1. Learning Objective 1 Adjustments: prepaid rent, office supplies, depreciation on equipment, and accrued salaries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

2. Steps in Accounting Cycle © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Business transactions occur Analyze and record transactions in journal Post information from journal to ledger Prepare a Worksheet Prepare Financial Statements LO-1

3. Preparing a Worksheet What is it? ◦ A columnar device used to aid accountants in completing the accounting cycle ◦ Internal document – not a formal financial statement Why is it prepared? ◦ Used to organize and check data for errors before preparing financial statements Has 5 sections ◦ Trial Balance ◦ Adjustments ◦ Adjusted Trial Balance ◦ Income Statement ◦ Balance Sheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

4. Adjusting Entries Internal transactions Bring accounts up-to-date Recognize revenues and expenses in the proper accounting period © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

5. Items that Need to be Adjusted Office Supplies Prepaid Items (Rent, Advertising) Equipment (Depreciation, Accumulated Depreciation) Expenses (Salaries, Rent, Supplies) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

6. Examples of Prepaid Adjustments Prepaid Rent at beginning of month = $3,000 (covers 6 months) End of month 1adjustment of $500 = ($3,000/6 months) Rent Expense Prepaid Rent 500 3,000 Debit 500 Credit © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

7. Examples of Adjustments Supplies on hand at the beginning of month = $4,000 Supplies on hand at the end of month = $1,200 Calculate the difference between the beginning and ending balances $4,000 - $1,200 = $2,800- Supplies used Supplies Expense Supplies 2800 4,000 2800 Debit Credit © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

8. Adjusting for Items © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Supplies Jan 5 Purchased supplies for $800800 Jan 20 Purchased supplies for $600600 1,400 Supplies available for use during January LO-1

9. Adjusting for Items © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater 1,100 Supplies available$1,400 Supplies on hand300 Supplies used$1,100 Supplies Jan 31 Supplies on hand, $300 800 600 1,400 Supplies Expense 300 LO-1 1,100 ________ 1,100

10. Adjusting for Long-Term Assets Depreciation – Allocating the cost of the asset over its useful life Straight-line depreciation Cost – Residual Value Estimated Years of Usefulness © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

11. Examples of Adjustments Company bought a piece of equipment that has a cost of $50,000, no residual value and a useful life of 10 years Formula for calculating depreciation: (Cost – Residual Value) ÷ Est. Usefulness in Months ($50,000 – 0) ÷ 120 (10 x 12) = $417 Depreciation Expense Accumulated Depreciation 417 Debit Credit © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

12. Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Equipment Jan 1 Purchased equipment for $14,000. It is estimated that the equipment will be used for 5 years, at which time it will be worth $800. LO-1 14,000

13. Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Determine depreciation for the month of January. Cost – Residual Value Estimated Years of Usefulness $14,000 – 800 5 years = $2,640 For one year: $2,640 / 12 months = $220 LO-1

14. Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Equipment 14,000 Accumulated Depreciation, Equipment Depreciation Expense, Equipment Depreciation for one month: $2,640 / 12 months = $220 LO-1 220

15. Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Depreciation Expense, Equipment 220 Expense shown on income statement LO-1

16. Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Balance Sheet January 31, 200X Assets Cash Equipment$14,000 Less accumulated depreciation 220 13,780 Historical cost of $14,000 does not change LO-1 Book Value: Unused amount to be depreciated in future periods

17. Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Accumulated Depreciation, Equipment 220 Contra asset account Shown on Balance Sheet Accumulates depreciation recognized over entire life of asset LO-1

18. Adjusting for Long-Term Assets © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Balance Sheet February 28, 200X Assets Cash$xxxx …….. xxxx Equipment$14,000 Less accumulated depreciation 44013,560 Increases each accounting period Book Value decreases LO-1

19. Adjusting for Accrued Expenses JANUARY SMTWTFS 123456 78910111213 14151617181920 21222324252627 28293031 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Employee salaries are $100 a day for a five day work week which runs from Monday thru Friday. Employees are paid every Friday. Salaries Paid (Cash) Jan 5 500 Jan 12 500 Jan 19 500 Jan 26 500 LO-1

20. Adjusting for Accrued Expenses © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Employees worked 3 days more in January, but have not yet been paid. LO-1 JANUARY SMTWTFS 123456 78910111213 14151617181920 21222324252627 28293031 Salaries Expense Jan 5 500 Jan 12 500 Jan 19 500 Jan 26 500 Jan 31 300

21. Adjusting for Accrued Expenses Employees worked 3 days more in January, but will not be paid until February 2. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Salaries Payable 3 days X $100 = $300 300 Jan 31 LO-1 Salaries Expense Jan 5 500 Jan 12 500 Jan 19 500 Jan 26 500 Jan 31 300 2,300

22. Worksheet – Problem 4B-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2