Chapter 5 Adjustments and the Worksheet

5-1 Chapter 5 Adjustments and the Worksheet

Section 1: The Worksheet

Section Objectives

1. Complete a trial balance on a worksheet.

2. Prepare adjustments for unrecorded business transactions.

The worksheet has The worksheet also Each section has an Account Name column has five sections. two columns.

JT’s Consulting Services Worksheet Month Ended December 31, 2010

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

5-3 Complete the Trial Balance section in four steps

1. Enter the general ledger account names.

2. Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section. 3. Total the Debit and Credit columns to prove that the trial balance is in balance. 4. Place a double rule under each Trial Balance column to show that the work in that column is complete.

5-4 Step 1: Enter the general ledger account names.

JT’s Consulting Services Step 1: Enter the general ledger accountWorksheet names. Month Ended December 31, 2010 TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME Carter Consulting Service DEBIT CREDIT DEBITWorksheetCREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Month Ended December 31, 2004 Accounts Receivable Supplies TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STATEMENT BALANCE SHEET ACCOUNT NAME Prepaid Rent DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT EquipmentCash Accum. Depr.—Equip. These four new accounts will Accounts Payable be used for the adjustments. Jason Taylor, Cap. Jason Taylor, Draw. Fees Income Salaries Expense **If additional new expense accounts Utilities Expense Supplies Expense are needed in the adjustment process, Rent Expense add them to the bottom of the Depr. Exp.—Equip. ACCOUNT NAME column. Totals 5-5 Step 2: Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section.

JT’s Consulting Services Worksheet Month Ended December 31, 2010

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Rec. 101 Supplies ACCOUNT ______Cash ACCOUNT NO. ______

Prepaid Rent BALANCE

Equipment POST DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT Accum. Depr. 2010 Nov. 30 Bal. forward 64,40065,000 Accounts Pay. Dec. 31 J2 26,000 91,000 J. Taylor, Cap. Dec. 31 J2 4,000 95,000 Dec. 31 J2 7,000 88,000 J. Taylor, Draw. Dec. 31 J2 500 87,500 Dec. 31 J2 4,000 83,500 5-6 Step 3: Total the Debit and Credit columns to prove that the trial balance is in balance.

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Step 4: Place a double rule under Supplies 3,000 each Trial Balance column to show Prepaid Rent 7,000 Equipment 22,000 that the work in that column is Accum. Depr.—Equip. complete. Accounts Payable 7,000 Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense Rent Expense Depr. Exp.—Equip. Totals 132,000 132,000 5-7 Objective 2 Prepare adjustments for unrecorded business transactions

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 3,000 Prepaid Rent 7,000 Equipment 22,000 Accum. Depr.—Equip. Accounts Payable 7,000 Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 These adjusting entries are first Salaries Expense 7,000 entered in the Adjustments Utilities Expense 500 section of the worksheet. Supplies Expense Rent Expense Depr. Exp.—Equip. Totals 132,000 132,000 5-8 The Supplies Adjustment

JT’s Consulting Services began the month with $3,000 in supplies. At the end of the month, $2,000 in supplies remained.

QUESTION:

What dollar amount of supplies was $3,000 used during the month? - 2,000

ANSWER: $1,000

5-9 JT’s Consulting Services Worksheet Month Ended December 31, 2010

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000

Supplies 3,000 (a) 1,000 Prepaid Rent 7,000 Equipment 22,000 Accum. Depr.—Equip. Accounts Payable 7,000 Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense (a) 1,000 Rent Expense Depr. Exp.—Equip. Totals 132,000 132,000 5-10 The Prepaid Adjustment

On November 20, 2010, JT’s Consulting Services paid $7,000 for the December and January rent. As of December 31, 2010, one month’s rent had already been used up.

QUESTION:

What dollar amount of rent was $7,000 used during the month of December? - 3,500

ANSWER: $3,500

5-11 JT’s Consulting Services Worksheet Month Ended December 31, 2010

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000

Supplies 3,000 (a) 1,000

Prepaid Rent 7,000 (b) 3,500 Equipment 22,000 Accum. Depr.—Equip. Accounts Payable 7,000 Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense (a) 1,000

Rent Expense (b) 3,500 Depr. Exp.—Equip. Totals 132,000 132,000 5-12 Depreciation

The cost is recorded as an asset and charged to expense over the time the asset is used for the business.

$ ASSET

Expense Expense

This expense is called Jan. depreciation. 2008 Expense

5-13 There are several methods to calculate depreciation. JT’s Consulting Services uses the straight-line method.

QUESTION:

What is straight-line depreciation?

ANSWER:

Straight-line depreciation (S/L) allocates an asset’s cost in equal amounts to each accounting period of its useful life.

S/L depreciation = Cost - salvage value Estimated months of useful life

5-14 Calculating Depreciation

JT’s Consulting Services purchased equipment in November, 2010. · Cost = $22,000 · Useful life = 5 yrs or 60 months (5 yrs x 12 months) · Salvage value = $0

QUESTION:

What dollar amount of depreciation expense should be recorded for the month?

