1. Adjustments & the Ten-Column Worksheet
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Adjustments & the Ten-Column Worksheet
Chapter 18

2. Completing end-of-period work
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Completing end-of-period work
In this chapter, you will prepare a ten-column work sheet for a merchandising business organized as a corporation
This work sheet is the basis for preparing end-of-period financial statements, adjusting entries, & closing entries

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Ten-column work sheet
How is the ten-column work sheet different from the six-column work sheet?
Additional columns are for Adjustments & Adjusted Trial Balance sections.
The ten-column work sheet has five amount sections instead of three:
Trial Balance
Adjustments
Adjusted Trial Balance
Income Statement
Balance Sheet

4. Completing the trial balance section
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Completing the trial balance section
Proves the equality of debits & credits in the general ledger
Accounts are listed in the order that they appear in the general ledger
Every general ledger account is listed, even those with zero balances

5. Calculating adjustments
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Calculating adjustments
Not all changes in account balances result from daily business transactions
Some result from internal business operations or the passage of time
Some assets are used gradually over the accounting period (ex. Supplies & prepaid insurance)

6. Permanent & temporary accounts
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Permanent & temporary accounts
There are no source documents for changes in account balances caused by the internal operations of a business or the passage of time.
Such changes are recorded through adjustments made at the end of the period to the account balance
Adjustment- amount that is added to or subtracted from an account balance to bring that balance up to date.
Every adjustment affects at least one permanent account & one temporary account

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At the end of the period, adjustments are made to transfer the costs of the assets consumed from the asset accounts (permanent accounts) to the appropriate expense accounts (temporary accounts)
Accountants say these accounts are “expensed” because the costs of consumed assets are expenses of doing business
Thus when an adjustment is recorded, the expenses for a given period are matched with the revenue for that period.

8. Determining the adjustments needed
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Determining the adjustments needed
Review each account balance in the work sheet’s trial balance section
If the balance is not up to date as of the last day of the fiscal period, that account balance must be adjusted

9. The changes are not recorded in the Merchandise Inventory account
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The amount of merchandise on hand is constantly changing during the period
The changes are not recorded in the Merchandise Inventory account
During the period, the cost of merchandise purchased is recorded in the Purchases account
As merchandise sales reduce inventory, the amount of each sale is recorded in the Sales account, not Merchandise Inventory
At the end of the period, the balance in the Merchandise Inventory account does not reflect the amount of merchandise on hand. So the Merchandise Inventory account must be adjusted

10. Adjusting the Merchandise Inventory Account
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Adjusting the Merchandise Inventory Account
Merchandise Inventory is an asset account used by merchandising businesses
Beginning inventory – merchandise a business has on hand and available for sale at the beginning of a period.
Ending Inventory – merchandise on hand at the end of a period. The ending inventory for one period becomes the beginning inventory for the next period.
The account balance for Merchandise Inventory does not change during the period. It is changed only when a physical inventory is taken.

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Physical Inventory
An actual count of all merchandise on hand and available for sale.
Can be taken at any time
One is always taken at the end of the period
Cost of Inventory = quantity of each item * unit cost
After physical inventory has been taken, ending inventory amount replaces the beginning inventory amount recorded in Merchandise Inventory. This is accomplished by an adjustment to Merchandise Inventory.

12. Calculating the adjustment for Merchandise Inventory
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Calculating the adjustment for Merchandise Inventory
When calculating the adjustment for Merchandise Inventory, you need to know (1) the Merchandise Inventory account balance and (2) the physical inventory amount
See Adjustment Example on page 521.
The effect of all the purchases and sales during the period is a decrease to Merchandise Inventory
This reduction in inventory needs to be recorded as an adjustment in the accounting records
The two accounts affected by the inventory adjustment are Merchandise Inventory & Income Summary.

13. Entering the adjustment for Merchandise Inventory on the Work Sheet
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If the ending inventory is higher than beginning inventory, Merchandise Inventory is debited & Income Summary is credited
Entering the adjustment for Merchandise Inventory on the Work Sheet
Adjustments are entered in the Adjustments column of the work sheet.
The debit & credit parts of each adjustment are given a unique label that consists of a small letter in parentheses placed just above & to the left of the adjustment amounts
The adjustments are labeled as follows:
First adjustment (a)
Second adjustment (b)
Third adjustment (c)
The number of adjustments varies depending on the business
Once the adjustments have been entered, the work sheet provides the information needed to make the adjusting journal entries

14. Adjusting supplies, prepaid insurance, & Federal Corporate Income Tax
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Adjusting supplies, prepaid insurance, & Federal Corporate Income Tax
Financial statements must reflect the proper insurance expenses each period
Supplies & federal corporate income taxes also represent significant expenses that must be reported accurately
Adjusting the supplies account
As supplies are consumed, they become an expense of the business
The Supplies account is updated at the end of the period
See Adjustment example on pages in book.

15. Adjusting the prepaid insurance account
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Adjusting the prepaid insurance account
Prepaid Insurance is an expense paid in advance.
As coverage “expires,” the value of the unexpired portion of the coverage will decrease
Prepaid Insurance will be adjusted with a credit to update its balance.
The adjustment records the expired portion as a business expense
See Adjustment Example on pages in book.

16. Adjusting the Federal Corporate Income Tax Accounts
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Adjusting the Federal Corporate Income Tax Accounts
Corporations pay Federal Corporate Income Taxes on its net income
Many states & cities also tax corporate income
A corporation’s accountant estimates its federal corporate income taxes for the coming year & pays that amount to the federal government in quarterly installments
At the end of the year, the exact net income & the tax on that income are determined
Adjustments may need to be made if the corporation paid too much or not enough Federal Corporate Income Tax

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After all adjustments have been entered, the adjustments section of the work sheet is totaled and ruled.
Each adjustment has an equal debit & credit so the totals of the adjustments debit & credit columns should be the same.

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Completing the Work Sheet & Journalizing & Posting the Adjusting Entries
After proving the Adjusted Trial Balance section, the accountant can complete the work sheet
Extending the Work Sheet Balances
At this point, the amounts for each account must be extended to or carried over to the Adjusted Trial Balance, Income Statement, & Balance Sheet sections

19. Completing the adjusted trial balance section
This work sheet shows the updated balance of all general ledger accounts
The accountant will combine the balance of each account in the Trial Balance section with the adjustment (if any)
The new balance is entered in the appropriate Adjusted Trial Balance column
See Figure 18.4 on page 530.
The amount of the adjustment is added to or subtracted from the amount in the Trial Balance section.
Add debits to debits; add credits to credits; subtract debits & credits
If total debits equal total credits, this section has been proved

20. Extending amounts to the balance sheet & income statement sections
Each account balance in the Adjusted Trial Balance section is extended to the appropriate column of either the Balance Sheet or Income statement
Income statement section contains the balances of all temporary accounts
Balance sheet contains the balances of all permanent accounts

21. Journalizing & posting adjusting entries
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Journalizing & posting adjusting entries
Adjusting entries – journal entries that update the general ledger account at the end of the period
Adjustments section of work sheet is source of information for journalizing the adjusting entries
Accounts debited & credited in adjustments section are entered in the general journal

22. Journalizing adjustments
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Journalizing adjustments
Before recording the first adjusting entry, write words adjusting entries in description column
This eliminates the need for an explanation after each entry
Following entries are recorded in Adjustments column of work sheet:
Adjusting merchandising inventory
Adjusting supplies
Adjusting insurance
Adjusting income tax

23. Posting adjusting entries to the General Ledger
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Posting adjusting entries to the General Ledger
Adjusting entries are then posted to general ledger
Balances in general ledger accounts all agree with amounts entered on Income Statement & Balance Sheet

24. Posting these entries accomplishes the following:
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Posting these entries accomplishes the following:
Supplies expense account has been “charged” with the value of supplies used in the period
Supplies account reflects only the amount of items still remaining in inventory.
Merchandise inventory account reflects the correct inventory value
Income summary account has been “charged” with the cost of goods sold for the period
Insurance expense account reflects the appropriate insurance for the period
Prepaid insurance account has been reduced by the amount of insurance expired
Federal Corporate Income Tax Payable account has been increased to reflect the appropriate payable amount.
Federal Corporate Income Tax Expense account reflects the tax expense for the period.
See Figure 18.7 for general journal & ledger accounts after posting of adjusting entries