1. Adjustments and the Ten-Column Work Sheet Making Accounting Relevant Financial data must be communicated properly before it can be used effectively. Making Accounting Relevant Financial data must be communicated properly before it can be used effectively. Discuss the types of communication skills that are important to success in the workplace.

2. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory What You’ll Learn  How to complete the Trial Balance section of the work sheet.  Why certain general ledger accounts are adjusted.  Why Merchandise Inventory is adjusted.  How to calculate and record the adjustment for Merchandise Inventory. What You’ll Learn  How to complete the Trial Balance section of the work sheet.  Why certain general ledger accounts are adjusted.  Why Merchandise Inventory is adjusted.  How to calculate and record the adjustment for Merchandise Inventory.

3. Why It’s Important Some general ledger account balances are adjusted, or updated, so that the general ledger correctly reflects the financial position of the business at the end of the period. This ensures the accuracy of the end-of-period reports and statements. Why It’s Important Some general ledger account balances are adjusted, or updated, so that the general ledger correctly reflects the financial position of the business at the end of the period. This ensures the accuracy of the end-of-period reports and statements. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.) Key Terms  adjustment  beginning inventory Key Terms  adjustment  beginning inventory  ending inventory  physical inventory  ending inventory  physical inventory

4. Completing End-of-Period Work  to provide information about financial position of business  worksheet is basis for preparing financial statements and end-of-period journal entries  to provide information about financial position of business  worksheet is basis for preparing financial statements and end-of-period journal entries Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

5. The Ten-Column Work Sheet Five amount sections: The Ten-Column Work Sheet Five amount sections:  Trial Balance Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)  Adjustments  Adjusted Trial Balance  Income statement  Balance Sheet

6. Completing Trial Balance Section Proves Equality of Debits and Credits in General Ledger Completing Trial Balance Section Proves Equality of Debits and Credits in General Ledger  enter number and name of each account  even ones with zero balances  accounts listed in numerical order  enter number and name of each account  even ones with zero balances  accounts listed in numerical order Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

7. Completing the Trial Balance Section (con’t.)  enter balance of each account in appropriate column  Debit and Credit columns are:  ruled  totaled  proved  double ruled  enter balance of each account in appropriate column  Debit and Credit columns are:  ruled  totaled  proved  double ruled Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

8. Calculating Adjustments  Some account balances change because of:  internal operations of the business  passage of time  Some account balances change because of:  internal operations of the business  passage of time Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

9. Calculating Adjustments  Adjustment:  amount added to or subtracted from an account balance  brings balance up-to-date.  Adjustment:  amount added to or subtracted from an account balance  brings balance up-to-date. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

10. Calculating Adjustments  Transfer costs of assets consumed from permanent asset accounts to temporary expense accounts  assets are “expensed”  expenses are costs of doing business  matches expenses with revenues  Transfer costs of assets consumed from permanent asset accounts to temporary expense accounts  assets are “expensed”  expenses are costs of doing business  matches expenses with revenues Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

11. Determining the Adjustments Needed If the balance shown for an account is not up-to-date as of the last day of the fiscal period, then that account balance must be adjusted. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

12. Determining the Adjustments Needed IS IT ADJUSTED? Inventory Supplies Insurance Taxes IS IT ADJUSTED? Inventory Supplies Insurance Taxes Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

13. Adjusting Merchandise Inventory  Merchandise on Hand is constantly changing  Changes NOT recorded in Merchandise Inventory  Merchandise on Hand is constantly changing  Changes NOT recorded in Merchandise Inventory Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

14. Adjusting Merchandise Inventory  Buy Merchandise – Debit Purchases  Sell Merchandise – Credit Sales  Buy Merchandise – Debit Purchases  Sell Merchandise – Credit Sales Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

15. Adjusting Merchandise Inventory  Beginning Inventory = $84,921  from general ledger  in Trial Balance  same as last period’s ending  Beginning Inventory = $84,921  from general ledger  in Trial Balance  same as last period’s ending Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

