2. CHAPTER ELEVEN WORK SHEET AND ADJUSTING ENTRIES

3. Work Sheet Of A Merchandising Business  Similar to a service business’s worksheet  Used to record adjustments This chapter introduces two more adjusting entries: Unearned Revenue Merchandise Inventory  Used to prepare financial statements

4. Adjustment For Unearned Revenue Example: Brown County Playhouse sells season tickets. Tickets sell for $10 for each play ($50 for a 5 play season ticket) and a maximum of 1,000 seats can be sold for each play. Let’s assume all shows sell out during the first week that season tickets are available. I was in the play, but they told me to “Break a leg” and look what happened!%$#

5. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 When season tickets are sold Cash is debited and Unearned Ticket Revenue is credited NEW Liability account

6. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 Following the production of the third show, financial statements are to be prepared...but the balance in this liability account is wrong.

7. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 An adjusting entry is needed to recognize the ticket revenue earned for the 3 shows performed. (Remember 5 shows were paid for..)

8. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 TICKET REVENUE 3 shows x 1,000 tickets for each show = 3,000 tickets 3,000 tickets x $10 per ticket = $30,000

9. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 TICKET REVENUE $30,000 in earned revenue is removed from the unearned account and put into the revenue account. $30,000 Balance Sheet Income Statement

10. ADJUSTMENT FOR UNEARNED REVENUE UNEARNED TICKET REVENUE $50,000 TICKET REVENUE The remaining balance of $20,000 in season ticket sales is reported on the Balance Sheet as a current liability. $30,000 $20,000 Bal. Balance Sheet Income Statement

11. Adjustment For Merchandise Inventory (Using the periodic inventory system) Example: Double Bubble Chew Shop had a beginning merchandise inventory of $25,000. At the end of the year, a physical inventory of merchandise determined that merchandise costing $30,000 was still on hand.

12. Adjustment For Merchandise Inventory Humm...Why is there more inventory at the END then at the BEGINNING of the year? When PURCHASES exceed SALES, the inventory balance will be higher at the end of the year. Beginning merchandise inventory of $25,000. At the end of the year, a physical inventory of $30,000 was still on hand.

13. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25,000 BEG. BALANCE This Beginning balance of $25,000 is wrong. We are going to remove it and put the new ending balance of $30,000 in this account. We do this through the adjusting process at the end of the period.

14. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY $25,000 This account has NOT changed during the accounting period. It still shows the old, beginning balance.

15. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25,000 PURCHASES XXX Merchandise bought during the year was debited to Purchases instead of Merchandise Inventory

16. ADJUSTMENT FOR MERCHANDISE INVENTORY MERCHANDISE INVENTORY 25,000 PURCHASES XXX The COST of merchandise sold is NOT recorded. The selling price is credited to the Sales account XXX SALES

17. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25,000 After a year of purchasing and selling merchandise, the balance is no longer accurate

18. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25,000 An adjusting entry is needed to update the balance of the Merchandise Inventory account

19. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25,000 Adjusting the Inventory account is a TWO-step process! OKAY!! Two-steps! Tell me what the two steps are so I can take notes. (I know this is going to be on the next quiz or on our next COK!)

20. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25,000 The first adjusting entry, removes this old $25,000 balance. FIRST-step: Debit Income Summary Credit Merchandise Inventory 25,000 Old INCOME SUMMARY Old 25,000

21. Adjustment For Merchandise Inventory MERCHANDISE INVENTORY 25,000 The second adjusting entry, enters the new physical inventory of $30,000 SECOND-step: Debit Merchandise Inventory Credit Income Summary 25,000 Old INCOME SUMMARY Old 25,000 30,000 New Correct ending balance!

22. Double Bubble Chew Shop CHART OF ACCOUNTS Let’s review the Chart of Accounts for a merchandising business!

23. Double Bubble Chew Shop Chart of Accounts Assets 101 Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. Assets now include Merchandise Inventory

24. Double Bubble Chew Shop Chart of Accounts Assets (100-199) 101 Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. 161 Land 171 Building 171.1 Acc. Depr. - Bldg 181 Store Equipment 181.1 Acc. Depr. - Store Eq I wonder if everyone has their own office in the building... I’d like mine with a view

25. Double Bubble Chew Shop CHART OF ACCOUNTS (cont.) Liabilities (200-299) 201 Notes Payable 219 Wages Payable 231 Utilities Payable 251 Mortgage Payable Owner’s Equity (300-399) 202 Accounts Payable 241 Unearned Ticket Rev. 311 G.L. Fishel, Capital 312 G.L. Fishel, Drawing Wow! There is that Unearned Ticket Revenue account again. Remember this account as it will appear on the quiz.. hint, hint

26. Double Bubble Chew Shop CHART OF ACCOUNTS (cont.) 231 Utilities Payable 241 Unearned Ticket. Rev. 251 Mortgage Payable Owner’s Equity (300-399) 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing 313 Income Summary How would you like to go around with a last name of “Fishel”? I bet his first name is “Go” hee hee Income Summary is also considered an Owner’s Equity account

