© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater The Accounting Cycle Continued Chapter 4

Learning Objective 1 Adjustments: prepaid rent, office supplies, depreciation on equipment, and accrued salaries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Steps in Accounting Cycle © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Business transactions occur Analyze and record transactions in journal Post information from journal to ledger Prepare a Worksheet Prepare Financial Statements LO-1

Preparing a Worksheet What is it? ◦ A columnar device used to aid accountants in completing the accounting cycle ◦ Internal document – not a formal financial statement Why is it prepared? ◦ Used to organize and check data for errors before preparing financial statements Has 5 sections ◦ Trial Balance ◦ Adjustments ◦ Adjusted Trial Balance ◦ Income Statement ◦ Balance Sheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Adjusting Entries Internal transactions Bring accounts up-to-date Recognize revenues and expenses in the proper accounting period © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Items that Need to be Adjusted Office Supplies Prepaid Items (Rent, Advertising) Equipment (Depreciation, Accumulated Depreciation) Expenses (Salaries, Rent, Supplies) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Examples of Prepaid Adjustments Prepaid Rent at beginning of month = $3,000 (covers 6 months) End of month 1adjustment of $500 = ($3,000/6 months) Rent Expense Prepaid Rent 500 3,000 Debit 500 Credit © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Examples of Adjustments Supplies on hand at the beginning of month = $4,000 Supplies on hand at the end of month = $1,200 Calculate the difference between the beginning and ending balances $4,000 - $1,200 = $2,800- Supplies used Supplies Expense Supplies , Debit Credit © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Adjusting for Items © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Supplies Jan 5 Purchased supplies for $ Jan 20 Purchased supplies for $ ,400 Supplies available for use during January LO-1

Adjusting for Items © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 1,100 Supplies available$1,400 Supplies on hand300 Supplies used$1,100 Supplies Jan 31 Supplies on hand, $ ,400 Supplies Expense 300 LO-1 1,100 ________ 1,100

Adjusting for Long-Term Assets Depreciation – Allocating the cost of the asset over its useful life Straight-line depreciation Cost – Residual Value Estimated Years of Usefulness © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Examples of Adjustments Company bought a piece of equipment that has a cost of $50,000, no residual value and a useful life of 10 years Formula for calculating depreciation: (Cost – Residual Value) ÷ Est. Usefulness in Months ($50,000 – 0) ÷ 120 (10 x 12) = $417 Depreciation Expense Accumulated Depreciation 417 Debit Credit © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Equipment Jan 1 Purchased equipment for $14,000. It is estimated that the equipment will be used for 5 years, at which time it will be worth $800. LO-1 14,000

Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Determine depreciation for the month of January. Cost – Residual Value Estimated Years of Usefulness $14,000 – years = $2,640 For one year: $2,640 / 12 months = $220 LO-1

Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Equipment 14,000 Accumulated Depreciation, Equipment Depreciation Expense, Equipment Depreciation for one month: $2,640 / 12 months = $220 LO-1 220

Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Depreciation Expense, Equipment 220 Expense shown on income statement LO-1

Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Balance Sheet January 31, 200X Assets Cash Equipment$14,000 Less accumulated depreciation ,780 Historical cost of $14,000 does not change LO-1 Book Value: Unused amount to be depreciated in future periods

Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accumulated Depreciation, Equipment 220 Contra asset account Shown on Balance Sheet Accumulates depreciation recognized over entire life of asset LO-1

Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Balance Sheet February 28, 200X Assets Cash$xxxx …….. xxxx Equipment$14,000 Less accumulated depreciation 44013,560 Increases each accounting period Book Value decreases LO-1

Adjusting for Accrued Expenses JANUARY SMTWTFS © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Employee salaries are $100 a day for a five day work week which runs from Monday thru Friday. Employees are paid every Friday. Salaries Paid (Cash) Jan Jan Jan Jan LO-1

Adjusting for Accrued Expenses © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Employees worked 3 days more in January, but have not yet been paid. LO-1 JANUARY SMTWTFS Salaries Expense Jan Jan Jan Jan Jan

Adjusting for Accrued Expenses Employees worked 3 days more in January, but will not be paid until February 2. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Salaries Payable 3 days X $100 = $ Jan 31 LO-1 Salaries Expense Jan Jan Jan Jan Jan ,300

Learning Objective 2 Preparing the adjusted trial balance on the worksheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Problem 4B-3 We will use Problem 4B-3 to apply the concepts presented in the chapter. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Worksheet – Problem 4B-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

a. Insurance expired, $600 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Prepaid Insurance 3,288 Insurance Expense 600 LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater a. 600 Insurance Exp LO-2

b. Moving supplies on hand, $310 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Moving Supplies 1,400 Moving Supplies Expense 1,090 ? 310 LO-2 Take $1,400 - $310 on hand to arrive at $1,090

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater a. 600 Insurance Exp b. 1,090 Mov Supp Exp LO-2

c. Depreciation on truck, $580 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Depreciation Expense, Truck 3,660 Accumulated Depreciation, Moving Truck 580 LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater a. 600 Insurance Exp b. 1,090 Mov Supp Exp c. 580 Depr Exp,Truck c. 580 LO-2

d. Wages earned but unpaid, $410 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Wages Expense 5,712 Salaries Payable 410 LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater a. 600 Insurance Exp b. 1,090 Mov Supp Exp c. 580 Depr Exp,Truck c. 580 d. 410 Wages Payable d. 410 Totals 2,680 LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Learning Objective 3 Preparing the income statement and balance sheet sections of the worksheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Balance Sheet Accounts Income Statement Accounts Balance Sheet Account LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Income Statement Accounts Balance Sheet Accounts LO-3 Balance Sheet Account

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 9,790 1,628 8,16221,81623,444 9,790 1,628 23,444 Net Loss LO-3

Learning Objective 4 Preparing financial statements from the worksheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Kevin’s Moving Company Income Statement For Month Ended October, 200X Revenue: Revenue from Moving$8,162 Operating Expenses: Wages Expense$6,122 Moving Supplies Expense1,090 Rent Expense1,080 Insurance Expense600 Depreciation Expense, Truck580 Advertising Expense318 Total Operating Expenses9,790 Net Loss($1,628) LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Kevin’s Moving Company Statement of Owner’s Equity For Month Ended October 31, 200X K. Hoff, Capital, October 1, 200X$17,482 Net Loss for October($1,628) Less: Withdrawals for October4,240 Decrease in Capital(5,868) K. Hoff, Capital, October 31, 200X $11,614 LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 4