Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO1Identify the steps necessary to prepare for end-of-period financial reporting. LO2Prepare an unadjusted trial balance. LO3Journalize adjusting entries. LO4Prepare an adjusted trial balance. LESSON4-1 Preparing Financial Information for a Departmentalized Business

© 2014 Cengage Learning. All Rights Reserved. Preparing for End-of-Period Financial Reporting ●The length of time for which a business summarizes its financial information and reports its financial performance is called a fiscal period. ●A fiscal period consisting of 12 consecutive months is called a fiscal year. SLIDE 2 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. LO1

© 2014 Cengage Learning. All Rights Reserved. Proving the Accuracy of Subsidiary Ledgers ●A schedule of accounts receivable is a listing of customer accounts, account balances, and total amount due from all customers. SLIDE 3 LO1 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Proving the Accuracy of Subsidiary Ledgers ●A listing of vendor accounts, account balances, and the total amount due all vendors is called a schedule of accounts payable. ●Some businesses call this listing an accounts payable trial balance. SLIDE 4 LO1 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Preparing an Unadjusted Trial Balance ●Journal entries recorded to update general ledger accounts at the end of a fiscal period are called adjusting entries. ●A trial balance prepared before adjusting entries are posted is called an unadjusted trial balance. SLIDE 5 LO2 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Preparing an Unadjusted Trial Balance ●A proof of the equality of debits and credits in a general ledger is called a trial balance. SLIDE 6 LO2 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Adjustment Information SLIDE 7 LO3 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. ●UNCOLLECTIBLE ACCOUNTS ADJUSTMENT ●Adjustment Information, December 31 ●Estimate of uncollectible accounts $ 2, The current balance in Allowance for Uncollectible Accounts is a $95.69 credit. An adjusting entry for $2, ($2, required balance less $95.69 current credit balance) is required to increase the allowance account balance to $2,

© 2014 Cengage Learning. All Rights Reserved. Adjustment Information SLIDE 8 LO3 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. ●MERCHANDISE INVENTORY ADJUSTMENT ●Adjustment Information, December 31 ●Ending merchandise inventory—grills $89, ●Ending merchandise inventory—furniture $102, To bring the grills inventory up to date, the balance of Merchandise Inventory— Grills needs to be increased by $3, ($89, ending inventory less $86, beginning inventory). Similarly, the $3, credit adjusting entry reduces the balance of Merchandise Inventory—Furniture.

© 2014 Cengage Learning. All Rights Reserved. Adjustment Information SLIDE 9 LO3 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. ●SUPPLIES ADJUSTMENT ●Adjustment Information, December 31 ●Supplies on hand $2, To bring the Supplies account up to date, the balance must be decreased by $5, (December 31 balance, $7,610.87, less the estimate of supplies on hand, $2,430.00).

© 2014 Cengage Learning. All Rights Reserved. Adjustment Information SLIDE 10 LO3 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. ●PREPAID INSURANCE ADJUSTMENT ●Adjustment Information, December 31 ●Value of prepaid insurance $2, To bring the prepaid account up to date, the balance of Prepaid Insurance must be decreased by $12, (December 31 balance, $14,000.00, less unexpired insurance, $2,000.00).

© 2014 Cengage Learning. All Rights Reserved. Adjustment Information ●Physical assets that will be used for a number of years in the operation of a business are called plant assets. ●The portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during that asset’s useful life is called depreciation expense. ●The amount of depreciation is an estimate. SLIDE 11 LO3 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Adjustment Information SLIDE 12 LO3 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. ●DEPRECIATION EXPENSE ADJUSTMENT ●Adjustment Information, December 31 ●Depreciation expense—office equipment $7, ●Depreciation expense—store equipment $8, To adjust for the depreciation of store equipment, Depreciation Expense—Store Equipment increases by a $8, debit. The contra asset account, Accumulated Depreciation— Store Equipment, increases by a $8, credit.

© 2014 Cengage Learning. All Rights Reserved. Preparing an Adjusted Trial Balance ●A trial balance prepared after adjusting entries are posted is called an adjusted trial balance. SLIDE 13 LO4 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Calculating the Federal Income Tax Adjustment ●Different tax rates are applied to different levels of net income. ●Each tax rate and taxable income amount on one line of a tax table is called a tax bracket. ●The tax rate associated with a tax bracket is called a marginal tax rate. SLIDE 14 LO4 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Calculating the Federal Income Tax Adjustment ●The amount of federal income tax a corporation must pay is calculated using a tax rate table issued by the Internal Revenue Service. SLIDE 15 LO4 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. This example shows how to calculate tax for income of $82, Income subject to Marginal Tax $82, $75,000 = $7, Marginal Tax $7, x 34% = $2, Total Federal Income Tax $13,750 + $2, = $16,322.38

© 2014 Cengage Learning. All Rights Reserved. Calculating the Federal Income Tax Adjustment SLIDE 16 LO4 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. Corporations are required to make quarterly federal income tax payments. The adjusting entry increases Federal Income Tax Expense and increases the balance of Federal Income Tax Payable by $2, to the actual amount of $16,

© 2014 Cengage Learning. All Rights Reserved. Completing the Adjusted Trial Balance ●The completed trial balance provides the information necessary to prepare the financial statements. SLIDE 17 LO4 Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved. Federal Income Tax Amounts Total, Prove, & Rule

© 2014 Cengage Learning. All Rights Reserved. Using a Work Sheet to Prepare Financial Statements SLIDE 18 LO4 Lesson 4-1 ●A work sheet is a columnar accounting form used to summarize the general ledger information needed to prepare financial statements. ●Prior to computerized accounting systems, the work sheet was the most effective tool for collecting the information needed to prepare the financial statements. © 2014 Cengage Learning. All Rights Reserved.

Lesson 4-1 Audit Your Understanding 1.What two reports are prepared to prove the accuracy of posting to subsidiary ledgers? SLIDE 19 ANSWER Schedule of accounts receivable and schedule of accounts payable. Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Lesson 4-1 Audit Your Understanding 2.Why are adjustments made to certain accounts at the end of the fiscal period? SLIDE 20 ANSWER To bring certain general ledger accounts up to date. Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.

Lesson 4-1 Audit Your Understanding 3.Explain how income before income taxes is calculated using an adjusted trial balance. SLIDE 21 ANSWER Subtract the total of the income statement accounts having a debit balance, except for Federal Income Tax Expense, from the total of the income statement accounts having a credit balance. Include any debit or credit balances of income summary accounts. Lesson 4-1 © 2014 Cengage Learning. All Rights Reserved.