Chapter Four Adjusting Entries and the Work Sheet.

Chapter Four

Adjusting Entries and the Work Sheet

Accounting Is Fun! 4 - 2

Performance Objectives1. Define:

• Fiscal period• Fiscal year• Accounting cycle• Adjustments• Worksheet

2. Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages

3. Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheet


Performance Objectives

4. Journalize and post adjusting entries

5. Prepare financial statementsa) An income statement involving more than one

revenue account and a net loss

b) A statement of owner’s equity with an additional investment and either a net income or a net loss

c) An income statement and a balance sheet for a business having more than one accumulated depreciation account

d) A balance sheet containing the statement of owner’s equity information


Define:• Fiscal Period

– Any period of time covering a complete accounting cycle

– Generally consisting of twelve consecutive months

– The period could be:• One month• One quarter• One year

• Fiscal Year– A fiscal period consisting of twelve

consecutive months


Accounting Cycle

• The sequence of steps in the accounting process completed during the fiscal period


List The Steps In The Accounting Cycle

1. Analyze source documents & record business transactions in a journal

2. Post journal entries to the ledger accounts

3. Prepare a trial balance4. Gather adjustment data and record

adjustments in the work sheet5. Complete the work sheet6. Create financial reports from data in work

sheet7. Journalize and post the adjusting entries8. Journalize and post the closing entries9. Prepare the post-closing trial balance


What Are Adjustments?

• Are all the accounts up to date?

• Example:– What

about prepaid Insurance?

•Adjustments:

Internal transactions that bring ledger accounts up to date as a planned part of the accounting procedure


Work Sheet

• A multicolumn working paper used by accountants to record necessary adjustments and provide up-to-date account balances needed to prepare the financial statements

• A TOOL used by accountants to bring all the account information together to prepare financial statements


Performance Objective 3

Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages


Adjustments• Internal transactions that make the financial

statements more accurate and bring ledger accounts up to date as a planned part of the accounting procedure– 1st:

• Recorded in the Adjustments columns of the work sheet (makes the financial statements more accurate)

– 2nd:• Record the adjustments in the journal, then post to

the ledger accounts (brings the books up to date)

• Each adjustment directly affect accounts on the– Income statement– Balance sheet


Adjustments


Matching Principle

The principle that the revenue for one time period is matched up or compared with the related expenses for the same time period

• To get an more accurate net income number (and resultant balance sheet accounts), we always want to match all the expenses of one period to the all the revenues of that same period

• Match does not mean:– Match.Com (joke)– “Equals”


Accruals• Accrual

– Recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded

• Expense meaning of accrual:– Record (recognize) an expense when it has been

incurred but not yet recorded in the books• Regardless of when the cash is paid

• Revenue meaning of accrual:– Record (recognize) a revenue when it has been earned but not yet

recorded in the books• Regardless of when the cash is received

• Accrued earnings are a better financial measurement for the economic activity for the accounting period Define incur: To come in existence;

To bring upon oneself


Adjustment for Prepaid Insurance

• The asset insurance paid for in advance partly or completely expires with the passage of time

• The asset portion must be reduced and the corresponding expense increased


Adjustment for Prepaid Insurance Recorded in Work Sheet


Adjustments - Depreciation

• Originally we bought equipment for $49,720– We paid the cash or incurred debt for it, so why can’t

we just record it as an expense?• Because the income statement would show expenses

that are too large• Because the equipment will probably be around for many

more years!• The Equipment will probably help to generate revenue for

many more years to come• As a result, we must chop the original cost up into pieces

and spread the pieces out over the useful life of the asset– This is called depreciation


Depreciation

• Systematically spreads out the cost of these assets over their useful lives

• Matches the expenses for one period to the revenue generated for that same period (Matching Principle)


Depreciation

• An expense based on the expectation that an asset will gradually decline in usefulness due to time, wear and tear, or obsolescence; the cost of the asset is therefore spread out over its estimated useful life

• A portion of depreciation expense is allotted to each fiscal period


Straight-line Depreciation

• A means of calculating depreciation in which the cost of an asset, less any trade-in value, is allocated evenly over the useful life of the asset

• (Cost - Trade-in Value)/(Useful Life in Years)

Cost $49,720.00Estimated Salvage $6,880.00Useful Years 7

Annual Depreciation $6,120.00

Monthly Depreciation $510.00

Assumptions

(49720-6880)/7

(49720-6880)/7/12


Adjustment for Depreciation of Equipment

• We have calculated the depreciation expense• Expenses are debits• But what is the credit entry?

