Adjusting Entries and the Work Sheet

Full text

(1)

College Accounting

Heintz & Parry

Heintz & Parry

2020ththEditionEdition

Chapter 5

Adjusting Entries

and the Work Sheet

1

Prepare end-of-period

adjustments.

END-OF-PERIOD ADJUSTMENTS

• Changes occur that affect the business’s financial condition:

– Equipment wearing out

– Prepaid insurance and supplies being used up

– Employees earning wages that have not yet been paid

• Since these events have not been entered into the accounting system, ADJUSTING ENTRIES must be made.

MATCHING PRINCIPLE

• Requires the matching of REVENUES EARNED during an accounting period with the

EXPENSES INCURRED

• Provides the best measure of net income

• Necessitates accounts be brought up to date before financial statements are prepared

FISCAL YEAR

• A 12-month period of time used as an accounting period

• Does not need to be the same as a calendar year

• Many businesses schedule their fiscal year to end when business is slow

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2

Post adjusting entries to

the general ledger.

ADJUSTING ENTRIES

Let’s look at some adjusting entries for Jessie Jane’s Campus Delivery.

TB

SUPPLIES

During June, Jessie purchased supplies

for $80. These were debited to the

supplies account.

SUPPLIES

PURCHASED

80

IN JUNE

SUPPLIES

During June, Jessie purchased supplies

for $80. These were debited to the

supplies account.

SUPPLIES

80

Bal.

80

According to an inventory of supplies,

there are only $20 of supplies on hand at the end of June.

TB

SUPPLIES

During June, Jessie purchased supplies

for $80. These were debited to the

supplies account.

SUPPLIES

80

Bal.

80

But unless there is an adjusting entry made,

$80 of supplies will be shown on the balance sheet.

TB

SUPPLIES

During June, Jessie purchased supplies

for $80. These were debited to the

supplies account.

SUPPLIES

80

Bal.

80

ADJUSTING ENTRY NEEDED!!!!

TB

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SUPPLIES

SUPPLIES

80

Bal.

80

$80 Purchased during month – 20 Supplies remaining

$60 Supplies used TB

SUPPLIES

SUPPLIES

80

Bal.

80

$60 is credited to Supplies to remove

the amount of supplies used during June.

60

TB

Adj.

SUPPLIES

SUPPLIES

80

Bal.

80

$60 is debited to Supplies Expense to recognize the amount of

supplies used during June.

60

SUPPLIES EXPENSE

60

TB

Adj.

Adj.

SUPPLIES

SUPPLIES

80

Bal.

80

60

SUPPLIES EXPENSE

60

TB

Adj.

Adj.

Now the balance sheet will show $20

of supplies!

20

Bal.

SUPPLIES

SUPPLIES

80

Bal.

80

60

SUPPLIES EXPENSE

60

TB

Adj.

Adj.

20

Bal.

The income statement will show $60 of supplies

used during June.

Bal.

60

TB

PREPAID INSURANCE

During June, Jessie paid $200 for an

eight-month liability insurance policy

with coverage beginning on June 1.

PREPAID INSURANCE

8-month policy

200

June 1–Jan. 31

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19

TB

PREPAID INSURANCE

During June, Jessie paid $200 for an

eight-month liability insurance policy

with coverage beginning on June 1.

PREPAID INSURANCE

200

Now that June is over, we need to remove the cost of one month’s insurance

from this account.

PREPAID INSURANCE

PREPAID INSURANCE

200

$200 for 8 months:

$200 ÷ 8 = $25 per month TB

PREPAID INSURANCE

PREPAID INSURANCE

200

Prepaid Insurance is credited for $25 to remove

June’s insurance coverage that has expired.

25

TB

Adj.

PREPAID INSURANCE

PREPAID INSURANCE

200

25

INSURANCE EXPENSE

25

Insurance Expense is debited for

$25 to recognize the amount of insurance coverage for June.

TB

Adj.

Adj.

PREPAID INSURANCE

PREPAID INSURANCE

200

25

INSURANCE EXPENSE TB

25

Adj.

Adj.

The balance sheet will show

$175 (7 months) of prepaid insurance!

Bal.

