Work Sheet and Adjusting Entries

1
Chapter 12

• Work Sheet and Adjusting Entries

2
Chapter 12

• Performance Objectives
• New Adjustments
• Adjustment for Supplies
• Adjustment for merchandise inventory under the
  periodic inventory system
• Adjustment of unearned revenue
• Complete the work sheet with the new adjustments
• Journalize the adjusting entries for a
  merchandising business under the periodic
  inventory system

3
Adjustments

• Bring the books up to date
• Adjustments are made every time the financial
  statements are produced
• Each adjustment will affect
• At least one income statement account
• Adjusting entries update the I/S accounts so we
  get a more accurate net income number
• At least one balance sheet account
• Adjusting entries update the B/S accounts so we
  get a more accurate A L OE

4
Adjustments

• First
• Record adjustments in the worksheet
• Be sure to label each adjustment entry into the
  worksheet with a letter reference a), b), c)
  both sides of the entry!
• Second
• Record the adjusting journal entries in the
  general journal

5
Data for Adjusting Supplies

• Debit Supplies when supplies are purchased
  throughout the period
• Take inventory to determine the amount of
  supplies left at the end of the period
• New Adjustment
• Make an adjusting entry for the amount used
  (total minus amount left)
• Debit Supplies Expense
• Credit Supplies

6
New AdjustmentsMerchandise Inventory

• What is merchandise inventory?
• Goods bought with the intention of reselling for
  a profit
• Office supplies are not merchandise inventory
• Examples
• Shoe store?
• Shoes
• Kite store?
• Kites boomerangs
• Hardware store?
• Hammers, lumber, etc.

7
Periodic Inventory System

• The system under which the buying of merchandise
  during the year is recorded as
• Debit to purchases
• Credit to accounts payable or cash
• At the end of the period, a physical count of the
  stock of goods is taken
• Adjusting entries are made to record the amount
  of the physical count

8
Prepare An Adjustment For Merchandise Inventory
Under The Periodic Inventory System

• Inventory account sits on books, untouched
• Buy inventory during period and record it in
  purchases
• At the end of the period, you perform a physical
  count
• Income summary is used during adjustment process
• Put beginning inventory into income summary
  (debit)
• Put physical count number into income summary
  (credit)
• Both numbers show up on face of income statement
  as part of COGS calculation
• Difference shows up as
• Cost of goods sold (I/S)
• Merchandise inventory (B/S)

9
New AdjustmentsMerchandise Inventory

• Step One
• Empty out inventory account
• Credit
• Put it into income summary
• Debit

• Step Two
• Record the physical count number in inventory
  account
• Debit
• Put it into income summary
• Credit

Brings Inventory Balance to Counted Total!
10
After Recording Adjustment In The Work Sheet,
Inventory Adjusting Journal Entry
"Update Accounts"
11
Demonstration Problem
We will complete a work sheet and make the
adjusting journal entries
12
Empty Inventory Account
13
Place Counted Inventory Into Merch. Inv. Account
14
New Adjustments Unearned Revenue
See both sides of the coin! One persons
expense is another persons revenue!

• When we buy a one year insurance policy, we
  record prepaid insurance
• Each month, we incur 1/12 of it as insurance
  expense!
• This updates our accounts makes our financial
  statements more accurate

• When the insurance company receives our check,
  they record unearned insurance revenue
• Each month, they earn 1/12 of it as insurance
  revenue
• This updates their accounts makes their
  financial statements more accurate

15
Unearned Revenue

• If Time Magazine receives subscription revenue
  for the whole year, can they record it all as
  revenue in the first month?
• No
• They must record unearned subscription revenue,
  and then make adjustments each month
• Other examples
• Sports teams receive ticket sales in advance
• Health club advance payments

16
Asset, Liability Or Owners Equity?

• Unearned revenue?
• Time Magazine owes the customer the magazines,
  right?
• The insurance company owes the customer the
  insurance coverage, right?
• Unearned revenue is a liability!
• The customer has a claim against the company for
  the goods or services until the goods are
  delivered or the services are rendered

