acct076 chp 5 acctg

College AccountingCollege Accounting

Heintz & ParryHeintz & Parry2020thth Edition Edition

Heintz & ParryHeintz & Parry2020thth Edition Edition

ChapterChapter 55

Adjusting Entries and the Work Sheet

Adjusting Entries and the Work Sheet

1

Prepare end-of-period

adjustments.

END-OF-PERIOD ADJUSTMENTSEND-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 PRINCIPLEMATCHING 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 YEARFISCAL 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

2

Post adjusting entries to

the general ledger.

ADJUSTING ENTRIESADJUSTING ENTRIES

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

TB

SUPPLIESSUPPLIES

During June, Jessie purchased supplies for $80. These were

debited to the supplies account.

SUPPLIES80

PURCHASED IN JUNE

SUPPLIESSUPPLIES

During June, Jessie purchased supplies for $80. These were

debited to the supplies account.

SUPPLIES80

Bal. 80

According to an inventory of supplies, there are only $20

of supplies on hand at the end of June.

TB

SUPPLIESSUPPLIES

During June, Jessie purchased supplies for $80. These were

debited to the supplies account.

SUPPLIES80

Bal. 80

But unless there is an adjusting entry made,$80 of supplies will be

shown on the balance sheet.

TB

SUPPLIESSUPPLIES

During June, Jessie purchased supplies for $80. These were

debited to the supplies account.

SUPPLIES80

Bal. 80ADJUSTING ENTRY

NEEDED!!!!

TB

SUPPLIESSUPPLIES

SUPPLIES80

Bal. 80 $80 Purchased during month

– 20 Supplies remaining $60 Supplies used

TB

SUPPLIESSUPPLIES

SUPPLIES80

Bal. 80

$60 is credited to Supplies to remove

the amount of supplies used during June.

60

TB

Adj.

SUPPLIESSUPPLIES

SUPPLIES 80

Bal. 80

$60 is debited to Supplies Expense to recognize the amount of supplies used during June.

60

SUPPLIES EXPENSE60TB

Adj.

Adj.

SUPPLIESSUPPLIES

SUPPLIES 80

Bal. 80 60

SUPPLIES EXPENSE60TB

Adj.

Adj.

Now the balance sheet will show $20

of supplies!

20Bal.

SUPPLIESSUPPLIES

SUPPLIES 80

Bal. 80 60

SUPPLIES EXPENSE60TB

Adj.

Adj.

20Bal.

The income statementwill show $60 of supplies

used during June.

Bal. 60

TB

PREPAID INSURANCEPREPAID INSURANCE

During June, Jessie paid $200 for an eight-month liability insurance policy with coverage beginning on

June 1.PREPAID INSURANCE

2008-month policyJune 1–Jan. 31

19

TB

PREPAID INSURANCEPREPAID 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, weneed to remove the costof one month’s insurance

from this account.

PREPAID INSURANCEPREPAID INSURANCE

PREPAID INSURANCE 200

$200 for 8 months:$200 ÷ 8 = $25 per month

TB

PREPAID INSURANCEPREPAID INSURANCE

PREPAID INSURANCE 200

Prepaid Insurance iscredited for $25 to remove June’s insurance coverage

that has expired.

25

TB

Adj.

PREPAID INSURANCEPREPAID 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 INSURANCEPREPAID INSURANCE

PREPAID INSURANCE

200

25

INSURANCE EXPENSE

25TB

Adj.

Adj.

The balance sheet will show$175 (7 months) of prepaid insurance!

Bal. 175

24

PREPAID INSURANCEPREPAID INSURANCE

PREPAID INSURANCE

200

25

INSURANCE EXPENSE

25TB

Adj.

Adj.

Bal. 175

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

Bal. 25

WAGES EXPENSEWAGES 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

650Bal.

$650 does not include all of thewages earned by employees

during June.

TB

WAGES EXPENSEWAGES 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

650Bal.

An ADJUSTING ENTRY is needed!

