The Accounting Cycle Continued: Preparing Worksheets and Financial Statements Chapter 4 2

The Accounting Cycle Business transactions Book of original entry 1 Book of original entry 2 Journal Book of final entry 3 Ledger Worksheet 5 Trial balance 4 4

The Accounting Cycle Worksheet Trial balance Adjustments Adjusted Income statement Balance sheet Income statement Statement of owner’s equity 6 Financial Statements Balance sheet

Adjustments: prepaid rent, office supplies, depreciation on Learning Objective 1 Adjustments: prepaid rent, office supplies, depreciation on equipment, and accrued salaries. 6

Learning Unit 4-1 (Preparing the Worksheet) The worksheet is not a formal report. Correct heading information is used. It is used to facilitate the preparation of adjusting entries and financial statements.

Learning Unit 4-1 (Preparing the Worksheet) Worksheet Sections The trial balance The adjustments The adjusted trial balance Income statement Balance sheet

Learning Unit 4-1 (Preparing the Worksheet) Account Titles Trial Balance Dr. Cr. Adjustments Dr. Cr. Adj. Trial Bal. Dr. Cr. Cash, Accts. Rec. Office Supplies Prepaid Rent Equipment Accounts Payable B. Clark, Capital B. Clark, Withdrawals Fees Salaries Expense Other Expenses Office Supplies Expense Rent Expense Depreciation Expense Accum. Depreciation Salaries Payable Totals Net income 11,155 600 1,200 6,000 3,350 10,000 625 8,000 1,300 470 21,350 21,350

Learning Unit 4-1 (Preparing the Worksheet) Assets must be adjusted to show amounts used or allocated to periods. Supplies used Prepaid rent expired Depreciation Salaries incurred 7

Learning Unit 4-1 (Preparing the Worksheet) Expenses incurred must be recorded in the correct period before the period closes. What are examples? Supplies used Prepaid rent expired

Learning Unit 4-1 (Preparing the Worksheet) Depreciation is a unique adjustment. Accounting period

Learning Unit 4-1 (Preparing the Worksheet) Historical cost of the asset remains in the financial statements. This cost remains in the records as a balance in the asset account. This cost is allocated to expense over the life of the asset. What is the accompanying account?

Learning Unit 4-1 (Preparing the Worksheet) The accompanying (contra-asset) account is called Accumulated Depreciation. This account is used for the yearly credited amounts. The normal balance is a credit balance.

Learning Unit 4-1 (Preparing the Worksheet) Cost of equipment $6,000 Less: Estimated residual value –1,200 Depreciable base $4,800 Estimated useful life 5 years (Cost – Residual value) ÷ Estimated useful life ($6,000 – $1,200) ÷ 5 = $960 $960 ÷ 12 = $80 per month

Learning Unit 4-1 (Preparing the Worksheet) Clark’s Word Processing Services Balance Sheet May 31, 200x Word processing equipment $6,000 Less: Accumulated depreciation 80 $5,920 Book value

Learning Unit 4-1 (Preparing the Worksheet) Clark’s Word Processing Services paid $1,300 in office salaries. The last salary checks for the month were paid on May 27. John Murray worked for Clark on May 28, 29, 30, and 31, but his next pay check is not due until June 3.

Learning Unit 4-1 (Preparing the Worksheet) Is John Murray’s earnings of $350 an expense for May? Yes Office Salary Expense 1,300 350

Learning Unit 4-1 (Preparing the Worksheet) Account Titles Trial Balance Dr. Cr. Adjustments Dr. Cr. Adj. Trial Bal. Dr. Cr. Cash, Accts. Rec. Office Supplies Prepaid Rent Equipment Accounts Payable B. Clark, Capital B. Clark, Withdrawals Fees Salaries Expense Other Expenses Office Supplies Expense Rent Expense Depreciation Expense Accum. Depreciation Salaries Payable Totals Net income 11,155 600 1,200 6,000 3,350 10,000 625 8,000 1,300 470 21,350 21,350 (a) 500 (b) 400 (d) 350 (c) 80

Preparation of adjusted trial balance on the worksheet. Learning Objective 2 Preparation of adjusted trial balance on the worksheet. 6

Adjustments Example What are the adjusting entries for supplies? Journal: Debit Credit Supplies Expense xxx Supplies (record correct amounts) xxx The balance in the supplies account after adjusting entries will be equal to the dollar amount of the supplies on hand at the end of the accounting period.

Adjusting entries for depreciation. Adjustments Example Adjusting entries for depreciation. Journal: Debit Credit Depreciation Expense xxx Accum. Depr. Equipment xxx To record the proper amounts for all relevant asset accounts

Adjustments Example What are the adjusting entries for accrued service revenue? Journal: Debit Credit Accounts Receivable xxx Revenue xxx To record the proper amounts for relevant asset and revenue accounts

Adjustments Example Account Titles Trial Balance Dr. Cr. Adjustments Adj. Trial Bal. Dr. Cr. Cash, Accts. Rec. Office Supplies Prepaid Rent Equipment Accounts Payable B. Clark, Capital B. Clark, Withdrawals Fees Salaries Expense Other Expenses Office Supplies Expense Rent Expense Depreciation Expense Accum. Depreciation Salaries Payable Totals Net income 11,155 600 1,200 6,000 3,350 10,000 625 8,000 1,300 470 21,350 21,350 (a) 500 (b) 400 (d) 350 (c) 80 1,330 1,330 11,155 100 800 6,000 3,350 10,000 625 8,000 1,650 470 500 400 80 350 21,780 21,780

The income statement and balance sheet sections Learning Objective 3 The income statement and balance sheet sections of the worksheet. 6

The Income Statement and Balance Sheet Section 11,155 100 800 6,000 3,350 10,000 625 8,000 1,650 470 500 400 80 350 21,780 21,780 Adj. Trial Bal. Dr. Cr. 3,100 8,000 4,900 Inc. Statement 18,680 13,780 Balance Sheet Cash, Accts. Rec. Office Supplies Prepaid Rent Equipment Accounts Payable B. Clark, Capital B. Clark, Withdrawals Fees Salaries Expense Other Expenses Office Supplies Expense Rent Expense Depreciation Expense Accum. Depreciation Salaries Payable Totals Net income Account Titles

Preparing financial statements Learning Objective 4 Preparing financial statements from the worksheet. 6

Learning Unit 4-2 (Preparing the Financial Statements) Income Statement It reports revenues and expenses. Statement of Owner's Equity Beginning capital balance from the balance sheet columns – Withdrawals – Loss, or + Net income = Ending capital balance

Learning Unit 4-2 (Preparing the Financial Statements) Balance Sheet Use the asset and liability balances from the balance sheet columns. Use the corrected owner’s equity amounts from the statement of owner’s equity.

End of Chapter 4