ACCOUNTING 2 CH. 2

ADJUSTMENTS 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.

Glencoe Accounting Key Terms  adjustment  beginning inventory  ending inventory  physical inventory Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory

COMPLETING END-OF- PERIOD WORK Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Managers, stockholders, and creditors need to know net income and the value of stockholders’ equity to make sound business decisions.

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Five amount sections in the ten-column work sheet Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory adjustment An amount that is added to or subtracted from an account balance to bring that balance up to date. At the end of the period, adjustments are made to transfer the costs of assets consumed from asset accounts to the appropriate expense accounts.

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory If a balance is not up to date as of the last day of the fiscal period, it must be adjusted.

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Section 18.1 Three Types of Inventory Beginning Inventory Ending Inventory Physical Inventory beginning inventory The merchandise a business has on hand at the beginning of a period.

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Three Types of Inventory Beginning Inventory Ending Inventory Physical Inventory ending inventory The merchandise a business has on hand at the end of a period.

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Section 18.1 Three Types of Inventory Beginning Inventory Ending Inventory Physical Inventory physical inventory An actual count of all merchandise on hand and available for sale.

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory When calculating the adjustment for Merchandise Inventory, you need to know The account’s balance The physical inventory amount

THE TEN-COLUMN WORK SHEET Glencoe Accounting Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Adjusting the Merchandise Inventory Account Adjustment To adjust the Merchandise Inventory account (bal. 84,921) to reflect the physical inventory amount ($81,385), the following transaction is recorded. See pages 524–525

Glencoe Accounting No normal balance

Glencoe Accounting

Key Term prepaid expense Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax

ADJUSTING THE SUPPLIES ACCOUNT Glencoe Accounting Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Section 18.2 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 THE SUPPLIES ACCOUNT Glencoe Accounting Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Adjusting the Supplies Account Adjustment Record the adjustment for supplies. Beg bal. $5,749 – on-hand $1,839 – supplies used up $3,710

ADJUSTING THE PREPAID INSURANCE ACCOUNT Glencoe Accounting Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Insurance premiums are an example of a prepaid expense. prepaid expense An expense paid in advance.

ADJUSTING THE PREPAID INSURANCE ACCOUNT Glencoe Accounting Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Adjusting the Prepaid Insurance Account Adjustment Record the adjustment for the expiration of one-half month’s insurance coverage. $1,500 for a 6 month premium = $250/month purchased Dec 15

ADJUSTING THE FEDERAL CORPORATE INCOME TAX ACCOUNTS Glencoe Accounting Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax When the exact amount of federal corporate income tax is determined: Additional tax may need to be paid. The company may qualify for a refund.

Glencoe Accounting Key Terms adjusting entries Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Section 18.3

EXTENDING WORK SHEET BALANCES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries The amounts for each account must be extended to or carried over to these sections: The Adjusted Trial Balance The Income Statement The Balance Sheet

EXTENDING WORK SHEET BALANCES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries 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

JOURNALIZING AND POSTING ADJUSTING ENTRIES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Adjusting entries come from the Adjustments section of the work sheet. adjusting entries Journal entries that update the general ledger accounts at the end of a period.

JOURNALIZING AND POSTING ADJUSTING ENTRIES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Section 18.3 Entries Recorded in the Adjustments Column Adjusting Merchandise Inventory Adjusting Supplies Adjusting Insurance Adjusting Income Tax

JOURNALIZING AND POSTING ADJUSTING ENTRIES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Section 18.3 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.

JOURNALIZING AND POSTING ADJUSTING ENTRIES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Section 18.3 Posting Adjusting Entries to the General Ledger

JOURNALIZING AND POSTING ADJUSTING ENTRIES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Section 18.3 Posting Adjusting Entries to the General Ledger

JOURNALIZING AND POSTING ADJUSTING ENTRIES Glencoe Accounting Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Section 18.3 Posting Adjusting Entries to the General Ledger

Glencoe Accounting 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? 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.

Glencoe Accounting Question 2 Given the following information, determine what adjustments need to be made to the accounts. Indicate the amounts of the adjustments.

Glencoe Accounting Question 2 The adjustments that need to be made are shown below:

Glencoe Accounting Question 3 Explain the matching principle and why it is important to accounting. 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.