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College Accounting

Heintz & Parry20th Edition

Chapter 5

Adjusting Entries

and the Work Sheet

1

Prepare end-of-period

adjustments.

• Changes occur that affect the business’s

financial condition:

– Equipment wearing out

– Prepaid insurance and supplies being

used up

– Employees earning wages that have

not yet been paid

• Since these events have not been entered into

the accounting system, ADJUSTING ENTRIES

must be made.

• Requires the matching of REVENUES EARNED

during an accounting period with the

EXPENSES INCURRED

• Provides the best measure of net income

• Necessitates accounts be brought up to date

before financial statements are prepared

• A 12-month period of time used as an

accounting period

• Does not need to be the same as a calendar

year

• Many businesses schedule their fiscal year to

end when business is slow

2

Post adjusting entries to

the general ledger.

Let’s look at some adjusting entries for Jessie Jane’s Campus Delivery.

TB

During June, Jessie purchased supplies for $80. These were debited to the

supplies account.

SUPPLIES

80PURCHASED

IN JUNE


supplies account.

SUPPLIES

80

Bal. 80

According to an inventory of supplies,

there are only $20of supplies on hand at the end of June.

TB


supplies account.

SUPPLIES

80

Bal. 80

But unless there is an adjusting entry made,$80 of supplies will be

shown on thebalance sheet.

TB


supplies account.

SUPPLIES

80

Bal. 80ADJUSTING ENTRY

NEEDED!!!!

TB

SUPPLIES

80

Bal. 80 $80 Purchased during month

– 20 Supplies remaining

$60 Supplies used

TB

SUPPLIES

80

Bal. 80

$60 is credited to Supplies to remove

the amount of supplies used during June.

60

TB

Adj.

SUPPLIES

80

Bal. 80

$60 is debited to Supplies Expenseto recognize the amount ofsupplies used during June.

60

SUPPLIES EXPENSE

60TB

Adj.

Adj.

SUPPLIES

80

Bal. 80

60

SUPPLIES EXPENSE

60TB

Adj.

Adj.

Now the balance sheet will show $20

of supplies!

20Bal.

SUPPLIES

80

Bal. 80

60

SUPPLIES EXPENSE

60TB

Adj.

Adj.

20Bal.

The income statementwill show $60 of supplies

used during June.

Bal. 60

TB

During June, Jessie paid $200 for an eight-month liability insurance policy with coverage beginning on June 1.

PREPAID INSURANCE

2008-month policyJune 1–Jan. 31

19

TB

During June, Jessie paid $200 for an eight-month liability insurance policy with coverage beginning on June 1.

PREPAID INSURANCE

200Now that June is over, weneed to remove the costof one month’s insurance

from this account.

PREPAID INSURANCE

200

$200 for 8 months:$200 ÷ 8 = $25 per month

TB

PREPAID INSURANCE

200

Prepaid Insurance iscredited for $25 to removeJune’s insurance coverage

that has expired.

25

TB

Adj.

PREPAID

INSURANCE

200

25

INSURANCE EXPENSE

25

Insurance Expense is debited for$25 to recognize the amount

of insurance coverage for June.

TB

Adj.

Adj.

PREPAID

INSURANCE

200

25

INSURANCE

EXPENSE

25TB

Adj.

Adj.

The balance sheet will show$175 (7 months) of prepaid insurance!

Bal. 175

24

PREPAID

INSURANCE

200

25

INSURANCE

EXPENSE

25TB

Adj.

Adj.

Bal. 175

The income statement will show $25 (1 month) of insurance consumed!

Bal. 25

Jessie paid her part-time employees $650 on June 27. Since then, they have earned an

additional $50, but have not yet been paid.

WAGES EXPENSE

650

650Bal.

$650 does not include all of thewages earned by employees

during June.

TB

Jessie paid her part-time employees $650 on June 27. Since then, they have earned an additional $50, but

have not yet been paid.

WAGES EXPENSE

650

650Bal.

An ADJUSTING ENTRY is needed!

TB

WAGES EXPENSE

650

$50 debit to Wages Expense for the additional wages

earned during June.

50

TB

Adj.

