Chapter Four Adjusting Entries and the Work Sheet
- Slides: 102
Chapter Four Adjusting Entries and the Work Sheet
Performance Objectives 1. Define: • Fiscal period • Fiscal year 2. List the classifications of the accounts that occupy each column of a ten-column work sheet Copyright © Houghton Mifflin Company. All rights reserved. 2
Performance Objectives 3. Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages 4. Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheet Copyright © Houghton Mifflin Company. All rights reserved. 3
Performance Objectives 5. Journalize and post adjusting entries 6. Prepare financial statements a) 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 Copyright © Houghton Mifflin Company. All rights reserved. 4
Performance Objectives 6. Prepare financial statements 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 Copyright © Houghton Mifflin Company. All rights reserved. 5
Performance Objective 1 Define: – Fiscal period – Fiscal year Copyright © Houghton Mifflin Company. All rights reserved. 6
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 Copyright © Houghton Mifflin Company. All rights reserved. 7
Fiscal Year • A fiscal period consisting of twelve consecutive months Copyright © Houghton Mifflin Company. All rights reserved. 8
Accounting Cycle • The sequence of steps in the accounting process completed during the fiscal period Copyright © Houghton Mifflin Company. All rights reserved. 9
List the Steps in the Accounting Cycle 1. Analyze source documents and record business transactions in a journal 2. Post journal entries to the ledger accounts 3. Prepare a trial balance 4. Gather adjustment data and record adjustments in the work sheet 5. Complete the work sheet 6. Create financial reports from data in work sheet 7. Journalize and post the adjusting entries 8. Journalize and post the closing entries 9. Prepare the post-closing trial balance Copyright © Houghton Mifflin Company. All rights reserved. Chapter 3 Chapter 4 Chapter 5 10
Copyright © Houghton Mifflin Company. All rights reserved. 11
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 Copyright © Houghton Mifflin Company. All rights reserved. 12
Performance Objective 2 List the classifications of the accounts that occupy each column of a ten-column work sheet Copyright © Houghton Mifflin Company. All rights reserved. 13
Classifications of Accounts in a Ten. Column Work Sheet • What are the classifications of accounts that appear in the Trial Balance, Income Statement, and Balance Sheet columns? • Remember your T accounts: Copyright © Houghton Mifflin Company. All rights reserved. 14
The Fundamental Accounting Equation and Normal Balances of Accounts Copyright © Houghton Mifflin Company. All rights reserved. 15
Income Statement Columns: Revenue Minus Expenses Copyright © Houghton Mifflin Company. All rights reserved. 16
Balance Sheet Columns: Assets Equal Liabilities Plus Owner’s Equity Copyright © Houghton Mifflin Company. All rights reserved. 17
Classifications of Accounts in Each Column of a Work Sheet Copyright © Houghton Mifflin Company. All rights reserved. 18
Classifications of Accounts in Each Column of a Work Sheet Copyright © Houghton Mifflin Company. All rights reserved. 19
Classifications of Accounts in Each Column of a Work Sheet Copyright © Houghton Mifflin Company. All rights reserved. 20
Performance Objective 3 Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages Copyright © Houghton Mifflin Company. All rights reserved. 21
Adjustments Copyright © Houghton Mifflin Company. All rights reserved. 22
Adjustments • Internal transactions that bring ledger accounts up to date as a planned part of the accounting procedure • First recorded in the Adjustments columns of the work sheet • Directly affect accounts on the – Income statement – Balance sheet • Make financial statements more accurate Copyright © Houghton Mifflin Company. All rights reserved. 23
Adjusting Entries • Entries that bring the books up to date at the end of the fiscal period Copyright © Houghton Mifflin Company. All rights reserved. 24
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 Copyright © Houghton Mifflin Company. All rights reserved. 25
Accruals • Accrual – Recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded • Accrued earnings are a better financial measurement of the economic activity for the accounting period Copyright © Houghton Mifflin Company. All rights reserved. 26
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 Copyright © Houghton Mifflin Company. All rights reserved. 27
