Adjusting Entries and

The Worksheet

Lecture #14: Adjusting Entries & Worksheet

 Learning Objectives

1. Identify annual accounting activities

that make year-end the “busy season”

2. Explain the purpose of adjusting

entries.
 Learning Objectives

3. Describe and prepare the basic four

types of adjusting entries.

4. Explain practically the concept of

“materiality”.

5. Explain the concept of adequate

disclosure.
 Learning Objectives

6. Explain how interim financial

statements are prepared in a
business that closes its accounts
only at year-end.

7. Preparing a worksheet and explain

its usefulness.
 Learning Objective 1

Explain why adjustments are

needed.

4-5
 Expected Learning Outcomes
• List the classifications of the accounts that
occupy each column of a ten-column
worksheet
• Complete a worksheet for a service enterprise
• Journalize and post adjusting entries
• Prepare statements from worksheet
 Fiscal Period
• Period of time covering a complete accounting cycle
through closing entries
• A day, week, month, whenever you want
• Monthly is normal for comparison purposes
• Fiscal year
– Complete cycle for 12 months
– Need not coincide with calendar year
 The 10-Column Worksheet
• Working paper
– Simply a tool used for accounting
– To record necessary updates for financial
statements
• Central place for bringing together
information for adjustments
 Ten Column Worksheet
• 10 columns for recording dollar amounts
• 2 columns for each heading (debit/credit)
– Trial balance
– Adjustments
– Adjusted trial balance
– Income Statement
– Balance Sheet
 Trial Balance Columns

• A listing of each account in the order of

– Assets
– Liabilities
– Owner’s equity
– Revenue
– Expenses
 Trial Balance Columns
• Noting the balance in each account
• Foot the debit and credit columns and make
sure they balance
• If you are not in balance, fix it here before
continuing
 Adjustments

• These update the ledger accounts

• Internal transactions where no money has
changed hands….cash is NOT involved
• Cash account is NEVER used in adjustment
columns
 Adjustment Example
Paid $360 for Insurance for 1 Year on February 1
Analyze the transaction
– Debit Prepaid Insurance $360
– Credit Cash $360
• March 1st – How have the accounts changed?
– $360/12 = $30 of Prepaid Insurance used
– Insurance Expense increased $30
 Depreciation
• Depreciation Expense is recorded every period
that an asset was in use
• This “expenses” the cost of the asset over its
useful life
• At the end of its use, an asset has a “trade-in
value” or salvage value.
 Depreciation
• The amount in the asset account is the cost of the asset
until disposed
• The amount in the asset account minus the amount in
the Accumulated Depreciation account is called “book
value”
• Depreciation is not deducted directly from the asset
account – a new account called “Accumulated
Depreciation” is created for each asset. This way, you can
see on the balance sheet how much of the asset has
expired.
 Depreciation of Equipment
• Estimated useful life of equipment is 7 years
• Estimated value of equipment at end of 7 years is $6,880
(trade-in or salvage value)
• Cost of equipment ($49,720) minus trade-in value
($6,880) divided by the number of years of use (7) is the
annual depreciation
• This annual depreciation is divided by 12 to get the
Depreciation Expense amount for each month

(continued next slide)

Lecture #14: Adjusting Entries &

Worksheet
 Depreciation Example
Bought Equipment for $49,720
• $49,720 - $6,880 (trade-in) = $42,840
• $42,840 / 7 years = $6,120 per year
• Divide the depreciation for one year by 12 to get the
depreciation for one month ($6,120 per year / 12 = $510
per month)
• Each month the depreciation expense is recorded in
Depreciation Expense as a debit of $510 (Income
Statement)
• Each month Accumulated Depreciation is credited $510
(Balance Sheet)
• You are matching expenses against revenue for a certain
period
Lecture #14: Adjusting Entries &
Worksheet
 Depreciation (review)
• Record assets at the purchase price
• Expense the asset over its useful life
• Expense claimed each period during the
useful life is called Depreciation Expense
• Each asset has its own Accumulated
Depreciation account (contra account)
• it will look on the Balance Sheet.