WAGES EXPENSE

650

Jessie Jane owes the employees for the additional wages.

This liability is recorded in the wages payable account.

50

WAGES PAYABLE

50

Adj.

TB Adj.

WAGES EXPENSE

650

50

WAGES PAYABLE

50

Adj.

TB Adj.

The income statement will show ALL wages earnedby employees in June!

Bal. 700

WAGES EXPENSE

650

50

WAGES PAYABLE

50

Adj.

TB Adj.

Bal. 700

The balance sheet will show the liability for wages earned in June that will be paid in July.

Bal. 50

• Assets are recorded at their actual cost.

• The cost remains on the books as long as the

business owns the asset.

• No adjustments are made for changes in the

market value of the asset.

• The period of time that an asset is expected to

help produce revenues.

• Useful life expires as a result of wear and tear or

because it no longer satisfies the needs of the

business.

• As this happens, depreciation expense should

be recognized and the value of the asset should

be reduced.

• Depreciation is a method of matching an asset’s

original cost against the revenue produced over

the useful life.

• There are many depreciation methods. (We will

use the straight-line method.)

• Depreciation expense is based on estimates of

useful lives and salvage values.

• The expected market value or selling price of an

asset at the end of its useful life

• Also called:

– Scrap value, or

– Residual value

Jessie has motor scooters with an estimated useful live of 3 years, no

salvage value, and an original cost of $3,600.

Because Jessie expects the scootersto be of no value when the three yearsare over, the whole $3,600 cost needsto be spread over the next three years.

FORMULA:

1st step: Calculate the depreciable cost.

Original

Cost

Salvage

Value =Depreciable

Cost

$3,600 $0 = $3,600

–

–

37

2nd step: Determine depreciation expense for this accounting period.

FORMULA:

Depreciable

Cost

Estimated

Useful Life

$3,600

Since we are trying to computedepreciation for one month,we will use months instead

of years.

=


FORMULA:

Depreciable

Cost

Estimated

Useful Life

$3,600

36 months=


FORMULA:

Depreciable

Cost

Estimated

Useful Life

$3,600

36 months= =

$100 per

month

Now that we know depreciation for June is $100, let’s figure out the

adjusting entry.

DELIVERY

EQUIPMENT

3,600

We do NOT adjust this account.It should always reflect the

ORIGINAL COST of the asset.

TB

DELIVERY

EQUIPMENT

3,600

Depreciation is credited to this account instead of the asset account.

ACCUMULATED

DEPRECIATION—

DELIVERY EQUIPMENT

100TB Adj.

• Is a contra-asset account

– “Contra” means opposite

• Has a credit balance (the opposite of an asset)

• Is deducted from the related asset account on

the balance sheet

• The value carried on the books or in the

accounting records

• Book Value = Cost of Plant Assets –

Accumulated Depreciation

• Also called undepreciated cost

DELIVERY

EQUIPMENT

3,600

ACCUMULATED

DEPRECIATION—

DEL. EQUIP.

100

DEPRECIATION

EXPENSE—

DEL. EQUIP.

100

3

Prepare a work sheet.

• Pulls together all of the information needed to:

– Enter adjusting entries

– Prepare financial statements

• Is not a financial statement

• Is not a formal part of the accounting system

• Ordinarily, only the accountant uses a work sheet

• Commonly in a 10-column format

5 STEPS

1. Prepare the Trial Balance.

2. Prepare the Adjustments.

3. Prepare the Adjusted Trial Balance.

4. Extend Adjusted Balances to the

Income Statement and Balance

Sheet columns.

5. Complete the Work Sheet.

Jessie Jane’s Campus Delivery

Work Sheet

For Month Ended June 30, 20--

TRIAL BALANCE

DEBIT CREDITACCOUNT TITLE

Heading includes:Name of the company

Name of the working paperDate of the accounting

period just ended

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Jessie Jane’s Campus Delivery

Work Sheet

For Month Ended June 30, 20--

TRIAL BALANCE

DEBIT CREDITACCOUNT TITLE

Step #1: Prepare the trial balance (before any adjustments)

in the first pair of amount columns.


