Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 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. Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 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 Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 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. Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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

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

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 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. Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 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. Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 Adjusting the Merchandise Inventory Account 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. Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 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. Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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

Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory SECTION 18.1 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. 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 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. 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 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 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. 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 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 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. 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 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. 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 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. Glencoe Accounting Unit 4 Chapter 18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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

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

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

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