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CHAPTER # 04 REVIEW Atef Abuelaish

The General Journal and
Chapter 04 The General Journal and Atef Abuelaish

The General Journal and General Ledger
Chapter 04 The General Journal and General Ledger Atef Abuelaish

The Accounting Cycle Step 2 Journalize the data about transactions
Step 2 Journalize transactions Step 3 Post transactions to the ledger Step 1 Analyze and classify transactions Step 1 Analyze transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Here are the steps in the accounting cycle. The accounting cycle is a series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information. Take a moment to review the steps. Let’s take a look at these steps in more detail. Step 9 Evaluate and communicate financial information Step Journnalize adjusting entries Step 7 Journalize closing entries Step 8 Prepare a postclosing trial balance Atef Abuelaish

Journal A journal is a diary of business activities.
Record transactions in the general journal Journal A journal is a diary of business activities. There are different types of accounting journals. Transactions are entered in the journal in chronological order. Our first objective is to learn how to record financial transactions in the general journal. A journal is a book of original entry. Just like in school when you kept a “diary” or “journal” of your activities, a business or accounting journal does the same thing. The journal keeps a record of the financial events (transactions) in the order that they occurred. We call this chronological order. Journalizing means to “record” transactions in the journal. A business event (transaction) that has been recorded in the journal is called a journal entry. Atef Abuelaish

GENERAL JOURNAL PAGE 1 Enter the account to be debited.
DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Nov. 6 Cash 100,000.00 Carolyn Wells, Capital 100,000.00 Enter the account to be debited. Take a look at a journal entry. Carolyn Wells, Owner, invested $100,000 cash into the business on November 6. Let’s look at each part of the journal entry. First you should enter the year and the date of the transaction, then enter the name of the account debited flush against the line, then place the dollar amount in the debit column. Next drop down a line and indent ¼ to ½ inch and write the name of the account credited. Place the dollar amount of the credit in the credit column. Enter the amount on the same line in the Debit column. Enter the account to be credited. Enter the amount on the same line in the Credit column. Atef Abuelaish

GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Nov Cash ,000.00 Carolyn Wells, Capital ,000.00 Investment by owner , Memo 01 Once the transaction has been journalized, we need to indent a little and add an explanation of the event. The audit trail is a chain of references that make it possible to trace information, locate errors, and prevent fraud. This is an important part of each journal entry. Then enter a complete but concise description of the transaction. Whenever possible, the journal entry should refer to the source of the information. Document numbers are part of the audit trail. Atef Abuelaish

Recording a Business Transaction
1. Analyze the financial event. Identify the accounts affected. Classify the accounts affected. Determine the amount of increase or decrease for each account affected. 2. Apply the rules of debit and credit. Which account is debited? For what amount? Which account is credited? For what amount? Here are the steps to take to record a journal entry. 3. Record the complete entry in general journal form. 4. Make the entry in T-account form. Atef Abuelaish

Ledgers The ledger contains a separate form for each account.
The third step of the accounting cycle is posting to the ledger. The process of transferring data from the journal to the ledger is known as posting. We learned how to journalize in our previous section—that was the second step in the accounting cycle, now let’s learn the third step in our accounting cycle: posting to ledgers. A ledger is the record of final entry. It is the last place that accounting transactions are recorded. Atef Abuelaish

Posting What is posting?
QUESTION: What is posting? Posting is the process of transferring data from a journal to a ledger. ANSWER: When we transfer data from the general journal to the ledger, this is called “posting”. It’s important that we keep a ledger so that we know at all times the cumulative balances in all of the accounts. T accounts represent the accounts in our ledger. All of our journal entries will update accounts in the ledger. A general ledger is a permanent, classified record of all accounts used in a firm’s operation. The general ledger is the master reference file for the business. Atef Abuelaish

Ledger Account Forms On the ledger account form shown below, notice the: Account name and number Columns for date, description, and posting reference Columns for debit, credit, debit balance, and credit balance ACCOUNT CASH ACCOUNT NO POST BALANCE DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT 2016 Nov J1 100, ,000.00 The general ledger looks a lot like the general journal but it has two additional BALANCE columns. We will now post our general journal entries to the general ledger. Atef Abuelaish

Five Steps for Posting Post journal entries to general ledger accounts
On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions. On the ledger form, enter the general journal page in the Posting Reference column. On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column. On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column. On the general journal, enter the ledger account number in the Posting Reference column. Posting is the third objective of this chapter. Let’s review the five steps of posting from the general journal to the general ledger. Atef Abuelaish

Step 1: On the ledger form, enter the date of the transaction
Step 1: On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions. GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Nov Equipment ,000.00 Cash ,000.00 Purchased equipment Check 1001 Step one: transfer the date and description (if necessary). ACCOUNT Equipment ACCOUNT NO POST BALANCE DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT 2016 Nov J1 5, ,000.00 Atef Abuelaish

Step 2: On the ledger form, enter the general journal page in the Posting Reference column. The letter J refers to the general journal. GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Nov Equipment ,000.00 Cash ,000.00 Purchased equipment Check 1001 Next, write the Journal page that the journal entry is recorded on in the Posting Reference column in the General Ledger. “J” refers to journal. ACCOUNT Equipment ACCOUNT NO POST BALANCE DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT 2016 Nov J1 5, ,000.00 Atef Abuelaish

Step 3: On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column. GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Nov Equipment ,000.00 Cash ,000.00 Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO POST BALANCE DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT 2016 Nov J1 5, ,000.00 Next, transfer the dollar amount to either the debit or the credit column of the general ledger “action” columns. Atef Abuelaish

Step 4: On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column. GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Nov Equipment ,000.00 Cash ,000.00 Purchased equipment Check 1001 ACCOUNT Equipment ACCOUNT NO POST BALANCE DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT 2016 Nov J1 5, ,000.00 Make sure that you enter the balance of the account after posting from the general journal. (This is the most up-to-date balance in the account.) Make sure you include the previous account balance in your current account balance. Atef Abuelaish

Step 5: On the general journal, enter the ledger account number in the Posting Reference column.
GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Nov Equipment ,000.00 Cash ,000.00 Purchased equipment Check 1001 141 ACCOUNT Equipment ACCOUNT NO POST BALANCE DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT 2016 Nov J1 5, ,000.00 The last thing you need to do is to write the account number of the account in the POST REF column of the general journal. This indicates that the journal entry has been posted to the general ledger. Atef Abuelaish

General Ledger Accounts
In the general ledger accounts, the balance sheet accounts appear first and are followed by the income statement accounts. The order is: Assets Liabilities Owner’s equity Revenue Expenses The general ledger contains all of the accounts that exist in a business and all of their activity. In the general ledger, balance sheet accounts are listed first, then the income statement accounts are listed next. This order of accounts speeds the preparation of the trial balance and the financial statements. Atef Abuelaish

Journal and Ledger Errors
Correct errors made in the journal or ledger Journal and Ledger Errors Sometimes errors are made when recording transactions in the journal. The method used to correct an error depends on whether or not the journal entry has been posted to the ledger. Sometimes errors are made in journalizing or posting. If the accountant wants to correct an error, the correction method will depend on whether or not the journal entry has been posted to the general ledger. Atef Abuelaish

Correcting Journal and Ledger Errors
If an error is discovered before the entry is posted, neatly cross out the incorrect item and write the correct data above it. To ensure honesty and provide a clear audit trail, erasures are not made in the journal. Here is one correction method. Atef Abuelaish

Error Correction BEFORE Posting
On September 1 an automobile repair shop purchased some shop equipment for $18,000 in cash. By mistake the journal entry debited the Office Equipment account rather than the Shop Equipment account. Let’s practice correcting an error that was discovered before it was posted to the general ledger. Atef Abuelaish

Before Posting Shop Equipment
GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Sept. 1 Office Equipment ,000.00 Cash ,000.00 Purchased equipment Check 1104 Shop Equipment Cross out the incorrect account and write the correct account above the crossed out one. Post like normal after the correction is made. The accountant would neatly cross out Office Equipment and write Shop Equipment above it. The correct account Shop Equipment would be posted to the ledger in the usual manner. Atef Abuelaish

Error correction AFTER posting
If the error is discovered after posting, a correcting entry is journalized and posted. Do not erase or change the journal entry or the postings in the ledger accounts. Note that erasures are never permitted in the journal or ledger. What if the error is discovered after posting? It is important never to erase in the journal or the ledger. Atef Abuelaish

Error Correction After Posting
On September 1 an automobile repair shop debited Office Equipment rather than Shop Equipment for $18,000 by mistake. The debit was posted to the Office Equipment account in the general ledger. A correcting journal entry must be journalized and posted. If the error is discovered after being posted to the general ledger, then a correcting journal entry must be journalized and posted. Atef Abuelaish

GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Sept. 1 Office Equipment ,000.00 Cash ,000.00 Purchased equipment Check 2141 If you discover an error after posting, it is best to make a correcting entry. A correcting entry is a journal entry made to correct an erroneous entry. In this journal entry Office Equipment was debited instead of Shop Equipment. To correct this error, a correcting journal entry must be made. This erroneous journal entry was posted to the general ledger. Atef Abuelaish

GENERAL JOURNAL PAGE DATE DESCRIPTION POST DEBIT CREDIT REF. 2016 Oct Shop Equipment ,000.00 Office Equipment ,000.00 To correct error made on Sept. 1 when a purchase of shop equipment was recorded as office equipment Here is the correcting journal entry. The correcting journal entry debits Shop Equipment and credits Office Equipment for $18,000. The entry transfers $18,000 out of the Office Equipment and into the Shop Equipment account. Atef Abuelaish

Chapter 05 Adjustments and Atef Abuelaish

Adjustments and Worksheet
Chapter 05 Adjustments and Worksheet Atef Abuelaish

Adjustments and the Worksheet
Section 1: The Worksheet Section Objectives Chapter 4 introduced and explained how to use the general journal and the general ledger. Chapter 5 shows how to complete and use the worksheet. It also shows how to prepare and record adjustments for unrecorded business transactions. We will also continue using the general journal and general ledger to journalize and post the new adjusting entries introduced in the chapter. Section one of the chapter introduces us to a “worksheet.” 5-1 Complete a trial balance on a worksheet. 5-2 Prepare adjustments for unrecorded business transactions. Atef Abuelaish

Wells’ Consulting Services
Complete a trial balance on a worksheet. The worksheet has an Account Name column The worksheet also has five sections Each section has two columns ACCOUNT NAME Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Let’s begin by entering the trial balance on the worksheet. What is a worksheet? It is a tool that accountants use at the end of an accounting period. The worksheet has three parts to the heading just like a financial statement. The heading answers Who, What and When. The first column of a worksheet is the Account Name column. The worksheet has five sections. Each section has a debit and a credit column. So, this can also be called a 10-column worksheet. Atef Abuelaish

Complete the Trial Balance section in four steps:
1. Enter the general ledger account names. 2. Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section. 3. Total the Debit and Credit columns to prove that the trial balance is in balance. To enter a trial balance on the worksheet, you would follow these steps: 4. Place a double rule under each Trial Balance column to show that the work in that column is complete. Atef Abuelaish

Step 1: Enter the general ledger account names.
CREDIT TRIAL BALANCE BALANCE SHEET ADJ. TRIAL BAL. ADJUSTMENTS INCOME STMT. DEBIT ACCOUNT NAME Wells’ Consulting Services Worksheet Month Ended December 31, 2016 Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Carolyn Wells, Cap. Accounts Payable Carolyn Wells, Draw. Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals Step 1: Enter the general ledger account names. ACCOUNT NAME Carter Consulting Service Worksheet Month Ended December 31, 2004 TRIAL BALANCE BALANCE SHEET ADJ. TRIAL BAL. ADJUSTMENTS INCOME STATEMENT CREDIT DEBIT Cash These four new accounts will be used for the adjustments. The first step is to enter the general ledger account names. We will need to add four new accounts at this time so that we can make adjustments at the end of the month. If you are not sure whether you need any additional accounts or what those account names will be, remember you can add them at the bottom of the existing list of accounts in that column. **If additional new expense accounts are needed in the adjustment process, add them to the bottom of the ACCOUNT NAME column. Atef Abuelaish

Step 2: Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section. Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 Accounts Rec. ACCOUNT ____________________________ ACCOUNT NO. ________ DATE DESCRIPTION POST REF. DEBIT CREDIT BALANCE Cash 101 Supplies Prepaid Rent Next, using the general ledger, we transfer the account balances to the DEBIT and CREDIT columns of the Trial Balance section. Equipment Accum. Depr. 2016 64,400 Nov. 30 Dec. 31 Bal. forward 87,000 123,000 125,000 117,000 116,350 111,350 Accounts Pay. J2 36,000 2,000 C. Wells, Cap. 8,000 650 5,000 C. Wells, Draw. Atef Abuelaish

Step 3: Total the Debit and Credit columns to prove that the trial balance is in balance.
111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Step 4: Place a double rule under each Trial Balance column to show that the work in that column is complete. Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. After entering all of the balances from the general ledger, we need to “foot” the columns in the Trial Balance section. To foot a column means to add the numbers in that column. They MUST BALANCE BEFORE MOVING TO THE NEXT SET OF COLUMNS. When you insure that the debits equal the credits, you are ready to complete step 4 which is to place a double rule underline under the trial balance columns to show that the work in the columns is complete. Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals Atef Abuelaish 150, ,500

Prepare adjustments for unrecorded business transactions.
TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. Now it is time to move to the next set of columns. We need to prepare adjustments for unrecorded business transactions. Let’s make some adjustments. The process of updating accounts at the end of an accounting period for unrecorded items that belong to the period is referred to as making adjustments or adjusting entries. The adjustments are made in the ADJUSTMENTS column. Adjusting entries are first entered in the Adjustments section of the worksheet Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals Atef Abuelaish 150, ,500

The Supplies Adjustment
Wells’ Consulting Services began the month with $1,500 in supplies. At the end of the month, $1,000 in supplies remained. QUESTION: What dollar amount of supplies was used during the month? $1,500 1,000 ANSWER: Let’s first discuss the supplies adjustment. The business purchased $1,500 of supplies during the month but by the end of the month, only $1,000 of supplies are left. This implies that we must have used $500 of supplies. Wells’ Consulting Services must make an adjustment to show that the company used $500 in supplies during the month. To do this we debit supplies expense and credit the asset supplies for the $500 used up. $500 Atef Abuelaish

Worksheet Month Ended December 31, 2016 TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies (a) 500 Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. We can use the worksheet to show this adjustment. We credit the Supplies account $500 and debit the Supplies Expense account $500. Notice the letter (a) by both of the adjustments. By “keying” the adjustment with a letter reference the accountant can better see the debit and credit amounts of the adjustment. Fees Income Salaries Expense Utilities Expense Supplies Expense (a) 500 Rent Expense Depr. Exp.—Equip. Totals Atef Abuelaish

The Prepaid Adjustment
On November 20, 2016, Wells’ Consulting Services paid $8,000 for the December and January rent. As of December 31, 2016, one month’s rent had already been used up. QUESTION: What dollar amount of rent was used during the month of December? $8,000 4,000 ANSWER: Now let’s take a look at the adjustment for expired rent. Recall that the company paid for two months rent in advance. By the end of the month, one month had expired so we need to reduce the Prepaid Rent account by the amount for one month’s rent. $4,000 Atef Abuelaish

Worksheet Month Ended December 31, 2016 TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies (a) 500 Prepaid Rent (b) 4,000 Equipment Accum. Depr.—Equip. Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. When we originally paid the two months of rent we debited prepaid rent and credited cash. This means that one month of rent was equal to $4,000. Wells’ Consulting Services must make an adjustment to show that $4,000 of the prepaid rent has expired. We will debit the Rent Expense account by $4,000 and credit the Prepaid Rent account by $4,000. Here is how we enter the adjustment in the worksheet. Notice the letter “b” has been placed next to both the debit and the credit. Fees Income Salaries Expense Utilities Expense Supplies Expense (a) 500 Rent Expense (b) 4,000 Depr. Exp.—Equip. Totals Atef Abuelaish

Depreciation The cost is recorded as an asset and charged to expense over the time the asset is used for the business. Asset Pie Dec. 2013 Expense Feb. 2014 Expense Now let’s move on to the concept of depreciation. When we buy an asset that will be used for many years, we will expense a portion of the cost of the asset during each of the periods that the asset benefits. This is called depreciation. Depreciation is the process of allocating the cost of long term assets over their useful lives. We do not record the cost as an expense at the time that the asset was purchased. The cost is recorded as an asset (such as equipment or building) and charged to expense over the time the asset is used in the business. This periodic expensing of the original cost is called cost allocation or DEPRECIATION. Jan. 2014 Expense This expense is called depreciation Atef Abuelaish

Estimated months of useful life
There are several methods to calculate depreciation. Wells’ Consulting Services uses the straight-line method. QUESTION: What is straight-line depreciation? Straight-line depreciation (S/L) allocates an asset’s cost in equal amounts to each accounting period of its useful life. ANSWER: Cost - salvage value Estimated months of useful life S/L depreciation = We will be using the straight-line depreciation method to figure the periodic adjustment for depreciation. The salvage value of an asset represents what we estimate it will be worth at the end of its useful life. Atef Abuelaish

Calculating Depreciation
Wells’ Consulting Services purchased equipment in November, 2016. · Cost = $11,000 · Useful life = 5 yrs or 60 months (5 yrs x 12 months) · Salvage value = $0 QUESTION: What dollar amount of depreciation expense should be recorded for the month? $11,000 - $0 60 months Cost - salvage value Estimated months of useful life When figuring depreciation, we need to understand what salvage value means. Salvage value is an estimate of the amount that may be received by selling or disposing of an asset at the end of its useful life. The equipment does not have any salvage value and we expect to use it for five years in the business. In applying the straight-line formula, we calculate a monthly depreciation amount of $183. ANSWER: $183 Atef Abuelaish

Adjustment for Depreciation Accumulated Depreciation—
Instead of decreasing the asset account directly, the adjustment for depreciation is recorded in a contra account named Accumulated Depreciation—Equipment. Equipment Accumulated Depreciation— Equipment + + In making the $183 depreciation adjustment, we do not credit the asset account directly, instead we credit a different account. We will credit a contra-asset account called Accumulated Depreciation –Equipment. This account will accumulate the amount of the asset’s cost that has been expensed (depreciated) over the life of the asset. Asset account has a normal debit balance Contra asset account has a normal credit balance Atef Abuelaish

When all adjustments are entered, total and rule the
Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies (a) 500 Prepaid Rent (b) 4,000 Equipment Accum. Depr.—Equip. (c) 183 Accounts Payable When all adjustments are entered, total and rule the Adjustments columns. Carolyn Wells, Cap. Carolyn Wells, Draw. Letter “c” is written next to the debit and credit of the journal entry in the worksheet that shows the depreciation adjustment. When all of the adjustments have been completed, “foot” the columns to insure that they balance. Fees Income Salaries Expense Utilities Expense Supplies Expense (a) 500 Rent Expense (b) 4,000 Depr. Exp.—Equip. (c) 183 Totals Atef Abuelaish 4,683 4,683

Accumulated Depreciation—
Book Value Equipment Accumulated Depreciation— Equipment 11,000 183 Original cost of equipment Record of all depreciation taken on equipment Book value shows what the asset’s net cost is on the books of the business. By “net cost,” we mean its original cost less the depreciation taken to date. It is the un-expensed portion of the original cost. The book value of our equipment right after the first depreciation adjustment is $11,000 – $183 = $10,817. Book value = Original cost – Accumulated depreciation = ,000 – 183 = ,817 Atef Abuelaish

Adjustments and the Worksheet
Chapter 5 Adjustments and the Worksheet Section 2: Financial Statements Section Objectives 5-3 Complete the worksheet. 5-4 Prepare an income statement, statement of owner's equity, and balance sheet from the completed worksheet. 5-5 Journalize and post the adjusting entries. The third objective of the chapter is to be able to complete the worksheet. Atef Abuelaish

Complete the worksheet
You have already seen how to prepare the first two sections of a worksheet: Trial Balance Adjustments You will now learn how to complete a worksheet. We are now ready to prepare the next set of columns on the worksheet. Preparing a worksheet is the fourth step of the accounting cycle. Atef Abuelaish

Step 1: Combine the figures from the Trial Balance section and the Adjustments section. Record the results in the Adjusted Trial Balance columns. ADJUSTMENTS CREDIT ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals DEBIT (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 Carolyn Wells, Cap. Carolyn Wells, Draw. ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Notice that the third section of the work sheet is the Adjusted Trial Balance section. This is where we do “horizontal math” and combine the first set of columns with the second set of adjustments columns. Atef Abuelaish

The accounts that do not have adjustments are extended from the Trial Balance section to the Adjusted Trial Balance section. 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 Carolyn Wells, Cap. Carolyn Wells, Draw. INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 5,000 11,000 3,500 100,000 8,000 650 47,000 Cash had no adjustments so its balance carries over to the Adjusted Trial balance section. The same with Accounts Receivable and so on. Atef Abuelaish

($1,500 debit and $500 credit = $1,000)
The Supplies account has a $1,500 debit balance in the Trial Balance section and a $500 credit in the Adjustments section. ($1,500 debit and $500 credit = $1,000) 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 Carolyn Wells, Cap. Carolyn Wells, Draw. INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 5,000 11,000 3,500 100,000 8,000 650 47,000 1,000 4,000 183 Our first account which had an adjustment is Supplies. It started with a $1,500 debit balance, then we credited it for $500. We carry the new adjusted balance of $1,000 to the Adjusted Trial Balance section. The second adjustment was to record the expired rent. The third adjustment was for depreciation. After each one, the new extended total is carried over to the trial balance. 500 4,000 183 Atef Abuelaish

Step 2: Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits. 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 Carolyn Wells, Cap. Carolyn Wells, Draw. 500 4000 183 1,000 4,000 INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 183 Make sure to “foot” the columns of the Adjusted Trial Balance section to insure that they balance. Atef Abuelaish 150, ,683

For accounts that appear on the balance sheet, enter the amount in the appropriate column of the Balance Sheet section. For accounts that appear on the income statement, enter the amount in the appropriate column of the Income Statement section. 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150, ,500 Carolyn Wells, Cap. Carolyn Wells, Draw. 500 4000 183 1,000 4,000 INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 183 Now we move to the final steps of completing the worksheet. Transfer the accounts which belong on the Balance sheet to the Balance Sheet section. Transfer the accounts which belong on the income statement to the Income statement section. Only assets, liabilities, and the owner’s capital account belong on the balance sheet. Revenues and Expenses belong on the income statement. The only exception to this rule of “balance sheet” and “income statement” is the drawing account. This account, when included in the adjusted trial balance is moved over to the “Balance Sheet” section even though it doesn‘t’ show up on that statement; rather it shows up on the statement of Owner’s Equity. Atef Abuelaish 150, ,683

After all the account balances are transferred to the financial statement sections, total the Debit and Credit columns. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 111,350 111,350 Accounts Receivable 5,000 5,000 5,000 Supplies 1,500 (a) 500 1,000 1,000 Prepaid Rent 8,000 (b) 4,000 4,000 4,000 Equipment 11,000 11,000 11,000 Accum. Depr.—Equip. (c) 183 183 183 Accounts Payable 3,500 3,500 3,500 Carolyn Wells, Cap. 100,000 100,000 100,000 Carolyn Wells, Draw. After all balances have been transferred, “foot” the four columns. Notice that the totals of the last two sections, “Income Statement” and “Balance Sheet” do NOT balance. More on the next slide. 5,000 5,000 5,000 Fees Income 47,000 47,000 47,000 Salaries Expense 8,000 8,000 8,000 Utilities Expense 650 650 650 Supplies Expense (a) 500 500 500 Rent Expense (b) 4,000 4000 4,000 Depr. Exp.—Equip. (c) 183 183 183 Totals Atef Abuelaish 150, ,500 4,683 4,683 150, ,683 13,333 47,000 137,350 103,683

Subtract the smaller total from the larger total in the Income Statement section to find the Net Income or Net Loss. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 111,350 111,350 Accounts Receivable 5,000 5,000 5,000 Supplies 1,500 (a) 500 1,000 1,000 Prepaid Rent 8,000 (b) 4,000 4,000 4,000 Equipment 11,000 11,000 11,000 Accum. Depr.—Equip. (c) 183 183 183 Accounts Payable 3,500 3,500 3,500 Carolyn Wells, Cap. 100,000 100,000 100,000 Carolyn Wells, Draw. 5,000 5,000 5,000 Fees Income 47,000 47,000 47,000 Focus on the Income Statement section and subtract the smaller column total from the larger column total. You will notice that the totals of the columns do not balance. The difference is considered net income or net loss. Salaries Expense 8,000 8,000 8,000 Utilities Expense 650 650 650 Supplies Expense (a) 500 500 500 Rent Expense (b) 4,000 4000 4,000 Depr. Exp.—Equip. (c) 183 183 183 Totals 150, ,500 4,683 4,683 150, ,683 13,333 47,000 137,350 103,683 Net Income Atef Abuelaish

Enter the amount on the Net Income line. (47,000 – 13,333 = 33,667)
If the credit total is more than the debit total, the firm has net income. . . Enter the amount on the Net Income line. (47,000 – 13,333 = 33,667) Net Income 150, ,683 CREDIT BALANCE SHEET INCOME STMT. DEBIT 111,350 5,000 1,000 4,000 11,000 3,500 100,000 47,000 8,000 650 500 183 13,333 137,350 103,683 ADJ. TRIAL BAL. ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 1,500 150, ,500 Carolyn Wells, Cap. Carolyn Wells, Draw. 4000 33,667 183 183 For Wells’ Consulting Services, they had $33,667 of net income for the period. Place this amount in the debit column so that both of the income statement columns now balance. Place the same amount of $33,667 in the credit column of the Balance Sheet section. After doing this, the two columns of the Balance Sheet section will also balance. This has the effect of “adding” the net income to the owner’s capital account. (Notice it’s on the credit side of the Balance Sheet section.) Atef Abuelaish

Total the Income Statement and the Balance Sheet sections.
TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 111,350 111,350 Accounts Receivable 5,000 5,000 5,000 Supplies 1,500 (a) 500 1,000 1,000 Prepaid Rent 8,000 (b) 4,000 4,000 4,000 Equipment 11,000 11,000 11,000 Accum. Depr.—Equip. (c) 183 183 183 Accounts Payable 3,500 3,500 3,500 Carolyn Wells, Cap. 100,000 100,000 100,000 Carolyn Wells, Draw. 5,000 5,000 5,000 Fees Income 47,000 47,000 47,000 Salaries Expense You can see that the “footed” columns of the Income Statement and Balance Sheet sections now balance. 8,000 8,000 8,000 Utilities Expense 650 650 650 Supplies Expense (a) 500 500 500 Rent Expense (b) 4,000 4000 4,000 Depr. Exp.—Equip. (c) 183 183 183 Totals 150, ,500 4,683 4,683 150, ,683 13,333 47,000 137,350 103,683 Net Income 33,667 33,667 47,000 47,000 137,350 137,350 Atef Abuelaish

Step 3 Post the data about transactions Step 1 Analyze transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 5 Prepare financial statements Preparing the financial statements is the fifth step in the accounting cycle. Step 9 Interpret the financial information Step Record adjusting entries Step 7 Record closing entries Step 8 Prepare a postclosing trial balance Atef Abuelaish

Prepare financial statements from the worksheet
Wells’ Consulting Services Income Statement Month Ended December 31, 2016 Revenue Fees Income $47,000 Expenses Salaries Expense $8,000 Utilities 650 Supplies Expense 500 Rent Expense 4,000 Depreciation Expense - Equipment 183 Total Expenses $13,333 Net Income for the Month $33,667 Objective Four requires that we prepare an income statement, statement of owner’s equity, and balance sheet from the completed worksheet. Use the Income Statement section of the worksheet for the amounts to carry to the income statement. You can see that the income statement is now easy to prepare. It’s just a matter of transferring the numbers over into a proper income statement format. Atef Abuelaish

Wells’ Consulting Services Statement of Owner’s Equity
Month Ended December 31, 2016 Carolyn Wells, Capital, December 1, 2016 $ 100,000 Net Income for December $33,667 Less Withdrawals for December 5,000 Increase in Capital 28,667 Carolyn Wells, Capital, December 31, 2016 $128,667 The statement of owner’s equity reports the changes that have occurred in the owner’s financial interest (the owner’s capital account) during the reporting period. Here is the Statement of Owner’s Equity for Wells’ Consulting Services. The beginning capital balance came from the (unadjusted) trial balance column, the amount of net income came from the worksheet. Atef Abuelaish

Account Form of Balance Sheet
Wells’ Consulting Services Balance Sheet December 31, 2016 Assets Cash $111,350.00 Accounts Receivable , Supplies ,000.00 Prepaid Rent ,000.00 Equipment ,817.00 Total Assets $ 132,167.00 Liabilities Accounts Payable $ 3,500.00 Owner’s Equity Carolyn Wells, Capital ,667.00 Total Liabilities and Owner’s Equity $ 132,167.00 In addition to the account form of a balance sheet that was previously used in chapter four, there is also a report form of a balance sheet, which shows the balance sheet data in a vertical format. In actual practice the report form is used most often. Atef Abuelaish

Report Form of Balance Sheet
Wells’ Consulting Services Balance Sheet December 31, 2016 Assets Cash $111,350 Accounts Receivable 5,000 Supplies 1,000 Prepaid Rent 4,000 Equipment $11,000 Less Accumulated Depreciation 183 10,817 Total Assets $132,167 Liabilities and Owner’s Equity Liabilities Accounts Payable $ 3,500 Owner’s Equity Carolyn Wells, Capital 128,667 Total Liabilities and Owner’s Equity And here it is. This balance sheet has been prepared using a report form format. All accounts, both asset and liabilities and owner’s equity are listed. Atef Abuelaish

Journalize and post the adjusting entries
The worksheet is NOT A financial statement A permanent part of the accounting records It is only a tool. Remember, a worksheet is just a tool that accountants use. It is not a formal financial statement. The adjustments shown on the worksheet must become part of the permanent accounting records. Each adjustment is journalized and posted to the general ledger accounts. The fifth objective of this chapter is to journalize and post the adjusting entries. Atef Abuelaish

Step 3 Post the data about transactions Step 1 Analyze transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Recording the adjusting journal entries is also the sixth step in the accounting cycle. Step 9 Interpret the financial information Step Record adjusting entries Step Record adjusting entries Step 7 Record closing entries Step 8 Prepare a postclosing trial balance Atef Abuelaish

What adjustments must Wells’ Consulting Services record for the month?
QUESTION: Adjustment for supplies used. Adjustment for expired rent. Adjustment for depreciation. ANSWER: Atef Abuelaish

GENERAL JOURNAL PAGE 3 POST. DATE DESCRIPTION REF . DEBIT CREDIT
Adjusting Entries Dec Supplies Expense Supplies 31 Rent Expense Prepaid Rent 31 Depr. Expense–Equipment Accum. Depr.–Equipment ACCOUNT Supplies Expense ACCOUNT NO POST BALANCE DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT Here is the first adjusting journal entry which has been posted to the supplies expense ledger account. You can take a moment and review the posting steps. The other ones are posted in a similar manner. After all adjustments have been posted, all accounts in the financial records are up to date. Adjustments are usually made on the last day of the accounting period. 2016 Dec. 31 Adjusting J3 500.00 Atef Abuelaish

Happiness is having all homework up to date
Homework assignment Using Connect – 4 Questions for 50 Points for Chapter 05. Log in Connect web site and do “Connect Orientation” for 10 Points Complete Quiz # 2 for CH at Home for 25 Points.; available till 09/28 till 09/29 at 11:59 PM. Prepare chapter 6 “Closing Entries and the Postclosing Trial Balance.” Happiness is having all homework up to date Atef Abuelaish

Thank you and See You Next Week at the Same Time, Take Care
Atef Abuelaish

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