TRIAL BALANCEDEBITCREDIT

ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS

Accounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr.—Del. Equip.Accounts PayableWages PayableJessica Jane, Capital

Delivery FeesWages Expense

Jessica Jane, Drawing

Rent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.—Del. Equip.

37065080

2003,600

1,800

2000150

2150650200

50

5,950 5,950

This is the same trial balance

from Chapter 3, now being shown

on a 10-column work sheet.



ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS





370650

80200

3,600

1,800

2,000150

2,150650200

50

5,950 5,950

Step #2: Prepare the adjustments.



ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS





37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

Let’s record the supplies adjustmentwe computed earlier:

$60 debit to Supplies Expense;$60 credit to Supplies.



ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS





37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

60(a)


Adjustments are identified with a letter in parentheses.


ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS





37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

60(a)

The remaining adjustments are entered on the work sheet and the

Adjustments columns are totaled.



ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS





37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)



ACCOUNT TITLE

CashDEBIT CREDIT

ADJUSTMENTS





37065080

2003,600

1,800

2,000150

2,150650200

50

5,950 5,950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235


The Adjustments columns

BALANCE!!!

TRIAL BAL.ACCOUNT

TITLE

Cash

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80

Step #3: Prepare the adjusted trial balance.

DR.CR. CR.DR.

ADJ. TRIAL BAL.

DR. CR.


TRIAL BAL.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. EqA. D..-Del Eq.Accts PayWages PayJ. J., Cap

Del. FeesWages Exp.

J. J., Drawing


370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80

CR. DR.ADJ. TRIAL BAL.

Balance before Adjustments

+/– Adjustment =Adjusted Balance

$370 +/– $0 = $370

370


TRIAL BAL.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del Eq.Accts. Pay.Wages PayJ. J., Cap

Del. FeesWages Exp

J. J., Drawing


370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80



+/– Adjustment = Adjusted Balance

$650 +/– $0 = $650

370650


TRIAL BAL.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts PayWages PayJ. J., Cap

Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80



+/– Adjustment = Adjusted Balance

$80 – $60 = $20

37065020


TRIAL BAL.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

ADJUSTMENTS


Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. ExpTel. ExpIns. Exp.D. E.–Del. Eq.

370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80


37065020

This process continuesuntil ALL accountsare included in the

Adjusted Trial Balance columns.


TRIAL BAL.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

ADJUSTMENTS

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap.

Del. FeesWages Exp

J. J., Drawing


370650

2003600

1800

2000150

2150650200

50

5950 5950

60(a)

60(a)25(b)

25(b)

50(c)

50(c)

100(d)

100(d)235 235

80


37065020

1753600

1001800

502000

150

2150700200605025

1006100 6100


The AdjustedTrial Balance columns

balance!!!!

ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. Exp.Tel. Exp.Ins. ExpD. E.–Del. Eq.

CR. DR.BALANCE SHEET

370650

20175

3600100

180050

2000150

2150700200605025

1006100 6100

Step #4: Extend adjusted balancesto the Income Statement and

Balance Sheet columns.


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del. Eq.Accts. Pay.Wages PayJ. J., Cap

Del. FeesWages Exp

J. J., Drawing

Rent ExpSup. ExpTel. Exp.Ins. Exp.D. E.–Del. Eq.


37065020

1753600

1001800

502000

1502150

700200605025

1006100 6100

Each account in theAdjusted Trial Balance columns

is extended to either the Income Statement columns

or the Balance Sheet columns, but not both.


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp

J. J., Drawing



37065020

1753600

1001800

502000

1502150

700200605025

1006100 6100

The Income Statement columns include all accounts found on the

income statement…REVENUES AND EXPENSES


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp

J. J., Drawing



37065020

1753600

1001800

502000

1502150

700200605025

1006100 6100

The Balance Sheet columns include the remaining accounts…

ASSETS, LIABILITIES, CAPITAL, AND DRAWING


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

1006100 6100

37065020

1753600

25

ASSETS


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

1006100 6100

37065020

1753600

100

25

CONTRA-ASSET


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

50

25


LIABILITIES

ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

502000

25

CAPITAL


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing

Rent Exp.Sup. Exp.Tel. ExpIns. Exp.D. E.–Del. Eq.


