Mama's Pizza Shoppe borrowed $7,200 at 12% interest on May 1, 2021, with principal and interest due on October 31, 2022. The company's fiscal year ends June 30, 2021. What adjusting entry is necessary on June 30, 2021

Adjusting Entry on June 30, 2021:

Debit Interest Expense $144

Credit Interest Payable $144

To accrue interest expense for the year (2 months).

Explanation:

a) Calculation: The interest on the borrowing is $144 ($7,200 x 12%)/12 x 2

b) Adjusting entries are prepared at the end of the accounting period in order to recognize non-cash expenses and revenue, prepaid expenses, and revenue received in advance, and depreciation expense for the period.  It is in accordance with the accrual concept and matching principle of generally accepted accounting principles.  These require that expenses and revenue are recognized on the accrual basis whether cash is paid or received for them or not.  And that expenses and revenue are matched to the period they occur.

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