16. Adjusting Merchandise Inventory  Compare Beginning to Physical  Physical Inventory = $81,385  Beginning Inventory =$84,921  Merch Inv. went down $3,536  Need to credit Merch Inv.  Debit Income Summary  Compare Beginning to Physical  Physical Inventory = $81,385  Beginning Inventory =$84,921  Merch Inv. went down $3,536  Need to credit Merch Inv.  Debit Income Summary Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

17. Adjusting the Merchandise Inventory Account (con’t.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.) Adjustment To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded. ANALYSIS Identify1.The accounts Merchandise Inventory and Income Summary are affected. Classify2. Merchandise Inventory is an asset account (permanent). Income Summary is a temporary capital account. + / –3.Merchandise Inventory is decreased by $3,536. This amount is transferred to Income Summary.

18. Adjusting the Merchandise Inventory Account (con’t.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.) Adjustment (con’t.) To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded. DEBIT-CREDIT RULE 4.To transfer the decrease in Merchandise Inventory, debit Income Summary for $3,536. 5.Decreases to asset accounts are recorded as credits. Credit Merchandise Inventory for $3,536.

19. Adjusting the Merchandise Inventory Account (con’t.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.) Adjustment (con’t.) To adjust the Merchandise Inventory account to reflect the physical inventory amount ($81,385), the following transaction is recorded. T ACCOUNTS 6. IncomeMerchandise SummaryInventory Credit Debit + 3,305 Credit – 3,536 Debit +

20. Entering the Adjustment for Merchandise Inventory on the Work Sheet Adjustments are entered in the Adjustments columns of the work sheet. The debit and credit parts of each adjustment are given a unique label. The label consists of a small letter in parentheses and is placed just above and to the left of the adjustment amounts. Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

21. Entering the Adjustment for Merchandise Inventory on the Work Sheet (con’t.) Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

22. Check Your Understanding What would you do if the Debit and Credit columns of the Trial Balance section of the work sheet are not equal? Section 1Identifying Accounts To Be Adjusted and Adjusting Merchandise Inventory (con’t.)

23. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax What You’ll Learn  Why the Supplies, Prepaid Insurance, and Federal Corporate Income Tax Expense accounts are adjusted.  How to calculate the adjustments for supplies, insurance, and federal corporate income tax.  How to enter the adjustments on the work sheet. What You’ll Learn  Why the Supplies, Prepaid Insurance, and Federal Corporate Income Tax Expense accounts are adjusted.  How to calculate the adjustments for supplies, insurance, and federal corporate income tax.  How to enter the adjustments on the work sheet.

24. Why It’s Important Account balances related to supplies, insurance, and federal corporate income tax required adjustment in order to prepare accurate financial reports. Why It’s Important Account balances related to supplies, insurance, and federal corporate income tax required adjustment in order to prepare accurate financial reports. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.)

25. Adjusting the Supplies Account Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.) Adjustment Record the adjustment for supplies. ANALYSIS Identify1.The accounts affected are Supplies and Supplies Expense. Classify2. Supplies is an asset account (permanent). Supplies Expense is an expense account (temporary). + / –3.Supplies is decreased by $3,710. Supplies Expense is increased by $3,710.

26. Adjusting the Supplies Account (con’t.) Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.) Adjustment (con’t.) Record the adjustment for supplies. DEBIT-CREDIT RULE 4.Increases to expense accounts are recorded as debits. Debit Supplies Expense for $3,710. 5.Decreases to asset accounts are recorded as credits. Credit Supplies for $3,710.

