1. Copyright  2006 Pearson Education Canada Inc. 5-1

2. Copyright  2006 Pearson Education Canada Inc. 5-2 Outline  Adjusting the Trial Balance: Step 5  Adjusting Entries: Need and Purposes  Prepayments  Inventory Adjustments  Unearned Revenue  Bad Debts  The Worksheet  The Adjusted Trial Balance  Preparing the Financial Statement Worksheet: 6 Steps

3. Copyright  2006 Pearson Education Canada Inc. 5-3 Adjusting the Trial Balance: Step 5  Need for adjusting entries  Recorded in the General Journal on the last day of the accounting period  Use of a financial statement worksheet  Types of adjusting entries - Prepayments, accruals, utilization of assets, unearned revenues, bad debts

4. Copyright  2006 Pearson Education Canada Inc. 5-4 Adjusting Entries: Need and Purposes  Update the trial balance accounts before the financial statements are prepared  Properly reflect assets, liabilities, owners’ equity, revenue and expense accounts on the financial statements based on accrual accounting

5. Copyright  2006 Pearson Education Canada Inc. 5-5 Prepayments  Items paid in advance that will benefit one or more accounting periods  Purpose of adjusting entry is to recognize the expense by debiting the expired portion of the prepayment, so that what remains is the UNexpired portion

6. Copyright  2006 Pearson Education Canada Inc. 5-6 Prepaid expenses Paid two year-insurance premium on Nov 1, 2002 Prepaid expenses 2400- Cash 2400- Adjustment on Dec 31, 2002 Insurance Expense 200- Prepaid expenses 200- 2400 = 100 x 2 months= 200 To record insurance expired from Nov 1 to Dec 31 2400 = 100 x 2 months= 200 24mos 24mos

7. Copyright  2006 Pearson Education Canada Inc. 5-7 Insurance Exp Prepaid Insurance 12/31 adj. 200 10/2 2400- Adj. Bal 200 Bal 2400- 12/31 adj. 200- Adj. bal 2200- Trial balance-Information (before adjusting entry) Prepaid Insurance 2400- Insurance Expense -0- PREPAID ADJUSTING ENTRIES

8. Copyright  2006 Pearson Education Canada Inc. 5-8 Accrued expenses Nov 1- Company borrowed $100,000 from Third N. Bank(90-day note) Nov 1 Cash 100,000 Notes Payable 100,000 Dec 31 Interest Expense 2,000 Interest Payable 2000 To record interest incurred from Nov 1 to Dec 31, as = Follows: 100,000 x 12% = 12000 = 1000X 2= 2000 12 months $1000/month times Two months

9. Copyright  2006 Pearson Education Canada Inc. 5-9 Depreciation Purchase furniture with an estimated useful life of 10 years for $61,000 Sept 1 Furniture 61,000 Cash 61,000 Depreciation Expense 2,000 Acc Depr., Furniture 2,000 ADJUSTING ENTRY ON DECEMBER 31

10. Copyright  2006 Pearson Education Canada Inc. 5-10 Reporting Furniture and Equipment on the Balance Sheet Furniture and Equipment $61,000 Less Accumulated depreciation 2,000 Net Furniture and Equipment $59,000

11. Copyright  2006 Pearson Education Canada Inc. 5-11 Inventory Adjustments Purchased office supplies in the amount of $300 May 1 and another $500 (on credit) on July 10 May 1 Office Supplies Inventory 300 Cash 300 July 10 Office Supplies Inventory 500 A/P 500 Oct 31 Office Supplies Expense 600 Office Supplies Inventory 600 To expense office supplies consumed during the period ($800-200=600) Office Supplies On Hand $200 On Oct 31

12. Copyright  2006 Pearson Education Canada Inc. 5-12 Inventory Adjustments Office Supplies Inventory 5/1 300 Adj. 10/31 600 7/10 500 Bal 10/31 800 600 Adj bal 10/31 200 Office Supplies Expense Adj. 600 Adj bal 10/31 600 Adjusted balance of $200 will appear on the Adjusted Trial Balance and on the Balance Sheet Adjusted balance of $600 will appear on the Adjusted Trial Balance and on the Income Statement

13. Copyright  2006 Pearson Education Canada Inc. 5-13 Unearned Revenue (or Deferred Income) On Oct 10 Rx Hotel receives $10,000 to be used against future hotel reservations Oct 10 Cash 10,000 Customer Deposits 10,000 Dec 31 Customers’ Deposits 6,000 Room Sales 6,000

14. Copyright  2006 Pearson Education Canada Inc. 5-14 Bad Debt Estimate A/R on trial balance $100,000- It is estimated (from previous experience) that 3% are uncollectible Dec 31 Bad Debts Expense 3,000 Allowance for doubtful accounts 3,000 Allowance for doubtful Accounts –Contra Asset Account Balance Sheet Presentation Accounts Receivable $100,000 Less Allowance for doubtful Accts 3,000 Net Receivables $ 97,000

15. Copyright  2006 Pearson Education Canada Inc. 5-15 General Journal Adjusting Entry for Accrued Interest

16. Copyright  2006 Pearson Education Canada Inc. 5-16 The Adjusted Trial Balance  Prepared after all adjusted entries are recorded in the journal and posted to the general ledger  Can be used as a basis to prepare financial statements, because it contains all the current balances in the accounts

17. Copyright  2006 Pearson Education Canada Inc. 5-17  The worksheet is a multi-column form which serves as a “tool” in the preparation of adjusting entries, closing entries, and financial statements It is composed of five sections (5 sets of Dr. and Cr. columns):  Trial balance  Adjustments  Adjusted trial balance  Income statement  Balance sheet The Worksheet

18. Copyright  2006 Pearson Education Canada Inc. 5-18 Preparing the Financial Statement Worksheet: 6 Steps 1. Heading 2. Unadjusted balances are placed in trial balance column 3. Adjusting entries are entered in the adjustments column 4. Combine adjustments and unadjusted trial balance columns to produce the adjusted trial balance 5. Extend all amounts to the income statement or balance sheet columns 6. Determine net income or net loss for the period as the balancing amount

19. Copyright  2006 Pearson Education Canada Inc. 5-19 Neat Restaurants Financial Statement Worksheet For the year ended July 31, 2005

20. Copyright  2006 Pearson Education Canada Inc. 5-20 Neat Restaurants Financial Statement Worksheet For the year ended July 31, 2005

21. Copyright  2006 Pearson Education Canada Inc. 5-21 Neat Restaurants Financial Statement Worksheet For the year ended July 31, 2005

22. Copyright  2006 Pearson Education Canada Inc. 5-22 Neat Restaurant F/S Worksheet Year ended July 31, 2005