CHAPTER ELEVEN WORK SHEET AND ADJUSTING ENTRIES Work

CHAPTER ELEVEN WORK SHEET AND ADJUSTING ENTRIES

Work Sheet Of A Merchandising Business § Similar to a service business’s worksheet § Used to record adjustments This chapter introduces two more adjusting entries: • Unearned Revenue • Merchandise Inventory § Used to prepare financial statements

Adjustment For Unearned Revenue Example: Brown County Playhouse sells season tickets. Tickets sell for $10 for each play ($50 for a 5 play season ticket) and a maximum of 1, 000 seats can be sold for each play. Let’s assume all shows sell out during the first week that season tickets are available. I was in the play, but they told me to “Break a leg” and look what happened!%$#

ADJUSTMENT FOR UNEARNED REVENUE NEW Liability account UNEARNED TICKET REVENUE $50, 000 When season tickets are sold Cash is debited and Unearned Ticket Revenue is credited

ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50, 000 Following the production of the third show, financial statements are to be prepared. . . but the balance in this liability account is wrong.

ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50, 000 An adjusting entry is needed to recognize the ticket revenue earned for the 3 shows performed. (Remember 5 shows were paid for. . )

ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $30, 000 TICKET REVENUE $50, 000 3 shows x 1, 000 tickets for each show = 3, 000 tickets x $10 per ticket = $30, 000

ADJUSTMENT FOR UNEARNED REVENUE Balance Sheet UNEARNED TICKET REVENUE $30, 000 $50, 000 Income Statement TICKET REVENUE $30, 000 in earned revenue is removed from the unearned account and put into the revenue account.

ADJUSTMENT FOR UNEARNED REVENUE Balance Sheet UNEARNED TICKET REVENUE $30, 000 $50, 000 Income Statement TICKET REVENUE $30, 000 $20, 000 Bal. The remaining balance of $20, 000 in season ticket sales is reported on the Balance Sheet as a current liability.

Adjustment For Merchandise Inventory (Using the periodic inventory system) Example: Double Bubble Chew Shop had a beginning merchandise inventory of $25, 000. At the end of the year, a physical inventory of merchandise determined that merchandise costing $30, 000 was still on hand.

Adjustment For Merchandise Inventory Beginning merchandise inventory of $25, 000. At the end of the year, a physical inventory of $30, 000 was still on hand. Humm. . . Why is there more inventory at the END then at the BEGINNING of the year? When PURCHASES exceed SALES, the inventory balance will be higher at the end of the year.

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY BEG. BALANCE 25, 000 This Beginning balance of $25, 000 is wrong. We are going to remove it and put the new ending balance of $30, 000 in this account. We do this through the adjusting process at the end of the period.

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY $25, 000 This account has NOT changed during the accounting period. It still shows the old, beginning balance.

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25, 000 PURCHASES XXX Merchandise bought during the year was debited to Purchases instead of Merchandise Inventory

ADJUSTMENT FOR MERCHANDISE INVENTORY PURCHASES 25, 000 XXX SALES XXX The COST of merchandise sold is NOT recorded. The selling price is credited to the Sales account

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25, 000 After a year of purchasing and selling merchandise, the balance is no longer accurate

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25, 000 An adjusting entry is needed to update the balance of the Merchandise Inventory account

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY OKAY!! Two-steps! Tell me what the two steps are so I can take notes. (I know this is going to be on the next quiz or on our next COK!) 25, 000 Adjusting the Inventory account is a TWO-step process!

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY INCOME SUMMARY Old 25, 000 Old FIRST-step: Debit Income Summary Credit Merchandise Inventory The first adjusting entry, removes this old $25, 000 balance.

Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25, 000 INCOME SUMMARY Old 25, 000 Old 30, 000 New Correc t ending balanc e! SECOND-step: Debit Merchandise Inventory Credit Income Summary The second adjusting entry, enters the new physical inventory of $30, 000

Double Bubble Chew Shop CHART OF ACCOUNTS Let’s review the Chart of Accounts for a merchandising business!

Double Bubble Chew Shop Chart of Accounts Assets 101 122 131 145 Cash Accts. Rec. Merch. Inv. Supplies Prepaid Ins. Assets now include Merchandise Inventory

Double Bubble Chew Shop Chart of Accounts Assets (100 -199) 101 Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. 161 171. 1 181. 1 Land Building Acc. Depr. - Bldg Store Equipment Acc. Depr. - Store Eq I wonder if everyone has their own office in the building. . . I’d like mine with a view

Double Bubble Chew Shop CHART OF ACCOUNTS (cont. ) Liabilities (200 -299) 201 202 219 231 241 251 Notes Payable Accounts Payable Wages Payable Utilities Payable Unearned Ticket Rev. Mortgage Payable Owner’s Equity (300 -399) 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing Wow! There is that Unearned Ticket Revenue account again. Remember this account as it will appear on the quiz. . hint, hint