17
Unearned Revenue

• Revenue received in advance for goods or services
  to be delivered later
• Considered to be a liability until the revenue is
  earned

18
After Recording Adjustment In The Work Sheet,
Unearned Revenue Adjusting Entry

• (Recorded earlier in the year) insurance company
  receives cash for a one year insurance policy

• Time passes insurance company earns one months
  revenue

19
Journal Entries Posting (T-Accounts Demo)
1100
2110
2110
4110
20
Worksheet

• Tool used by accountants to help prepare the
  financial statements
• Chapter 12
• Adjusted trial balance is gone
• Why?
• Because we can carry the updated account numbers
  straight to either the
• Income statement column
• Balance sheet column

21
Demonstration Problem
We will complete a work sheet and make the
adjusting journal entries
22
Work Sheet
23
Empty Inventory Account
24
Place Counted Inventory Into Merch. Inv. Account
25
Record All Adjustments
26
Carry Over To I/S Column
27
Carry Over To B/S Column
28
Work Sheet
29
Journal Entries Before Posting
30
Steps For Completing The Work Sheet

• Place account totals in trial balance column
• Total and rule (DR CR)
• Record adjustments in work sheet
• Letter references a), b)
• Total and rule (DR CR)
• Place I/S B/S amounts into I/S and B/S columns,
  total at bottom (DR ? CR)

31
Steps For Completing The Work Sheet

• In the income statement column, calculate net
  income/loss
• Subtract the smaller side from the larger side
• Plug this number to get DR CR
• If there is net income, the credit side of the
  columns will be larger and you will place net
  income on the debit side
• If there is net loss, the debit side of the
  columns will be larger and you will place net
  loss on the credit side

32
Steps For Completing The Work Sheet

• In the balance sheet column, calculate net
  income/loss
• Subtracting the smaller side from the larger side
• Plug this number to get DR CR

33
Chapter 13

• Financial Statements, Closing Entries, And
  Reversing Entries

34
Chapter 13

• Performance objectives
• Prepare a classified income statement for a
  merchandising firm
• Net sales
• Cost of goods sold
• Gross profit
• Income from operations
• Prepare a classified balance sheet for any type
  of business
• Current assets
• Plant equipment
• Current liabilities
• Long-term liabilities

35
Chapter 13

• Performance objectives
• Compute working capital and current ratio
• Journalize the closing entries for a
  merchandising firm
• Determine which adjusting entries can be
  reversed, and journalize the reversing entries

36
Prepare A Classified Income Statement For
Merchandising Co.(Multi-Step Income Statement)

• Single step income statement

• Multi-step income statement

Why multi-step I/S?
Provides better info. for decision making!
37
(No Transcript)
38
Performance Measures

• Different measure on the classified income
  statement tell us different things
• Gross profit
• How profitable the company is after only
  subtracting COGS
• Common measure used to compare companies (GP)
• Operating income
• How profitable the company is from its ordinary
  operations, before any other revenue/expenses
• Common measure used in estimating future
  profitability
• Net income
• The bottom line
• Profit for the period

39
Other Income, Or Expenses

• Not related to ordinary operations
• Examples
• Interest revenue
• Rent Revenue
• Interest expense
• Cash Sort Over
• (If Firm decides to classify it as such)
• Spa Magic classifies it as such

40
Template for Classified Income Statement
41
Calculate Net Sales
42
Cost Of Goods Sold(COGS)

• Cost of all the goods sold during the period
• Example
• Shoe store sells shoes and accessories
• At the end of the period, the accountants must
  determine the cost of all the shoes sold during
  the period in order to match it with the shoe
  sales revenue

43
Cost of Goods Sold

• Good Diagram on page 457

44
Calculate COGS
45
Calculate Gross Profit
46
Calculate Income From Operations
47
Calculate Other Income Expenses
48
Calculate Net Income
49
(No Transcript)
50
Statement Of Owners Equity

• After we complete the income statement, we are
  ready to make the statement of owners equity
• Preparation is the same as earlier chapters
• Look on page 460