27. Adjusting the Supplies Account (con’t.) Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.) Adjustment (con’t.) Record the adjustment for supplies. T ACCOUNTS 6. InsurancePrepaid ExpenseInsurance Debit + 3,710 Debit + Credit – 3,710 Credit –

28. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.) Adjustment Record the adjustment for the expiration of one-half month’s insurance coverage. ANALYSIS Identify1.The accounts affected are Insurance Expense and Prepaid Insurance. Classify2. Insurance Expense is an expense account (temporary). Prepaid Insurance is an asset account (permanent). + / –3.Insurance Expense is increased by $125. Prepaid Insurance is decreased by $125. Adjusting the Prepaid Insurance Account

29. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.) Adjustment (con’t.) DEBIT-CREDIT RULE 4.Increases to expense accounts are recorded as debits. Debit Insurance Expense for $125. 5.Decreases to asset accounts are recorded as credits. Credit Prepaid Insurance for $125. Adjusting the Prepaid Insurance Account (con’t.) Record the adjustment for the expiration of one-half month’s insurance coverage.

30. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.) Adjustment (con’t.) T ACCOUNTS 6. InsurancePrepaid ExpenseInsurance Debit + 125 Debit + Credit – 125 Credit – Adjusting the Prepaid Insurance Account (con’t.) Record the adjustment for the expiration of one-half month’s insurance coverage.

31. Check Your Understanding Explain how to make an adjustment for prepaid insurance. Section 2Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax (con’t.)

32. Section 3Completing the Work Sheet and Journalizing and Posting the Adjusting Entries What You’ll Learn  How to complete the Adjusted Trial Balance section.  How to extend amounts to the Income Statement and Balance sheet sections.  How to report the net income or net loss for the period.  How to journalize the adjusting entries in the general journal.  How to post the adjusting entries to the general ledger. What You’ll Learn  How to complete the Adjusted Trial Balance section.  How to extend amounts to the Income Statement and Balance sheet sections.  How to report the net income or net loss for the period.  How to journalize the adjusting entries in the general journal.  How to post the adjusting entries to the general ledger.

33. Why It’s Important The work sheet is the source of information for journalizing the adjusting entries and preparing the financial statements. Why It’s Important The work sheet is the source of information for journalizing the adjusting entries and preparing the financial statements. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

34. Completing the Adjusted Trial Balance Section Once the adjustments are entered in the Adjustments section of the work sheet, it is important to prove that the accounts are still in balance. This is done by completing an adjusted trial balance. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

35. Extending Amounts to the Balance Sheet and Income Statement Sections Beginning with line 1, each account balance in the Adjusted Trial Balance section is extended to the appropriate column of either the Balance Sheet section or the Income Statement section. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

36. Completing the Work Sheet  After all amounts are extended to the Balance Sheet and Income Statement sections, a single rule is drawn across the columns in these sections.  All four columns are then totaled.  The difference between the two column totals in each section is the amount of net income (or net loss) for the period.  After all amounts are extended to the Balance Sheet and Income Statement sections, a single rule is drawn across the columns in these sections.  All four columns are then totaled.  The difference between the two column totals in each section is the amount of net income (or net loss) for the period. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

37. Completing the Work Sheet (con’t.)  After the net income (or net loss) is recorded, the columns in the Balance Sheet and Income Statement sections are ruled and totaled.  A double rule is drawn across all four columns.  After the net income (or net loss) is recorded, the columns in the Balance Sheet and Income Statement sections are ruled and totaled.  A double rule is drawn across all four columns. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

38. Journalizing Adjustments The journal entries that update the general ledger accounts at the end of a period are called adjusting entries. The source of information for journalizing the adjusting entries is the Adjustments section of the work sheet. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

39. Journalizing Adjustments (con’t.) Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

40. Posting Adjusting Entries to the General Ledger  After the adjusting entries are recorded in the general journal, they are posted to the general ledger accounts.  Once the adjusting entries are posted, the general ledger accounts are up-to-date.  After the adjusting entries are recorded in the general journal, they are posted to the general ledger accounts.  Once the adjusting entries are posted, the general ledger accounts are up-to-date. Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)

41. Check Your Understanding Which types of general ledger accounts appear in the Balance Sheet section of the work sheet? Section 3Completing the Work Sheet & Journalizing & Posting the Adjusting Entries (con’t.)