175

24

PREPAID INSURANCE

PREPAID INSURANCE

200

25

INSURANCE EXPENSE TB

25

Adj.

Adj.

Bal.

175

The income statement will show $25 (1 month) of

insurance consumed!

Bal.

25

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WAGES EXPENSE

Jessie paid her part-time employees $650 on June 27. Since then, they have earned an additional $50, but have not yet been paid.

WAGES EXPENSE

650

650

Bal.

$650 does not include all of the wages earned by employees

during June.

TB

WAGES EXPENSE

Jessie paid her part-time employees

$650 on June 27. Since then, they

have earned an additional $50, but

have not yet been paid.

WAGES EXPENSE

650

650

Bal.

An ADJUSTING ENTRY is needed!

TB

WAGES EXPENSE

WAGES EXPENSE

650

$50 debit to Wages Expense for the additional wages

earned during June.

50

TB Adj.

WAGES EXPENSE

WAGES EXPENSE

650

Jessie Jane owes the employees for the additional wages.

This liability is recorded in the wages payable account.

50

WAGES PAYABLE

50

Adj.

TB Adj.

WAGES EXPENSE

WAGES EXPENSE

650

50

WAGES PAYABLE

50

Adj.

TB Adj.

The income statement will show ALL wages earned

by employees in June!

Bal.

700

WAGES EXPENSE

WAGES EXPENSE

650

50

WAGES PAYABLE

50

Adj.

TB Adj.

Bal.

700

The balance sheet will show the liability for wages earned in June that will be paid in July.

Bal.

50

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HISTORICAL COST PRINCIPLE

• Assets are recorded at their actual cost.

• The cost remains on the books as long as the business owns the asset.

• No adjustments are made for changes in the market value of the asset.

USEFUL LIFE

• The period of time that an asset is expected to help produce revenues.

• Useful life expires as a result of wear and tear or because it no longer satisfies the needs of the business.

• As this happens, depreciation expense should be recognized and the value of the asset should be reduced.

DEPRECIATION EXPENSE

• Depreciation is a method of matching an asset’s original cost against the revenue produced over the useful life.

• There are many depreciation methods. (We will use the straight-line method.)

• Depreciation expense is based on estimates of useful lives and salvage values.

SALVAGE VALUE

• The expected market value or selling price of an asset at the end of its useful life

• Also called:

– Scrap value, or – Residual value

STRAIGHT-LINE DEPRECIATION

EXAMPLE

Jessie has motor scooters with an

estimated useful live of 3 years, no

salvage value, and an original cost of

$3,600.

Because Jessie expects the scooters to be of no value when the three years are over, the whole $3,600 cost needs to be spread over the next three years.

STRAIGHT-LINE DEPRECIATION

EXAMPLE

FORMULA:

1st step: Calculate the depreciable cost.

Original

Cost

Salvage

Value = Depreciable

Cost

$3,600 $0 = $3,600

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37

STRAIGHT-LINE DEPRECIATION

EXAMPLE

2nd step: Determine depreciation

expense for this accounting period.

FORMULA:

Depreciable

Cost

Estimated

Useful Life

$3,600

Since we are trying to compute depreciation for one month, we will use months instead

of years.

=

STRAIGHT-LINE DEPRECIATION

EXAMPLE

2nd step: Determine depreciation

expense for this accounting period.

FORMULA:

Depreciable

Cost

Estimated

Useful Life

$3,600

36 months

=

STRAIGHT-LINE DEPRECIATION

EXAMPLE

2nd step: Determine depreciation

expense for this accounting period.

FORMULA:

Depreciable

Cost

Estimated

Useful Life

$3,600

36 months

= = $100 per

month

DEPRECIATION EXPENSE

Now that we know depreciation

for June is $100, let’s figure out

the adjusting entry.

DEPRECIATION

DELIVERY

EQUIPMENT

3,600

We do NOT adjust this account.

It should always reflect the ORIGINAL COST of the asset.

TB

ACCUMULATED DEPRECIATION

DELIVERY

EQUIPMENT

3,600

Depreciation is credited to this account instead of the asset account.

ACCUMULATED

DEPRECIATION—

DELIVERY EQUIPMENT

100

TB Adj.