Mixed Accounts • Certain accounts that appear in the trial balance with balances that are partly income statement amounts and partly balance sheet amounts—for example, Prepaid Insurance. Copyright © Houghton Mifflin Company. All rights reserved. 28
Adjustment for Prepaid Insurance Recorded in Work Sheet Copyright © Houghton Mifflin Company. All rights reserved. 29
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 Copyright © Houghton Mifflin Company. All rights reserved. 30
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) Copyright © Houghton Mifflin Company. All rights reserved. 31
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) Copyright © Houghton Mifflin Company. All rights reserved. 32
Calculating Straight-line Depreciation 1. Subtract the trade-in value from the cost to get the depreciable amount Copyright © Houghton Mifflin Company. All rights reserved. 33
Calculating Straight-line Depreciation 2. Divide the depreciable amount by the number of useful years Copyright © Houghton Mifflin Company. All rights reserved. 34
Calculating Straight-line Depreciation 3. Divide the depreciation for one year by 12 Copyright © Houghton Mifflin Company. All rights reserved. 35
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 Copyright © Houghton Mifflin Company. All rights reserved. 36
Contra Accounts • Contra account – An account that is contrary to, or a deduction from, another account • Contra asset account – An account that is contrary to or a deduction from its companion asset account Copyright © Houghton Mifflin Company. All rights reserved. 37
Accumulated Depreciation • A contra asset account – “Connected” to the related asset account – Debits and credits are the same – Plus and minus signs are reversed because the contra asset account is subtracted from the related asset account! • Depreciation is recorded in the contra asset account • Depreciation is never subtracted directly from the related asset Copyright © Houghton Mifflin Company. All rights reserved. 38
Accumulated Depreciation Copyright © Houghton Mifflin Company. All rights reserved. 39
Book Value or Carrying Value • The cost of an asset minus the accumulated depreciation • Listed on the balance sheet Copyright © Houghton Mifflin Company. All rights reserved. 40
Adjustment for Depreciation Recorded in Work Sheet Copyright © Houghton Mifflin Company. All rights reserved. 41
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 Copyright © Houghton Mifflin Company. All rights reserved. 42
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) Copyright © Houghton Mifflin Company. All rights reserved. 43
Adjustment for Wages Expense Copyright © Houghton Mifflin Company. All rights reserved. 44
Adjustment for Wages Expense Copyright © Houghton Mifflin Company. All rights reserved. 45
Adjustment for Wages Expense Copyright © Houghton Mifflin Company. All rights reserved. 46
Adjustment for Wages Expense for Arch Copy Co. Copyright © Houghton Mifflin Company. All rights reserved. 47
Adjustment for Wages Expense Recorded in Work Sheet Copyright © Houghton Mifflin Company. All rights reserved. 48
Placement of Accounts in the Work Sheet • Pay special attention to the Capital and Drawing accounts Copyright © Houghton Mifflin Company. All rights reserved. 49
Placement of Accounts in the Work Sheet • Pay special attention to the Equipment and Accumulated Depreciation, Equipment accounts Copyright © Houghton Mifflin Company. All rights reserved. 50
Placement of Accounts in the Work Sheet • Enter adjustments • Extend amounts to Income Statement and Balance Sheet columns • Calculate net income Copyright © Houghton Mifflin Company. All rights reserved. 51
Calculating Net Income E R Copyright © Houghton Mifflin Company. All rights reserved. 52
Complete a Work Sheet for a Service Enterprise Copyright © Houghton Mifflin Company. All rights reserved. 53
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) Copyright © Houghton Mifflin Company. All rights reserved. 54
Steps to Complete Worksheet 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 Copyright © Houghton Mifflin Company. All rights reserved. 55
Steps to Complete Worksheet 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 Copyright © Houghton Mifflin Company. All rights reserved. 56
Complete the Trial Balance Columns Copyright © Houghton Mifflin Company. All rights reserved. 57
Complete the Adjustments Columns Copyright © Houghton Mifflin Company. All rights reserved. 58
Complete the Adjusted Trial Balance Columns Copyright © Houghton Mifflin Company. All rights reserved. 59
