work sheet, financial statements, and adjusting entries © paradigm publishing, inc.1 chapter 6...
TRANSCRIPT
1. Prepare three basic financial statements.
2. Explain the need for adjusting entries.
3. Make adjusting entries for supplies used, expired insurance, depreciation, and unpaid wages.
4. Complete a work sheet for a service business.
5. Prepare financial statements from a work sheet.
6. Journalize and post adjusting entries.
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Learning Objectives
Financial Statements
Summaries of financial activities
Used to communicate important accounting information to users
The three basic types:Income Statement
Statement of Owner’s Equity
Balance Sheet
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Financial Statements
Income StatementA summary of a business’s revenue and expenses for a specific period of time, such as a month or year
Statement of Owner’s Equity A summary of the changes that have occurred in owner’s equity during a specific period of time
Balance SheetA listing of a firm’s assets, liabilities, and owner’s equity at a specific point in time
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Salaries expense would appear on a firm’s
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a. statement of owner’s equity.
b. balance sheet.
c. income statement.
d. balance sheet and statement of owner’s equity.
e. balance sheet and income statement.
Relationships Among Statements
Income StatementPrepared first
To determine a firm’s net income
Net Income Is shown on the statement of owner’s equity
Part of determining ending owner’s equity
Ending Owner’s EquityShown on the balance sheet
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Which financial statement is prepared first?
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a. Statement of owner’s equity
b. Income statement
c. Balance sheet
d. Balance sheet or statement of owner’s equity, depending on management’s preference
e. Balance sheet or income statement, depending on management’s preference
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Net income would appear
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a. only on a statement of owner’s equity.
b. on a firm’s balance sheet.
c. only on a firm’s income statement.
d. on both a firm’s balance sheet and statement of owner’s equity.
e. on both a firm’s income statement and statement of owner’s equity.
The Accounting Cycle: Steps 5 Through 8
Step 5 Determine needed adjustments.
Step 6 Prepare a work sheet.
Step 7 Prepare financial statements from a completed work sheet.
Step 8 Journalize and post adjusting entries.
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Determine Needed Adjustments
An adjusting entry is an entry made at the end of an accounting period to bring up to date the balance of an account that has become out of date.
Adjusting entries are referred to as internal transactions because they do not involve parties outside the business.
Adjusting entries never affect the cash account.
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Make adjusting entries for supplies used, expired insurance,
depreciation, and unpaid wages
Learning Objective 3
Example
Supplies Used
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Assume the Office Supplies account has a balance before adjustment of $275.An inventory account on December 31 shows $230 of supplies still on hand.Therefore $45 of supplies have been used during the accounting period.
Example
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Adjusting Entry for Supplies Used
Office Supplies
Debit Credit
+ -
BalanceAmount
used
Office Supplies Expense
Debit Credit
+ -
Transferred to
The amount of supplies used is debited to an expense account (Office Supplies Expense) and credited to an asset account (Office Supplies).
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If it is determined that $150 of supplies are used during the accounting period, the adjusting entry will include a
a. debit to Cash for $150.
b. debit to Supplies for $150.
c. credit to Supplies Expense for $150.
d. debit to Supplies Expense for $150.
e. credit to Supplies Payable for $150.
Quick Check
Example
Insurance Expired
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Assume the Prepaid Insurance account has a balance before adjustment of $240, representing a one-year insurance policy, purchased on Dec. 1.The amount of insurance will be $240 per year ÷ 12 months = $20 per month.
Example
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Adjusting Entry for Insurance Expired
Prepaid Insurance
Debit Credit
+ -
BalanceAmount of coverage expired
Insurance Expense
Debit Credit
+ -
Transferred to
The amount of insurance expired is debited to an expense account (Insurance Expense) and credited to an asset account (Prepaid Insurance).
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If it is determined that expired insurance is $75 for the current accounting period, the adjusting entry will include a
a. credit to Insurance Expense for $75.
b. debit to Insurance Expense for $75.
c. debit to Prepaid Insurance for $75.
d. debit to Cash for $75.
e. credit to Insurance Payable for $75.
Quick Check
Depreciation of Office Equipment and Office Furniture
Depreciation describes the expense that results from the loss in usefulness of an asset due to age, wear and tear, and obsolescence.
The purpose of depreciation accounting is to spread the cost of an asset over its useful life rather than treating the asset’s cost as an expense in the year it was purchased.
