1. Adjusting Entries and the Work Sheet
Chapter Four
Adjusting Entries and the Work Sheet

2. Performance Objectives
Define:
Fiscal period
Fiscal year
Accounting cycle
Adjustments
Worksheet
Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages
Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheet
Accounting Is Fun!

3. Performance Objectives
Journalize and post adjusting entries
Prepare financial statements
An income statement involving more than one revenue account and a net loss
A statement of owner’s equity with an additional investment and either a net income or a net loss
An income statement and a balance sheet for a business having more than one accumulated depreciation account
A balance sheet containing the statement of owner’s equity information
Accounting Is Fun!

4. Define: Fiscal Period Fiscal Year
Any period of time covering a complete accounting cycle
Generally consisting of twelve consecutive months
The period could be:
One month
One quarter
One year
Fiscal Year
A fiscal period consisting of twelve consecutive months
Accounting Is Fun!

5. Accounting Cycle
The sequence of steps in the accounting process completed during the fiscal period
Accounting Is Fun!

6. List The Steps In The Accounting Cycle
Analyze source documents & record business transactions in a journal
Post journal entries to the ledger accounts
Prepare a trial balance
Gather adjustment data and record adjustments in the work sheet
Complete the work sheet
Create financial reports from data in work sheet
Journalize and post the adjusting entries
Journalize and post the closing entries
Prepare the post-closing trial balance
Chapter 3
Chapter 4
Chapter 5
Accounting Is Fun!

7. What Are Adjustments? Are all the accounts up to date? Example:
What about prepaid Insurance?
Adjustments:
Internal transactions that bring ledger accounts up to date as a planned part of the accounting procedure
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8. Work Sheet
A multicolumn working paper used by accountants to record necessary adjustments and provide up-to-date account balances needed to prepare the financial statements
A TOOL used by accountants to bring all the account information together to prepare financial statements
Accounting Is Fun!

9. Accounting Is Fun!

10. Performance Objective 3
Complete a work sheet for a service enterprise, involving adjustments for expired insurance, depreciation, and accrued wages
Accounting Is Fun!

11. Adjustments
Internal transactions that make the financial statements more accurate and bring ledger accounts up to date as a planned part of the accounting procedure
1st:
Recorded in the Adjustments columns of the work sheet (makes the financial statements more accurate)
2nd:
Record the adjustments in the journal, then post to the ledger accounts (brings the books up to date)
Each adjustment directly affect accounts on the
Income statement
Balance sheet
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12. Adjustments
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13. Matching Principle
The principle that the revenue for one time period is matched up or compared with the related expenses for the same time period
To get an more accurate net income number (and resultant balance sheet accounts), we always want to match all the expenses of one period to the all the revenues of that same period
Match does not mean:
Match.Com (joke)
“Equals”
Accounting Is Fun!

14. Accruals Accrual Expense meaning of accrual:
Recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded
Expense meaning of accrual:
Record (recognize) an expense when it has been incurred but not yet recorded in the books
Regardless of when the cash is paid
Revenue meaning of accrual:
Record (recognize) a revenue when it has been earned but not yet recorded in the books
Regardless of when the cash is received
Accrued earnings are a better financial measurement for the economic activity for the accounting period
Define incur: To come in existence; To bring upon oneself
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15. Adjustment for Prepaid Insurance
The asset insurance paid for in advance partly or completely expires with the passage of time
The asset portion must be reduced and the corresponding expense increased
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16. Adjustment for Prepaid Insurance Recorded in Work Sheet
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17. Adjustments - Depreciation
Originally we bought equipment for $49,720
We paid the cash or incurred debt for it, so why can’t we just record it as an expense?
Because the income statement would show expenses that are too large
Because the equipment will probably be around for many more years!
The Equipment will probably help to generate revenue for many more years to come
As a result, we must chop the original cost up into pieces and spread the pieces out over the useful life of the asset
This is called depreciation
Accounting Is Fun!

