Presentation on theme: "Adjusting Entries and the Work Sheet"— Presentation transcript:
1 Adjusting Entries and the Work Sheet Chapter FourAdjusting Entries and the Work Sheet
2 Performance Objectives Define:Fiscal periodFiscal yearAccounting cycleAdjustmentsWorksheetComplete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wagesPrepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheetAccounting Is Fun!
3 Performance Objectives Journalize and post adjusting entriesPrepare financial statementsAn income statement involving more than one revenue account and a net lossA statement of owner’s equity with an additional investment and either a net income or a net lossAn income statement and a balance sheet for a business having more than one accumulated depreciation accountA balance sheet containing the statement of owner’s equity informationAccounting Is Fun!
4 Define: Fiscal Period Fiscal Year Any period of time covering a complete accounting cycleGenerally consisting of twelve consecutive monthsThe period could be:One monthOne quarterOne yearFiscal YearA fiscal period consisting of twelve consecutive monthsAccounting Is Fun!
5 Accounting CycleThe sequence of steps in the accounting process completed during the fiscal periodAccounting Is Fun!
6 List The Steps In The Accounting Cycle Analyze source documents & record business transactions in a journalPost journal entries to the ledger accountsPrepare a trial balanceGather adjustment data and record adjustments in the work sheetComplete the work sheetCreate financial reports from data in work sheetJournalize and post the adjusting entriesJournalize and post the closing entriesPrepare the post-closing trial balanceChapter 3Chapter 4Chapter 5Accounting Is Fun!
7 What Are Adjustments? Are all the accounts up to date? Example: What about prepaid Insurance?Adjustments:Internal transactions that bring ledger accounts up to date as a planned part of the accounting procedureAccounting Is Fun!
8 Work SheetA multicolumn working paper used by accountants to record necessary adjustments and provide up-to-date account balances needed to prepare the financial statementsA TOOL used by accountants to bring all the account information together to prepare financial statementsAccounting Is Fun!
10 Performance Objective 3 Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wagesAccounting Is Fun!
11 AdjustmentsInternal transactions that make the financial statements more accurate and bring ledger accounts up to date as a planned part of the accounting procedure1st:Recorded in the Adjustments columns of the work sheet (makes the financial statements more accurate)2nd:Record the adjustments in the journal, then post to the ledger accounts (brings the books up to date)Each adjustment directly affect accounts on theIncome statementBalance sheetAccounting Is Fun!
13 Matching PrincipleThe principle that the revenue for one time period is matched up or compared with the related expenses for the same time periodTo get an more accurate net income number (and resultant balance sheet accounts), we always want to match all the expenses of one period to the all the revenues of that same periodMatch does not mean:Match.Com (joke)“Equals”Accounting Is Fun!
14 Accruals Accrual Expense meaning of accrual: Recognition of an expense or a revenue that has been incurred or earned but has not yet been recordedExpense meaning of accrual:Record (recognize) an expense when it has been incurred but not yet recorded in the booksRegardless of when the cash is paidRevenue meaning of accrual:Record (recognize) a revenue when it has been earned but not yet recorded in the booksRegardless of when the cash is receivedAccrued earnings are a better financial measurement for the economic activity for the accounting periodDefine incur: To come in existence; To bring upon oneselfAccounting Is Fun!
15 Adjustment for Prepaid Insurance The asset insurance paid for in advance partly or completely expires with the passage of timeThe asset portion must be reduced and the corresponding expense increasedAccounting Is Fun!
16 Adjustment for Prepaid Insurance Recorded in Work Sheet Accounting Is Fun!
17 Adjustments - Depreciation Originally we bought equipment for $49,720We paid the cash or incurred debt for it, so why can’t we just record it as an expense?Because the income statement would show expenses that are too largeBecause the equipment will probably be around for many more years!The Equipment will probably help to generate revenue for many more years to comeAs a result, we must chop the original cost up into pieces and spread the pieces out over the useful life of the assetThis is called depreciationAccounting Is Fun!
18 DepreciationSystematically spreads out the cost of these assets over their useful livesMatches the expenses for one period to the revenue generated for that same period (Matching Principle)Accounting Is Fun!
19 DepreciationAn expense based on the expectation that an asset will gradually decline in usefulness due to time, wear and tear, or obsolescence; the cost of the asset is therefore spread out over its estimated useful lifeA portion of depreciation expense is allotted to each fiscal periodAccounting Is Fun!
20 Straight-line Depreciation A means of calculating depreciation in which the cost of an asset, less any trade-in value, is allocated evenly over the useful life of the asset(Cost - Trade-in Value)/(Useful Life in Years)Accounting Is Fun!
21 Adjustment for Depreciation of Equipment We have calculated the depreciation expenseExpenses are debitsBut what is the credit entry?Equipment?No: The historical cost principle says that we must keep the original cost on the books!We cannot credit the Equipment accountWe credit the contra account: Accumulated DepreciationAccounting Is Fun!
22 Definitions Contra Account An account that is contrary to, or a deduction from, another account; for example, Accumulated Depreciation is listed as a deduction from EquipmentContra accounts are always “attached” to another accountContra accounts are always a subtraction from the account it is attached toAccounting Is Fun!
23 Accumulated Depreciation Accumulated depreciation is a contra asset accountIt is “connected” to the related asset accountThe debits & credits are the same as the asset accountBut the plus and minus signs are reversedBecause it is subtracted from the related asset account!When depreciation is recorded, we do not directly subtract (credit) the related asset, such as equipmentThe amount of depreciation should be recorded in the account: accumulated depreciationAccounting Is Fun!