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ACCUMULATED DEPRECIATION

• Is a contra-asset account – “Contra” means opposite

• Has a credit balance (the opposite of an asset)

• Is deducted from the related asset account on the balance sheet

BOOK VALUE

• The value carried on the books or in the accounting records

• Book Value = Cost of Plant Assets – Accumulated Depreciation

• Also called undepreciated cost

DEPRECIATION EXPENSE

DELIVERY

EQUIPMENT

3,600

ACCUMULATED

DEPRECIATION—

DEL. EQUIP.

100

DEPRECIATION

EXPENSE—

DEL. EQUIP.

100

3

Prepare a work sheet.

THE WORK SHEET

• Pulls together all of the information needed to:

– Enter adjusting entries – Prepare financial statements

• Is not a financial statement

• Is not a formal part of the accounting system

• Ordinarily, only the accountant uses a work sheet

• Commonly in a 10-column format

PREPARING THE WORK SHEET

5 STEPS

1. Prepare the Trial Balance.

2. Prepare the Adjustments.

3. Prepare the Adjusted Trial Balance.

4. Extend Adjusted Balances to the Income Statement and Balance Sheet columns.

5. Complete the Work Sheet.

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Jessie Jane’s Campus Delivery Work Sheet For Month Ended June 30, 20--

TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Heading includes:

Name of the company Name of the working paper

Date of the accounting period just ended

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Jessie Jane’s Campus Delivery Work Sheet For Month Ended June 30, 20--

TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Step #1: Prepare the trial balance (before any adjustments)

in the first pair of amount columns.

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TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Cash DEBIT CREDIT

ADJUSTMENTS Accounts Receivable

Supplies Prepaid Insurance Delivery Equipment Accum. Depr.—Del. Equip.

Accounts Payable Wages Payable Jessica Jane, Capital Delivery Fees Wages Expense Jessica Jane, Drawing

Rent Expense Supplies Expense Telephone Expense Insurance Expense Depr. Exp.—Del. Equip.

370 650 20080 3,600

1,800 2000 150

2150 650 200 50

5,950 5,950 This is the same

trial balance from Chapter 3, now being shown on a 10-column work sheet.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Cash DEBIT ADJUSTMENTSCREDIT

Accounts Receivable Supplies

Prepaid Insurance Delivery Equipment Accum. Depr.—Del. Equip.

Accounts Payable Wages Payable Jessica Jane, Capital Delivery Fees Wages Expense Jessica Jane, Drawing

Rent Expense Supplies Expense Telephone Expense Insurance Expense Depr. Exp.—Del. Equip.

370 650 20080 3,600

1,800 2,000 150

2,150 650 200 50

5,950 5,950 Step #2: Prepare the

adjustments.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Cash DEBIT ADJUSTMENTSCREDIT

Accounts Receivable Supplies

Prepaid Insurance Delivery Equipment Accum. Depr.—Del. Equip.

Accounts Payable Wages Payable Jessica Jane, Capital Delivery Fees Wages Expense Jessica Jane, Drawing

Rent Expense Supplies Expense Telephone Expense Insurance Expense Depr. Exp.—Del. Equip.

370 650 20080 3,600

1,800 2,000 150

2,150 650 200 50

5,950 5,950 Let’s record the supplies adjustment

we computed earlier:

$60 debit to Supplies Expense;

$60 credit to Supplies.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Cash DEBIT ADJUSTMENTSCREDIT

Accounts Receivable Supplies

Prepaid Insurance Delivery Equipment Accum. Depr.—Del. Equip.

Accounts Payable Wages Payable Jessica Jane, Capital Delivery Fees Wages Expense Jessica Jane, Drawing

Rent Expense Supplies Expense Telephone Expense Insurance Expense Depr. Exp.—Del. Equip.

370 650 20080 3,600

1,800 2,000 150

2,150 650 200 50

5,950 5,950 60 (a)

(a) 60

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Adjustments are identified with a letter in parentheses.

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TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Cash DEBIT CREDIT

ADJUSTMENTS Accounts Receivable

Supplies Prepaid Insurance Delivery Equipment Accum. Depr.—Del. Equip.

Accounts Payable Wages Payable Jessica Jane, Capital Delivery Fees Wages Expense Jessica Jane, Drawing

Rent Expense Supplies Expense Telephone Expense Insurance Expense Depr. Exp.—Del. Equip.