Cost - salvage value $22,000 - $0 Estimated months of useful life 60 months

ANSWER: $367

5-15 Adjustment for Depreciation

Instead of decreasing the asset account directly, the adjustment for depreciation is recorded in a contra account named Accumulated Depreciation—Equipment. Accumulated Depreciation— Equipment Equipment + +

Asset account has a Contra asset account has normal debit balance a normal credit balance

5-16 JT’s Consulting Services Worksheet Month Ended December 31, 2010

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000

Supplies 3,000 (a) 1,000

Prepaid Rent 7,000 (b) 3,500 Equipment 22,000 Accum. Depr.—Equip. (c) 367 Accounts Payable 7,000 Jason Taylor, Cap. 90,000 When all adjustments are Jason Taylor, Draw. 4,000 Fees Income 35,000 entered, total and rule the Salaries Expense 7,000 Adjustments columns. Utilities Expense 500 Supplies Expense (a) 1,000

Rent Expense (b) 3,500

Depr. Exp.—Equip. (c) 367 Totals 132,000 132,000 4,867 4,867 5-17 Book Value

Equipment Accumulated Depreciation— Equipment 22,000 367

Original cost of equipment Record of all depreciation taken on equipment

Book value = Original cost – Accumulated depreciation = 22,000 – 367 = 21,633

5-18 Chapter 5 Adjustments and the Worksheet

Section 2: Financial Statements

Section Objectives 3. Complete the worksheet.

4. Prepare an income statement, statement of owner's equity, and balance sheet from the completed worksheet.

5. Journalize and post the adjusting entries.

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet

Step 5 Prepare financial statements

Step 9 Step 6 Interpret Record the financial Step 7 adjusting information Step 8 Record entries Prepare a closing postclosing entries trial balance

5-20 Objective 3 Complete the worksheet

You have already seen how to prepare the first two sections of a worksheet:

 Trial Balance

 Adjustments

You will now learn how to complete a worksheet.

Preparing a worksheet is the fourth step of the accounting cycle.

5-21 Step 1: Combine the figures from the Trial Balance section and the Adjustments section. Record the results in the Adjusted Trial Balance columns.

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 45,000 Supplies 3,000 (a) 1,500 Prepaid Rent 7,000 (b) 3,500 Equipment 22,000 Accum. Depr.—Equip. (c) 367 Accounts Payable 7,000 Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense (a) 1,000

Rent Expense (b) 3,500

Depr. Exp.—Equip. (c) 367 Totals 132,000 132,000 4,867 4,867 5-22 The accounts that do not have adjustments are extended from the Trial Balance section to the Adjusted Trial Balance section.

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 83,500 Accounts Receivable 5,000 5,000 Supplies 3,000 (a) 1,000 Prepaid Rent 7,000 (b) 3,500 Equipment 22,000 22,000 Accum. Depr.—Equip. (c) 367 Accounts Payable 7,000 7,000 Jason Taylor, Cap. 90,000 90,000 Jason Taylor, Draw. 4,000 4,000 Fees Income 35,000 35,000 Salaries Expense 7,000 7,000 Utilities Expense 500 500 Supplies Expense (a) 1,000

Rent Expense (b) 3,500

Depr. Exp.—Equip. (c) 367 Totals 120,000 120,000 4,867 4,867 5-23 The Supplies account has a $3,000 debit balance in the Trial Balance section and a $1,000 credit in the Adjustments section. ($3,000 debit and $1,000 credit = $2,000)

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 83,500 Accounts Receivable 5,000 5,000 Supplies 3,000 (a) 1,000 2,000 Prepaid Rent 7,000 (b) 3,500 Equipment 22,000 22,000 Accum. Depr.—Equip. (c) 367 367 Accounts Payable 7,000 7,000 Jason Taylor, Cap. 90,000 90,000 Jason Taylor, Draw. 4,000 4,000 Fees Income 35,000 35,000 Salaries Expense 7,000 7,000 Utilities Expense 500 500 Supplies Expense (a) 1,000

Rent Expense (b) 3,500

Depr. Exp.—Equip. (c) 367 Totals 132,000 132,000 4,867 4,867 5-24 Step 2: Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits.

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 83,500 Accounts Receivable 5,000 5,000 Supplies 3,000 (a) 1,000 2,000 Prepaid Rent 7,000 (b) 3,500 3,500 Equipment 22,000 22,000 Accum. Depr.—Equip. (c) 367 367 Accounts Payable 7,000 7,000 Jason Taylor, Cap. 90,000 90,000 Jason Taylor, Draw. 4,000 4,000 Fees Income 35,000 35,000 Salaries Expense 7,000 7,000 Utilities Expense 500 500 Supplies Expense (a) 1,000 1,000 Rent Expense (b) 3,500 3,500

Depr. Exp.—Equip. (c) 367 367 Totals 132,000 132,000 4,867 4,867 132,367 132,367 5-25 For accounts that appear on the balance sheet, enter the amount in the appropriate column of the Balance Sheet section. For accounts that appear on the income statement, enter the amount in the appropriate column of the Income Statement section.

