0 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 4 The Accounting Cycle for a Merchandising Corporation Chapter 14Accounting for Sales and Cash Receipts Chapter 15Accounting for Purchases and Cash Payments Chapter 16Special Journals: Sales and Cash Receipts Chapter 17Special Journals: Purchases and Cash Payments Chapter 18Adjustments and the Ten-Column Work Sheet Chapter 19Financial Statements for a Corporation Chapter 20Completing the Accounting Cycle for a Merchandising Corporation Chapter 21Accounting for Publicly Held Corporations

1 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18 Adjustments and the Ten-Column Work Sheet What You’ll Learn  Describe the parts of a ten-column work sheet.  Generate trial balances and end-of-period adjustments.  Determine which general ledger accounts to adjust.  Calculate the adjustments.  Prepare a ten-column work sheet.  Journalize the adjustments.  Define the accounting terms introduced in this chapter.

2 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18, Section 1 Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory What Do You Think? Why is it important to have up-to-date balances at period end?

3 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Adjustments transfer the cost of “used up” assets to expense accounts. Adjustments for changes in merchandise inventory are made directly to the Income Summary account. You Will Learn  the purpose of the ten-column work sheet.  how to use the ten-column work sheet for adjustments. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

4 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  adjustment  beginning inventory  ending inventory  physical inventory Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

5 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing End-of-Period Work In addition to account totals, managers, stockholders, and creditors need to know net income and the value of stockholders’ equity to make sound business decisions. In this chapter, you will learn how to prepare a ten- column work sheet for a merchandising business. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

6 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Ten-Column Work Sheet The ten-column work sheet is prepared in the same way as the six-column work sheet, but the ten-column work sheet has five amount sections:  Trial Balance  Adjustments  Adjusted Trial Balance  Income Statement  Balance Sheet Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

7 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing the Trial Balance Section A trial balance is used to prove the general ledger. Follow these steps to prepare the trial balance:  Enter the account name and number for each account in the Account Name and Number columns.  Enter the balance in the Debit or Credit column.  Rule the Debit and Credit columns.  If the Debit and Credit columns are proven, draw a double-rule line across both columns. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

8 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.1 Completing the Trial Balance Section The Trial Balance section of the Work Sheet

9 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Calculating Adjustments Some changes in account balances result from internal business operations or the passage of time. Examples are Supplies and Prepaid Insurance. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

10 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Permanent Accounts and Temporary Accounts A change in an account balance caused by the internal operations or the passage of time is recorded through an adjustment. At the end of the period, adjustments are made to transfer the costs of assets consumed from asset accounts to the appropriate expense accounts.adjustment Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

11 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Determining the Adjustments Needed If a balance is not up to date as of the last day of the fiscal period, it must be adjusted. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

12 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting the Merchandise Inventory Account Beginning inventory Beginning inventory is the merchandise a business has on hand at the beginning of a period. Ending inventory is the merchandise on hand at the end of a period. The asset account Merchandise Inventory’s balance changes only when a physical inventory, an actual count of all merchandise on hand and available for sale, is taken.Ending inventory physical inventory Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

13 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Calculating the Adjustment for Merchandise Inventory When calculating the adjustment for Merchandise Inventory, you need to know  the account’s balance, and  the physical inventory amount. Purchases and sales during the period will decrease the account balance. The reduction in inventory is recorded as an adjustment in the accounting records. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

14 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.1 Calculating the Adjustment for Merchandise Inventory

15 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.1 Calculating the Adjustment for Merchandise Inventory

16 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.1 Calculating the Adjustment for Merchandise Inventory

17 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Entering the Adjustment for Merchandise Inventory on the Work Sheet Adjustments are entered in the Adjustments columns of the work sheet. To do this, follow these steps:  In the Adjustments Debit column, enter the debit amount of the adjustment on the Income Summary line.  In the Adjustments Credit column, enter the credit amount of the adjustment on the Merchandise Inventory line. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

18 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  adjustment An amount that is added to or subtracted from an account balance to bring that balance up to date.  beginning inventory The merchandise a business has on hand at the beginning of a period.  ending inventory The merchandise a business has on hand at the end of a period.  physical inventory An actual count of all merchandise on hand and available for sale. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1

19 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18, Section 2 Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax What Do You Think? Why are some accounts not up to date?