370 650 20080 3,600

1,800 2,000 150

2,150 650 200 50

5,950 5,950 (a) 60

60 (a)

The remaining adjustments are entered on the work sheet and the Adjustments columns

are totaled.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Cash DEBIT CREDIT

ADJUSTMENTS Accounts Receivable

Supplies Prepaid Insurance Delivery Equipment Accum. Depr.—Del. Equip.

Accounts Payable Wages Payable Jessica Jane, Capital Delivery Fees Wages Expense Jessica Jane, Drawing

Rent Expense Supplies Expense Telephone Expense Insurance Expense Depr. Exp.—Del. Equip.

370 650 20080 3,600

1,800 2,000 150

2,150 650 200 50

5,950 5,950 (a) 60

60 (a)

25 (b)

25 (b)

(c) 50

(c) 50

100 (d)

(d) 100

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TRIAL BALANCE DEBIT CREDIT ACCOUNT TITLE

Cash DEBIT ADJUSTMENTSCREDIT

Accounts Receivable Supplies

Prepaid Insurance Delivery Equipment Accum. Depr.—Del. Equip.

Accounts Payable Wages Payable Jessica Jane, Capital Delivery Fees Wages Expense Jessica Jane, Drawing

Rent Expense Supplies Expense Telephone Expense Insurance Expense Depr. Exp.—Del. Equip.

370 650 20080 3,600

1,800 2,000 150

2,150 650 200 50

5,950 5,950 (a) 60

60 (a) (b) 25

25 (b)

(c) 50

(c) 50

100 (d)

100 (d)

235 235

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The Adjustments columns BALANCE!!!

TRIAL BAL.

ACCOUNT TITLE Cash

ADJUSTMENTS Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

370650

200 3600

1800 2000 150

2150 650 200 50

5950 5950 (a) 60

(a) 60 (b) 25

(b) 25 (c) 50

(c) 50

100 (d)

(d)100

235 235

80

Step #3: Prepare the adjusted trial balance.

DR.

CR. CR.

DR.

ADJ. TRIAL BAL.

DR. CR.

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TRIAL BAL.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

ADJUSTMENTS Accts. Rec.

Supplies Ppd. Ins.

Del. Eq A. D..-Del Eq.

Accts Pay Wages Pay J. J., Cap Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

370 650 200 3600

1800 2000 150

2150 650 200 50

5950 5950 (a) 60

(a) 60 (b) 25

(b) 25 (c) 50

(c) 50 (d)100

(d)100

235 235

80

CR. DR.

ADJ. TRIAL BAL.

Balance before

Adjustments +/– Adjustment = Adjusted Balance

$370

+/–

$0

=

$370

370

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TRIAL BAL.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

ADJUSTMENTS Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del Eq.

Accts. Pay.

Wages Pay J. J., Cap Del. Fees Wages Exp J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

370 650 200 3600

1800 2000 150

2150 650 200 50

5950 5950 (a) 60

(a) 60 (b) 25

(b) 25 (c) 50

(c) 50 (d)100

(d)100

235 235

80

CR. DR.

ADJ. TRIAL BAL.

Balance before

Adjustments +/– Adjustment = Adjusted Balance

$650

+/–

$0

=

$650

370650

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(11)

TRIAL BAL.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

ADJUSTMENTS Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts Pay Wages Pay J. J., Cap Del. Fees Wages Exp J. J., Drawing

Rent Exp Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

370 650 200 3600

1800 2000 150

2150 650 200 50

5950 5950 (a) 60

(a) 60 25 (b)

(b) 25 (c) 50

(c) 50 (d)100

(d)100

235 235

80

CR. DR.

ADJ. TRIAL BAL.

Balance before

Adjustments +/– Adjustment = Adjusted Balance

$80

$60

=

$20

370650 20

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TRIAL BAL.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

ADJUSTMENTS Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp Tel. Exp Ins. Exp.

D. E.–Del. Eq.

370 650 200 3600

1800 2000 150

2150 650 200 50

5950 5950 (a) 60

(a) 60 25 (b)

(b) 25 (c) 50

(c) 50 (d)100

(d)100

235 235

80

CR. DR.

