1. Work Sheet, Financial Statements, and Adjusting Entries © Paradigm Publishing, Inc.1 Chapter 6 & 7

2. 1.Prepare three basic financial statements. Prepare three basic financial statements.Prepare three basic financial statements. 2.Explain the need for adjusting entries. Explain the need for adjusting entries.Explain the need for adjusting entries. 3.Make adjusting entries for supplies used, expired insurance, depreciation, and unpaid wages. Make adjusting entries for supplies used, expired insurance, depreciation, and unpaid wages.Make adjusting entries for supplies used, expired insurance, depreciation, and unpaid wages. 4.Complete a work sheet for a service business. Complete a work sheet for a service business.Complete a work sheet for a service business. 5.Prepare financial statements from a work sheet. Prepare financial statements from a work sheet.Prepare financial statements from a work sheet. 6.Journalize and post adjusting entries. Journalize and post adjusting entries.Journalize and post adjusting entries. © Paradigm Publishing, Inc.2 Learning Objectives

3. Learning Objective 1 © Paradigm Publishing, Inc.3 Prepare three basic financial statements

4. Summaries of financial activities Used to communicate important accounting information to users The three basic types:  Income Statement  Statement of Owner’s Equity  Balance Sheet © Paradigm Publishing, Inc.4

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6. Income Statement A summary of a business’s revenue and expenses for a specific period of time, such as a month or year Statement of Owner’s Equity A summary of the changes that have occurred in owner’s equity during a specific period of time Balance Sheet A listing of a firm’s assets, liabilities, and owner’s equity at a specific point in time © Paradigm Publishing, Inc.6

7. 7 Salaries expense would appear on a firm’s Quick Check statement of owner’s equity. balance sheet. income statement. balance sheet and statement of owner’s equity. balance sheet and income statement.

8. Income Statement  Prepared first  To determine a firm’s net income Net Income  Is shown on the statement of owner’s equity  Part of determining ending owner’s equity Ending Owner’s Equity  Shown on the balance sheet © Paradigm Publishing, Inc.8

9. 9 Which financial statement is prepared first? Quick Check Statement of owner’s equity Income statement Balance sheet Balance sheet or statement of owner’s equity, depending on management’s preference Balance sheet or income statement, depending on management’s preference

10. © Paradigm Publishing, Inc. 10 Net income would appear Quick Check only on a statement of owner’s equity. on a firm’s balance sheet. only on a firm’s income statement. on both a firm’s balance sheet and statement of owner’s equity. on both a firm’s income statement and statement of owner’s equity.

11. Review Quiz 4- © Paradigm Publishing, Inc.11

12. Review Quiz 4- © Paradigm Publishing, Inc.12

13. Review Quiz 4- © Paradigm Publishing, Inc.13

14. Step 5 Determine needed adjustments. Step 6 Prepare a work sheet. Step 7 Prepare financial statements from a completed work sheet. Step 8 Journalize and post adjusting entries. © Paradigm Publishing, Inc.14

15. © Paradigm Publishing, Inc.15 Explain the need for adjusting entries Learning Objective 2

16. An adjusting entry is an entry made at the end of an accounting period to bring up to date the balance of an account that has become out of date. Adjusting entries are referred to as internal transactions because they do not involve parties outside the business. Adjusting entries never affect the cash account. © Paradigm Publishing, Inc.16

17. © Paradigm Publishing, Inc.17 Make adjusting entries for supplies used, expired insurance, depreciation, and unpaid wages Learning Objective 3

18. Example © Paradigm Publishing, Inc.18 Assume the Office Supplies account has a balance before adjustment of $275. An inventory account on December 31 shows $230 of supplies still on hand. Therefore $45 of supplies have been used during the accounting period.

19. Example © Paradigm Publishing, Inc.19 Office Supplies DebitCredit +- Balance Amount used Office Supplies Expense DebitCredit +- Transferred to The amount of supplies used is debited to an expense account (Office Supplies Expense) and credited to an asset account (Office Supplies).

