Adjusting Entries and The Worksheet

1. Adjusting Entries and The Worksheet Chapter 4

2. Expected Learning Outcomes • List the classifications of the accounts that occupy each column of a ten-column worksheet • Complete a worksheet for a service enterprise • Journalize and post adjusting entries • Prepare statements from worksheet

3. How the Course Is Organized • Chapter 1 – Introduction • Chapter 2 – Analyzing business transactions • Chapter 3 – Journalizing and posting • Chapter 4 – Adjustment data and worksheet • Chapter 5 – Closing entries

4. Fiscal Period • Period of time covering a complete accounting cycle through closing entries • A day, week, month, whenever you want • Monthly is normal for comparison purposes • Fiscal year • Complete cycle for 12 months • Need not coincide with calendar year

5. The 10-Column Worksheet • Working paper • Simply a tool used for accounting • To record necessary updates for financial statements • Central place for bringing together information for adjustments

6. Ten Column Worksheet (Overlay pages - Page 120) • 10 columns for recording dollar amounts • 2 columns for each heading (debit/credit) • Trial balance • Adjustments • Adjusted trial balance • Income Statement • Balance Sheet

7. Trial Balance Columns • You have done this in the homework • A listing of each account in the order of • Assets • Liabilities • Owner’s equity • Revenue • Expenses

8. Trial Balance Columns • Noting the balance in each account • Foot the debit and credit columns and make sure they balance • If you are not in balance, fix it here before continuing

9. Adjustments • These update the ledger accounts • Internal transactions where no money has changed hands….cash is NOT involved • Cash account is NEVER used in adjustment columns

10. Adjustment ExamplePaid $360 for Insurance for 1 Year on February 1 Analyze the transaction • Debit Prepaid Insurance $360 • Credit Cash $360 • March 1st – How have the accounts changed? • $360/12 = $30 of Prepaid Insurance used • Insurance Expense increased $30

11. Depreciation • Depreciation Expense is recorded every period that an asset was in use • This “expenses” the cost of the asset over its useful life • At the end of its use, an asset has a “trade-in value” or salvage value.

12. Depreciation • The amount in the asset account is the cost of the asset until disposed • The amount in the asset account minus the amount in the Accumulated Depreciation account is called “book value” • Depreciation is not deducted directly from the asset account – a new account called “Accumulated Depreciation” is created for each asset. This way, you can see on the balance sheet how much of the asset has expired.

13. Depreciation of Equipment (page 115) • Estimated useful life of equipment is 7 years • Estimated value of equipment at end of 7 years is $6,880 (trade-in or salvage value) • Cost of equipment ($49,720) minus trade-in value ($6,880) divided by the number of years of use (7) is the annual depreciation • This annual depreciation is divided by 12 to get the Depreciation Expense amount for each month (continued next slide)

14. Depreciation ExampleBought Equipment for $49,720 • $49,720 - $6,880 (trade-in) = $42,840 • $42,840 / 7 years = $6,120 per year • Divide the depreciation for one year by 12 to get the depreciation for one month ($6,120 per year / 12 = $510 per month) • Each month the depreciation expense is recorded in Depreciation Expense as a debit of $510 (Income Statement) • Each month Accumulated Depreciation is credited $510 (Balance Sheet) • You are matching expenses against revenue for a certain period

15. Depreciation (review) • Record assets at the purchase price • Expense the asset over its useful life • Expense claimed each period during the useful life is called Depreciation Expense • Each asset has its own Accumulated Depreciation account (contra account) • See p. 116 for how it will look on the Balance Sheet.