27. Double Bubble Chew Shop CHART OF ACCOUNTS Assets (100-199) 101Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. 161 Land 171 Building 171.1 Acc. Depr. - Bldg 181 Store Equipment 181.1 Acc. Depr. - Store Eq Revenue (400-499) 401 Sales 401.1 Sales Returns & Allow 411 Interest Revenue 412 Rent Revenue 413 Ticket Revenue

28. Double Bubble Chew Shop CHART OF ACCOUNTS Assets (100-199) 101Cash 122 Accts. Rec. 131 Merch. Inv. 141 Supplies 145 Prepaid Ins. 161 Land 171 Building 171.1 Acc. Depr. - Bldg 181 Store Equipment 181.1 Acc. Depr. - Store Eq Revenue (400-499) 401 Sales 401.1 Sales Returns & Allow 411 Interest Revenue 412 Rent Revenue 413 Ticket Revenue Expenses (600-699) Cost of Goods Sold (500-599) 501 Purchases 501.1 Purch. Ret. & Allow. 501.2 Purchases Discounts 502 Freight-In Oh my Gosh! I’m freaking out here! There are too many accounts!

29. Double Bubble Chew Shop CHART OF ACCOUNTS (cont.) Liabilities (200-299) 201 Notes Payable 202 Accounts Payable 219 Wages Payable 231 Utilities Payable 241 Unearned Ticket Rev. 251 Mortgage Payable Owner’s Equity (300-399) 311 G. L. Fishel, Capital 312 G. L. Fishel, Drawing Expenses (600-699) 511 Wages Expense 521 Rent Expense 523 Supplies Expense 525 Telephone Expense 533 Utilities Expense 535 Insurance Expense 540 Depr. Exp. - Building 541 Depr. Exp. - Store Eq. 549 Misc. Expense 512 Advertising Expense 513 Bk Credit Card Exp. Okay, This is the 20 th slide on the chart of accounts, I’m officially asleep. Zzz...

30. Using a Work Sheet to Record Adjustments Same 5 STEPS that we used for a Service Business. Step 1: Prepare the Trial Balance. Step 2: Prepare the Adjustments. Step 3: Prepare the Adjusted Trial Balance. Step 4: Extend Adjusted Balances to the Income Statement & Balance Sheet columns. Step 5: Complete the Work Sheet. Okay- No more chart of accounts slides. Let’s move on…

31. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE Cash DEBIT CREDIT ADJUSTMENTS Accounts Receivable Supplies Prepaid Insurance Merchandise Inventory Accum. Depr.-Building. Unearned Ticket Revenue Salaries Payable G.L. Fishel, Capital Sales Sales Discounts G.L. Fishel, Drawing Purchases Purchase Discounts Freight In Purchase Returns & Allow. 370 650 80 200 25,000 50,000 54,150 150 2,150 650 80,000 700 107,800 Step #1: Prepare the Trial Balance (before any adjustments) in the first pair of amount columns. Now, we are ready to enter some adjustments. 1,000 500 Depreciation Expense Lots of new accounts on this Trial Balance:

32. Double Bubble Chew Shop Work Sheet (partial) TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE For Year Ended December 31, 20-- Merchandise Inventory Income Summary Purchases Purchases Returns and Allowances Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 Let’s look at the merchandise inventory adjustments on a partial work sheet. Adjustments #1 and #2: Remove the Beginning Inventory from the Merchandise Inventory account and enter the new Ending Inventory amount.

33. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 STEP #1 REMOVE THE BEGINNING BALANCE.

34. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 By crediting Merchandise Inventory, the balance is reduced to zero. 25,000 (a)

35. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 25,000 (a) 25,000 (a) The corresponding debit is to Income Summary.

36. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 25,000 (a) 25,000 (a) Step #2 The new ending inventory is entered into the Merchandise Inventory account. 30,000 (b) The balance in the Merchandise Inventory account now reflects the new actual amount of inventory on hand at the end of the year.

37. TRIAL BALANCE DEBITCREDIT ACCOUNT TITLE DEBIT CREDIT ADJUSTMENTS Merchandise Inventory Income Summary Purchases Purchases Ret. & Allow. Purchases Discounts Freight-In 25,000 80,000 1,000 500 700 25,000 (a) 25,000 (a) Income Summary is credited. 30,000 (b) 30,000

38. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (c) In this example, our next adjustment for the company is for Depreciation Expense of $1,000 Cash10,000 Equipment18,000 Accum. Depr 2,000 1,000(c) Depr. Exp.1,000 (a)

39. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (c) In the same way, we can enter all of our other adjustments for: Cash10,000 Equipment18,000 Accum. Depr 2,0001,000(c) Depr. Exp.1,000 (a) 1.Unearned Ticket Revenue 2.Supplies used up 3.Prepaid Insurance that has expired Let’s keep it simple and just look at these adjustments for now…

40. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (c) Before moving to our next set of columns, remember to foot your columns to verify equality!!! Cash10,000 Equipment18,000 Accum. Depr 2,0001,000(c) Depr. Exp.1,000 (a) Totals 56,000

41. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Accum. Depr Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 2,000 80,000 30,000(b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (a) 30,000 Cash10,000 Equipment 25,000Merch. Inv. 18,000 (c)1,000 Depr. Exp. (c) 1,000 The new balance in Merchandise Inventory is extended to the “Adjusted Trial Balance” columns.

42. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Accum. Depr Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 2,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (a) 25,00030,000 New Balance Cash10,000 Equipment 25,000Merch. Inv. 18,000 30,000 (c)1,000 Depr. Exp. (c) 1,000 BE CAREFUL!!! BOTH the beginning and ending inventory amounts are extended from the Income Summary account to the “Adjusted Trial Balance” columns. 10,000 3,000 18,000 Old Balance

43. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (c) 30,000 25,00030,000 80,000 1,000 500 700 All other accounts are extended. Some with adjustments. Cash10,000 Equipment18,000 Accum. Depr 2,0001,000(c) Depr. Exp.1,000 (a) 10,000 3,000 18,000 1,000

44. Name of Company Work Sheet DEBITCREDIT For Year Ended December 31, 20-- STEP #4 Extend Adjusted Account Balances DEBITCREDIT Ending Inv. Assets ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET DEBITCREDIT STEP #3 Prepare the Adj. Trial Bal. Capital Drawing The Assets (including the ending balance of Merchandise Inventory) are extended to the Balance Sheet columns.

45. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 80,000 1,000 500 700 25,00030,000 Make sure the Adjusted Trial Balance columns balance and then... begin transferring numbers to the Inc. Stmt. and Balance sheet columns Depr. Exp.1,000 Totals XX The new ending Merchandise Inventory is extended to the Balance Sheet columns.

46. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 80,000 1,000 500 700 25,00030,000 BOTH the beginning and ending inventory amounts are extended to the Income Statement columns and placed in the Income Summary account. 25,000 Old Balance 30,000 New Balance

47. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 1,000 500 700 25,00030,000 25,000 30,000 80,000 1,000 500 700 Since the Purchases accounts and Freight-In are Income Statement accounts, they are extended to the Income Statement columns. So would Sales, Sales Discounts, and Sales Returns & Allowances too! (But I didn’t show them here.)

48. ADJUST. T/B DR.CR. ACCOUNT TITLE DR. CR. INCOME STMT CR. DR. BALANCE SHEET Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 30,000 1,000 500 700 25,00030,000 25,000 30,000 80,000 1,000 500 700 The Cost of Goods Sold can be computed By using the numbers in the Income Statement columns— But, we’ll learn how to do this in our next chapter.

49. Name of Company Work Sheet DEBITCREDIT For Year Ended December 31, 20-- STEP #4 Extend Adjusted Account Balances DEBITCREDIT Ending Inv. Liabilities Unearned Ticket Rev. Assets Capital Drawing ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET DEBITCREDIT STEP #3 Prepare the Adj. Trial Bal. Capital Liabilities & Owner’s Equity accounts are also extended to the Balance Sheet columns.

50. INCOME STATEMENT DEBITCREDIT ADJ. TRIAL BALBALANCE SHEET DEBITCREDITDEBITCREDIT Expenses Sales Discounts Expenses Purchases Purchase R&A Purchase Discounts Freight-In STEP #5 COMPLETE THE WORK SHEET (1) Sum columns (2) Compute net income (loss) Net Income Remember, if Revenues are greater than expenses, then we report Net Income!

51. TRIAL BAL. DR.CR. ACCOUNT TITLE DR. CR. ADJUSTMENTS CR. DR. ADJ. TRIAL BAL. Merch. Inv. Income Sum. Purchases Purch. R &A Purch. Disc. Freight-In 25,000 80,000 30,000 (b) 1,000 500 700 25,000 30,000 (b) (a) 25,000 (c) 30,000 25,00030,000 80,000 1,000 500 700 Cash10,000 Equipment18,000 Accum. Depr 2,0001,000(c) Depr. Exp.1,000 (a) 10,000 3,000 18,000 1,000 Now, that we have: Reviewed how to complete a worksheet for a merchandiser and Discussed a new adjustment for Unearned Revenue Let’s make our adjusting journal entries in the General Journal. Record journal entries for these adjustments!

52. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Adjusting Entries 1 2 3 4 5 6 7 8 9 10 11 Dec. 20-- 31 Income Summary Merchandise Inventory Income Summary Depreciation Expense 25,000 30,000 1,000 31 Accumulated Depr. 1,000 (Remove old inv. Balance) (Enter new inv. Balance) (Record deprec. Exp on the Building) Pg 11

53. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT Adjusting Entries-cont. 1 2 3 4 5 6 7 8 9 10 11 Dec. 20-- 31 Unearned Ticket Revenue Ticket Revenue Supplies Expense Supplies Wages Expense 30,000 1,125 1,030 31 Wages Payable. 1,030 (To report the amount of ticket revenue earned) (To record the amount of supplies used during the period) (To record wages owed at the end of the period) Pg 12