37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

502000

150

25

DRAWING


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



37065020

1753600

1001800

502000

1502150

7002006050

1006100 6100

37065020

1753600

1001800

502000

1502150

25

REVENUE


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

EXPENSES


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.–Del Eq.Accts Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

Step#5: Complete the work sheet.a. Rule and total the Income Statement

and Balance Sheet columns.


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

Step #5: Complete the work sheet.b. Calculate the difference between

the Income Statement Debit andCredit columns.

($2,150 – $1,135 = $1,015)


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

Step #5: Complete the work sheet.c. Calculate the difference between

the Balance Sheet Debit andCredit columns.

($4,965 – $3,950 = $1,015)


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.

Accts. Rec.SuppliesPpd. Ins.Del. EqA. D.–Del. Eq.Accts. Pay.Wages Pay.J. J., Cap.

Del. FeesWages Exp

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

The differences are the same!!!!The work sheet balances!!!

Since the Income Statement Credit column (REVENUES) exceedsthe Income Statement Debit

column (EXPENSES), the difference is called NET INCOME.


DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

Step #5: Complete the work sheet.d. Add the net income to theIncome Statement Debit and

the Balance Sheet Credit column(columns with the smallest totals).

ADJ. T. B.


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing

Rent ExpSup. Exp.Tel. Exp.Ins. Exp.D. E.–Del. Eq.


37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 3950

Step #5: Complete the work sheet.e. Total and double rule (underline) the columns.

1015 1015Net Income


ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965


Describe methods

for finding errors on

the work sheet.

4

If any of the columns on the work sheet do not balance, you must find the error before you

continue.

• Check the addition of all columns.

• Check the addition and subtraction required when extending to the Adjusted Trial Balance columns.

• Make sure the adjusted account balances have been extended to the appropriate columns.

• Make sure that the net income or net loss has been added to the appropriate columns.

• The work sheet helps the accountant organize

the end-of-period financial information, including

adjusting entries.

• The accounts are not adjusted until a general

journal entry is made and posted to the general

ledger accounts.

DATE DESCRIPTION PR DEBIT CREDIT

Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

Instead of an explanation aftereach adjusting entry, “Adjusting Entries” is

written before the first adjusting entry.



Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

Each adjusting entry is dated the last day of the accounting

period.

June 3020--



Adjusting Entries1

2

3

4

5

6

7

8

9

10

11

June 3020--

Supplies Expense 60 00

Supplies 60 00

30 Insurance Expense 25 00

25 00Prepaid Insurance

30 Wages Expense 50 00

Wages Payable 50 00



Adjusting Entries (cont.)1

2

3

4

5

6

7

8

9

10

11

30 Depr. Exp.—Del. Equip. 100 00

Accum. Depr.—Del. Equip. 100 00

June20--


Account: Account No.

DATE ITEM PR DR. CR.BALANCE

DR. CR.

Supplies Expense 523

20--June 30 Adjusting

Posting adjusting entries is the same as posting other entries

except “Adjusting” is writtenin the item area.


Account: Account No.

DATE ITEM PR DR. CR.BALANCE

DR. CR.

Supplies Expense 523

20--June 30 Adjusting 60 60


Explain the cash,

modified cash,

and accrual bases

of accounting.

6

• Revenues are recorded when EARNED

• Expenses are recorded when INCURRED

• Recognizes receivables and payables

• Offers the best matching of revenues and

expenses

– The best method of measuring income

for most businesses

– Smaller service organizations often

use the cash or modified cash basis

• Revenues are recorded when cash is

RECEIVED

• Expenses are recorded when cash is PAID

• Similar to the accrual basis if:

– There are few receivables, payables,

and assets

• Can vary significantly if:

– A business has many receivables,

payables, and assets

• Combines aspects of the cash and accrual

methods

• A business uses the cash basis for recording

revenues and most expenses

• Exceptions are made when cash is paid for

assets with useful lives greater than one

accounting period

• If cash is paid for equipment, buildings,

supplies, or insurance, these are recorded as

assets, and adjustments are made each period

as under the accrual basis

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