16. Adjustments -- Wages Expense (page 116) • End of the reporting period • Owe wages to employees • Haven’t paid them yet but the books are “being closed” so they must be accounted for • Figure out how much they have earned up to the date you are closing the books • Debit Wages Expense account • Credit Wages Payable account

17. Wages Expense ExampleEnd of Month on a Wednesday • You pay wages of $300 every week on Friday to your employees • Equals $60 per day (5-day week) • Your employees worked 3 days in this calendar month (Mon., Tues., Wed.) - $180 of wages earned ($60 x 3) • Wages Expense debited $180 • Wages Payable credited $180

18. What Happens Friday When You Pay Wages • Debit – Wages Payable • Credit - Cash Cash Wages Payable 180 180 If you debit Wages Expense here then you will be recording it twice

19. The Worksheet Adjustment Columns • Page 120 • Make sure that debits equal credits here • Label each adjusting entry with letter labels, for example, (a) for each debit and credit adjustment to insurance, (b) for each adjustment to depreciation, and (c) for each adjustment to wages • Write notes explaining each adjustment, labeled by letter, at the bottom of the Account Name column on the worksheet.

20. Adjusted Trial Balance • You have added the columns (up and down) up until now. • Now you are going to add/subtract the rows (across) from the trial balance and adjustments • This gives you the current status of the accounts (Adjusted Trial Balance) • Page 123

21. Income Statement Column • Copy the figures from the adjusted trial balance for all accounts that go into the Income Statement • Revenue and expenses only • See overlay after page 120 • Foot the columns – and debits will NOT equal credits – why not? • You haven’t considered profit

22. Balance Sheet Column • Copy the balances from all other than Income Statement accounts from the adjusted trial balance column to these accounts • Foot the columns and they will not balance….why not?

23. Balance Sheet Column • We haven’t considered profit • The difference here will be the exactsame difference from the Income Statement columns

24. Steps in Completing the Worksheet • Complete trial balance columns, foot and double underline if in balance (rule) • Complete the adjustments columns, foot and rule • Complete adjusted trial balance, foot and rule

25. Steps in Completing the Worksheet • Record balances in the Income Statement and Balance Sheet columns, foot • Record net income or net loss in Income Statement columns by subtracting the smaller side from the larger side and adding the difference to the smaller side, foot and rule

26. Steps in Completing the Worksheet • Record net income or net loss in Balance Sheet column by subtracting the smaller side from the larger side and adding the difference to the smaller side, foot and rule • The numbers in step 5 and 6 should be the same

27. Completing Financial Statements • The worksheet helps us do this • The Income Statement is taken directly from the Income Statement columns of the worksheet

28. Completing Financial Statements • When completing the Statement of Owner’s Equity – you need to look at the ledgeraccount…NOT the worksheet for the beginning total • The Balance Sheet figures come directly from the Balance Sheet columns EXCEPT Capital, which is taken the Statement of Owner’s Equity

29. After Completing the Statements • Journalize and post adjustments • You do this by looking at the adjustment columns on the worksheet and making the journal entries. Then post the journal entries to your ledger accounts to update your books.

30. Depreciation Accounts • Contra Assets • Are on the Balance Sheet following the asset • See page 125

31. Learning Outcomes Review • List the classifications of the accounts that occupy each column of a ten-column worksheet • Complete a worksheet for a service enterprise • Journalize and post adjusting entries • Prepare statements from worksheet

32. Monday, October 1In-class demonstration problems p. 137 – Exercise 4-8 – Journalize adjusting entries p. 133 – Exercise 4-2 – Classify accounts and indicate normal balances and statement columns p. 135 – Exercise 4-5 – Prepare adjustments and adjusted trial balance

33. Wednesday, October 3In-class demonstration problem pp. 141-142 – Problem 4-1B • Record amounts in the Trial Balance columns of the work sheet • Complete the work sheet by making adjustments

34. Homework for Chapter 4 • p. 139 – Problem 4-2A Prepare Income Statement, Statement of Owner’s Equity, Balance Sheet, and adjusting entries • pp. 139-140 – Problem 4-3A • Complete the work sheet by making adjustments • Journalize the adjusting entries Not due until October 17, but keep current!