© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Please note: this presentation includes slide transitions and animations. To utilize the presentation features, launch the slide show and click to advance the slides and where appropriate, the animations will appear.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. College Accounting 11 th Edition Adjusting Entries and the Work Sheet chapter 4 4-2

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives After you have completed this chapter, you will be able to do the following: 4-3

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 4-4

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A fiscal period is any period of time covering a complete accounting cycle. A fiscal year is a fiscal period consisting of twelve consecutive months. A fiscal year does not have to coincide with the calendar year. For income tax purposes, any period of twelve consecutive months may be selected. However, you must be consistent from year to year. Fiscal Period 4-5

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The accounting cycle represents the sequence of steps in the accounting process completed during the fiscal period. The Accounting Cycle 4-6

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. You are Here 4-7

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The work sheet is a tool (working paper) used by accountants to record necessary adjustments and provide up-to-date account balances needed to help in preparing financial statements. The heading consists of three lines: 1.The name of the company 2.The title of the working paper 3.The period of time covered The Work Sheet 4-8

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Work Sheet for Conner’s Whitewater Adventure The name of the company The title of the working paper The period of time covered 4-9

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 4-11

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trial Balance Columns Assuming normal balances, the account classifications are listed in the Trial Balance Debit and Credit columns of the work sheet: The Columns of the Work Sheet 4-12

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Adjusted Trial Balance Columns The adjusted trial balance columns are merely extensions of the Trial Balance Columns, plus or minus any adjustment amounts. The Columns of the Work Sheet 4-13

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement Columns An income statement contains the revenues minus the expenses. Revenue accounts have credit balances, so they are recorded in the Income Statement Credit column. Expense accounts have debit balances, so they are recorded in the Income Statement Debit column. The Columns of the Work Sheet 4-14

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income Statement Columns The Columns of the Work Sheet 4-15

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet Columns Asset accounts have debit balances, so they are recorded in the Balance Sheet Debit column. Liability accounts have credit balances, so they are recorded in the Balance Sheet Credit column. The Capital account has a credit balance, so it is recorded in the Balance Sheet Credit column. Drawing is a deduction from Capital, thus it has a debit balance and is recorded in the Balance Sheet Debit column. The Columns of the Work Sheet 4-16

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet Columns The Columns of the Work Sheet 4-17

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 4-19

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Adjustments are a way of updating the ledger accounts. Adjustments may be considered internal transactions. They are determined after the trial balance has been prepared. Adjustments are first recorded on the work sheet when using a manual accounting system. Adjustments 4-20

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Without adjustments the financial statements would be out of focus.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Supplies The amount of supplies used during the period is deducted from the Supplies account and added to Supplies Expense. Count supplies on hand and determine the value ($215) The difference is the amount used during the period, or supplies expense ($675 – 215 = $460) 4-22

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Prepaid Insurance The $1,875 balance in Prepaid Insurance represents the premium paid in advance for a three-month liability insurance policy Cost of insurance that remains paid in advance. 1,875 per year ÷ 3 months = $625 per month

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Durable items, such as appliances and fixtures, are recorded as Equipment because they will last longer than one year. The cost of these assets should be systematically spread out over their useful lives. This process is called depreciation Depreciation of Equipment 4-24

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Equipment account has a balance of $51,300. Conner estimates that the equipment will have a useful life of seven years, with a trade-in (salvage) value of $8,292 at the end of that time. Depreciation of Equipment 4-25

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Depreciation of Equipment Accumulated Depreciation, Equipment, is contrary to, or a deduction from, Equipment, so we call it a contra account. 4-26

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. On the balance sheet, the balance of Accumulated Depreciation is deducted from the balance of the related asset account. Depreciation of Equipment 4-27

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why is this adjustment necessary? The end of the pay period rarely falls on the same day as the end of the fiscal period. What are accrued wages? Accrued wages are the unpaid wages owed to employees for the time between the end of the last pay period and the end of the fiscal period. What accounts are used? Wages Expense (DR) Wages Payable (CR) Wages Expense 4-28

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Wages Expense 4-29

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Brown Company pays its employees a total of $400 per day and that payday falls on Friday. Assume the last day of the fiscal period ends on Wednesday, December 31. Wages Expense 4-30

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Wages Expense 4-31 An expense for the 3 days (December 29-31) in the fiscal year. Increase in Expense account. Not paid until January 2 (Next Payday). Increase in liability account.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The amount of wages for the month of June for Conner Whitewater Adventures is $2,360 (or $78.67 per day based on 30 days). The last payday was June 24. Wages Expense $78.67 x 6 days = $472 Accruing wages is recognizing an expense (the 6 days they will have to pay) that has been incurred but has not yet been recorded (payday has not yet arrived). 4-32

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Each adjusting entry contains an income statement account (revenue or expense) and a balance sheet account (asset, contra asset, or liability). Accountants refer to these accounts as mixed accounts, which are accounts with balances that are partly income statement and partly balance sheet amounts. Mixed Accounts 4-33

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Placement of Accounts on the Work Sheet: Capital and Drawing Account Balances Drawing is deducted from Capital. Capital account normal balance is a Credit balance. Drawing is a contra account. Drawing account normal balance is a Debit balance. 4-34

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Placement of Accounts on the Work Sheet: Capital and Drawing Account Balances Equipment is an asset. Equipment account normal balance is a Debit balance. Accumulated Depreciation, Equipment is deducted from Equipment. Accumulated Depreciation, Equipment account normal balance is a Credit balance. 4-35

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Placement of Accounts on the Work Sheet: Capital and Drawing Account Balances Net Income (or loss) is the difference between revenue and expenses. Net Income is added to the Capital account (credit) Net Loss is deducted from the Capital account (debit) 4-36

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Steps in Completion of the Work Sheet 4-37

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-38

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-39

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-40

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Finding Errors in the Income Statement and Balance Sheet Columns 4-41

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objective 4-45

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The work sheet is not a journal, so we must journalize adjusting entries to update the ledger accounts. Take the information for these entries directly from the Adjustments columns of the work sheet. Debit and credit exactly the same accounts and amounts from the work sheet to the journal. Many adjustments are made to follow the matching principle. In other words, revenues earned in one period are matched with the expenses associated with that revenue. Journalizing Adjusting Entries 4-46

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-47

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-48

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-50

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-51

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-52

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-53

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 4-54

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Since we have completed the work sheet for Conner’s Whitewater Adventures, we can now prepare the income statement, the statement of owner’s equity, and the balance sheet by taking the figures directly from the work sheet. Completion of the Financial Statements 4-55

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. to Statement of Owner’s Equity 4-56

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. from the Income Statement to the Balance Sheet 4-57

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. from Statement of Owner’s Equity 4-58

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-60

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-61

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-62

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 4-63

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. When an organization has more than one distinct source of revenue, a separate revenue account is set up for each source. Harris Miniature Golf’s income statement is an example of a company has more than one revenue account. Income Statement Involving More than One Revenue Account and a Net Loss 4-64

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Note that expenses are greater than revenues, resulting in a net loss. 4-65

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 6a 4-66

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-67

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 4-68

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-69

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-70

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 6b 4-71

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-72

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 4-73

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-74

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-75

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 6c 4-76

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4-77

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. College Accounting 11 th Edition Adjusting Entries and the Work Sheet chapter