1. 4–1 McQuaig Bille 1 College Accounting 10 th Edition McQuaig Bille Nobles © 2011 Cengage Learning PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University Chapter 4

2. 4–2 After studying this chapter, you should be able to: After you have completed this chapter, you will be able to do the following: Define fiscal period and fiscal year. 1 List the classifications of the accounts that occupy each column of a ten-column work sheet. 2 Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages. 3 (continued) LEARNING OBJECTIVES

3. 4–3 Journalize and post the adjusting entries. 5 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) a balance sheet for a business having more than one accumulated depreciation account, and (d) a balance sheet containing the statement of owner’s equity information. 6 Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheet. 4 After you have completed this chapter, you will be able to do the following:

4. 4–4 Learning Objective 1 Define fiscal period and fiscal year.

5. 4–5 Fiscal Period  A fiscal period is any period of time covering a complete accounting cycle.  A fiscal year is a fiscal period consisting of twelve consecutive months.  A fiscal year does not have to coincide with the calendar year.  For income tax purposes, any period of twelve consecutive months may be selected. However, you must be consistent from year to year.

6. 4–6 The Accounting Cycle The accounting cycle represents the sequence of steps in the accounting process completed during the fiscal period.

7. 4–7

8. 4–8 The Work Sheet  The work sheet is a tool (working paper) used by accountants to record necessary adjustments and provide up-to-date account balances needed to help in preparing financial statements.  The heading consists of three lines: (1) the name of the company, (2) the title of the working paper, and (3) the period of time covered.

9. 4–9 Work Sheet for Conner’s Whitewater Adventure

10. 4–10 PRACTICE EXERCISE 1 SOLUTION (a) and (d) PRACTICE EXERCISE 1 Which of the following would be considered a fiscal year? (a)July 1, 20— to June 30, 20— (b)October 1, 20— to August 31, 20— (c)April 1, 20— to January 31, 20— (d)January 1, 20— to December 31, 20—

11. 4–11 Learning Objective 2 List the classifications of the accounts that occupy each column of a ten-column work sheet.

12. 4–12 The Columns of the Work Sheet Assuming normal balances, the account classifications are listed in the Trial Balance Debit and Credit columns of the work sheet as follows: Trial Balance Columns (continued)

13. 4–13 The Columns of the Work Sheet The adjusted trial balance columns are merely extensions of the Trial Balance Columns, plus or minus any adjustment amounts. Adjusted Trial Balance Columns

14. 4–14 The Columns of the Work Sheet  An income statement contains the revenues minus the expenses. Income Statement Columns  Revenue accounts have credit balances, so they are recorded in the Income Statement Credit column.  Expense accounts have debit balances, so they are recorded in the Income Statement Debit column. (continued)

15. 4–15 The Columns of the Work Sheet dit Income Statement Columns

16. 4–16 The Columns of the Work Sheet Balance Sheet Columns  Asset accounts have debit balances, so they are recorded in the Balance Sheet Debit column.  Liability accounts have credit balances, so they are recorded in the Balance Sheet Credit column.  The Capital account has a credit balance, so it is recorded in the Balance Sheet Credit column.  Drawing is a deduction from Capital, thus it has a debit balance and is recorded in the Balance Sheet Debit column. (continued)

17. 4–17 The Columns of the Work Sheet Balance Sheet Columns Assets

18. 4–18 Using a ten-column work sheet, list the classifications of accounts that are found in each column (Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, and Balance Sheet).

19. 4–19

20. 4–20 Learning Objective 3 Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages.

21. 4–21 Adjustments  Adjustments are a way of updating the ledger accounts.  Adjustments may be considered internal transactions.  They are determined after the trial balance has been prepared.  Adjustments are first recorded on the work sheet when using a manual accounting system.

22. 4–22 Without adjustments, the financial statements would be out of focus.