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Depreciation Calculations Straight-Line Method
One of the most popular depreciation methods
Yields the same amount of depreciation for each full period an asset is used
Formula:
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Cost of asset – Trade-in value= Annual depreciation expense
Estimated years of usefulness
Example
Depreciation Calculations
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Assume office furniture costs $2,000 and has a $200 trade-in value.
The office furniture has a useful life of 5 years.
The annual depreciation will therefore be $1,800 ÷ 5 years or $360 per year.
The monthly depreciation will be $360 per year ÷ 12 months or $30 per month.
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The Depreciation Entry
Depreciation is always recorded by
Debiting an expense account entitled Depreciation Expense
Crediting an account entitled Accumulated Depreciation
Example
Example
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The Depreciation Entry
Accumulated Depreciation
A contra asset account
Always has a credit balance
Example
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Adjusting Entry for Depreciation
Depreciation Expense
Debit Credit
+ -
Accumulated Depreciation
Debit Credit
- +
The Estimated depreciation is always debited to an expense account (Depreciation Expense) and credited to a contra asset account (Accumulated Depreciation)
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If it is determined that depreciation on office equipment is $250 for the current accounting period, the adjusting entry will include a
a. credit to Office Equipment for $250.
b. debit to Accumulated Depreciation — Office Equipment for $250.
c. debit to Depreciation Expense — Office Equipment for $250.
d. debit to Cash for $250.
e. credit to Depreciation Payable for $250.
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Book Value
The difference between the cost of an asset and its accumulated depreciation
Shown on the balance sheet
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Book ValueExample: Office equipment and office furniture accounts for Walker and Associates
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Unpaid Salaries
Assume A business has 3 employees each earning
$150 per day.
Employees are paid every Friday for a 5-day week ending on Friday.
December 31 falls on a Wednesday.
Example
Example
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Unpaid Salaries
An adjusting entry must be prepared
On Wednesday, December 31 for salaries owed to employees for Monday, Tuesday, and Wednesday.
For 3 employees × $150 per day × 3 days = $1,350.
Example
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Unpaid SalariesThe adjusting entry for unpaid salaries includes
A debit to Salaries Expense
A credit to Salaries Payable
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If it is determined that salaries owed to employees at year-end amount to $500, the adjusting entry will include a
a. credit to Salaries Expense for $500.
b. credit to Cash for $500.
c. debit to Salaries Payable for $500.
d. debit to Prepaid Salaries for $500.
e. credit to Salaries Payable for $500.
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Matching Principle
Revenue and expenses are recorded in the accounting period in which they occurred.
Adjusting entries are needed to properly match expenses and revenue.
Although adjusting entries may be made any time, they are normally adjusted at the end of a month or the end of the year.
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1. The Office Supplies account shows a $900 balance; however, a current count reveals that $750 worth remains on hand.
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Office Supplies Expense
+ -
Adjusting 150
Office Supplies
+ -
Balance 900
Adjusting 150
Review Quiz 4-
Review Quiz 4-
2. Insurance expired, $50.
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Insurance Expense
+ -
Adjusting 50
Prepaid Insurance
+ -
Adjusting 50
Review Quiz 4-
3. Depreciation of trucks, $1,000.
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Depreciation Expense—Trucks
+ -
Adjusting 1,000
Accumulated Depreciation—Trucks
+ -
Adjusting 1,000
Review Quiz 4-
4. Unpaid salaries, $150.
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Salaries Expense
+ -
Adjusting 150
Salaries Payable
+ -
Balance 900
Adjusting 150
The Work Sheet
Informal working paper
Used in preparing the financial statements and completing the work of the accounting cycle
The work sheet is used toOrganize dataLessen the possibility of overlooking an
adjustmentProvide an arithmetical check on the accuracy
ofworkArrange data in logical form for the preparation
of financial statements
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Steps in Completing the Work Sheet1. Enter the heading.
2. Enter the current trial balance in the Trial Balance columns.
3. Enter the adjustments in the Adjustments Debit and Credit columns.
4. Complete the Adjusted Trial Balance columns.
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Steps in Completing the Work Sheet5. Complete the Income Statements columns.
