Copyright 2006 Pearson Education Canada Inc. 5-1

Copyright 2006 Pearson Education Canada Inc. 5-1


OutlineAdjusting the Trial Balance: Step 5Adjusting Entries: Need and PurposesPrepayments Inventory AdjustmentsUnearned RevenueBad DebtsThe WorksheetThe Adjusted Trial BalancePreparing the Financial Statement Worksheet:

6 Steps


Adjusting the Trial Balance: Step 5 Need for adjusting entries Recorded in the General Journal on the last day of

the accounting period Use of a financial statement worksheet Types of adjusting entries - Prepayments, accruals,

utilization of assets, unearned revenues, bad debts


Adjusting Entries: Need and Purposes

Update the trial balance accounts before the financial statements are prepared

Properly reflect assets, liabilities, owners’ equity, revenue and expense accounts on the financial statements based on accrual accounting


Prepayments

Items paid in advance that will benefit one or more accounting periods

Purpose of adjusting entry is to recognize the expense by debiting the expired portion of the prepayment, so that what remains is the UNexpired portion


Prepaid expenses

Paid two year-insurance premiumon Nov 1, 2002

Prepaid expenses 2400- Cash 2400-Adjustment on Dec 31, 2002Insurance Expense 200- Prepaid expenses 200-To record insurance expired from Nov 1 to

Dec 31 2400 2400 = 100 x 2 months= 200 = 100 x 2 months= 200 24mos24mos


Insurance Exp Prepaid Insurance 12/31 adj. 200 10/2 2400-

Adj. Bal 200

Bal 2400- 12/31 adj. 200-

Adj. bal 2200-

Trial balance-Information (before adjusting entry) Prepaid Insurance 2400-

Insurance Expense -0-

PREPAID ADJUSTING ENTRIES


Accrued expenses

Nov 1- Company borrowed $100,000 from Third N. Bank(90-day note)

Nov 1 Cash 100,000 Notes Payable 100,000

Dec 31 Interest Expense 2,000 Interest Payable 2000

To record interest incurred from Nov 1 to Dec 31, as Follows: 100,000 x 12% = 12000 = = 1000X 2= 2000

12 months

$1000/month timesTwo months


Depreciation

Purchase furniture with an estimated useful life of 10 years for $61,000

Sept 1 Furniture 61,000 Cash 61,000

Depreciation Expense 2,000 Acc Depr., Furniture 2,000

ADJUSTINGENTRY ON

DECEMBER 31


Reporting Furniture and Equipment on the Balance Sheet

Furniture and Equipment $61,000

Less Accumulated depreciation 2,000

Net Furniture and Equipment $59,000


Inventory Adjustments

Purchased office supplies in the amount of $300 May 1 and another $500 (on credit) on July 10

May 1 Office Supplies Inventory 300 Cash 300

July 10 Office Supplies Inventory 500 A/P 500

Oct 31 Office Supplies Expense 600 Office Supplies Inventory 600

To expense office supplies consumed during the period($800-200=600)

Office Supplies

On Hand $200On Oct 31


Inventory Adjustments

Office Supplies Inventory 5/1 300 Adj.10/31 600

7/10 500

Bal 10/31 800 600

Adj bal 10/31 200

Office Supplies Expense

Adj. 600 Adj bal 10/31 600

Adjusted balance of $200will appear on the Adjusted

Trial Balance and on theBalance Sheet

Adjusted balance of$600 will appear on theAdjusted Trial Balance

and on the Income Statement


Unearned Revenue (or Deferred Income)

On Oct 10 Rx Hotel receives $10,000 to be used against future hotel reservations

Oct 10 Cash 10,000

Customer Deposits 10,000

Dec 31 Customers’ Deposits 6,000 Room Sales 6,000


Bad Debt Estimate

A/R on trial balance $100,000-

It is estimated (from previous experience) that 3% are uncollectible

Dec 31 Bad Debts Expense 3,000 Allowance for doubtful accounts 3,000

Allowance for doubtfulAccounts –Contra Asset

Account

Balance Sheet PresentationAccounts Receivable $100,000Less Allowance for doubtful Accts 3,000Net Receivables $ 97,000


General Journal Adjusting Entry for Accrued Interest

A Travel Consultant, Inc.

General Journal

2006 Posting

December Description Reference Debit Credit

31 Interest expense 2,000

Accrued interest payable 2,000

To accrue 60 days of interest on 90 day note at 12% per year.