TB

WAGES EXPENSEWAGES EXPENSE

WAGES EXPENSE 650

$50 debit to Wages Expense for the additional wages

earned during June.

50

TB

Adj.

WAGES EXPENSEWAGES EXPENSE

WAGES EXPENSE 650

Jessie Jane owes the employees for the additional wages.

This liability is recorded in the wages payable account.

50

WAGES PAYABLE50

Adj.

TB Adj.

WAGES EXPENSEWAGES EXPENSE

WAGES EXPENSE 650

50

WAGES PAYABLE

50

Adj.

TB Adj.

The income statement will show ALL wages earnedby employees in June!

Bal. 700

WAGES EXPENSEWAGES 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

HISTORICAL COST PRINCIPLEHISTORICAL 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 LIFEUSEFUL 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 EXPENSEDEPRECIATION 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 VALUESALVAGE 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 EXAMPLESTRAIGHT-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 scootersto be of no value when the three yearsare over, the whole $3,600 cost needsto be spread over the next three years.

STRAIGHT-LINE DEPRECIATION EXAMPLESTRAIGHT-LINE DEPRECIATION EXAMPLE

FORMULA:

1st step: Calculate the depreciable cost.

Original Cost

Salvage Value =

Depreciable Cost

$3,600 $0 = $3,600

–

–

37

STRAIGHT-LINE DEPRECIATION EXAMPLESTRAIGHT-LINE DEPRECIATION EXAMPLE

2nd step: Determine depreciation expense for this accounting period.

FORMULA:

Depreciable Cost

Estimated Useful Life

$3,600Since we are trying to compute

depreciation for one month,we will use months instead

of years.

=

STRAIGHT-LINE DEPRECIATION EXAMPLESTRAIGHT-LINE DEPRECIATION EXAMPLE

2nd step: Determine depreciation expense for this accounting period.

FORMULA:

Depreciable Cost

Estimated Useful Life

$3,60036 months

=

STRAIGHT-LINE DEPRECIATION EXAMPLESTRAIGHT-LINE DEPRECIATION EXAMPLE

2nd step: Determine depreciation expense for this accounting period.

FORMULA:

Depreciable Cost

Estimated Useful Life

$3,60036 months

= =$100 per month

DEPRECIATION EXPENSEDEPRECIATION EXPENSE

Now that we know depreciation for June is $100, let’s figure out the adjusting

entry.

DEPRECIATION DEPRECIATION

DELIVERY EQUIPMENT

3,600

We do NOT adjust this account.It should always reflect the ORIGINAL COST of the asset.

TB

ACCUMULATED DEPRECIATION ACCUMULATED DEPRECIATION

DELIVERY EQUIPMENT 3,600

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

ACCUMULATED DEPRECIATION—

DELIVERY EQUIPMENT 100TB Adj.

ACCUMULATED DEPRECIATIONACCUMULATED 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 VALUEBOOK 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 EXPENSEDEPRECIATION EXPENSE

DELIVERY EQUIPMENT

3,600

ACCUMULATED DEPRECIATION—

DEL. EQUIP. 100

DEPRECIATION EXPENSE—DEL. EQUIP. 100

3

Prepare a work sheet.

THE WORK SHEETTHE 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 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 theIncome Statement and Balance Sheet columns.

5. Complete the Work Sheet.

Jessie Jane’s Campus Delivery Work Sheet

For Month Ended June 30, 20--TRIAL BALANCE

DEBIT CREDITACCOUNT TITLE

Heading includes:Name of the company

Name of the working paperDate of the accounting

period just ended

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Jessie Jane’s Campus Delivery Work Sheet

For Month Ended June 30, 20--TRIAL BALANCEDEBIT CREDIT

ACCOUNT TITLE

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

in the first pair of amount columns.

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TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2000150

2150650200

50

5,950 5,950

This is the same trial balance

from Chapter 3, now being shown

on a 10-column work sheet.

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TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

Step #2: Prepare the adjustments.

