1. Adjustments and the Ten-Column Work Sheet Making Accounting Relevant Financial data must be communicated properly before it can be used effectively. Making Accounting Relevant Financial data must be communicated properly before it can be used effectively. Question: In the accounting you’ve learned so far would all of your assets be accurately stated on your balance sheet? Why or why not?

2. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory What You’ll Learn  How to complete the Trial Balance section of the work sheet.  Why certain general ledger accounts are adjusted.  Why Merchandise Inventory is adjusted.  How to calculate and record the adjustment for Merchandise Inventory. What You’ll Learn  How to complete the Trial Balance section of the work sheet.  Why certain general ledger accounts are adjusted.  Why Merchandise Inventory is adjusted.  How to calculate and record the adjustment for Merchandise Inventory.

3. Why It’s Important Some general ledger account balances are adjusted, or updated, so that the general ledger correctly reflects the financial position of the business at the end of the period. This ensures the accuracy of the end-of-period reports and statements. Why It’s Important Some general ledger account balances are adjusted, or updated, so that the general ledger correctly reflects the financial position of the business at the end of the period. This ensures the accuracy of the end-of-period reports and statements. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.) Key Terms  adjustment  beginning inventory Key Terms  adjustment  beginning inventory  ending inventory  physical inventory  ending inventory  physical inventory

4. Completing End-of-Period Work  The purpose of all end-of-period reports is to provide essential information about the financial position of a business organization.  The worksheet is the basis for preparing end-of-period financial statements and journal entries.  The purpose of all end-of-period reports is to provide essential information about the financial position of a business organization.  The worksheet is the basis for preparing end-of-period financial statements and journal entries. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

5. The Ten-Column Work Sheet The ten-column work sheet has five amount sections: The Ten-Column Work Sheet The ten-column work sheet has five amount sections:  Trial Balance Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)  Adjustments  Adjusted Trial Balance  Income statement  Balance Sheet

6. Completing the Trial Balance Section  To prepare the trial balance, the number and name of each account in the general ledger are entered on the work sheet in the Account Number and Account Name columns.  The accounts are listed in the order in which they appear in the general ledger.  To prepare the trial balance, the number and name of each account in the general ledger are entered on the work sheet in the Account Number and Account Name columns.  The accounts are listed in the order in which they appear in the general ledger. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

7. Completing the Trial Balance Section (cont'd.)  The balance of each account is entered in the appropriate column.  The Trial Balance Debit and Credit columns are ruled, totaled, and proved.  Then a double rule is drawn across both columns.  The balance of each account is entered in the appropriate column.  The Trial Balance Debit and Credit columns are ruled, totaled, and proved.  Then a double rule is drawn across both columns. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

8. Calculating Adjustments  NOT ALL CHANGES in account balances are the result of daily business transactions. Some changes result from the internal operations of the business or from the passage of time.  An adjustment is an amount that is added to or subtracted from an account balance to bring that balance up-to-date.  NOT ALL CHANGES in account balances are the result of daily business transactions. Some changes result from the internal operations of the business or from the passage of time.  An adjustment is an amount that is added to or subtracted from an account balance to bring that balance up-to-date. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

9. Determining the Adjustments Needed If the balance shown for an account is not up-to-date as of the last day of the fiscal period, then that account balance must be adjusted. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

10. Adjusting the Merchandise Inventory Account When calculating the adjustment for Merchandise Inventory, you need to know: Adjusting the Merchandise Inventory Account When calculating the adjustment for Merchandise Inventory, you need to know:  the Merchandise Inventory account balance  the physical inventory amount  the Merchandise Inventory account balance  the physical inventory amount Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

11. Adjusting Merchandise Inventory Merchandise Inventory is an asset account. Beginning Inventory is the merchandise a business has on hand and available at the BEGINNING of an accounting period. Ending Inventory is the merchandise a business had on had and available at the END of an accounting period. The account balance for Merchandise Inventory does not change during the period. It is changed ONLY when a physical inventory is taken. Adjusting Merchandise Inventory Merchandise Inventory is an asset account. Beginning Inventory is the merchandise a business has on hand and available at the BEGINNING of an accounting period. Ending Inventory is the merchandise a business had on had and available at the END of an accounting period. The account balance for Merchandise Inventory does not change during the period. It is changed ONLY when a physical inventory is taken. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

12. Adjusting the Merchandise Inventory Account (cont'd.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.) Adjustment To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded. ANALYSIS Identify1.The accounts Merchandise Inventory and Income Summary are affected. Classify2. Merchandise Inventory is an asset account (permanent). Income Summary is a stockholder’s equity account. + / –3.Merchandise Inventory is decreased by $3,536. This amount is transferred to Income Summary.