23. 4–23 Prepaid Insurance (a)The $1,875 balance in Prepaid Insurance represents the premium paid in advance for a three-month liability insurance policy. $1,875 per year ÷ 3 months = $625 per month Prepaid Insurance Cost of insurance that remains paid in advance

24. 4–24 Recording the Adjustment on the Work Sheet  Label the debit and credit amounts of the adjustment with (a) in the Adjustment columns.  Extend the new amount in the Prepaid Insurance account to the Balance Sheet Debit column.  Extend the new amount for the Insurance Expense account to the Income Statement Debit column.

25. 4–25 Depreciation of Equipment  Durable items, such as appliances and fixtures, are recorded as Equipment because they will last longer than one year.  The cost of these assets should be systematically spread out over their useful lives.  This process is called depreciation. (continued)

26. 4–26 (b)The Equipment account has a balance of $51,300. Conner estimates that the equipment will have a useful life of seven years, with a trade-in (salvage) value of $8,292 at the end of that time. Depreciation of Equipment Using straight-line depreciation, Conner determines the depreciation for one month is $512 as shown on Slide 27. (continued)

27. 4–27 Depreciation of Equipment STEP 1.Subtract the trade-in (salvage) value from the cost to get the full depreciation. $51,300 – $8,292 = $43,008 STEP 2.Divide the full depreciation by the number of years in the asset’s useful life to get the depreciation for one year. $43,008 ÷ 7 = $6,144 STEP 3.Divide the depreciation for one year by 12 to get the depreciation for one month. $6,144 ÷ 12 = $512 (continued)

28. 4–28 Depreciation of Equipment Depreciation Expense, Equipment Accumulated Depreciation, Equipment, is contrary to, or a deduction from, Equipment, so we call it a contra account. (continued)

29. 4–29 On the balance sheet, the balance of Accumulated Depreciation is deducted from the balance of the related asset account. Depreciation of Equipment

30. 4–30  Why is this adjustment necessary? –The end of the pay period rarely falls on the same day as the end of the fiscal period.  What are accrued wages? –Accrued wages are the unpaid wages owed to employees for the time between the end of the last pay period and the end of the fiscal period.  What accounts are used? –Wages Expense (DR) –Wages Payable (CR) Wages Expense (continued)

31. 4–31 The end of the fiscal period and the end of the employees’ payroll period rarely fall on the same day, as shown in the diagram below. (continued) Wages Expense

32. 4–32 Wages Expense Brown Company pays its employees a total of $400 per day and that payday falls on Friday. Assume the last day of the fiscal period ends on Wednesday, December 31. (continued)

33. 4–33 (continued) Wages Expense

34. 4–34 (c) The amount of wages for the month of June for Conner Whitewater Adventures is $2,360 (or $78.67 per day based on 30 days). The last payday was June 24. Wages Expense

35. 4–35 Net Income Net income (or net loss) is the difference between revenue and expenses. When revenue is larger than expenses, net income is placed in the Income Statement Debit column.

36. 4–36 Net Income Net income (or net loss) is the difference between revenue and expenses. (continued) It is also placed in the Balance Sheet Credit column.

37. 4–37 Net Loss When revenue is smaller than expenses, the net loss is placed in the Income Statement Credit column.

38. 4–38 It is also placed in the Balance Sheet Debit column. Net Loss

39. 4–39 Mixed Accounts  Each adjusting entry contains an income statement account (revenue or expense) and a balance sheet account (asset, contra asset, or liability).  Accountants refer to these accounts as mixed accounts, which are accounts with balances that are partly income statement and partly balance sheet amounts.

40. 4–40 Steps in Completion of the Work Sheet 1.Complete the Trial Balance columns, total, and rule. 2.Complete the Adjustments columns, total, and rule. 3.Complete the Adjusted Trial Balance columns, total, and rule. 4.Record balances in the Income Statement and Balance Sheet columns and total each column. (continued)

41. 4–41 5.Record net income or net loss in the Income Statement columns by subtracting the smaller side from the larger side and adding the differences to the smaller side, total, and rule. 6.Record net income or net loss in the Balance Sheet columns by subtracting the smaller side from the larger side and adding the difference to the smaller side, total, and rule.