– Equipment?– No: The historical cost principle says that we must

keep the original cost on the books!

• We cannot credit the Equipment account• We credit the contra account: Accumulated

Depreciation


Definitions

• Contra Account– An account that is contrary to, or a

deduction from, another account; for example, Accumulated Depreciation is listed as a deduction from Equipment

– Contra accounts are always “attached” to another account

– Contra accounts are always a subtraction from the account it is attached to


Accumulated Depreciation• Accumulated depreciation is a contra asset

account– It is “connected” to the related asset account– The debits & credits are the same as the asset

account– But the plus and minus signs are reversed

• Because it is subtracted from the related asset account!

• When depreciation is recorded, we do not directly subtract (credit) the related asset, such as equipment– The amount of depreciation should be recorded

in the account: accumulated depreciation


Accumulated Depreciation


Book Value or Carrying Value

• The cost of an asset minus the accumulated depreciation

• Listed on the balance sheet


Adjustment for Depreciation Recorded in Work Sheet


Depreciation and Land

• Why don’t we depreciate land?

• Land supposedly lasts forever– It does not get “used up over time”– It can help to generate revenue for a very

long time


Adjustment for Wages Expense

• Why necessary?– The end of the pay period rarely falls on the same

day as the end of the fiscal period

• Accrued wages– The amount of unpaid wages owed to employees

for the time between the end of the last pay period and the end of the fiscal period

• Accounts used:– Wages Expense (DR)– Wages Payable (CR)


Adjustment for Wages Expense for Arch Copy Co.


Adjustment for Wages Expense Recorded in Work Sheet


Complete a Work Sheet for a Service Enterprise


Steps to Complete Worksheet

1. Complete Trial Balance columns, total, and rule (DR = CR)

2. Complete Adjustments columns, total, and rule (DR = CR)

• Label entries with letter references: (a), (b)

3. Complete Adjusted Trial Balance columns, total, and rule (DR = CR)

4. Record balances in Income Statement and Balance Sheet columns and total each column (DR ≠ CR)



5. Record net income or net loss– Subtract the smaller of the Income

Statement columns from the larger; add the difference to the smaller side, total, and rule

– If there is a net income, the credit side of the columns will be larger and you will place net income on the debit side

– If there is a net loss, the debit side of the columns will be larger and you will place net loss on the credit side



6. Record net income or net loss in the Balance Sheet columns

– Subtract the smaller side from the larger side; add the difference to the smaller side, total, and rule

– The amount should equal the difference between the Income Statement columns


Complete the Trial Balance Columns


Complete the Adjustments Columns


Complete the Adjusted Trial Balance Columns


Carry the Amounts to Either the Income Statement or Balance Sheet Columns


Worksheets with Two Pages

• Totals at the bottom of the first page of the work sheet may not be equal

• DR must equal CR at the bottom of the second or last page


Finding Errors in Income Statement and Balance Sheet Columns

• Is all the addition across to the Adjusted Trial Balance columns correct?

• Are the adjusted trial balance amounts moved to the correct column?– Revenues and expenses to Income Statement

columns?– Everything else to Balance Sheet columns?

• Is the addition for totals and footings correct?• Is net income or net loss placed in the correct

columns?



Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheet


Income Statement

• Copy all revenue and expenses from the Income Statement columns straight over to the income statement

• Date is for the whole period


Income Statement


Statement of Owner’s Equity

• Always check the beginning balance of Capital

• Is there any additional investment?• Record net income or net loss• Are there any withdrawals?• Date is for the whole period• Remember:

– Since we list the Capital account twice, the appropriate date must be included with the account title


Statement of Owner’s Equity


Balance Sheet

• Create new accounts for accumulated depreciation

• Copy all assets and liabilities to balance sheet

• Use ending Capital from statement of owner’s equity

• Date is just one day– “Snapshot in time!”


Balance Sheet



Journalize and post adjusting entries


Why Journalize and Post?

• Adjustments– In the work sheet but not officially in the

books

• Adjusting entries– Bring the books up to date at the end of the

fiscal period


Sequence

• First journalize the adjustments in the general journal

• Then post the adjustments to the appropriate ledger accounts


Journal Entries

Be sure to write “Adjusting Entries” before you begin the entries


Post the Journal Entries

Be sure to write “Adjusting” in the Item column



• Preparea. An income statement involving more than

one revenue account and a net lossb. A statement of owner’s equity with an

additional investment and either a net income or a net loss

c. An income statement and a balance sheet for a business having more than one accumulated depreciation account

d. A balance sheet containing the statement of owner’s equity information


An Income Statement Involving More Than One Revenue Account and a Net Loss


A Statement of Owner’s Equity with an Additional Investment and Net Income


A Statement of Owner’s Equity with an Additional Investment and a Net Loss

$68

7 6

04

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0


An Income Statement with More Than One Depreciation Expense Account


A Balance Sheet with More Than One Accumulated Depreciation Account


A Balance Sheet Containing Statement of Owner’s Equity Information


Demonstration Problem

• The account balances of Colfeld Company as of June 30, 2003, the end of the fiscal month, are shown on the following slide

• We will complete the following tasks:– Complete the work sheet– Prepare an income statement– Prepare a statement of owner’s equity– Prepare a balance sheet– Journalize the adjusting entries


DR CR DR CR DR CR DR CR

Cash 4,381.00

Accounts Receivable 578.00

Prepaid Property Insurance 397.00

Prepaid Auto Insurance 1,138.00

Equipment 5,713.00

Accumulated Depreciation, Equipment 2,487.00

Accounts Payable 997.00

J. Pham, Capital 5,964.00

J. Pham, Drawing 1,800.00

Professional Fees 8,131.00

Salary Expense 2,000.00

Advertising Expense 887.00

Utilities Expense 685.00

17,579.00 17,579.00

Joe's Accounting ServiceWork Sheet

For The Month Ended June 30, 2003

Adjustments Balance SheetTrial Balance Adjusted Trial Balance Income StatementAccount Name CRDR


Adjustment Data

Adjustments

a) Expired or used up property insurance, $200.00b) Expired or used up auto insurance, $100.00c) Depreciation expense on equipment, $250.00d) Salary accrued since the last payday, $400.00



Cash 4,381.00


Prepaid Property Insurance 397.00 a) 200.00

Prepaid Auto Insurance 1,138.00

Equipment 5,713.00









17,579.00 17,579.00

Property Insurance Expense a) 200.00

Income StatementAccount Name CRDR



Adjustments Balance SheetTrial Balance Adjusted Trial Balance



Cash 4,381.00



Prepaid Auto Insurance 1,138.00 b) 100.00

Equipment 5,713.00









17,579.00 17,579.00


Auto Insurance Expense b) 100.00






Cash 4,381.00




Equipment 5,713.00

Accumulated Depreciation, Equipment 2,487.00 c) 250.00








17,579.00 17,579.00



Depreciation Expense, Equipment c) 250.00

DR



Adjustments Balance SheetTrial Balance Adjusted Trial Balance Income StatementAccount Name CR



Cash 4,381.00




Equipment 5,713.00

Accumulated Depreciation, Equipment 2,487.00 c) 250.00





Salary Expense 2,000.00 d) 400.00



17,579.00 17,579.00



Depreciation Expense, Equipment c) 250.00

Salaries Payable d) 400.00

950.00 950.00

CRDR



Adjustments Balance SheetTrial Balance Adjusted Trial Balance Income StatementAccount Name