20. © Paradigm Publishing, Inc.20 If it is determined that $150 of supplies are used during the accounting period, the adjusting entry will include a a.debit to Cash for $150. b.debit to Supplies for $150. c.credit to Supplies Expense for $150. d.debit to Supplies Expense for $150. e.credit to Supplies Payable for $150. Quick Check

21. Example © Paradigm Publishing, Inc.21 Assume the Prepaid Insurance account has a balance before adjustment of $240, representing a one-year insurance policy, purchased on Dec. 1. The amount of insurance will be $240 per year ÷ 12 months = $20 per month.

22. Example © Paradigm Publishing, Inc.22 Prepaid Insurance DebitCredit +- Balance Balance Amount of coverage expired Insurance Expense DebitCredit +- Transferred to The amount of insurance expired is debited to an expense account (Insurance Expense) and credited to an asset account (Prepaid Insurance).

23. © Paradigm Publishing, Inc.23 If it is determined that expired insurance is $75 for the current accounting period, the adjusting entry will include a a.credit to Insurance Expense for $75. b.debit to Insurance Expense for $75. c.debit to Prepaid Insurance for $75. d.debit to Cash for $75. e.credit to Insurance Payable for $75. Quick Check

24. Depreciation describes the expense that results from the loss in usefulness of an asset due to age, wear and tear, and obsolescence. The purpose of depreciation accounting is to spread the cost of an asset over its useful life rather than treating the asset’s cost as an expense in the year it was purchased. © Paradigm Publishing, Inc.24

25. Straight-Line Method One of the most popular depreciation methods Yields the same amount of depreciation for each full period an asset is used Formula: © Paradigm Publishing, Inc.25 Cost of asset – Trade-in value = Annual depreciation expense Estimated years of usefulness

26. Example © Paradigm Publishing, Inc.26 Assume office furniture costs $2,000 and has a $200 trade-in value. The office furniture has a useful life of 5 years. The annual depreciation will therefore be $1,800 ÷ 5 years or $360 per year. The monthly depreciation will be $360 per year ÷ 12 months or $30 per month.

27. © Paradigm Publishing, Inc.27 Depreciation is always recorded by  Debiting an expense account entitled Depreciation Expense  Crediting an account entitled Accumulated Depreciation Example

28. © Paradigm Publishing, Inc.28 Accumulated Depreciation  A contra asset account  Always has a credit balance

29. Example © Paradigm Publishing, Inc.29 Depreciation Expense DebitCredit +- Accumulated Depreciation DebitCredit -+ The Estimated depreciation is always debited to an expense account (Depreciation Expense) and credited to a contra asset account (Accumulated Depreciation)

30. © Paradigm Publishing, Inc.30 If it is determined that depreciation on office equipment is $250 for the current accounting period, the adjusting entry will include a a.credit to Office Equipment for $250. b.debit to Accumulated Depreciation — Office Equipment for $250. c.debit to Depreciation Expense — Office Equipment for $250. d.debit to Cash for $250. e.credit to Depreciation Payable for $250. Quick Check

31. The difference between the cost of an asset and its accumulated depreciation Shown on the balance sheet © Paradigm Publishing, Inc.31

32. Example: Office equipment and office furniture accounts for Walker and Associates © Paradigm Publishing, Inc.32

33. Example © Paradigm Publishing, Inc.33

34. © Paradigm Publishing, Inc.34 Assume  A business has 3 employees each earning $150 per day.  Employees are paid every Friday for a 5-day week ending on Friday.  December 31 falls on a Wednesday. Example

35. © Paradigm Publishing, Inc.35 An adjusting entry must be prepared  On Wednesday, December 31 for salaries owed to employees for Monday, Tuesday, and Wednesday.  For 3 employees × $150 per day × 3 days = $1,350.