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TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

Let’s record the supplies adjustmentwe computed earlier:

$60 debit to Supplies Expense;$60 credit to Supplies.

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TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

60(a)

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Adjustments are identified with a letter in parentheses.

TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

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 BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)

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TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

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The Adjustments columns

BALANCE!!!

TRIAL BAL.ACCOUNT TITLE

Cash

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)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

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. EqA. D..-Del Eq.Accts PayWages PayJ. J., Cap

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)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

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del Eq.Accts. Pay.Wages PayJ. J., Cap

Del. FeesWages Exp

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80

CR. DR.ADJ. TRIAL BAL.

Balance before Adjustments

+/– Adjustment

= Adjusted

Balance

$650 +/– $0 = $650

370650

©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

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts PayWages PayJ. J., Cap

Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80

CR. DR.ADJ. TRIAL BAL.

Balance before Adjustments

+/– Adjustment

= Adjusted

Balance

$80 – $60 = $20

37065020

©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

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. ExpTel. ExpIns. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80

CR. DR.ADJ. TRIAL BAL.

37065020

This process continuesuntil ALL accountsare included in the

Adjusted Trial Balance columns.

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TRIAL BAL.DR.CR.

ACCOUNT TITLE

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap.

Del. FeesWages Exp

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80

CR. DR.ADJ. TRIAL BAL.

37065020

1753600

1001800

502000

1502150

700200605025

1006100 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 AdjustedTrial Balance columns

balance!!!!

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap.

Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. Exp.Tel. Exp.Ins. ExpD. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

2150700200605025

1006100 6100

Step #4: Extend adjusted balancesto the Income Statement and

Balance Sheet columns.

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ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap

Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. ExpTel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

700200605025

1006100 6100

Each account in theAdjusted Trial Balance columns

is extended to either the Income Statement columns

or the Balance Sheet columns, but not both.

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ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap.

Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. ExpTel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

700200605025

1006100 6100

The Income Statement columns include all accounts found on the

income statement…REVENUES AND EXPENSES

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ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap.

Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. ExpTel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

700200605025

1006100 6100

The Balance Sheet columns include the remaining accounts…

ASSETS, LIABILITIES, CAPITAL, AND DRAWING

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ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

21507002006050

1006100 6100

37065020

1753600

25

ASSETS

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ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

21507002006050

1006100 6100

37065020

1753600

100

25

CONTRA-ASSET

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ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

50

25

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LIABILITIES

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

502000

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

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. ExpIns. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

502000

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.

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

502000

1502150

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

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

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

CashDR. CR.

INCOME STMT

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del Eq.Accts Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

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

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

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

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

Step #5: Complete the work sheet.b. Calculate the difference between

the Income Statement Debit andCredit 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

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

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.

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. EqA. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

The differences are the same!!!!The work sheet balances!!!

Since the Income Statement Credit column (REVENUES) exceedsthe 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

TITLECash

DR. CR.INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

Step #5: Complete the work sheet.d. Add the net income to theIncome 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

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent ExpSup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

Step #5: Complete the work sheet.e. Total and double rule (underline) the columns.

1015 1015Net 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

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 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 SHEETFINDING 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.

FOUR TIPS FOR FINDING ERRORS ON THE WORK SHEETFOUR 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 ENTRIESJOURNALIZING 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 ENTRIESADJUSTING ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

Instead of an explanation aftereach 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 ENTRIESADJUSTING ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

Each adjusting entry is dated the last day of the accounting

period.

June 3020--

©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 ENTRIESADJUSTING ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

June 3020--

Supplies Expense 60 00

Supplies 60 00

30 Insurance Expense 25 00

25 00Prepaid 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.

ADJUSTING ENTRIESADJUSTING 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 ENTRIESPOSTING 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 writtenin 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 ENTRIESPOSTING 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 ACCOUNTINGACCRUAL 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 ACCOUNTINGCASH 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

MODIFIED CASH BASISMODIFIED 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