College Accounting - MCCC

1 College AccountingHeintz & Parry20thEditionChapter5 Adjusting Entries and the Work Sheet1 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 slow2 Post adjusting entries to the general s look at some adjusting entries for Jessie Jane s Campus June, Jessie purchased supplies for $80.

2 These were debited to the supplies IN JUNED uring June, Jessie purchased supplies for $80. These were debited to the supplies to an inventory of supplies,there are only $20of supplies on hand at the end of June, Jessie purchased supplies for $80. These were debited to the supplies unless there is an adjusting entry made,$80 of supplies will be shown on thebalance June, Jessie purchased supplies for $80. These were debited to the supplies ENTRY NEEDED!!!! $80 Purchased during month 20 Supplies remaining$60 Supplies $60 is credited to Supplies to remove the amount of supplies used during $60 is debited to Supplies Expenseto recognize the amount ofsupplies used during the balance sheet will show $20 of supplies! income statementwill show $60 of supplies used during June, Jessie paid $200 for an eight-month liability insurance policy with coverage beginning on June INSURANCE2008-month policyJune 1 Jan.

3 3119 TBDuring June, Jessie paid $200 for an eight-month liability insurance policy with coverage beginning on June INSURANCE200 Now that June is over, weneed to remove the costof one month s insurancefrom this INSURANCE200$200 for 8 months:$200 8 = $25 per monthTBPREPAID INSURANCE200 Prepaid Insurance iscredited for $25 to removeJune s insurance coveragethat has INSURANCE20025 INSURANCE EXPENSE25 Insurance Expense is debited for$25 to recognize the amountof insurance coverage for INSURANCE20025 INSURANCE balance sheet will show$175 (7 months) of prepaid insurance! INSURANCE20025 INSURANCE income statement will show $25 (1 month) of insurance consumed! paid her part-time employees $650 on June 27. Since then, they have earned an additional $50, but have not yet been EXPENSE650650 Bal.

4 $650 does not include all of thewages earned by employees during June. TBJessie paid her part-time employees $650 on June 27. Since then, they have earned an additional $50, but have not yet been ADJUSTING ENTRY is needed! TBWAGES EXPENSE650$50 debit to Wages Expense for the additional wages earned during EXPENSE650 Jessie Jane owes the employees for the additional liability is recorded in the wages payable account. 50 WAGES EXPENSE65050 WAGES income statement will show ALL wages earnedby employees in June! EXPENSE65050 WAGES balance sheet will show the liability for wages earned in June that will be paid in 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.

5 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 valueJessie 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 :1st step: Calculate the depreciable CostSalvage Value=Depreciable Cost$3,600$0=$3,600 372nd step: Determine depreciation expense for this Accounting :Depreciable CostEstimated Useful Life$3,600 Since we are trying to computedepreciation for one month,we will use months instead of step: Determine depreciation expense for this Accounting :Depreciable CostEstimated Useful Life$3,60036 months=2nd step: Determine depreciation expense for this Accounting .

6 Depreciable CostEstimated Useful Life$3,60036 months==$100 per monthNow that we know depreciation for June is $100, let s figure out the adjusting EQUIPMENT3,600We do NOT adjust this should always reflect the ORIGINAL COST of the EQUIPMENT3,600 Depreciation is credited to this account instead of the asset account. ACCUMULATED DEPRECIATION DELIVERY EQUIPMENT100 TBAdj. 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 costDELIVERY EQUIPMENT3,600 ACCUMULATED DEPRECIATION DEL. EXPENSE DEL. 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 the Trial the the Adjusted Trial Adjusted Balances to theIncome Statement and Balance Sheet the Work Jane s Campus Delivery Work Sheet For Month Ended June 30, 20--TRIAL BALANCEDEBITCREDITACCOUNT TITLEH eading includes:Name of the companyName of the working paperDate of the Accounting period just ended 2011 Cengage Learning.

7 All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in Jane s Campus Delivery Work Sheet For Month Ended June 30, 20--TRIAL BALANCEDEBITCREDITACCOUNT TITLEStep #1: Prepare the trial balance (before any adjustments)in the first pair of amount columns. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in BALANCEDEBITCREDITACCOUNT TITLECashDEBITCREDITADJUSTMENTSA ccounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr. Del. PayableWages PayableJessica Jane, CapitalDelivery FeesWages ExpenseJessica Jane, DrawingRent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp.

8 Del. ,6001,80020001502150650200505,9505,950 This is the same trial balance from Chapter 3, now being shownon a 10-column work sheet. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in BALANCEDEBITCREDITACCOUNTTITLECashDEBITC REDITADJUSTMENTSA ccounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr. Del. PayableWages PayableJessica Jane, CapitalDelivery FeesWages ExpenseJessica Jane, DrawingRent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp. Del. ,6001,8002,0001502,150650200505,9505,950 Step #2: Prepare the adjustments. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in BALANCEDEBITCREDITACCOUNT TITLECashDEBITCREDITADJUSTMENTSA ccounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum.

9 Depr. Del. PayableWages PayableJessica Jane, CapitalDelivery FeesWages ExpenseJessica Jane, DrawingRent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp. Del. ,6001,8002,0001502,150650200505,9505,950 Let s record the supplies adjustmentwe computed earlier:$60 debit to Supplies Expense;$60 credit to Supplies. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in TITLECashDEBITCREDITADJUSTMENTSA ccounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr. Del. PayableWages PayableJessica Jane, CapitalDelivery FeesWages ExpenseJessica Jane, DrawingRent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp. Del. ,6001,8002,0001502,150650200505,9505,950 60(a)60(a) 2011 Cengage Learning.

10 All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in are identified with a letter in TITLECashDEBITCREDITADJUSTMENTSA ccounts ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr. Del. PayableWages PayableJessica Jane, CapitalDelivery FeesWages ExpenseJessica Jane, DrawingRent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr. Exp. Del. ,6001,8002,0001502,150650200505,9505,950 60(a)60(a)The remaining adjustments are entered on the work sheet and the Adjustments columns are totaled. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in ReceivableSuppliesPrepaid InsuranceDelivery EquipmentAccum. Depr. Del. PayableWages PayableJessica Jane, CapitalDelivery FeesWages ExpenseJessica Jane, DrawingRent ExpenseSupplies ExpenseTelephone ExpenseInsurance ExpenseDepr.