Double Bubble Chew Shop CHART OF ACCOUNTS (cont. ) 231 241 251 Utilities Payable Unearned Ticket. Rev. Mortgage Payable Owner’s Equity (300 -399) 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing 313 Income Summary How would you like to go around with a last name of “Fishel”? I bet his first name is “Go” hee Income Summary is also considered an Owner’s Equity account

Double Bubble Chew Shop CHART OF ACCOUNTS Assets (100 -199) 101 Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. 161 171. 1 181. 1 Land Building Acc. Depr. - Bldg Store Equipment Acc. Depr. - Store Eq Revenue (400 -499) 401 Sales 401. 1 Sales Returns & Allow 411 Interest Revenue 412 Rent Revenue 413 Ticket Revenue

Double Bubble Chew Shop CHART OF ACCOUNTS Assets (100 -199) 101 Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. Revenue (400 -499) 401 Sales 401. 1 Sales Returns & Allow 411 Interest Revenue 412 Rent Revenue 413 Ticket Revenue 161 171. 1 181. 1 Cost of Goods Sold (500 -599) Land Building Acc. Depr. - Bldg Store Equipment Acc. Oh Depr. - Store Eq my Gosh! I’m freaking out here! There are too many accounts! Expenses (600 -699) 501 Purchases 501. 1 Purch. Ret. & Allow. 501. 2 Purchases Discounts 502 Freight-In

Double Bubble Chew Shop CHART OF ACCOUNTS (cont. ) Liabilities (200 -299) 201 202 219 231 241 251 Notes Payable Accounts Payable Wages Payable Utilities Payable Unearned Ticket Rev. Mortgage Payable Owner’s Equity (300 -399) 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing Expenses (600 -699) 511 Wages Expense 512 Advertising Expense 513 Bk Credit Card Exp. 521 Rent Expense 523 Supplies Expense 525 Telephone Expense 533 Utilities Expense 535 Insurance Expense 540 Depr. Exp. - Building 541 Depr. Exp. - Store Eq. 549 Misc. Expense Okay, This is the 20 th slide on the chart of accounts, I’m officially asleep. Zzz. . .

Using a Work Sheet to Record Adjustments Same 5 STEPS that we used for a Service Business. • Step 1: Prepare the Trial Balance. • Step 2: Prepare the Adjustments. Okay- No more chart of accounts slides. Let’s move on… • Step 3: Prepare the Adjusted Trial Balance. • Step 4: Extend Adjusted Balances to the Income Statement & Balance Sheet columns. • Step 5: Complete the Work Sheet.

ACCOUNT TITLE Cash Accounts Receivable Supplies Prepaid Insurance Merchandise Inventory Accum. Depr. -Building. Unearned Ticket Revenue Salaries Payable G. L. Fishel, Capital G. L. Fishel, Drawing Sales Discounts Purchase Returns & Allow. Freight In Depreciation Expense TRIAL BALANCE ADJUSTMENTS CREDIT DEBIT 370 650 Lots of new accounts 80 on this Trial Balance: 200 25, 000 50, 000 150 650 80, 000 700 107, 800 Step #1: Prepare the Trial Balance 54, 150 (before any adjustments) in the first pair of 2, 150 amount columns. 500 1, 000 107, 800 Now, we are ready to enter some adjustments.

Double Bubble Chew Shop Work Sheet (partial) For Year Ended December 31, 20 -TRIAL BALANCE ACCOUNT TITLE DEBIT CREDIT Adjustments #1 and #2: Remove the Beginning Inventory from the Merchandise Inventory account and enter the new Ending Inventory amount. Merchandise Inventory Income Summary Purchases Returns and Allowances Purchases Discounts Freight-In 25, 000 80, 000 1, 000 500 700 Let’s look at the merchandise inventory adjustments on a partial work sheet.

ACCOUNT TITLE Merchandise Inventory Income Summary Purchases Ret. & Allow. Purchases Discounts Freight-In TRIAL BALANCE DEBIT CREDIT ADJUSTMENTS DEBIT CREDIT 25, 000 80, 000 1, 000 500 700 STEP #1 REMOVE THE BEGINNING BALANCE.

ACCOUNT TITLE Merchandise Inventory Income Summary Purchases Ret. & Allow. Purchases Discounts Freight-In TRIAL BALANCE DEBIT CREDIT ADJUSTMENTS DEBIT CREDIT (a) 25, 000 80, 000 1, 000 500 700 By crediting Merchandise Inventory, the balance is reduced to zero.