Reconcile the amounts in the Trial Balance columns and the

Adjustments columns and place the amounts into the Adjusted

Trial Balance column



Cash 4,381.00 4,381.00

Accounts Receivable 578.00 578.00

Prepaid Property Insurance 397.00 a) 200.00 197.00

Prepaid Auto Insurance 1,138.00 b) 100.00 1,038.00

Equipment 5,713.00 5,713.00

Accumulated Depreciation, Equipment 2,487.00 c) 250.00 2,737.00

Accounts Payable 997.00 997.00

J. Pham, Capital 5,964.00 5,964.00

J. Pham, Drawing 1,800.00 1,800.00

Professional Fees 8,131.00 8,131.00

Salary Expense 2,000.00 d) 400.00 2,400.00

Advertising Expense 887.00 887.00

Utilities Expense 685.00 685.00

17,579.00 17,579.00

Property Insurance Expense a) 200.00 200.00

Auto Insurance Expense b) 100.00 100.00

Depreciation Expense, Equipment c) 250.00 250.00

Salaries Payable d) 400.00 400.00

950.00 950.00 18,229.00 18,229.00

Account Name CRDR



Adjustments Balance SheetTrial Balance Adjusted Trial Balance Income Statement


Carry the appropriate amounts to either the Income

Statement columns or the Balance Sheet columns

Calculate net income or net loss



Cash 4,381.00 4,381.00

Accounts Receivable 578.00 578.00

Prepaid Property Insurance 397.00 a) 200.00 197.00

Prepaid Auto Insurance 1,138.00 b) 100.00 1,038.00

Equipment 5,713.00 5,713.00

Accumulated Depreciation, Equipment 2,487.00 c) 250.00 2,737.00

Accounts Payable 997.00 997.00

J. Pham, Capital 5,964.00 5,964.00

J. Pham, Drawing 1,800.00 1,800.00

Professional Fees 8,131.00 8,131.00 8,131.00

Salary Expense 2,000.00 d) 400.00 2,400.00 2,400.00

Advertising Expense 887.00 887.00 887.00

Utilities Expense 685.00 685.00 685.00

17,579.00 17,579.00

Property Insurance Expense a) 200.00 200.00 200.00

Auto Insurance Expense b) 100.00 100.00 100.00

Depreciation Expense, Equipment c) 250.00 250.00 250.00

Salaries Payable d) 400.00 400.00

950.00 950.00 18,229.00 18,229.00 4,522.00 8,131.00

Net Income 3,609.00

8,131.00 8,131.00

Income StatementAccount Name CRDR



Adjustments Balance SheetTrial Balance Adjusted Trial Balance



Cash 4,381.00 4,381.00 4,381.00

Accounts Receivable 578.00 578.00 578.00

Prepaid Property Insurance 397.00 a) 200.00 197.00 197.00

Prepaid Auto Insurance 1,138.00 b) 100.00 1,038.00 1,038.00

Equipment 5,713.00 5,713.00 5,713.00

Accumulated Depreciation, Equipment 2,487.00 c) 250.00 2,737.00 2,737.00

Accounts Payable 997.00 997.00 997.00

J. Pham, Capital 5,964.00 5,964.00 5,964.00

J. Pham, Drawing 1,800.00 1,800.00 1,800.00


Salary Expense 2,000.00 d) 400.00 2,400.00 2,400.00



17,579.00 17,579.00




Salaries Payable d) 400.00 400.00 400.00

950.00 950.00 18,229.00 18,229.00 4,522.00 8,131.00 13,707.00 10,098.00

Net Income 3,609.00 3,609.00

8,131.00 8,131.00 13,707.00 13,707.00





Prepare an Income Statement

Revenue:Professional Fees $8,131.00

Expenses:Salary Expense $2,400.00Advertising Expense $887.00Utilities Expense $685.00Property Insurance Expense $200.00Auto Insurance Expense $100.00Depreciation Expense, Equipment $250.00

Total Expenses 4,522.00Net Income $3,609.00


Joe's Accounting ServiceIncome Statement


Prepare a Statement of Owner’s Equity

J. Pham, Capital, June 1, 2003 $5,964.00Net Income For The Month $3,609.00Less: Withdarwals for The Month 1,800.00Increase In Capital 1,809.00J. Pham, Capital, June 30, 2003 $7,773.00

