0. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Completing End-of-Period Work
In addition to account totals, managers, stockholders, and creditors need to know net income and the value of stockholders’ equity to make sound business decisions.
In this chapter, you will learn how to prepare a ten-column work sheet for a merchandising business.
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1. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
The Ten-Column Work Sheet
The ten-column work sheet is prepared in the same way as the six-column work sheet, but the ten-column work sheet has five amount sections:
Trial Balance
Adjustments
Adjusted Trial Balance
Income Statement
Balance Sheet
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2. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Completing the Trial Balance Section
A trial balance is used to prove the general ledger. Follow these steps to prepare the trial balance:
Enter the account name and number for each account in the Account Name and Number columns.
Enter the balance in the Debit or Credit column.
Rule the Debit and Credit columns.
If the Debit and Credit columns are proven, draw a double-rule line across both columns.
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3. The Trial Balance section of the Work Sheet
Completing the Trial Balance Section
SECTION 18.1
The Trial Balance section of the Work Sheet
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4. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Calculating Adjustments
Some changes in account balances result from internal business operations or the passage of time. Examples are Supplies and Prepaid Insurance.
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5. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Permanent Accounts and Temporary Accounts
A change in an account balance caused by the internal operations or the passage of time is recorded through an adjustment. At the end of the period, adjustments are made to transfer the costs of assets consumed from asset accounts to the appropriate expense accounts.
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6. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Determining the Adjustments Needed
If a balance is not up to date as of the last day of the fiscal period, it must be adjusted.
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7. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Adjusting the Merchandise Inventory Account
Beginning inventory is the merchandise a business has on hand at the beginning of a period. Ending inventory is the merchandise on hand at the end of a period. The asset account Merchandise Inventory’s balance changes only when a physical inventory, an actual count of all merchandise on hand and available for sale, is taken.
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8. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Calculating the Adjustment for Merchandise Inventory
When calculating the adjustment for Merchandise Inventory, you need to know
the account’s balance, and
the physical inventory amount.
Purchases and sales during the period will decrease the account balance. The reduction in inventory is recorded as an adjustment in the accounting records.
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9. Calculating the Adjustment for Merchandise Inventory
SECTION 18.1
Calculating the Adjustment for Merchandise Inventory
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10. Identifying Accounts to Be Adjusted and Adjusting Merchandise Inventory
SECTION 18.1
Entering the Adjustment for Merchandise Inventory on the Work Sheet
Adjustments are entered in the Adjustments columns of the work sheet. To do this, follow these steps:
In the Adjustments Debit column, enter the debit amount of the adjustment on the Income Summary line.
In the Adjustments Credit column, enter the credit amount of the adjustment on the Merchandise Inventory line.
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11. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax
SECTION 18.2
Adjusting the Supplies Account
As supplies are used, they become expenses of the business. A physical inventory is taken at the end of the period to make an adjustment to the Supplies account.
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12. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax
SECTION 18.2
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13. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax
SECTION 18.2
Adjusting the Prepaid Insurance Account
A prepaid expense is an expense paid in advance. Insurance premiums are a prepaid expense. An adjustment records the expired portion as a business expense.
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14. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax
SECTION 18.2
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15. Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax
SECTION 18.2
Adjusting the Federal Corporate Income Tax Accounts
Corporations pay federal corporate income taxes on its net income. A corporation estimates its federal corporate income taxes for the coming year and pays that amount to the government in quarterly installments.
When the exact tax amount is determined, the company may find it is required to pay additional taxes or it may qualify for a tax refund.
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16. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
Extending Work Sheet Balances
The amounts for each account must be extended to or carried over to the Adjusted Trial Balance, the Income Statement, and the Balance Sheet sections.
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17. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
Completing the Adjusted Trial Balance Section
The balance of each Trial Balance account is combined with the adjustments in the Adjustments section. The new balance is entered in the appropriate Adjusted Trial Balance column.
If there is no adjustment, the balance is transferred to the same column in the Adjusted Trial Balance section.
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18. Completing the Adjusted Trial Balance Section
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19. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
Extending Amounts to the Balance Sheet and Income Statement Sections
Each account in the Adjusted Trial Balance section is extended to one of the following sections:
the Income Statement section, containing temporary account balances
the Balance Sheet section, containing permanent account balances
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20. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
Completing the Work Sheet
A single rule is drawn across the four columns in the Balance Sheet and Income Statement sections. The columns are totaled. Net income or net loss is recorded on the work sheet. The sections are proven if the two Income Statement sections are equal and the two Balance Sheet sections are equal.
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21. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
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22. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
Journalizing and Posting Adjusting Entries
Adjusting entries update the general ledger accounts at the end of a period. These entries come from the Adjustments section of the work sheet.
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23. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
Journalizing Adjustments
The following entries are recorded in the Adjustments columns:
adjusting merchandise inventory
adjusting supplies
adjusting insurance
adjusting income tax
The debit part of the entry is recorded first. The date for adjusting entries is the last day of the period.
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24. Completing the Work Sheet and Journalizing and Posting the Adjusting Entries
SECTION 18.3
Posting Adjusting Entries to the General Ledger
Adjusting entries are recorded in the general journal and then posted to the general ledger accounts. This will cause the general ledger account balances to agree with the Income Statement and Balance Sheet sections.
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25. Posting Adjusting Entries to the General Ledger
SECTION 18.3
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26. Posting Adjusting Entries to the General Ledger
SECTION 18.3
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27. Posting Adjusting Entries to the General Ledger
SECTION 18.3
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