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 83,500 Accounts Receivable 5,000 5,000 Supplies 3,000 (a) 1,000 2,000 Prepaid Rent 7,000 (b) 3,500 3,500 Equipment 22,000 22,000 Accum. Depr.—Equip. (c) 367 367 Accounts Payable 7,000 7,000 Jason Taylor, Cap. 90,000 90,000 Jason Taylor, Draw. 4,000 4,000 Fees Income 35,000 35,000 Salaries Expense 7,000 7,000 Utilities Expense 500 500 Supplies Expense (a) 1,000 1,000 Rent Expense (b) 3,500 3,500

Depr. Exp.—Equip. (c) 367 367 Totals 132,000 132,000 4,867 4,867 132,367 132,367 5-26 After all the account balances are transferred to the financial statement sections, total the Debit and Credit columns.

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 83,500 83,500 Accounts Receivable 5,000 5,000 5,000 Supplies 3,000 (a) 1,000 2,000 2,000 Prepaid Rent 7,000 (b) 3,500 3,500 3,500 Equipment 22,000 22,000 22,000 Accum. Depr.—Equip. (c) 367 367 367 Accounts Payable 7,000 7,000 7,000 Jason Taylor, Cap. 90,000 90,000 90,000 Jason Taylor, Draw. 4,000 4,000 4,000 Fees Income 35,000 35,000 35,000 Salaries Expense 7,000 7,000 7,000 Utilities Expense 500 500 500 Supplies Expense (a) 1,000 1,000 1,000 Rent Expense (b) 3,500 3,500 3,500

Depr. Exp.—Equip. (c) 367 367 367 Totals 132,000 132,000 4,867 4,867 132,367 132,367 12,367 35,000 120,000 97,367 5-27 Subtract the smaller total from the larger total in the Income Statement section to find the Net Income or Net Loss.

5-28 If the credit total is more than the debit total, the firm has net income. . . Enter the amount on the Net Income line. (35,000 – 12,367 = 22,633)

5-29 Total the Income Statement and the Balance Sheet sections.

5-30 The Accounting Cycle

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet

Step 5 Prepare financial statements

Step 9 Step 6 Interpret Record the financial Step 7 adjusting information Step 8 Record entries Prepare a closing postclosing entries trial balance

5-31 Objective 4 Prepare financial statements from the worksheet

JT’s Consulting Services Income Statement Month Ended December 31, 2010

Revenue Fees Income $35,000 Expenses Salaries Expense $7,000 Utilities 500 Supplies Expense 1,000 Rent Expense 3,500 Depreciation Expense - Equipment 367 Total Expenses $12,367 Net Income for the Month $22,633

5-32 JT’s Consulting Services Statement of Owner’s Equity Month Ended December 31, 2010

Jason Taylor, Capital, December 1, 2010 $ 90,000

Net Income for December $22,633

Less Withdrawals for December 4,000

Increase in Capital 18,633

Jason Taylor, Capital, December 31, 2010 $108,633

5-33 JT’s Consulting Services Balance Sheet December 31, 2010 Assets Liabilities Cash $83,500.00 Accounts Payable $ 7,000.00 Accounts Receivable 5,000.00 Supplies 2,000.00 Prepaid Rent 3,500.00 Owner’s Equity Equipment 22,000.00 Jason Taylor, Capital 108,633.00 Total Assets $ 115,633.00 Total Liabilities and Owner’s Equity $ 115,633.00

The balance sheet in Chapter 4 was prepared using the account form.

5-34 JT’s Consulting Services Balance Sheet Month Ended December 31, 2010

Assets Cash $83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment 22,000 Less Accumulated Depreciation 367 21,633 Total Assets $115,633 Liabilities and Owner’s Equity Liabilities Accounts Payable $ 7,000 Owner’s Equity Jason Taylor, Capital 108,633 Total Liabilities and Owner’s Equity $115,633

5-35 Objective 5 Journalize and post the adjusting entries

The worksheet is NOT

 A financial statement  A permanent part of the accounting record

It is only a tool.

5-36 The Accounting Cycle

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet

Step 5 Prepare financial statements

Step 9 StepStep 66 Interpret RecordRecord the financial Step 7 adjustingadjusting information Step 8 Record entriesentries Prepare a closing postclosing entries trial balance

5-37 QUESTION: What adjustments must JT’s Consulting Services record for the month?

ANSWER:

(a) Adjustment for supplies used (b) Adjustment for expired rent (c) Adjustment for depreciation

5-38 GENERAL JOURNAL PAGE 3

POST. DATE DESCRIPTION REF . DEBIT CREDIT

2010 Adjusting Entries Dec. 31 Supplies Expense 517 1000.00 Supplies 121 1000.00

31 Rent Expense 520 3,500.00 Prepaid Rent 137 3,500.00

31 Depr. Expense–Equipment 523 367.00 Accum. Depr.–Equipment 142 367.00

ACCOUNT Supplies Expense ACCOUNT NO. 517 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT

2010 Dec. 31 Adjusting J3 1000.00 1000.00

5-39 Thank You for using

College Accounting, 12th Edition

Price • Haddock • Farina

5-40