20 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Adjustments show the dollar amount of assets consumed during the period. They also recognize the corporation’s income tax expense. You Will Learn  how and why the Supplies account is adjusted.  how and why the Prepaid Insurance account is adjusted.  how and why the Federal Corporate Income Tax Expense account is adjusted. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

21 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term  prepaid expense Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

22 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting the Supplies Account As supplies are used, they become expenses of the business. A physical inventory is taken at the end of the period to make an adjustment to the Supplies account. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

23 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

24 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

25 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

26 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting the Prepaid Insurance Account A prepaid expense is an expense paid in advance. Insurance premiums are a prepaid expense. An adjustment records the expired portion as a business expense.prepaid expense Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

27 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

28 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

29 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

30 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Adjusting the Federal Corporate Income Tax Accounts Corporations pay federal corporate income taxes on its net income. A corporation estimates its federal corporate income taxes for the coming year and pays that amount to the government in quarterly installments. When the exact tax amount is determined, the company may find it is required to pay additional taxes or it may qualify for a tax refund. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

31 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term Review  prepaid expense An expense paid in advance. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax SECTION 18.2

32 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18, Section 3 Completing the Work Sheet and Journalizing and Posting the Adjusting Entries What Do You Think? How do adjustments affect net income?

33 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Adjustments affect the amount of net income (or net loss). You Will Learn  how to complete the ten-column work sheet.  how to journalize and post the adjusting entries. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

34 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term  adjusting entries Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

35 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Extending Work Sheet Balances The amounts for each account must be extended to or carried over to the Adjusted Trial Balance, the Income Statement, and the Balance Sheet sections. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

36 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing the Adjusted Trial Balance Section The balance of each Trial Balance account is combined with the adjustments in the Adjustments section. The new balance is entered in the appropriate Adjusted Trial Balance column. If there is no adjustment, the balance is transferred to the same column in the Adjusted Trial Balance section. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

37 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.3 Completing the Adjusted Trial Balance Section

38 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Extending Amounts to the Balance Sheet and Income Statement Sections Each account in the Adjusted Trial Balance section is extended to one of the following sections:  the Income Statement section, containing temporary account balances  the Balance Sheet section, containing permanent account balances Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

39 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing the Work Sheet A single rule is drawn across the four columns in the Balance Sheet and Income Statement sections. The columns are totaled. Net income or net loss is recorded on the work sheet. The sections are proven if the two Income Statement sections are equal and the two Balance Sheet sections are equal. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

40 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

41 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Journalizing and Posting Adjusting Entries Adjusting entries Adjusting entries update the general ledger accounts at the end of a period. These entries come from the Adjustments section of the work sheet. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

42 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Journalizing Adjustments The following entries are recorded in the Adjustments columns:  adjusting merchandise inventory  adjusting supplies  adjusting insurance  adjusting income tax The debit part of the entry is recorded first. The date for adjusting entries is the last day of the period. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

43 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Posting Adjusting Entries to the General Ledger Adjusting entries are recorded in the general journal and then posted to the general ledger accounts. This will cause the general ledger account balances to agree with the Income Statement and Balance Sheet sections. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

44 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.3 Posting Adjusting Entries to the General Ledger

45 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.3 Posting Adjusting Entries to the General Ledger

46 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. SECTION 18.3 Posting Adjusting Entries to the General Ledger

47 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Term Review  adjusting entries Journal entries that update the general ledger accounts at the end of a period. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries SECTION 18.3

48 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 After taking a physical inventory, you determined that the business has $132,755 of inventory on hand. The general ledger shows the Merchandise Inventory account with a balance of $139,400. What steps are needed to record the adjusting entry? Chapter 18 Review CHAPTER 18

49 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 1 Step 1: The accounts Merchandise Inventory and Income Summary are affected. Step 2: Merchandise Inventory is an asset account. Income Summary is a stockholder’s equity account. Step 3: Merchandise Inventory is decreased by $6,645 ($139,400 - $132,755). This amount is transferred to Income Summary. Step 4: To transfer the decrease in Merchandise Inventory, debit Income Summary for $6,645 Step 5: Decreases in asset accounts are recorded as credits. Credit Merchandise Inventory for $6,645. Chapter 18 Review CHAPTER 18

50 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 2 Given the following information, determine what adjustments need to be made to the accounts. Indicate the amounts of the adjustments. Chapter 18 Review CHAPTER 18

51 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 The adjustments that need to be made are shown below: Chapter 18 Review CHAPTER 18

52 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 3 Explain the matching principle and why it is important to accounting. Chapter 18 Review CHAPTER 18

53 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 3 The matching principle requires recording revenues in the period they are earned and recording expenses that were incurred to make those revenues in the same period. This may not be when expenses or revenues are paid or collected. By matching expenses and revenues, the matching principle provides an accurate measure of net income. For example, if you pay for (prepay) six months of insurance on one date, that expense is spread over the six months in which the policy is in effect. The cost of each month’s portion of the policy’s premium must be expensed in that month (1/6 of the total cost) so that records accurately reflect expenses. Having this information allows comparisons to be made for similar periods. Chapter 18 Review CHAPTER 18

54 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary