1. Chapter Twelve Work Sheet and Adjusting Entries

2. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 2 Performance Objectives 1.Prepare an adjustment for supplies 2.Prepare an adjustment for merchandise inventory under the periodic inventory system 3.Prepare an adjustment for unearned revenue

3. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 3 Performance Objectives 4.Record the following adjustment data in a work sheet: –Merchandise inventory –Unearned revenue –Supplies used –Expired insurance –Depreciation –Accrued wages or salaries

4. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 4 Performance Objectives 5.Complete the work sheet 6.Journalize the adjusting entries for a merchandising business under the periodic inventory system 7.Journalize the adjusting entry for merchandise inventory under the perpetual inventory system

5. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 5 Adjustments Bring the books “up to date” Are made every time the financial statements are produced Occur simply because time has passed or an asset has been used up Each adjustment affects at least one income statement account –Provides a more accurate net income number Each adjustment affects at least one balance sheet account –Makes the fundamental accounting equation (A = L + OE) more accurate

6. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 6 Matching Principle and Accrual Accounting Matching principle –Revenue for one time period is matched up or compared with the related expenses for the same time period –Uses adjusting entries to match unrecorded expenses and revenues in one period to expenses and revenues in that same period that have already been recorded Accrual accounting –Record revenue when it is earned, regardless of when the cash comes in –Record expenses when they are incurred, regardless of when the cash goes out

7. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 7 Adjustments 1.Record adjustments in the worksheet 1.Label debits and credits for each entry with a letter reference: (a),( b), (c) Record the adjustments in the general journal

8. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 8 Performance Objective 1 Prepare an adjustment for supplies

9. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 9 Data for Adjusting Supplies Debit Supplies when supplies are purchased throughout the period Take inventory to determine the amount of supplies left at the end of the period Make an adjusting entry for the amount used (total minus amount left) –Debit Supplies Expense –Credit Supplies

10. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 10 Performance Objective 2 Prepare an adjustment for merchandise inventory under the periodic inventory system

11. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 11 Periodic Inventory System The system under which the buying of merchandise during the year is recorded as –Debit to Purchases –Credit to Accounts Payable or Cash At the end of the year, a physical count of the stock of goods is taken –No changes to Merchandise Inventory account until physical count is taken Adjusting entries are made to record the amount of the physical count

12. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 12 Physical Inventory An actual count of the stock of goods on hand

13. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 13 Brings Inventory Balance to Counted Total! Adjustments for Merchandise Inventory Step One: Remove beginning inventory –Credit Merchandise Inventory –Debit Income Summary Step Two: Enter the new balance from the physical count –Debit Merchandise Inventory –Credit Income Summary

14. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 14 Performance Objective 3 Prepare an adjustment for unearned revenue

15. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 15 Unearned Revenue Revenue received in advance for goods or services to be delivered later Classified as a liability until the revenue is earned

16. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 16 Why We Adjust Unearned Revenue When we buy a one- year insurance policy, we record: Prepaid Insurance –Each month, we incur 1/12 of the cost as Insurance Expense –Adjustments “update our accounts” and make our financial statements more accurate When the insurance company receives our check, they record: Unearned Insurance Revenue –Each month, they earn 1/12 of it as Insurance Revenue –Adjustments “update their accounts” and make their financial statements more accurate “See both sides of the coin!” One person’s expense is another person’s revenue!

17. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 17 Unearned Revenue—A Liability The customer has a claim against the company for the goods or services until the goods are delivered or the services are rendered Time Magazine “owes” the customer the magazines The insurance company “owes” the customer the insurance coverage

18. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 18 The Adjustment for Unearned Revenue Assume Bell Publishing receives $82,000 in cash for subscriptions covering two years At the end of the year $30,750 of the subscriptions have been earned Record as –Debit to Unearned Subscriptions –Credit to Subscriptions Income

19. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 19 The Adjustment for Unearned Revenue

20. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 20 Performance Objective 4 Record the adjustment data in a work sheet (including merchandise inventory, unearned revenue, supplies used, expired insurance, depreciation, and accrued wages or salaries)

21. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 21 Adjusted Trial Balance in the Work Sheet Eliminate the Adjusted Trial Balance column Extend the adjusted amounts to –Income Statement column –Balance Sheet column

22. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 22 Income Statement and Balance Sheet Columns Don’t combine debit and credit amounts for Income Summary

23. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 23 Complete the Work Sheet Take a look in the textbook at the Dodson Plumbing Supply work sheet. –It’s too big to fit into the PowerPoint slides!

24. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 24 Steps for Completing the Work Sheet 1.Record trial balance –Total and rule column –Make sure DR = CR 2.Record adjustments in work sheet; make sure totals are equal 3.Record adjusted balance of each account in Income Statement and Balance Sheet columns –Total and rule columns –DR ≠ CR

25. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 25 Steps for Completing the Work Sheet 4.In the Income Statement columns, calculate net income or net loss –Subtract the smaller side from the larger side –“Plug” this number to make DR = CR –If there is net income, the credit side of the columns will be larger and you will place net income on the debit side –If there is net loss, the debit side of the columns will be larger and you will place net loss on the credit side

26. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 26 Steps for Completing the Work Sheet 5.In the Balance Sheet columns, calculate net income/loss –Subtract the smaller side from the larger side –“Plug” this number to make DR = CR

27. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 27 Performance Objective 6 Journalize the adjusting entries for a merchandising business under the periodic inventory system

28. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 28 Journalize Adjusting Entry for Supplies

29. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 29 Post Adjusting Entry for Supplies

30. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 30 Journalize Adjusting Entry for Merchandise Inventory Update Accounts

31. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 31 Journalize Adjusting Entry for Unearned Revenue Insurance company receives cash for a one-year insurance policy After a month, the insurance company has earned one month’s revenue

32. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 32 Journal Entries and Posting (T Account Demo) 1100 2110 4110

33. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 33 Journal Entries Under the Periodic Inventory System

34. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 34 Performance Objective 7 Journalize the adjusting entry for merchandise inventory under the perpetual inventory system

35. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 35 Perpetual Inventory System The system under which the buying of merchandise during the year is recorded as: –Debit to Merchandise Inventory –Credit to Accounts Payable or Cash When merchandise is sold, the cost of the merchandise is recorded as: –Debit to Cost of Goods Sold –Credit to Merchandise Inventory At the end of the year, a physical count of the stock of goods is taken –An adjusting entry is made to record the difference between the amount of the count and the amount previously recorded

36. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 36 T Account Comparison of the Two Inventory Systems Bought merchandise on account, $50,000

37. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 37 T Account Comparison of the Two Inventory Systems Sold merchandise for $82,000 having a cost of $61,200

38. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 38 T Account Comparison of the Two Inventory Systems Adjusting entry for ending inventory by physical count, $68,400

39. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 39 Journal Entries for Merchandise Inventory Under the Perpetual Inventory System

40. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 40 Comparison of Income Statements

41. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 41 Demonstration Problem We will complete a work sheet and make the adjusting journal entries

42. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 42 Work Sheet For Year Ended December 31, 20--

43. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 43 Empty Inventory Account For Year Ended December 31, 20--

44. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 44 Place Counted Inventory into Merch. Inv. Account For Year Ended December 31, 20--

45. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 45 Record All Adjustments For Year Ended December 31, 20--

46. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 46 Carry Over to Income Statement Column For Year Ended December 31, 20--

47. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 47 Carry Over to Balance Sheet Column For Year Ended December 31, 20--

48. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 48 Work Sheet For Year Ended December 31, 20--

49. Copyright © Houghton Mifflin Company. All rights reserved. 12 - 49 Journal Entries Before Posting 2,142.00