42. 4–42 FIGURE 2 Partial work sheet for Conner’s Whitewater Adventures

43. 4–43 FIGURE 3 Work sheet with steps of completion explained for Conner’s Whitewater Adventures (continued)

44. 4–44 FIGURE 3 Work sheet with steps of completion explained for Conner’s Whitewater Adventures (concluded)

45. 4–45 FIGURE 4 Work sheet for Conner’s Whitewater Adventure--Excel Version (continued)

46. 4–46 FIGURE 4 Work sheet for Conner’s Whitewater Adventure--Excel Version (concluded)

47. 4–47 Finding Errors in the Income Statement and Balance Sheet Columns 1.Check to see that the amount of the net income or loss is recorded in the correct columns. 2.Verify the addition of all the columns. 3.Look to see if the appropriate amounts have been recorded in the Income Statement and Balance Sheet columns. (continued)

48. 4–48 4.Verify, by adding or subtracting across each line, that the amounts carried over from the Trial Balance columns through the Adjustments columns into the Adjusted Trial Balance columns are correct. 5.Verify that the correct amounts of the revenue and expense accounts are transferred to the Income Statement columns. 6.Verify that the correct amounts of assets, liabilities, and owner’s equity accounts are transferred to the Balance Sheet columns.

49. 4–49 FIGURE 5 Work sheet with explanations of adjustments for Conner’s Whitewater Adventures (continued)

50. 4–50 FIGURE 5 Work sheet with explanations of adjustments for Conner’s Whitewater Adventures (concluded)

51. 4–51 Complete the work sheet for Fun and Games on Slide 52 for the month of September. Adjustment information: (a) Insurance expired during September, $175. (b) Depreciation of equipment for the month of September, $540. (c) Accrued wages owed at the end of September, $260. (continued)

52. 4–52 PRACTICE EXERCISE 3 (concluded)

53. 4–53

54. 4–54 Learning 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.

55. 4–55 Since we have completed the work sheet for Conner’s Whitewater Adventures, we can now prepare the income statement, the statement of owner’s equity, and the balance sheet by taking the figures directly from the work sheet. The statements are in Slides 56, 57, and 58. (continued) Completion of the Financial Statements

56. 4–56 to Statement of Owner’s Equity Financial statements for Conner’s Whitewater Adventures (continued)

57. 4–57 from the Income Statement to the Balance Sheet Financial statements for Conner’s Whitewater Adventures (continued)

58. 4–58 from the Statement of Owner’s Equity Financial statements for Conner’s Whitewater Adventures (concluded) FIGURE 6

59. 4–59 Prepare an income statement, a statement of owner’s equity, and a balance sheet for Fun and Games using the information from Practice Exercise 3.

60. 4–60 (continued)

61. 4–61 PRACTICE EXERCISE 4 SOLUTION (continued)

62. 4–62 PRACTICE EXERCISE 4 SOLUTION (concluded)

63. 4–63 Learning Objective 5 Journalize and post the adjusting entries.

64. 4–64 Journalizing Adjusting Entries  The work sheet is not a journal, so we must journalize adjusting entries to update the ledger accounts.  Take the information for these entries directly from the Adjustments columns of the work sheet. (continued)  Debit and credit exactly the same accounts and amounts from the work sheet to the journal.

65. 4–65 Journalizing Adjusting Entries Note that the entries have been posted

66. 4–66 Posting Adjusting Entries When you post the adjusting entries to the ledger accounts, write the abbreviation “Adj.” in the Item column of the ledger account.