36. Example © Paradigm Publishing, Inc.36 The adjusting entry for unpaid salaries includes A debit to Salaries Expense A credit to Salaries Payable

37. © Paradigm Publishing, Inc.37 If it is determined that salaries owed to employees at year-end amount to $500, the adjusting entry will include a a.credit to Salaries Expense for $500. b.credit to Cash for $500. c.debit to Salaries Payable for $500. d.debit to Prepaid Salaries for $500. e.credit to Salaries Payable for $500. Quick Check

38. Revenue and expenses are recorded in the accounting period in which they occurred. Adjusting entries are needed to properly match expenses and revenue. Although adjusting entries may be made any time, they are normally adjusted at the end of a month or the end of the year. © Paradigm Publishing, Inc.38

39. 1.The Office Supplies account shows a $900 balance; however, a current count reveals that $750 worth remains on hand. © Paradigm Publishing, Inc.39 Office Supplies Expense +- Adjusting 150 Office Supplies +- Balance 900 Adjusting 150 Review Quiz 4-

40. 2.Insurance expired, $50. © Paradigm Publishing, Inc.40 Insurance Expense +- Adjusting 50 Prepaid Insurance +- Adjusting 50

41. Review Quiz 4- 3.Depreciation of trucks, $1,000. © Paradigm Publishing, Inc.41 Depreciation Expense—Trucks +- Adjusting 1,000 Accumulated Depreciation—Trucks +- Adjusting 1,000

42. Review Quiz 4- 4.Unpaid salaries, $150. © Paradigm Publishing, Inc.42 Salaries Expense +- Adjusting 150 Salaries Payable +- Balance 900 Adjusting 150

43. © Paradigm Publishing, Inc.43 Complete a work sheet for a service business Learning Objective 4

44. Informal working paper Used in preparing the financial statements and completing the work of the accounting cycle The work sheet is used to  Organize data  Lessen the possibility of overlooking an adjustment  Provide an arithmetical check on the accuracy of work  Arrange data in logical form for the preparation of financial statements financial statements © Paradigm Publishing, Inc.44

45. 1.Enter the heading. 2.Enter the current trial balance in the Trial Balance columns. 3.Enter the adjustments in the Adjustments Debit and Credit columns. 4.Complete the Adjusted Trial Balance columns. © Paradigm Publishing, Inc.45

46. 5.Complete the Income Statements columns. 6.Complete the Balance Sheet columns. 7.Total the Income Statement and Balance Sheet columns. 8.Determine the amount of net income or net loss, and balance the statement columns. © Paradigm Publishing, Inc.46

47. © Paradigm Publishing, Inc.47

48. © Paradigm Publishing, Inc.48

49. © Paradigm Publishing, Inc.49 The owner’s drawing account appears on the work sheet in which set of columns? a.Trial balance, income statement, and balance sheet sheet b.Adjustments, adjusted trial balance, and income statement c.Trial balance, adjusted trial balance, and income statement d.Trial balance, adjusted trial balance, and balance sheet e.Income statement and balance sheet Quick Check

50. Review Quiz 4- On a completed work sheet, can the amount of net income (or net loss) be obtained by finding the difference between the total of the Balance Sheet Debit column and the total of the Balance Sheet Credit column? If so, why? © Paradigm Publishing, Inc.50 Yes. Differences between revenue and expenses will either increase or decrease capital. The difference between the totals of the Balance Sheet Debit and Credit columns of the work sheet reflects the net income or net loss that has not yet been transferred to the owner's capital account.

51. © Paradigm Publishing, Inc.51 Prepare financial statements from a work sheet Learning Objective 5

52. Summary of revenue and expenses showing net income or net loss for an accounting period Prepared directly from data in the Income Statements columns of the work sheet Typically prepared at the end of each month, quarter, or year; however, can be prepared for any period of time © Paradigm Publishing, Inc.52

53. Dated to cover a period of time The revenue and expenses shown occurred over the entire period, not just the last date © Paradigm Publishing, Inc.53

54. Summarizes the changes that have occurred in owner’s equity during an accounting period, such as a month or a year. Prepared from the information on the work sheet: 1. The owner’s capital account balance in the Balance Sheet Credit column 2. The owner’s drawing account balance in the Balance Sheet Debit column 3. The amount of net income or net loss, shown at the bottom of the Income Statement section © Paradigm Publishing, Inc.54

