4–1McQuaig Bille

11College Accounting10th Edition

McQuaig Bille Nobles

© 2011 Cengage Learning

PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University

Chapter 4

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Fiscal PeriodFiscal Period A fiscal period is any period of time covering

a complete accounting cycle. A fiscal year is a fiscal period consisting of

twelve consecutive months. A fiscal year does not have to coincide with

the calendar year. For income tax purposes, any period of 12

consecutive months may be selected. However, you must be consistent from year to year.

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The Accounting CycleThe Accounting CycleSequence of steps in the accounting process completed during the fiscal period.

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The Work SheetThe Work Sheet

The work sheet is a tool (working paper) used by accountants to record necessary adjustments and provide up-to-date account balances needed to help in preparing financial statements.

The heading consists of three lines: (1) the name of the company, (2) the title of the working paper, and (3) the period of time covered.

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Work Sheet for Conner’s Whitewater Adventure

Work Sheet for Conner’s Whitewater Adventure

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The Columns of the Work SheetThe Columns of the Work Sheet

Assuming normal balances, the account classifications are listed in the Trial Balance Debit and Credit columns of the work sheet as follows:

Trial Balance Columns

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The Columns of the Work SheetThe Columns of the Work Sheet

The adjusted trial balance columns are merely extensions of the Trial Balance Columns, plus or minus any adjustment amounts.

Adjusted Trial Balance Columns

Assets

The Columns of the Work SheetThe Columns of the Work Sheet

An income statement contains the revenues minus the expenses.

Revenue accounts have credit balances, so they are recorded in the Income Statement Credit column.

Expense accounts have debit balances, so they are recorded in the Income Statement Debit column.

Income Statement Columns

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The Columns of the Work SheetThe Columns of the Work Sheet

Balance Sheet Columns Asset accounts have debit balances, so they are

recorded in the Balance Sheet Debit column. Liability accounts have credit balances, so they

are recorded in the Balance Sheet Credit column.

The Capital account has a credit balance, so it is recorded in the Balance Sheet Credit column.

Drawing is a deduction from Capital, thus it has a debit balance and is recorded in the Balance Sheet Debit column.

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AdjustmentsAdjustments

Adjustments are a way of updating the ledger accounts.

Adjustments may be considered internal transactions.

They are determined after the trial balance has been prepared.

Adjustments are first recorded on the work sheet when using a manual accounting system.

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Prepaid InsurancePrepaid Insurance

(a) The $1,875 balance in Prepaid Insurance represents the premium paid in advance for a three-month liability insurance policy.

$1,875 per year ÷ 3 months = $625 per month

Prepaid Insurance

Cost of insurance that remains paid in advance

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Recording the Adjustment on the Work Sheet

Recording the Adjustment on the Work Sheet

Label the debit and credit amounts of the adjustment with (a) in the Adjustment columns.

Extend the new amount in the Prepaid Insurance account to the Balance Sheet Debit column.

Extend the new amount for the Insurance Expense account to the Income Statement Debit column.

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Depreciation of EquipmentDepreciation of Equipment Durable items, such as appliances and fixtures, are

recorded as Equipment because they will last longer than one year.

The cost of these assets should be systematically spread out over their useful lives.

This process is called depreciation.

Depreciation Expense, Equipment

Accumulated Depreciation, Equipment, is contrary to, or a deduction from, Equipment, so we call it a contra account.

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(b) The Equipment account has a balance of $51,300. Conner estimates that the equipment will have a useful life of seven years, with a trade-in (salvage) value of $8,292 at the end of that time. Using straight-line depreciation, Conner determines the depreciation for one month is $512.

Example of Depreciation of Equipment Example of Depreciation of Equipment

STEP 1. Subtract the trade-in (salvage) value from the cost to get the full depreciation.

$51,300 – $8,292 = $43,008

STEP 2. Divide the full depreciation by the number of years in the asset’s useful life to get the depreciation for one year.

$43,008 ÷ 7 = $6,144

STEP 3. Divide the depreciation for one year by 12 to get the depreciation for one month.

$6,144 ÷ 12 = $512

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On the balance sheet, the balance of Accumulated Depreciation is deducted from the balance of the related asset account.

Depreciation of EquipmentDepreciation of Equipment

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This adjustment necessary because the end of the pay period rarely falls on the same day as the end of the fiscal period.

Wages ExpenseWages Expense

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(c) The amount of wages for the month of June for Conner Whitewater Adventures is $2,360 (or $78.67 per day based on 30 days). The last payday was June 24.