67. 4–67 In adjusting accounts, notice that the intent is to make sure the expenses recorded match up or compare with the revenues of the same period of time. This is called the matching principle. Matching Principle

68. 4–68 Journalize and post the adjusting entries for Fun and Games from Exercise 3. PRACTICE EXERCISE 5

69. 4–69 (continued)

70. 4–70 PRACTICE EXERCISE 5 SOLUTION (continued)

71. 4–71 PRACTICE EXERCISE 5 SOLUTION (continued)

72. 4–72 PRACTICE EXERCISE 5 SOLUTION (concluded)

73. 4–73 Learning Objective 6a Prepare an income statement involving more than one revenue account and a net loss.

74. 4–74 Income Statement Involving More than One Revenue Account and a Net Loss  When an organization has more than one distinct source of revenue, a separate revenue account is set up for each source.  Harris Miniature Golf’s income statement (Slide 75) is an example of a company has more than one revenue account.

75. 4–75 Note that expenses are greater than revenues, resulting in a net loss.

76. 4–76 Depreciation Expense, Equipment$ 525 Income from Commissions4,000 Income from Services1,500 Insurance Expense200 Rent Expense1,950 Utilities Expense890 Wages Expense3,580 PRACTICE EXERCISE 6a Prepare an income statement involving more than one revenue account and a net loss.

77. 4–77

78. 4–78 Learning Objective 6b Prepare a statement of owner’s equity with an additional investment and either a net income or a net loss.

79. 4–79 Statement of Owner’s Equity with an Additional Investment and a Net Income Assume the following information is true for L. A. Grand Company, which has a net income: Balance of L. A. Grand, Capital, on April 1$86,000 Additional investment by L. A Grant on April 128,000 Net income for the month (from the income statement)6,200 Total withdrawn for the month4,000 (continued)

80. 4–80

81. 4–81 Statement of Owner’s Equity with an Additional Investment and a Net Loss Assume the following information for J. D. Ross Company, which has a net loss: J. D. Ross, Capital, on Oct. 1$75,000 Additional investment by J. D. Ross on Oct. 2510,000 Net loss for the month (from the income statement)1,500 Total withdrawn for the month5,100 (continued)

82. 4–82

83. 4–83 Prepare a statement of owner’s equity with an additional investment and either a net income or a net loss. PRACTICE EXERCISE 6b Using the following information, prepare a statement of owner’s equity for the month of July for Stanley’s Computers and Electronics. P. Stanley, Capital, on July 1$205,077 Additional investment by P. Stanley on July 2115,500 Net loss for the month (from income statement)1,850 Total withdrawals for the month3,500

84. 4–84

85. 4–85 Learning Objective 6c Prepare a balance sheet for a business having more than one accumulation depreciation account.

86. 4–86

87. 4–87

88. 4–88 Using the following information, prepare a year-end balance sheet for Moreland Clinic. Accounts Payable $ 7,380 Accumulated Depreciation, Building112,200 Accumulated Depreciation, Equipment87,600 Building339,100 Cash31,520 Equipment114,800 Land25,000 W. Moreland, Capital303,240 Prepare a balance sheet for a business have more than one accumulated depreciation account.

89. 4–89

90. 4–90 Learning Objective 6d Prepare a balance sheet containing the statement of owner’s equity information.

91. 4–91 Balance Sheet with Statement of Owner’s Equity Included  The information normally shown in the statement of owner’s equity is sometimes included as part of the owner’s equity section of the balance sheet.  Computerized accounting programs frequently do not produce a separate statement of owner’s equity. (continued)

92. 4–92

93. 4–93 Prepare a balance sheet containing the statement of owner’s equity information. PRACTICE EXERCISE 6d Complete a balance sheet at the end of July for Stanley’s Computers and Electronics by (a) using the following information for the Assets and Liabilities sections, and (b) including the information from the statement of owner’s equity you created in Practice Exercise 6b for the Owner’s Equity section. Accounts Payable$ 4,030 Accounts Receivable4,725 Accumulated Depreciation, Building1,420 Accumulated Depreciation, Equipment600 Building119,700 Cash47,270 Equipment48,500 Prepaid Insurance1,500 Wages Payable418

94. 4–94

95. 4–95 THE END