18. Depreciation
Systematically spreads out the cost of these assets over their useful lives
Matches the expenses for one period to the revenue generated for that same period (Matching Principle)
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19. Depreciation
An expense based on the expectation that an asset will gradually decline in usefulness due to time, wear and tear, or obsolescence; the cost of the asset is therefore spread out over its estimated useful life
A portion of depreciation expense is allotted to each fiscal period
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20. Straight-line Depreciation
A means of calculating depreciation in which the cost of an asset, less any trade-in value, is allocated evenly over the useful life of the asset
(Cost - Trade-in Value)/(Useful Life in Years)
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21. Adjustment for Depreciation of Equipment
We have calculated the depreciation expense
Expenses are debits
But what is the credit entry?
Equipment?
No: The historical cost principle says that we must keep the original cost on the books!
We cannot credit the Equipment account
We credit the contra account: Accumulated Depreciation
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22. Definitions Contra Account
An account that is contrary to, or a deduction from, another account; for example, Accumulated Depreciation is listed as a deduction from Equipment
Contra accounts are always “attached” to another account
Contra accounts are always a subtraction from the account it is attached to
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23. Accumulated Depreciation
Accumulated depreciation is a contra asset account
It is “connected” to the related asset account
The debits & credits are the same as the asset account
But the plus and minus signs are reversed
Because it is subtracted from the related asset account!
When depreciation is recorded, we do not directly subtract (credit) the related asset, such as equipment
The amount of depreciation should be recorded in the account: accumulated depreciation
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24. Accumulated Depreciation
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25. Book Value or Carrying Value
The cost of an asset minus the accumulated depreciation
Listed on the balance sheet
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26. Adjustment for Depreciation Recorded in Work Sheet
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27. Depreciation and Land Why don’t we depreciate land?
Land supposedly lasts forever
It does not get “used up over time”
It can help to generate revenue for a very long time
Accounting Is Fun!

28. Adjustment for Wages Expense
Why necessary?
The end of the pay period rarely falls on the same day as the end of the fiscal period
Accrued wages
The amount of unpaid wages owed to employees for the time between the end of the last pay period and the end of the fiscal period
Accounts used:
Wages Expense (DR)
Wages Payable (CR)
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29. Adjustment for Wages Expense
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30. Adjustment for Wages Expense
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31. Adjustment for Wages Expense
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32. Adjustment for Wages Expense for Arch Copy Co.
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33. Adjustment for Wages Expense Recorded in Work Sheet
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34. Complete a Work Sheet for a Service Enterprise
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35. Steps to Complete Worksheet
Complete Trial Balance columns, total, and rule (DR = CR)
Complete Adjustments columns, total, and rule (DR = CR)
Label entries with letter references: (a), (b)
Complete Adjusted Trial Balance columns, total, and rule (DR = CR)
Record balances in Income Statement and Balance Sheet columns and total each column (DR ≠ CR)
Accounting Is Fun!

36. Steps to Complete Worksheet
Record net income or net loss
Subtract the smaller of the Income Statement columns from the larger; add the difference to the smaller side, total, and rule
If there is a net income, the credit side of the columns will be larger and you will place net income on the debit side
If there is a net loss, the debit side of the columns will be larger and you will place net loss on the credit side
Accounting Is Fun!

37. Steps to Complete Worksheet
Record net income or net loss in the Balance Sheet columns
Subtract the smaller side from the larger side; add the difference to the smaller side, total, and rule
The amount should equal the difference between the Income Statement columns
Accounting Is Fun!

38. Complete the Trial Balance Columns
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39. Complete the Adjustments Columns
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40. Complete the Adjusted Trial Balance Columns
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41. Carry the Amounts to Either the Income Statement or Balance Sheet Columns
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42. Worksheets with Two Pages
Totals at the bottom of the first page of the work sheet may not be equal
DR must equal CR at the bottom of the second or last page
Accounting Is Fun!