ADJ. TRIAL BAL.

370650 20

This process continues until ALL accounts are included in the Adjusted Trial Balance columns.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TRIAL BAL.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

ADJUSTMENTS Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay J. J., Cap.

Del. Fees Wages Exp J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

370 650 200 3600

1800 2000 150

2150 650 200 50

5950 5950 (a) 60

60 (a) (b) 25

(b) 25 (c) 50

(c) 50 (d)100

100 (d)

235 235

80

CR. DR.

ADJ. TRIAL BAL.

370650 17520 3600 100

180050 2000 150

2150 700 200 60 50 25 100 6100 6100

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Adjusted Trial Balance columns

balance!!!!

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay J. J., Cap.

Del. Fees Wages Exp J. J., Drawing

Rent Exp Sup. Exp.

Tel. Exp.

Ins. Exp D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 25 100 6100 6100

Step #4: Extend adjusted balances to the Income Statement and

Balance Sheet columns.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay J. J., Cap Del. Fees Wages Exp J. J., Drawing

Rent Exp Sup. Exp Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET

370650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 25 100 6100 6100

Each account in the Adjusted Trial Balance columns

is extended to either the Income Statement columns or the Balance Sheet columns,

but not both.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay J. J., Cap.

Del. Fees Wages Exp J. J., Drawing

Rent Exp Sup. Exp Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET

650370 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 25 100 6100 6100

The Income Statement columns include all accounts found on the

income statement…

REVENUES AND EXPENSES

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(12)

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay J. J., Cap.

Del. Fees Wages Exp J. J., Drawing

Rent Exp Sup. Exp Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 25 100 6100 6100

The Balance Sheet columns include the remaining accounts…

ASSETS, LIABILITIES, CAPITAL, AND DRAWING

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 100 6100 6100

370650 17520 3600

25

ASSETS

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ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 100 6100 6100

370650 17520 3600 100

25

CONTRA-ASSET

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ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 100 6100 6100

370650 17520 3600 100

1800 50

25

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LIABILITIES

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370650

17520 3600

100 1800 50 2000 150

2150 700 200 60 50 100 6100 6100

370650 17520 3600 100

180050 2000

25

CAPITAL

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 650370

17520 3600

100 1800 50 2000 150

2150 700 200 60 50 100 6100 6100

370650 17520 3600 100

180050 2000 150

25

DRAWING

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

(13)

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50 100 6100 6100

370650 17520 3600 100

1800 200050 150 2150

25

REVENUE

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370650 17520 3600 100

1800 200050 150 2150 700 200 60 50 25

100

EXPENSES

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del Eq.

Accts Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370650 17520 3600 100

1800 200050 150 2150 700 200 60 50 25

100

Step#5: Complete the work sheet.

a. Rule and total the Income Statement and Balance Sheet columns.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370 650 17520 3600

100 1800 50 2000 150 2150 700 200 60 50 25

100

1135 2150 4965 3950

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370650

17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370 65020 175 3600

100 1800 50 2000 150 2150 700 200 60 50 25

100

1135 2150 4965 3950 Step #5: Complete the work sheet.

b. Calculate the difference between the Income Statement Debit and

Credit columns.

($2,150 – $1,135 = $1,015)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 650370

17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370 65020 175 3600

100 1800 50 2000 150 2150 700 200 60 50 25

100

1135 2150 4965 3950 Step #5: Complete the work sheet.

c. Calculate the difference between the Balance Sheet Debit and

Credit columns.

($4,965 – $3,950 = $1,015)

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

(14)

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370 650 17520 3600

100 1800 50 2000 150 2150 700 200 60 50 25

100

1135 2150 4965 3950 The differences are the same!!!!

The work sheet balances!!!

Since the Income Statement Credit column (REVENUES) exceeds the Income Statement Debit column (EXPENSES), the difference is called NET INCOME.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370 650 17520 3600

100 1800 50 2000 150 2150 700 200 60 50 25

100

1135 2150 4965 3950 Step #5: Complete the work sheet.

d. Add the net income to the Income Statement Debit and the Balance Sheet Credit column (columns with the smallest totals).

