Unit 11-Adjusting the Books Accounting 30S I Miss Schewczyk

Purpose: Adjusting the Books Employees work overtime or earn bonuses Changes have not been recorded by the end of the fiscal period

Adjusting the Books An adjusting entry is recorded at the end of the accounting period to bring an asset or liability account and revenue or expense balance to its proper amount.

Adjustments Prepaid Expenses Supplies Rent Insurance Depreciation

Prepaid Expenses Items paid for in advance of receiving their benefits Office supplies-current assets- unused When used-no longer assets-change to expense

Prepaid Expenses Entries are made to record the conversion of prepaid assets to expenses To correct account balances for the balance sheet and to record the appropriate expense for the period on the income statement These entries=adjusting entries

Prepaid Rent Rental lease: Rent of $1700 a month Must be paid in advance for three months April 1: cheque for $5100 is issued in payment of April, May and June rent. AprilMay June

Prepaid Rent Rent Expense is not debited Prepaid Rent is debited

Prepaid Rent End of April: Should Prepaid Rent be shown as a current asset with a value of $5100?

Prepaid Rent After one month: $1700 of asset Prepaid Rent has been used Value of prepaid rent must be reduced ($ =$3400) AprilMay June $1700

Prepaid Rent Value of prepaid rent must be reduced ($ =$3400) $1700 rent used record expense Adjusting entry

Prepaid Rent Adjusting entry Apr.30 Rent Expense1700 Prepaid Expense 1700 To record one month’s Rent Expense.

What is a Worksheet? A worksheet is a large sheet of accounting paper used to organize data in the preparation of financial statements. Income StatementBalance Sheet

Purpose of Work Sheets Its is not a formal statement provided for ManagementBusiness OwnerInvestors

Purpose of Work Sheets Its is only for the Accountant!

Purpose of Work Sheets To discover and eliminate errors before they become part of permanent records. It represents a rough draft of the work completed at the end of the accounting cycle

Steps in Preparing a Work Sheet 7. Rule the worksheet 6. Complete the Balance Sheet 5. Complete the income statement section 4. Transfer the income statement items 3. Transfer the balance sheet items 2. Record the trial balance 1. Write a heading

Step 1: Write the Heading The heading consist of three parts: Business Name (Who?) Work Sheet (What?) For the month ended …… (When?)

Step 2: Record the Trial Balance Ms Schewczyk’s Sports Club (Who?) Work Sheet (What?) For the month ended November 30, 2011 (When?) Account TitleAcc. NO. Trial BalanceIncome StatementBalance Sheet DebitCreditDebitCreditDebitCredit Cash Accounts Receivable Record balances from all ledger accounts.

ACTIVITY #1 Question: What three items of information are included in the heading? Fill out the heading of your worksheet template! Ms Schewczyk’s Sports Club-For the month ended November Work Sheet

Step 3: Transfer the Balance Sheet Items Transfer Assets, Liabilities and Owner’s Equity from the trial balance to the balance sheet section. Ms Schewczyk’s Sports Club (Who?) Work Sheet (What?) For the month ended November 30, 2011 (When?) Account TitleAcc. NO. Trial BalanceIncome StatementBalance Sheet DebitCreditDebitCreditDebitCredit Cash Accounts Receivable

Step 4: Transfer the Income Statement Items Transfer Revenue and Expense accounts from the trial balance to the income statement section. Ms Schewczyk’ s Sports Club (Who?) Work Sheet (What?) For the month ended November 30, 2011 (When?) Account TitleAcc. NO. Trial BalanceIncome StatementBalance Sheet DebitCreditDebitCreditDebitCredit Cash Accounts Receivable Members Fees Sports Equipment Rental

ACTIVITY #2 Question: What type of accounts do you have to transfer to the balance sheet section? Question: What type of accounts do you have to transfer to the income statement section? Transfer the appropriate accounts from the trial balance to the balance sheet and income statement section!

Step 5: Complete the Income Statement Section Determine net income or net loss. Rule a single line and add the income statement debit and credit columns. Write the totals below the single line.

ACTIVITY #3 Calculate the debit and credit total and compare your result with your partner! Question: How do you determine the net income or net loss of the income statement?

Step 5: Complete the Income Statement Section Determine the difference between the debit and credit columns. Subtract the debit total (expenses) from the credit total (revenue). Write the difference on the smaller side. ACTIVITY #4

Step 5: Complete the Income Statement Section Net Income: Credit is higher than debit Net Loss: Debit is higher than credit

Step 5: Complete the Balance Sheet Rule a single line and total the columns in the balance sheet section. Enter the net income amount below the total of the credit column of the balance sheet section. The net income represents the increase to the owner’s equity for the period.

Step 5: Complete the Balance Sheet Enter the net loss amount below the total of the debit column of the balance sheet section. The net loss represents the decrease to the owner’s equity for the period.

Step 6: Rule the Work Sheet Rule double lines below the totals to indicate completion and proof that the work is mathematically correct.