Using Wages Expense and Wages Payable accounts, update the ledger accounts for unpaid (or accrued) wages owed to employees for the time between the end of the last pay period and the end of the fiscal period.

Wages ExpenseWages Expense

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Net IncomeNet Income

Net income (or net loss) is the difference between revenue and expenses.

When revenue is larger than expenses, net income is placed in the Income Statement Debit column. It is also placed in

the Balance Sheet Credit column.

Net LossNet Loss

When revenue is smaller than expenses, the net loss is placed in the Income

Statement Credit column.

It is also placed in the Balance Sheet Debit column.

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Mixed AccountsMixed Accounts

Each adjusting entry contains an income statement account (revenue or expense) and a balance sheet account (asset, contra asset, or liability).

Accountants refer to these accounts as mixed accounts, which are accounts with balances that are partly income statement and partly balance sheet amounts.

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Steps in Completion of the Work SheetSteps in Completion of the Work Sheet

1. Complete the Trial Balance columns, total, and rule.

2. Complete the Adjustments columns, total, and rule.

3. Complete the Adjusted Trial Balance columns, total, and rule.

4. Record balances in the Income Statement and Balance Sheet columns and total each column.

5. Record net income or net loss in the Income Statement columns by subtracting the smaller side from the larger side and adding the differences to the smaller side, total, and rule.

6. Record net income or net loss in the Balance Sheet columns by subtracting the smaller side from the larger side and adding the difference to the smaller side, total, and rule.

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Finding Errors in the Income Statement and Balance Sheet Columns

Finding Errors in the Income Statement and Balance Sheet Columns

1. Check to see that the amount of the net income or loss is recorded in the correct columns.

2. Verify the addition of all the columns.3. Look to see if the appropriate amounts have been recorded in

the Income Statement and Balance Sheet columns.4. Verify, by adding or subtracting across each line, that the

amounts carried over from the Trial Balance columns through the Adjustments columns into the Adjusted Trial Balance columns are correct.

5. Verify that the correct amounts of the revenue and expense accounts are transferred to the Income Statement columns.

6. Verify that the correct amounts of assets, liabilities, and owner’s equity accounts are transferred to the Balance Sheet columns.

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Since we have completed the work sheet for Conner’s Whitewater Adventures, we can now prepare the income statement, the statement of owner’s equity, and the balance sheet by taking the figures directly from the work sheet.

Completion of the Financial Statements

Completion of the Financial Statements

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to Statement of Owner’s Equity

(continued)

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from the Income Statement

to the Balance Sheet

(continued)

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from the Statement of Owner’s Equity

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Journalizing Adjusting EntriesJournalizing Adjusting Entries

The work sheet is not a journal, so we must journalize adjusting entries to update the ledger accounts.

Take the information for these entries directly from the Adjustments columns of the work sheet.

Debit and credit exactly the same accounts and amounts from the work sheet to the journal.

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Journalizing Adjusting EntriesJournalizing Adjusting Entries

Note that the entries have been posted

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Posting Adjusting EntriesPosting Adjusting Entries

When you post the adjusting entries to the ledger accounts, write the abbreviation “Adj.” in the Item column of the ledger account.

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In adjusting accounts, notice that the intent is to make sure the expenses recorded match up or compare with the revenues of the same period of time. This is called the matching principle.

Matching PrincipleMatching Principle

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Income Statement Involving More Than One Revenue Account and a Net Loss

Income Statement Involving More Than One Revenue Account and a Net Loss

When an organization has more than one distinct source of revenue, a separate revenue account is set up for each source.

Harris Miniature Golf’s income statement is an example of a company has more than one revenue account.

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Note that expenses are greater than revenues, resulting in a net loss.

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Statement of Owner’s Equity with an Additional Investment

and a Net Income

Statement of Owner’s Equity with an Additional Investment

and a Net Income

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Statement of Owner’s Equity with an Additional Investment

and a Net Loss

Statement of Owner’s Equity with an Additional Investment

and a Net Loss

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Income Statement for Preparing Balance Sheet

Income Statement for Preparing Balance Sheet

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Balance Sheet for a Business Having More Than One Accumulation

Depreciation Account

Balance Sheet for a Business Having More Than One Accumulation

Depreciation Account

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Balance Sheet with Statement of Owner’s Equity Included

Balance Sheet with Statement of Owner’s Equity Included

The information normally shown in the statement of owner’s equity is sometimes included as part of the owner’s equity section of the balance sheet.

Computerized accounting programs frequently do not produce a separate statement of owner’s equity.

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