ADJ. T. B.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370 650 17520 3600

100 1800 50 2000 150 2150 700 200 60 50 25

100

1135 2150 4965 3950 Step #5: Complete the work sheet.

e. Total and double rule (underline) the columns.

1015 1015

Net Income

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJ. T. B.

DR.

CR.

ACCOUNT TITLE Cash

DR. CR.

INCOME STMT.

Accts. Rec.

Supplies Ppd. Ins.

Del. Eq.

A. D.–Del. Eq.

Accts. Pay.

Wages Pay.

J. J., Cap.

Del. Fees Wages Exp.

J. J., Drawing

Rent Exp.

Sup. Exp.

Tel. Exp.

Ins. Exp.

D. E.–Del. Eq.

CR. DR.

BALANCE SHEET 370

650 17520 3600

100 1800 50 2000 150

2150 700 200 60 50

25 100

6100 6100

370 650 17520 3600

100 1800 50 2000 150 2150 700 200 60 50 25

100

1135 2150 4965 3950

1015 1015

2150 2150 4965 4965

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Describe methods

for finding errors on

the work sheet.

4 FINDING ERRORS ON

THE WORK SHEET

If any of the columns on the

work sheet do not balance, you

must find the error before you

continue.

(15)

FOUR TIPS FOR FINDING

ERRORS ON THE WORK SHEET

• Check the addition of all columns.

• Check the addition and subtraction required when extending to the Adjusted Trial Balance columns.

• Make sure the adjusted account balances have been extended to the appropriate columns.

• Make sure that the net income or net loss has been added to the appropriate columns.

5

Journalize adjusting entries

from the work sheet.

JOURNALIZING ADJUSTING

ENTRIES

• The work sheet helps the accountant organize the end-of-period financial information, including adjusting entries.

• The accounts are not adjusted until a general journal entry is made and posted to the general ledger accounts.

ADJUSTING ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries 1

2 3 4 5 6 7 8 9 10 11

Instead of an explanation after each adjusting entry,

“Adjusting Entries” is written before the first

adjusting entry.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJUSTING ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries 1

2 3 4 5 6 7 8 9 10 11

Each adjusting entry is dated the last day of the accounting

period.

June 30 20--

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

ADJUSTING ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries 1

2 3 4 5 6 7 8 9 10 11

June 30

20-- Supplies Expense 60 00

Supplies 60 00

30 Insurance Expense 25 00

25 00 Prepaid Insurance

30 Wages Expense 50 00

Wages Payable 50 00

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

(16)

ADJUSTING ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries (cont.) 1

2 3 4 5 6 7 8 9 10 11

30 Depr. Exp.—Del. Equip. 100 00 Accum. Depr.—Del. Equip. 100 00 June20--

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

POSTING THE ADJUSTING

ENTRIES

Account: Account No.

DATE ITEM PR DR. CR.

BALANCE

DR. CR.

Supplies Expense 523

20--

June 30

Adjusting

Posting adjusting entries is the same as posting other entries

except “Adjusting” is written in the item area.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

POSTING THE ADJUSTING

ENTRIES

Account: Account No.

DATE ITEM PR DR. CR.

BALANCE

DR. CR.

Supplies Expense 523

20--

June 30 Adjusting 60 60

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Explain the cash,

modified cash,

and accrual bases

of accounting.

6

ACCRUAL BASIS OF

ACCOUNTING

• Revenues are recorded when EARNED

• Expenses are recorded when INCURRED

• Recognizes receivables and payables

• Offers the best matching of revenues and expenses

– The best method of measuring income for most businesses

– Smaller service organizations often use the cash or modified cash basis

CASH BASIS OF ACCOUNTING

• Revenues are recorded when cash is RECEIVED

• Expenses are recorded when cash is PAID

• Similar to the accrual basis if:

– There are few receivables, payables, and assets

• Can vary significantly if:

– A business has many receivables, payables, and assets

(17)

MODIFIED CASH BASIS

• Combines aspects of the cash and accrual methods

• A business uses the cash basis for recording revenues and most expenses

• Exceptions are made when cash is paid for assets with useful lives greater than one accounting period

• If cash is paid for equipment, buildings, supplies, or insurance, these are recorded as assets, and adjustments are made each period as under the accrual basis

Figure

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References

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