Joe's Accounting ServiceStatement of Owner's Equity



Prepare a Balance Sheet

AssetsCash $4,381.00Accounts Receivable $578.00Prepaid Property Insurance $197.00Prepaid Auto Insurance $1,038.00Equipment $5,713.00

Less Accumulated Depreciation $2,737.00 $2,976.00Total Assets $9,170.00

LiabilitiesAccounts Payable $997.00Salaries Payable 400.00Total Liabilities $1,397.00

Owner's EquityJ. Pham, Capital 7,773.00Total Liabilities & Owner's Equity $9,170.00

Joe's Accounting ServiceBalance SheetJune 30, 2003



Cash 4,381.00 4,381.00 4,381.00

Accounts Receivable 578.00 578.00 578.00

Prepaid Property Insurance 397.00 a) 200.00 197.00 197.00

Prepaid Auto Insurance 1,138.00 b) 100.00 1,038.00 1,038.00

Equipment 5,713.00 5,713.00 5,713.00

Accumulated Depreciation, Equipment 2,487.00 c) 250.00 2,737.00 2,737.00

Accounts Payable 997.00 997.00 997.00

J. Pham, Capital 5,964.00 5,964.00 5,964.00

J. Pham, Drawing 1,800.00 1,800.00 1,800.00


Salary Expense 2,000.00 d) 400.00 2,400.00 2,400.00



17,579.00 17,579.00




Salaries Payable d) 400.00 400.00 400.00

950.00 950.00 18,229.00 18,229.00 4,522.00 8,131.00 13,707.00 10,098.00

Net Income 3,609.00 3,609.00

8,131.00 8,131.00 13,707.00 13,707.00




Use Work Sheet To Make Adjustments


Journalize the Adjusting Entries

DescriptionPost.Ref. Debit Credit

1 Adjusting Entries2 20033 June 30 Property Insurance Expense 200.004 Prepaid Property Insurance 200.0056789

1011121314

General Journal

Date

Page 43Line #




1 Adjusting Entries2 20033 June 30 Property Insurance Expense 200.004 Prepaid Property Insurance 200.0056 30 Auto Insurance Expense 100.007 Prepaid Auto Insurance 100.0089

1011121314

General Journal

Date

Page 43Line #




1 Adjusting Entries2 20033 June 30 Property Insurance Expense 200.004 Prepaid Property Insurance 200.0056 30 Auto Insurance Expense 100.007 Prepaid Auto Insurance 100.0089 30 Depreciation Expense, Equipment 250.00

10 Accumulated Depreciation, Equipment 250.0011121314

General Journal

Date

Page 43Line #



Page J43


1 Adjusting Entries2 20033 June 30 Property Insurance Expense 200.004 Prepaid Property Insurance 200.0056 30 Auto Insurance Expense 100.007 Prepaid Auto Insurance 100.0089 30 Depreciation Expense, Equipment 250.00

10 Accumulated Depreciation, Equipment 250.001112 30 Salary Expense 400.0013 Salaries Payable 400.0014

General Journal

Date

Line #


Post In Order To Get Information Into Ledger Accounts

Account: Property Insurance Expense Account No: 650

Debit Credit123456

Line #

BalanceCreditDebit

Post.Ref.Item

General Ledger

Date

Account: Property Insurance Expense Account No: 650

Debit Credit1 20032 June 30 Adj. J43 200.00 200.00 3456

Line #

BalanceCreditDebit

Post.Ref.Item

General Ledger

Date


Post Reference!Page J43


1 Adjusting Entries2 20033 June 30 Property Insurance Expense 650 200.004 Prepaid Property Insurance 200.0056 30 Auto Insurance Expense 100.007 Prepaid Auto Insurance 100.0089 30 Depreciation Expense, Equipment 250.00

10 Accumulated Depreciation, Equipment 250.001112 30 Salary Expense 400.0013 Salaries Payable 400.0014

General Journal

Date

Line #

Chapter Four Adjusting Entries and the Work Sheet.

Documents

Transcript of Chapter Four Adjusting Entries and the Work Sheet.