43. Finding Errors in Income Statement and Balance Sheet Columns
Is all the addition across to the Adjusted Trial Balance columns correct?
Are the adjusted trial balance amounts moved to the correct column?
Revenues and expenses to Income Statement columns?
Everything else to Balance Sheet columns?
Is the addition for totals and footings correct?
Is net income or net loss placed in the correct columns?
Accounting Is Fun!

44. Performance Objective 4
Prepare an income statement, a statement of owner’s equity, and a balance sheet for a service business directly from the work sheet
Accounting Is Fun!

45. Income Statement
Copy all revenue and expenses from the Income Statement columns straight over to the income statement
Date is for the whole period
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46. Income Statement
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47. Statement of Owner’s Equity
Always check the beginning balance of Capital
Is there any additional investment?
Record net income or net loss
Are there any withdrawals?
Date is for the whole period
Remember:
Since we list the Capital account twice, the appropriate date must be included with the account title
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48. Statement of Owner’s Equity
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49. Balance Sheet Create new accounts for accumulated depreciation
Copy all assets and liabilities to balance sheet
Use ending Capital from statement of owner’s equity
Date is just one day
“Snapshot in time!”
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50. Balance Sheet
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51. Performance Objective 5
Journalize and post adjusting entries
Accounting Is Fun!

52. Why Journalize and Post?
Adjustments
In the work sheet but not officially in the books
Adjusting entries
Bring the books up to date at the end of the fiscal period
Accounting Is Fun!

53. Sequence First journalize the adjustments in the general journal
Then post the adjustments to the appropriate ledger accounts
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54. Be sure to write “Adjusting Entries” before you begin the entries
Journal Entries
Be sure to write “Adjusting Entries” before you begin the entries
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55. Post the Journal Entries
Be sure to write “Adjusting” in the Item column
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56. Performance Objective 6
Prepare
An income statement involving more than one revenue account and a net loss
A statement of owner’s equity with an additional investment and either a net income or a net loss
An income statement and a balance sheet for a business having more than one accumulated depreciation account
A balance sheet containing the statement of owner’s equity information
Accounting Is Fun!

57. An Income Statement Involving More Than One Revenue Account and a Net Loss
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58. A Statement of Owner’s Equity with an Additional Investment and Net Income
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59. A Statement of Owner’s Equity with an Additional Investment and a Net Loss7 6
$68 4
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60. An Income Statement with More Than One Depreciation Expense Account
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61. A Balance Sheet with More Than One Accumulated Depreciation Account
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62. A Balance Sheet Containing Statement of Owner’s Equity Information
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63. Demonstration Problem
The account balances of Colfeld Company as of June 30, 2003, the end of the fiscal month, are shown on the following slide
We will complete the following tasks:
Complete the work sheet
Prepare an income statement
Prepare a statement of owner’s equity
Prepare a balance sheet
Journalize the adjusting entries
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64. Accounting Is Fun!

65. Adjustment Data
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66. Accounting Is Fun!

67. Accounting Is Fun!

68. Accounting Is Fun!

69. Accounting Is Fun!

70. Reconcile the amounts in the Trial Balance columns and the Adjustments columns and place the amounts into the Adjusted Trial Balance column
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71. Accounting Is Fun!

72. Calculate net income or net loss
Carry the appropriate amounts to either the Income Statement columns or the Balance Sheet columns
Calculate net income or net loss
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73. Accounting Is Fun!

74. Accounting Is Fun!

75. Prepare an Income Statement
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76. Prepare a Statement of Owner’s Equity
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77. Prepare a Balance Sheet
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78. Use Work Sheet To Make Adjustments
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79. Journalize the Adjusting Entries
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80. Journalize the Adjusting Entries
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81. Journalize the Adjusting Entries
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82. Journalize the Adjusting Entries
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83. Post In Order To Get Information Into Ledger Accounts
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84. Post Reference!
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