13. Adjusting the Merchandise Inventory Account (cont'd.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.) Adjustment (cont'd.) To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded. DEBIT-CREDIT RULE 4.To transfer the decrease in Merchandise Inventory, debit Income Summary for $3,536. 5.Decreases to asset accounts are recorded as credits. Credit Merchandise Inventory for $3,536.

14. Adjusting the Merchandise Inventory Account (cont'd.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.) Adjustment (cont'd.) To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded. T ACCOUNTS 6. IncomeMerchandise SummaryInventory Credit Debit + 3,536 Credit – 3,536 Debit +

15. Entering the Adjustment for Merchandise Inventory on the Work Sheet Adjustments are entered in the Adjustments columns of the work sheet. The debit and credit parts of each adjustment are given a unique label. The label consists of a small letter in parentheses and is placed just above and to the left of the adjustment amounts. Adjustments are entered in the Adjustments columns of the work sheet. The debit and credit parts of each adjustment are given a unique label. The label consists of a small letter in parentheses and is placed just above and to the left of the adjustment amounts. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

16. Entering the Adjustment for Merchandise Inventory on the Work Sheet (cont'd.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (cont'd.)

17. Other Adustments? Account balances related to supplies, insurance, and federal corporate income tax require adjustment in order to prepare accurate financial reports. Supplies are used up every day. Insurance expires all the time. Without adjustments are your balances correct? NOPE! You have to make adjustments! Other Adustments? Account balances related to supplies, insurance, and federal corporate income tax require adjustment in order to prepare accurate financial reports. Supplies are used up every day. Insurance expires all the time. Without adjustments are your balances correct? NOPE! You have to make adjustments! Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.)

18. Adjusting the Supplies Account Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.) Adjustment Record the adjustment for supplies. ANALYSIS Identify1.The accounts affected are Supplies and Supplies Expense. Classify2. Supplies is an asset account (permanent). Supplies Expense is an expense account (temporary). + / –3.Supplies is decreased by $3,710. Supplies Expense is increased by $3,710.

19. Adjusting the Supplies Account (cont'd.) Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.) Adjustment (cont'd.) Record the adjustment for supplies. DEBIT-CREDIT RULE 4.Increases to expense accounts are recorded as debits. Debit Supplies Expense for $3,710. 5.Decreases to asset accounts are recorded as credits. Credit Supplies for $3,710.

20. Adjusting the Supplies Account (cont'd.) Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.) Adjustment (cont'd.) Record the adjustment for supplies. T ACCOUNTS 6. Supplies Expense Supplies Debit + 3,710 Debit + Credit – 3,710 Credit –

21. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.) Adjustment Record the adjustment for the expiration of one-half month’s insurance coverage. ANALYSIS Identify1.The accounts affected are Insurance Expense and Prepaid Insurance. Classify2. Insurance Expense is an expense account (temporary). Prepaid Insurance is an asset account (permanent). + / –3.Insurance Expense is increased by $125. Prepaid Insurance is decreased by $125. Adjusting the Prepaid Insurance Account

22. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.) Adjustment (cont'd.) DEBIT-CREDIT RULE 4.Increases to expense accounts are recorded as debits. Debit Insurance Expense for $125. 5.Decreases to asset accounts are recorded as credits. Credit Prepaid Insurance for $125. Adjusting the Prepaid Insurance Account (cont'd.) Record the adjustment for the expiration of one-half month’s insurance coverage.

23. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.) Adjustment (cont'd.) T ACCOUNTS 6. InsurancePrepaid ExpenseInsurance Debit + 125 Debit + Credit – 125 Credit – Adjusting the Prepaid Insurance Account (cont'd.) Record the adjustment for the expiration of one-half month’s insurance coverage.