ACCOUNT TITLE Merchandise Inventory Income Summary Purchases Ret. & Allow. Purchases Discounts Freight-In TRIAL BALANCE DEBIT CREDIT ADJUSTMENTS DEBIT CREDIT (a) 25, 000 80, 000 1, 000 500 700 The corresponding debit is to Income Summary.

ACCOUNT TITLE Merchandise Inventory Income Summary Purchases Ret. & Allow. TRIAL BALANCE DEBIT CREDIT ADJUSTMENTS DEBIT CREDIT (b) 30, 000 (a) 25, 000 80, 000 The balance in the Purchases Discounts Merchandise Inventory Freight-In 1, 000 500 700 Step #2 account now reflects the new d e r e t n e is y r o t actual amount inven g in d n e w e n u o c c of inventory on. Th a y r o t n e e Inv is d n a h c r e hand at the end tof M e h in o t the year.

ACCOUNT TITLE Merchandise Inventory Income Summary Purchases Ret. & Allow. Purchases Discounts Freight-In TRIAL BALANCE DEBIT CREDIT ADJUSTMENTS DEBIT CREDIT (b) 30, 000 (a) 25, 000 (b) 30, 000 25, 000 80, 000 1, 000 500 700 Income Summary is credited.

ACCOUNT TRIAL BAL. ADJUSTMENTS DR. CR. TITLE Cash 10, 000 (b)30, 000 (a)25, 000 Merch. Inv. 25, 000 Equipment 18, 000 ADJ. TRIAL BAL. DR. CR. 2, 000 (c)1, 000 Accum. Depr Income Sum. (a) 25, 000 (b)30, 000 Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In (c) 1, 000 Depr. Exp. In this example, our next adjustment for the company is for Depreciation Expense of $1, 000

ACCOUNT TRIAL BAL. ADJUSTMENTS ADJ. TRIAL BAL. DR. CR. TITLE Cash 10, 000 (b)30, 000 (a)25, 000 Merch. Inv. 25, 000 Equipment 18, 000 1. Unearned Ticket 2, 000 (c)1, 000 Accum. Depr Revenue Income Sum. (a) 25, 000 (b)30, 000 2. Supplies used Purchases 80, 000 up 1, 000 Purch. R &A 3. Prepaid Insurance that Purch. Disc. 500 has expired 700 Freight-In Let’s keep it simple and just look at these (c) 1, 000 Depr. Exp. adjustments for now… In the same way, we can enter all of our other adjustments for:

ACCOUNT TRIAL BAL. ADJUSTMENTS DR. CR. TITLE Cash 10, 000 (b)30, 000 (a)25, 000 Merch. Inv. 25, 000 Equipment 18, 000 2, 000 (c)1, 000 (a) 25, 000 (b)30, 000 Accum. Depr Income Sum. Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In (c) 1, 000 Depr. Exp. Totals 56, 000 ADJ. TRIAL BAL. DR. CR. Before moving to our next set of columns, remember to foot your columns to verify equality!!!

ACCOUNT TRIAL BAL. ADJUSTMENTS ADJ. TRIAL BAL. DR. CR. TITLE Cash 10, 000 Merch. Inv. 25, 000 (b)30, 000 (a) 25, 000 30, 000 Equipment 18, 000 (c)1, 000 Accum. Depr 2, 000 (b) (a) Income Sum. 25, 000 30, 000 Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In (c) 1, 000 Depr. Exp. The new balance in Merchandise Inventory is extended to the “Adjusted Trial Balance” columns.

ACCOUNT TRIAL BAL. ADJUSTMENTS ADJ. TRIAL BAL. DR. CR. TITLE Cash 10, 000 Merch. Inv. 25, 000 (b)30, 000 (a) 25, 000 30, 000 Old New Balance Equipment 18, 000 Balance 2, 000 (c)1, 000 3, 000 Accum. Depr (b) (a) Income Sum. 30, 000 25, 000 Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In Depr. Exp. 1, 000 BE (c) CAREFUL!!! BOTH the beginning and ending inventory amounts are extended from the Income Summary account to the “Adjusted Trial Balance” columns.

ACCOUNT TRIAL BAL. ADJUSTMENTS DR. CR. TITLE Cash 10, 000 (b)30, 000 (a)25, 000 Merch. Inv. 25, 000 Equipment 18, 000 2, 000 (c)1, 000 Accum. Depr Income Sum. (a) 25, 000 (b)30, 000 Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In (c) 1, 000 Depr. Exp. ADJ. TRIAL BAL. DR. CR. 10, 000 30, 000 18, 000 3, 000 25, 000 80, 000 30, 000 1, 000 500 700 1, 000 All other accounts are extended. Some with adjustments.