55. Shows that assets = liabilities + owners equity Shows that assets = liabilities + owner’s equity Data come from the Balance Sheet columns of the work sheet The up-to-date amount for owner’s equity on the balance sheet is taken from the statement of owners equity The up-to-date amount for owner’s equity on the balance sheet is taken from the statement of owner’s equity © Paradigm Publishing, Inc.55

56. 1.Prepare the income statement The net income or net loss calculated on the income statement is shown on the statement of owner’s equity. 2.Prepare the income statement The ending equity is shown on the balance sheet. 3.Prepare the balance sheet using the ending equity calculated on the statement of owner’s equity. © Paradigm Publishing, Inc.56

57. © Paradigm Publishing, Inc.57 The dates of the income statement and the statement of owner’s equity cover a period of time. On the income statement, expenses are usually arranged in order of highest to lowest.

58. © Paradigm Publishing, Inc.58 The date of the balance sheet is the last day of the accounting period.

59. © Paradigm Publishing, Inc.59 Net income appears on the a.balance sheet and the statement of owner’s equity. b.statement of owner’s equity only. c.income statement only. d.income statement and statement of owner’s equity. e.income statement and balance sheet. Quick Check

60. Review Quiz 4- The financial statement columns of Sether Company’s work sheet are shown below. © Paradigm Publishing, Inc.60 1)Prepare an income statement 2)Prepare a statement of owner’s equity 3)Prepare a balance sheet

61. © Paradigm Publishing, Inc.61 Review Quiz 4-

62. 1.Income Statement © Paradigm Publishing, Inc.62

63. Review Quiz 4- 2.Statement of Owner’s Equity © Paradigm Publishing, Inc.63

64. Review Quiz 4- 3.Balance Sheet © Paradigm Publishing, Inc.64

65. © Paradigm Publishing, Inc.65 Journalize and post adjusting entries Learning Objective 6

66. Example Assume a company uses $45 of office supplies during the current accounting period. Prepare the adjusting entry. © Paradigm Publishing, Inc.66 General Journal DateAccount TitleP.R.DebitCredit 20X1 Dec. 31 Office Supplies Expense 45 Office Supplies45

67. Example Assume expired insurance for the current period is $20. Prepare the adjusting entry. © Paradigm Publishing, Inc.67 General Journal DateAccount TitleP.R.DebitCredit 20X1 Dec. 31 Insurance Expense 20 Prepaid Insurance20

68. Example Assume depreciation on office furniture for the current period is $30. Prepare the adjusting entry. © Paradigm Publishing, Inc.68 General Journal DateAccount TitleP.R.DebitCredit 20X1 Dec. 31 Depreciation Expense — Office Furniture 30 Accumulated Depr. — Office Furniture 30

69. Example Assume December 31 is a Wednesday and accrued salaries owed to employees for Monday through Wednesday amount to $1,350. Prepare the adjusting entry. © Paradigm Publishing, Inc.69 General Journal DateAccount TitleP.R.DebitCredit 20X1 Dec. 31 Salaries Expense 1,350 Salaries Payable1,350

70. Review Quiz 4- If adjusting entries are entered on the work sheet, why is it necessary to formally journalize them and post to the ledger? © Paradigm Publishing, Inc.70 It is necessary to make journal entries for adjustments because the work sheet is not a journal. It is an informal document used to organize data and facilitate the work at the end of an accounting period. However, no posting is made from the work sheet. After adjustments have been journalized and posted, the ledger will be up to date and will agree with the data presented on the financial statements.

71. Focus on Ethics © Paradigm Publishing, Inc.71 How does failing to close the books in a timely fashion enhance the current year’s net income? Refer to the Focus on Ethics box on page 153 in your text.

72. © Paradigm Publishing, Inc.72 Joining the Pieces Adjusting Entries: Supplies Used

73. © Paradigm Publishing, Inc.73 Joining the Pieces Adjusting Entries: Insurance Expired

74. © Paradigm Publishing, Inc.74 Joining the Pieces Adjusting Entries: Depreciation of Long-Term Assets

75. © Paradigm Publishing, Inc.75 Joining the Pieces Adjusting Entries: Unpaid Salaries