24. Adjusting Estimated Federal Income Tax Expense Corporations pay federal corporate income taxes on their net income. Each corporation estimates its federal income tax and pays it to the government in quarterly installments. At the end of the year, they’ll figure out their ACTUAL net income and see if their estimates were high or low and appropriate payments or refunds are made. An adjustment is then done to insure that the account balances are correct. Adjusting Estimated Federal Income Tax Expense Corporations pay federal corporate income taxes on their net income. Each corporation estimates its federal income tax and pays it to the government in quarterly installments. At the end of the year, they’ll figure out their ACTUAL net income and see if their estimates were high or low and appropriate payments or refunds are made. An adjustment is then done to insure that the account balances are correct. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.)

25. Adjusting Estimated Federal Income Tax Expense Beginning of Year Estimate for Federal Corporate Income Tax = $9,840 At the end of the year, accountant deterimines that the tax owed for the year was $9,995. What would the adjustment be? We owe more! $155 more to be exact Debit Federal Corporate Income Tax Expense Credit Federal Corporate Income Tax Payable Adjusting Estimated Federal Income Tax Expense Beginning of Year Estimate for Federal Corporate Income Tax = $9,840 At the end of the year, accountant deterimines that the tax owed for the year was $9,995. What would the adjustment be? We owe more! $155 more to be exact Debit Federal Corporate Income Tax Expense Credit Federal Corporate Income Tax Payable Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (cont'd.)

26. Section 3Completing the Work Sheet and Journalizing and Posting the Adjusting Entries What You’ll Learn  How to complete the Adjusted Trial Balance section.  How to extend amounts to the Income Statement and Balance sheet sections.  How to report the net income or net loss for the period.  How to journalize the adjusting entries in the general journal.  How to post the adjusting entries to the general ledger. What You’ll Learn  How to complete the Adjusted Trial Balance section.  How to extend amounts to the Income Statement and Balance sheet sections.  How to report the net income or net loss for the period.  How to journalize the adjusting entries in the general journal.  How to post the adjusting entries to the general ledger.

27. Completing the Adjusted Trial Balance Section  Once the adjustments are entered in the Adjustments section of the work sheet, it is important to prove that the accounts are still in balance.  This is done by completing an adjusted trial balance.  Once the adjustments are entered in the Adjustments section of the work sheet, it is important to prove that the accounts are still in balance.  This is done by completing an adjusted trial balance. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (cont'd.)

28. Extending Amounts to the Balance Sheet and Income Statement Sections Beginning with line 1, each account balance in the Adjusted Trial Balance section is extended to the appropriate column of either the Balance Sheet section or the Income Statement section. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (cont'd.)

29. Completing the Work Sheet  After all amounts are extended to the Balance Sheet and Income Statement sections, a single rule is drawn across the columns in these sections.  All four columns are then totaled.  The difference between the two column totals in each section is the amount of net income (or net loss) for the period.  After all amounts are extended to the Balance Sheet and Income Statement sections, a single rule is drawn across the columns in these sections.  All four columns are then totaled.  The difference between the two column totals in each section is the amount of net income (or net loss) for the period. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (cont'd.)

30. Completing the Work Sheet (cont'd.)  After the net income (or net loss) is recorded, the columns in the Balance Sheet and Income Statement sections are ruled and totaled.  A double rule is drawn across all four columns.  After the net income (or net loss) is recorded, the columns in the Balance Sheet and Income Statement sections are ruled and totaled.  A double rule is drawn across all four columns. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (cont'd.)

31. Journalizing Adjustments The journal entries that update the general ledger accounts at the end of a period are called adjusting entries. The source of information for journalizing the adjusting entries is the Adjustments section of the work sheet. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (cont'd.)

32. Journalizing Adjustments (cont'd.) Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (cont'd.)

33. Posting Adjusting Entries to the General Ledger  After the adjusting entries are recorded in the general journal, they are posted to the general ledger.  Once the adjusting entries are posted, the general ledger accounts are up-to-date.  After the adjusting entries are recorded in the general journal, they are posted to the general ledger.  Once the adjusting entries are posted, the general ledger accounts are up-to-date. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (cont'd.)