(1% per month)


The Adjusted Trial Balance

Prepared after all adjusted entries are recorded in the journal and posted to the general ledger

Can be used as a basis to prepare financial statements,

because it contains all the

current balances in the accounts


The worksheet is a multi-column form which serves as a “tool” in the preparation of adjusting entries, closing entries, and financial statements

It is composed of five sections (5 sets of Dr. and Cr. columns): Trial balance Adjustments Adjusted trial balance Income statement Balance sheet

The WorksheetThe Worksheet


Preparing the Financial Statement Worksheet: 6 Steps

1. Heading

2. Unadjusted balances are placed in trial balance column

3. Adjusting entries are entered in the adjustments column

4. Combine adjustments and unadjusted trial balance columns to produce the adjusted trial balance

5. Extend all amounts to the income statement or balance sheet columns

6. Determine net income or net loss for the period as the balancing amount


Trial Balance Adjustments Income Statement Balance Sheet

Account Name Debits Credits Debits Credits Debits Credits Debits Credits Debits Credits

Cash 100

Accounts Receivable 200

Notes Receivable 300

Food Inventory 110

Prepaid Insurance 12

Furniture and Equipment 220

Accumulated Depreciation 88

Accounts Payable 150

Notes Payable 100

Amy Neat, Capital 502

Amy Neat , Withdrawals 50

Sales 300

Other Income 20

Salaries & Wages 100

Interest Expense 20

Other Operating Expenses 48

1160 1,160

Trial Balance

Adjusted

Neat RestaurantsFinancial Statement Worksheet

For the year ended July 31, 2005




Cash 100

Accounts Receivable 200

Notes Receivable 300

Food Inventory 110 (b)89

Prepaid Insurance 12 (a) 7

Furniture and Equipment 220

Accumulated Depreciation 88 ©22

Accounts Payable 150

Notes Payable 100

Amy Neat, Capital 502

Amy Neat , Withdrawals 50

Sales 300

Other Income 20

Salaries & Wages 100 (e)7

Interest Expense 20 (d)5

Other Operating Expenses 48

1160 1,160

Insurance Expense (a) 7

Cost of Food Sold (b)89

Depreciation Expense ©22

Accrued Interest Payable (d)5

Accrued Salaries Payable (e)7

Interest Income (f)18

Accrued Interest Receivable (f)18

Totals 148 148

Trial Balance

Adjusted






Cash 100 100

Accounts Receivable 200 200

Notes Receivable 300 300

Food Inventory 110 (b)89 21

Prepaid Insurance 12 (a)7 5

Furniture and Equipment 220 220

Accumulated Depreciation 88 ©22 110

Accounts Payable 150 150

Notes Payable 100 100

Amy Neat, Capital 502 502

Amy Neat , Withdrawals 50 50

Sales 300 300

Other Income 20 20

Salaries & Wages 100 (e)7 107

Interest Expense 20 (d)5 25

Other Operating Expenses 48 48

1160 1,160

Insurance Expense (a)7 7

Cost of Food Sold (b)89 89

Depreciation Expense ©22 22

Accrued Interest Payable (d)5 5

Accrued Salaries Payable (e)7 7

Interest Income (f)18 18

Accrued Interest Receivable (f) 18 18

148 148 1212 1,212

Trial Balance

Adjusted





Cash 100 100 100

Accounts Receivable 200 200 200

Notes Receivable 300 300 300

Food Inventory 110 (b)89 21 21

Prepaid Insurance 12 (a)7 5 5

Furniture and Equipment 220 220 220

Accumulated Depreciation 88 ©22 110 110

Accounts Payable 150 150 150

Notes Payable 100 100 100

Amy Neat, Capital 502 502 502

Amy Neat , Withdrawals 50 50 50

Sales 300 300 300

Other Income 20 20 20

Salaries & Wages 100 (e)7 107 107

Interest Expense 20 (d)5 25 25

Other Operating Expenses 48 48 48

1160 1,160

Insurance Expense (a)7 7 7

Cost of Food Sold (b)89 89 89

Depreciation Expense ©22 22 22

Accrued Interest Payable (d)5 5 5

Accrued Salaries Payable (e)7 7 7

Interest Income (f)18 18 18

Accrued Interest Receivable (f) 18 18 18

148 148 1212 1,212 298 338 914 874

NET INCOME 40 40

338 338 914 914

Neat RestaurantF/S Worksheet

Year ended July 31, 2005

Documents

Copyright 2006 Pearson Education Canada Inc. 5-1