Name of Company Work Sheet For Year Ended December 31, 20 -ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET DEBIT CREDIT STEP #3 Prepare the Adj. Trial Bal. STEP #4 Extend Adjusted Account Balances Assets Ending Inv. Capital Drawing The Assets (including the ending balance of Merchandise Inventory) are extended to the Balance Sheet columns.

ACCOUNT ADJUST. T/B INCOME STMT DR. CR. TITLE Make sure the Adjusted Trial Balance columns balance and then. . . begin transferring numbers to the Merch. Inv. 30, 000 Inc. Stmt. and Balance Income Sum. 25, 000 30, 000 sheet columns Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In Depr. Exp. 1, 000 BALANCE SHEET DR. CR. 30, 000 The new ending Merchandise Inventory is extended Sheet columns. Totals to the XX Balance XX

ACCOUNT ADJUST. T/B INCOME STMT DR. CR. TITLE BALANCE SHEET DR. CR. Old New Balance Merch. Inv. 30, 000 Income Sum. 25, 000 30, 000 25, 000 Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In 30, 000 BOTH the beginning and ending inventory amounts are extended to the Income Statement columns and placed in the Income Summary account.

ACCOUNT ADJUST. T/B INCOME STMT DR. CR. TITLE Merch. Inv. 30, 000 Income Sum. 25, 000 30, 000 Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In BALANCE SHEET DR. CR. 30, 000 25, 000 80, 000 30, 000 1, 000 500 700 Since the Purchases accounts and Freight-In are Income Statement accounts, they are extended to the Income Statement columns. So would Sales, Sales Discounts, and Sales Returns & Allowances too! (But I didn’t show them here. )

ACCOUNT ADJUST. T/B INCOME STMT DR. CR. TITLE Merch. Inv. 30, 000 Income Sum. 25, 000 30, 000 Purchases 80, 000 1, 000 Purch. R &A Purch. Disc. 500 700 Freight-In BALANCE SHEET DR. CR. 30, 000 25, 000 80, 000 30, 000 1, 000 500 But, we’ll learn how to do this in our next chapter. 700 The Cost of Goods Sold can be computed By using the numbers in the Income Statement columns—

Name of Company Work Sheet For Year Ended December 31, 20 -ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET DEBIT CREDIT STEP #3 Prepare the Adj. Trial Bal. STEP #4 Extend Adjusted Account Balances Assets Liabilities & Owner’s Equity accounts are also extended to the Capital Balance Sheet columns. Ending Inv. Liabilities Unearned Ticket Rev. Capital Drawing

ADJ. TRIAL BAL DEBIT CREDIT INCOME STATEMENT DEBIT CREDIT BALANCE SHEET DEBIT CREDIT Sales Discounts Expenses Purchase R&A Freight-In Purchase Discounts STEP #5 COMPLETE THE WORK SHEET (1) Sum columns (2) Compute net income (loss) Remember, if Revenues are greater than expenses, then we report Net Income! Net Income

ACCOUNT TRIAL BAL. ADJUSTMENTS DR. CR. TITLE Cash 10, 000 (b)30, 000 (a)25, 000 Merch. Inv. 25, 000 Equipment 18, 000 ADJ. TRIAL BAL. DR. CR. Now, that we 10, 000 have: 30, 000 • Reviewed 18, 000 how to complete a 2, 000 (c) 1, 000 3, 000 Accum. Depr worksheet for a Income Sum. (a) 25, 000 (b)30, 000 merchandiser 25, 000 30, 000 and Purchases 80, 000 1, 000 Purch. R &A • Discussed 1, 000 a new adjustment Purch. Disc. 500 for 700 Unearned 700 Freight-In Revenue (c) 1, 000 Depr. Exp. 1, 000 Re • Let’s make our en cord trie joadjusting ad s fo urna jus r th l entries tm journal e en se ts! in the General

GENERAL JOURNAL DATE DESCRIPTION Adjusting Entries 1 20 -2 Dec. 31 Income Summary 3 Merchandise Inventory (Remove old inv. Balance) 4 5 6 7 8 9 10 11 31 Merchandise Inventory Pg 11 PR DEBIT CREDIT 25, 000 30, 000 Income Summary (Enter new inv. Balance) 31 Depreciation Expense Accumulated Depr. (Record deprec. Exp on the Building) 1, 000

GENERAL JOURNAL DATE DESCRIPTION Adjusting Entries-cont. 1 20 -2 Dec. 31 Unearned Ticket Revenue 3 Ticket Revenue (To report the amount of ticket revenue 4 earned) 5 31 Supplies Expense 6 Supplies 7 8 9 10 11 Pg 12 PR DEBIT CREDIT 30, 000 1, 125 (To record the amount of supplies used during the period) 31 Wages Expense Wages Payable. (To record wages owed at the end of the period) 1, 030