51
Balance Sheet Classifications

• Current Assets
• Plant and Equipment
• Current Liabilities
• Long-Term Liabilities

52
(No Transcript)
53
Current Assets

• Cash and any other assets or resources that are
  expected to be realized in cash or to be sold or
  consumed during the normal operating cycle of
  the business
• One year, if the normal operating cycle is less
  than twelve months
• Listed on balance sheet in the order of liquidity
  (how quickly can it be converted to cash)
• Cash
• N/R (current)
• A/R
• Inventory
• Prepaid items (supplies, prepaid insurance)

54
Notes Receivable (Current)

• Written promises to pay the seller/lender the
  amount due in a period of less than one year

55
Calculate Current Assets
56
Plant And Equipment

• Long-lived assets that are held for use in the
  production or sale of other assets or services
• Also called fixed assets
• Order on Balance Sheet
• Rank according to length of life
• Longest life first

57
Calculate Plant Equipment Total Assets
58
Current Liabilities

• Debts that will become due within the normal
  operating cycle of a business
• Usually within one year
• Normally paid from current assets
• Listed on balance sheet in the order they will be
  paid off
• Mortgage payable (current portion)
• A/P
• N/P
• Wages payable
• Unearned revenue

59
Calculate Current Liabilities
60
Long-Term Liabilities

• Debts payable over a comparatively long period
• Usually more than one year
• For sole-proprietorship only LTL
• Mortgage payable (LT portion)

61
Calculate Total Liabilities Owners Equity
62
(No Transcript)
63
Liquidity

• How quickly an asset can be converted to cash
• The ability of an asset to be quickly turned into
  cash, either by selling it or by putting it up as
  security for a loan
• Banks want to know if the firm can make its
  interest payments
• Managers want to know if they have enough money
  to pay the bills and buy assets
• Cash is queen! (Cash is king)

64
Current Assets Current Liabilities

• Current assets (CA)
• Get cash soon
• Current liabilities (CL)
• Pay cash soon
• Short term cash management measures (liquidity
  measures)
• Working capital
• Current ratio

65
Total CA Total CL
66
Liquidity Measures

• Current Ratio
• A firms current assets divided by its current
  liabilities
• Because of the division, the number can be used
  to compare with other companies
• Portrays a firms short-term debt-paying ability
• Ability to pay current liabilities with current
  assets
• CA/CL Current Ratio

67
CA/CL
68
Liquidity Measures

• Working Capital
• A firms current assets less its current
  liabilities
• The amount of capital a firm has available to use
  or to work with during a normal operating cycle
• CA CL Working Capital

69
Working Capital
70
Closing Entries For Merchandising Co.

• Close all temporary (nominal) accounts with a
  credit balance (except income summary line)
• Debit nominal accounts
• Revenues contra expenses like purchase
  discounts
• Credit income summary
• Close all temporary (nominal) accounts with a
  debit balance (except income summary line)
• Credit nominal accounts
• Expenses contra revenues like sales discounts
• Debit income summary
• Close income summary to capital
• Close drawings to capital

71
Step 1
72
Step 2
73
Steps 3 and 4
74
Reversing Entries

• The reverse of certain adjusting entries,
  recorded as of the first day of the following
  fiscal period
• Make it easier for the accountant next period
• Next period the accountant does not need to worry
  about compound entries for payables and
  receivables where the cash is paid or is received
• The use of reversing entries is optional

75
Determine Which Adjusting Entries Can Be Reversed

• Must be first day of the period after you made
  adjusting entries
• Look at all adjusting entries and find entries
  that meet all three qualifications
• An asset or liability was increased
• The asset or liability did not have a previous
  balance
• Entry does not involve merchandise inventory or
  contra accounts
• Reverse it by making a new journal entry with the
  reverse debits and credits
• When you post, dont forget to write reversing
  in item column in the ledger accounts
• Example?

76
Adjusting Entries
77
Journalize the Reversing Entries
78
Posting Reversing Entries to Wages Payable Account
79
Posting Reversing Entries to Wages Expense Account
Notice that posting of 2,000 wages expense
results in an 800 balance.