained earnings if the adjustments affect net income.
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Instructions
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Analyze the error or omission with respect to accounts payable. It could be a simple mathematical error, a misplaced invoice or forgetting to record an incurred expense because of a misplaced invoice. The adjusting entries will depend on this analysis.
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Adjust accounts payable with the appropriate journal entries. Companies normally record expenses when they receive an invoice or if they have a receipt for a cash transaction. However, accounting rules require that you to record revenue when you earn it and record expense when you incur it.
For example, if a supplier has provided services to your company valued at $1,000 but you have not entered the transaction because of a misplaced invoice, the adjusting entries are to debit (increase) the appropriate expense account and credit (increase) accounts payable by $1,000 each. In another scenario, if your bookkeeper incorrectly enters $10,000 instead of $1,000 for an expense, the adjusting entries are to debit (decrease) accounts payable and credit (decrease) the appropriate expense account by the difference, which is $9,000 in this example ($10,000 minus $1,000).
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Record the offsetting entries for retained earnings. If the adjusting entries change any of the income statement accounts, it changes net income. The closing transactions at the end of an accounting period moves the income statement account balances to the income summary and then to retained earnings. Post-closing adjusting entries for changes in net income are to the retained earnings account.
For example, if an adjusting entry increases supplies expense by $500, net income decreases by the same amount. The adjusting entries are to credit (decrease and zero out) supplies expense and debit (decrease) retained earnings by $500 each.
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