Carry the Amounts to Either the Income Statement or Balance Sheet Columns Copyright © Houghton Mifflin Company. All rights reserved. 60
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 Copyright © Houghton Mifflin Company. All rights reserved. 61
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? Copyright © Houghton Mifflin Company. All rights reserved. 62
Performance Objective 4 Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheet Copyright © Houghton Mifflin Company. All rights reserved. 63
Income Statement • Copy all revenue and expenses from the Income Statement columns straight over to the income statement • Date is for the whole period Copyright © Houghton Mifflin Company. All rights reserved. 64
Income Statement Copyright © Houghton Mifflin Company. All rights reserved. 65
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 Copyright © Houghton Mifflin Company. All rights reserved. 66
Statement of Owner’s Equity Copyright © Houghton Mifflin Company. All rights reserved. 67
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!” Copyright © Houghton Mifflin Company. All rights reserved. 68
Balance Sheet Copyright © Houghton Mifflin Company. All rights reserved. 69
Performance Objective 5 Journalize and post adjusting entries Copyright © Houghton Mifflin Company. All rights reserved. 70
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 Copyright © Houghton Mifflin Company. All rights reserved. 71
Sequence • First journalize the adjustments in the general journal • Then post the adjustments to the appropriate ledger accounts Copyright © Houghton Mifflin Company. All rights reserved. 72
Journal Entries Be sure to write “Adjusting Entries” before you begin the entries Copyright © Houghton Mifflin Company. All rights reserved. 73
Post the Journal Entries Be sure to write “Adjusting” in the Item column Copyright © Houghton Mifflin Company. All rights reserved. 74
Performance Objective 6 • Prepare a. 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 Copyright © Houghton Mifflin Company. All rights reserved. 75
An Income Statement Involving More Than One Revenue Account and a Net Loss Copyright © Houghton Mifflin Company. All rights reserved. 76
A Statement of Owner’s Equity with an Additional Investment and Net Income Copyright © Houghton Mifflin Company. All rights reserved. 77
A Statement of Owner’s Equity with an Additional Investment and a Net Loss 7 6 0 $68 4 0 0 Copyright © Houghton Mifflin Company. All rights reserved. 78
An Income Statement with More Than One Depreciation Expense Account Copyright © Houghton Mifflin Company. All rights reserved. 79
A Balance Sheet with More Than One Accumulated Depreciation Account Copyright © Houghton Mifflin Company. All rights reserved. 80
A Balance Sheet Containing Statement of Owner’s Equity Information Copyright © Houghton Mifflin Company. All rights reserved. 81
Demonstration Problem • The account balances of Colfeld Company as of June 30, 2005, the end of the fiscal year, 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 Copyright © Houghton Mifflin Company. All rights reserved. 82
Copyright © Houghton Mifflin Company. All rights reserved. 83
Adjustment Data Copyright © Houghton Mifflin Company. All rights reserved. 84
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Extend the amounts in the Trial Balance columns and the Adjustments columns to the Adjusted Trial Balance columns Copyright © Houghton Mifflin Company. All rights reserved. 89
Copyright © Houghton Mifflin Company. All rights reserved. 90
Carry the appropriate amounts to either the Income Statement columns or the Balance Sheet columns Calculate net income or net loss Copyright © Houghton Mifflin Company. All rights reserved. 91
Copyright © Houghton Mifflin Company. All rights reserved. 92
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Copyright © Houghton Mifflin Company. All rights reserved. 95
Prepare an Income Statement Copyright © Houghton Mifflin Company. All rights reserved. 96
Prepare a Statement of Owner’s Equity Copyright © Houghton Mifflin Company. All rights reserved. 97
Prepare a Balance Sheet Copyright © Houghton Mifflin Company. All rights reserved. 98
Journalize the Adjusting Entries Copyright © Houghton Mifflin Company. All rights reserved. 99
Journalize the Adjusting Entries Copyright © Houghton Mifflin Company. All rights reserved. 100
Journalize the Adjusting Entries Copyright © Houghton Mifflin Company. All rights reserved. 101
Journalize the Adjusting Entries Copyright © Houghton Mifflin Company. All rights reserved. 102
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