Understanding 5-4 Application Problems in Accounting
If you’re studying accounting or preparing for exams like those from McGraw-Hill Connect or Cengage, you’ve likely come across the 5-4 application problem. This problem is designed to test your understanding of accounting fundamentals, including journal entries, T-accounts, and the impact of transactions on the financial statements.
In this post, we’ll break down the 5-4 application problem in simple steps, show you how to approach it, and even walk through a sample problem with the correct answers and reasoning. Whether you’re a student or just brushing up on concepts, this guide is for you.
What Is the 5-4 Application Problem in Accounting?
The 5-4 problem usually appears in Chapter 5 of most accounting textbooks, focusing on adjusting entries and accruals. You’ll need to understand how revenue and expenses are recognized under the accrual basis of accounting.
This problem type often includes situations like prepaid rent, unearned revenue, depreciation, or accrued salaries. It challenges your knowledge of both journal entries and how these entries affect the income statement and balance sheet.
If you’re using resources like McGraw-Hill Connect Accounting, you can find the official format for the 5-4 problem under its digital assignments. For a reference to the format and original examples, visit the assignment portal from McGraw-Hill Education.
Step-by-Step: Solving the 5-4 Application Problem
1. Read Each Scenario Carefully
Start by identifying what kind of transaction is presented. For example:
- Prepaid expenses → require adjusting entries
- Accrued revenue → earned but not yet received
- Depreciation → a non-cash expense needing adjustment
Highlight keywords like “accrued,” “prepaid,” or “unearned” to help you categorize the entries correctly.
2. Determine the Correct Journal Entry
Once you’ve identified the nature of the transaction, create the journal entry. For instance:
Accrued Salaries at Month-End
Debit Salaries Expense
Credit Salaries Payable
This shows that the company owes wages that haven’t been paid yet—an expense is recognized, and a liability is created.
3. Post to the T-Accounts
After journalizing, post the entries to the T-accounts to see how they affect each account’s balance. This visual tool helps you track increases and decreases in both assets and liabilities.
4. Adjust the Financial Statements
Next, see how your journal entries impact the adjusted trial balance, income statement, and balance sheet. For example:
- Expenses increase → Net income decreases
- Assets like prepaid insurance decrease → Total assets decrease
- Liabilities like unearned revenue get reduced → Total liabilities decrease
Example Answer for 5-4 Application Problem
Let’s say the problem gives you this scenario:
On December 31, the company owes employees $2,000 in unpaid salaries.
Correct Journal Entry:
- Debit Salaries Expense $2,000
- Credit Salaries Payable $2,000
Effect on Financial Statements:
- Net income will decrease by $2,000 due to the expense
- Liabilities will increase by $2,000
- No immediate effect on cash
This format follows the accrual accounting rule: expenses are recorded when incurred, not when paid.
For more examples and solved problems, many students refer to answer keys or step-by-step guides available on platforms like Course Hero or academic forums. Use these as support tools, but make sure you understand the logic behind the answers.
Common Mistakes to Avoid
- Recording cash when it’s not involved in the transaction
- Confusing accrued expenses with prepaid expenses
- Forgetting to adjust for partial months (like rent paid mid-month)
- Posting entries to the wrong account side in T-accounts
Tips to Master Application Problems
- Always start with understanding the type of transaction
- Practice similar problems from past assignments or textbooks
- Use visual aids like T-accounts to stay organized
- Review explanations from credible sources like the AccountingCoach for clarity
The 5-4 application problem is a great exercise to reinforce your understanding of real-world accounting entries. Mastering this format gives you a solid grasp on adjusting entries, a core part of the accounting cycle.
If you’re struggling, revisit the basics and use guided examples from trusted platforms like McGraw-Hill Connect or peer support sites such as Chegg, where walkthroughs of similar problems are available.
Stay consistent, focus on concepts—not just answers—and soon you’ll be solving even the most complex application problems with ease.