25 Book Value or Carrying Value The cost of an asset minus the accumulated depreciationListed on the balance sheetAccounting Is Fun!
26 Adjustment for Depreciation Recorded in Work Sheet Accounting Is Fun!
27 Depreciation and Land Why don’t we depreciate land? Land supposedly lasts foreverIt does not get “used up over time”It can help to generate revenue for a very long timeAccounting Is Fun!
28 Adjustment for Wages Expense Why necessary?The end of the pay period rarely falls on the same day as the end of the fiscal periodAccrued wagesThe amount of unpaid wages owed to employees for the time between the end of the last pay period and the end of the fiscal periodAccounts used:Wages Expense (DR)Wages Payable (CR)Accounting Is Fun!
29 Adjustment for Wages Expense Accounting Is Fun!
30 Adjustment for Wages Expense Accounting Is Fun!
31 Adjustment for Wages Expense Accounting Is Fun!
32 Adjustment for Wages Expense for Arch Copy Co. Accounting Is Fun!
33 Adjustment for Wages Expense Recorded in Work Sheet Accounting Is Fun!
34 Complete a Work Sheet for a Service Enterprise Accounting Is Fun!
35 Steps to Complete Worksheet Complete Trial Balance columns, total, and rule (DR = CR)Complete Adjustments columns, total, and rule (DR = CR)Label entries with letter references: (a), (b)Complete Adjusted Trial Balance columns, total, and rule (DR = CR)Record balances in Income Statement and Balance Sheet columns and total each column (DR ≠ CR)Accounting Is Fun!
36 Steps to Complete Worksheet Record net income or net lossSubtract the smaller of the Income Statement columns from the larger; add the difference to the smaller side, total, and ruleIf there is a net income, the credit side of the columns will be larger and you will place net income on the debit sideIf there is a net loss, the debit side of the columns will be larger and you will place net loss on the credit sideAccounting Is Fun!
37 Steps to Complete Worksheet Record net income or net loss in the Balance Sheet columnsSubtract the smaller side from the larger side; add the difference to the smaller side, total, and ruleThe amount should equal the difference between the Income Statement columnsAccounting Is Fun!
38 Complete the Trial Balance Columns Accounting Is Fun!
39 Complete the Adjustments Columns Accounting Is Fun!
40 Complete the Adjusted Trial Balance Columns Accounting Is Fun!
41 Carry the Amounts to Either the Income Statement or Balance Sheet Columns Accounting Is Fun!
42 Worksheets with Two Pages Totals at the bottom of the first page of the work sheet may not be equalDR must equal CR at the bottom of the second or last pageAccounting Is Fun!
43 Finding Errors in Income Statement and Balance Sheet Columns Is all the addition across to the Adjusted Trial Balance columns correct?Are the adjusted trial balance amounts moved to the correct column?Revenues and expenses to Income Statement columns?Everything else to Balance Sheet columns?Is the addition for totals and footings correct?Is net income or net loss placed in the correct columns?Accounting Is Fun!
44 Performance Objective 4 Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheetAccounting Is Fun!
45 Income StatementCopy all revenue and expenses from the Income Statement columns straight over to the income statementDate is for the whole periodAccounting Is Fun!
47 Statement of Owner’s Equity Always check the beginning balance of CapitalIs there any additional investment?Record net income or net lossAre there any withdrawals?Date is for the whole periodRemember:Since we list the Capital account twice, the appropriate date must be included with the account titleAccounting Is Fun!
49 Balance Sheet Create new accounts for accumulated depreciation Copy all assets and liabilities to balance sheetUse ending Capital from statement of owner’s equityDate is just one day“Snapshot in time!”Accounting Is Fun!
51 Performance Objective 5 Journalize and post adjusting entriesAccounting Is Fun!
52 Why Journalize and Post? AdjustmentsIn the work sheet but not officially in the booksAdjusting entriesBring the books up to date at the end of the fiscal periodAccounting Is Fun!
53 Sequence First journalize the adjustments in the general journal Then post the adjustments to the appropriate ledger accountsAccounting Is Fun!
54 Be sure to write “Adjusting Entries” before you begin the entries Journal EntriesBe sure to write “Adjusting Entries” before you begin the entriesAccounting Is Fun!
55 Post the Journal Entries Be sure to write “Adjusting” in the Item columnAccounting Is Fun!
56 Performance Objective 6 PrepareAn income statement involving more than one revenue account and a net lossA statement of owner’s equity with an additional investment and either a net income or a net lossAn income statement and a balance sheet for a business having more than one accumulated depreciation accountA balance sheet containing the statement of owner’s equity informationAccounting Is Fun!
57 An Income Statement Involving More Than One Revenue Account and a Net Loss Accounting Is Fun!
58 A Statement of Owner’s Equity with an Additional Investment and Net Income Accounting Is Fun!
59 A Statement of Owner’s Equity with an Additional Investment and a Net Loss 76$684Accounting Is Fun!
60 An Income Statement with More Than One Depreciation Expense Account Accounting Is Fun!
61 A Balance Sheet with More Than One Accumulated Depreciation Account Accounting Is Fun!
62 A Balance Sheet Containing Statement of Owner’s Equity Information Accounting Is Fun!
63 Demonstration Problem The account balances of Colfeld Company as of June 30, 2003, the end of the fiscal month, are shown on the following slideWe will complete the following tasks:Complete the work sheetPrepare an income statementPrepare a statement of owner’s equityPrepare a balance sheetJournalize the adjusting entriesAccounting Is Fun!