6. Complete the Balance Sheet columns.
7. Total the Income Statement and Balance Sheet columns.
8. Determine the amount of net income or net loss, and balance the statement columns.
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The owner’s drawing account appears on the work sheet in which set of columns?
a. Trial balance, income statement, and balance sheet
b. Adjustments, adjusted trial balance, and income statement
c. Trial balance, adjusted trial balance, and income statement
d. Trial balance, adjusted trial balance, and balance sheet
e. Income statement and balance sheet
Quick Check
Review Quiz 4-
On a completed work sheet, can the amount of net income (or net loss) be obtained by finding the difference between the total of the Balance Sheet Debit column and the total of the Balance Sheet Credit column? If so, why?
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Yes.
Differences between revenue and expenses will either increase or decrease capital.
The difference between the totals of the Balance Sheet Debit and Credit columns of the work sheet reflects the net income or net loss that has not yet been transferred to the owner's capital account.
The Income Statement
Summary of revenue and expenses showing net income or net loss for an accounting period
Prepared directly from data in the Income Statements columns of the work sheet
Typically prepared at the end of each month, quarter, or year; however, can be prepared for any period of time
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More on the Income Statement
Dated to cover a period of time
The revenue and expenses shown occurred over the entire period, not just the last date
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The Statement of Owner’s Equity
Summarizes the changes that have occurred in owner’s equity during an accounting period, such as a month or a year.
Prepared from the information on the work sheet:1.The owner’s capital account balance in the
Balance Sheet Credit column
2.The owner’s drawing account balance in the Balance Sheet Debit column
3.The amount of net income or net loss, shown at the bottom of the Income Statement section
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The Balance Sheet
Shows that assets = liabilities + owner’s equity
Data come from the Balance Sheet columns of the work sheet
The up-to-date amount for owner’s equity on the balance sheet is taken from the statement of owner’s equity
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Preparing the Financial Statements1. Prepare the income statement
The net income or net loss calculated on the income statement is shown on the statement of owner’s equity.
2. Prepare the income statementThe ending equity is shown on the balance sheet.
3. Prepare the balance sheet using the ending equity calculated on the statement of owner’s equity.
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Financial Statements
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The dates of the income statement and the statement of owner’s equity cover a period of time.
On the income statement, expenses are usually arranged in order of highest to lowest.
Financial Statements
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The date of the balance sheet is the last day of the accounting period.
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Net income appears on the
a. balance sheet and the statement of owner’s equity.
b. statement of owner’s equity only.
c. income statement only.
d. income statement and statement of owner’s equity.
e. income statement and balance sheet.
Quick Check
Review Quiz 4-
The financial statement columns of Sether Company’s work sheet are shown below.
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1) Prepare an income statement
2) Prepare a statement of owner’s equity
3) Prepare a balance sheet
Example
Assume a company uses $45 of office supplies during the current accounting period.
Prepare the adjusting entry.
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General Journal
Date Account Title P.R. Debit Credit
20X1Dec.
31 Office Supplies Expense 45
Office Supplies 45
Example
Assume expired insurance for the current period is $20.
Prepare the adjusting entry.
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General Journal
Date Account Title P.R. Debit Credit
20X1Dec.
31 Insurance Expense 20
Prepaid Insurance 20
Example
Assume depreciation on office furniture for the current period is $30.
Prepare the adjusting entry.
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General Journal
Date Account Title P.R. Debit Credit
20X1Dec.
31 Depreciation Expense —Office Furniture
30
Accumulated Depr. —Office Furniture
30
Example
Assume December 31 is a Wednesday and accrued salaries owed to employees for Monday through Wednesday amount to $1,350.Prepare the adjusting entry.
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General Journal
Date Account Title P.R. Debit Credit
20X1Dec.
31 Salaries Expense 1,350
Salaries Payable 1,350
Review Quiz 4-
If adjusting entries are entered on the work sheet, why is it necessary to formally journalize them and post to the ledger?
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It is necessary to make journal entries for adjustments because the work sheet is not a journal. It is an informal document used to organize data and facilitate the work at the end of an accounting period. However, no posting is made from the work sheet. After adjustments have been journalized and posted, the ledger will be up to date and will agree with the data presented on the financial statements.
Focus on Ethics
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How does failing to close the books in a timely fashion enhance the current year’s net income?
Refer to the Focus on Ethics box on page 153 in your text.
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Joining the Pieces
Adjusting Entries: Depreciation of Long-Term Assets