Lecture #14: Adjusting Entries &

Worksheet
 Adjustments --Wages Expense
• End of the reporting period
– Owe wages to employees
– Haven’t paid them yet but the books are “being
closed” so they must be accounted for
– Figure out how much they have earned up to
the date you are closing the books
– Debit Wages Expense account
– Credit Wages Payable account
 Wages Expense Example
End of Month on a Wednesday
• You pay wages of $300 every week on Friday
to your employees
• Equals $60 per day (5-day week)
• Your employees worked 3 days in this calendar
month (Mon., Tues., Wed.) - $180 of wages
earned ($60 x 3)
• Wages Expense debited $180
• Wages Payable credited $180
 What Happens Friday When You Pay
Wages

•Debit – Wages Payable •Credit - Cash

Wages Payable Cash

180 180

If you debit Wages Expense here then you will be

recording it twice
The Worksheet Adjustment Columns
• Make sure that debits equal credits here
• Label each adjusting entry with letter labels, for
example, (a) for each debit and credit adjustment to
insurance, (b) for each adjustment to depreciation,
and (c) for each adjustment to wages
• Write notes explaining each adjustment, labeled by
letter, at the bottom of the Account Name column on
the worksheet.
 Adjusted Trial Balance
• You have added the columns (up and
down) up until now.
• Now you are going to add/subtract the
rows (across) from the trial balance and
adjustments
• This gives you the current status of the
accounts (Adjusted Trial Balance)
 Income Statement Column
• Copy the figures from the adjusted trial
balance for all accounts that go into the
Income Statement
• Revenue and expenses only
• See overlay after page 120
• Foot the columns – and debits will NOT equal
credits – why not?
• You haven’t considered profit
 Balance Sheet Column
• Copy the balances from all other than Income
Statement accounts from the adjusted trial
balance column to these accounts
• Foot the columns and they will not
balance….why not?
 Balance Sheet Column
• We haven’t considered profit
• The difference here will be the exact same
difference from the Income Statement
columns
 Steps in Completing the Worksheet
1. Complete trial balance columns, foot and
double underline if in balance (rule)
2. Complete the adjustments columns, foot and
rule
3. Complete adjusted trial balance, foot and
rule
 Steps in Completing the Worksheet
4. Record balances in the Income Statement
and Balance Sheet columns, foot
5. Record net income or net loss in Income
Statement columns by subtracting the
smaller side from the larger side and adding
the difference to the smaller side, foot and
rule
 Steps in Completing the Worksheet
6. Record net income or net loss in Balance
Sheet column by subtracting the smaller side
from the larger side and adding the
difference to the smaller side, foot and rule
7. The numbers in step 5 and 6 should be the
same
 Completing Financial Statements

The worksheet helps us do this

• The Income Statement is taken directly

from the Income Statement columns of
the worksheet
Completing Financial Statements
• When completing the Statement of Owner’s
Equity – you need to look at the ledger
account…NOT the worksheet for the
beginning total
• The Balance Sheet figures come directly from
the Balance Sheet columns EXCEPT Capital,
which is taken the Statement of Owner’s
Equity
 After Completing the Statements
• Journalize and post adjustments
• You do this by looking at the adjustment
columns on the worksheet and making the
journal entries. Then post the journal
entries to your ledger accounts to update
your books.
 Depreciation Accounts
• Contra Assets
• Are on the Balance Sheet following the asset
 Learning Outcomes Review
• List the classifications of the accounts that
occupy each column of a ten-column
worksheet
• Complete a worksheet for a service enterprise
• Journalize and post adjusting entries
• Prepare statements from worksheet
 In-class demonstration problems

– Journalize adjusting entries

– Classify accounts and indicate normal
balances and statement columns
–Prepare adjustments and adjusted trial
balance
• Record amounts in the Trial Balance columns
of the work sheet
• Complete the work sheet by making
adjustments
 Learning Objective 6

Explain how adjustments affect

financial results.

4-37
 Adjusted Financial Results
Adjustments help to ensure that all revenues and
expenses are reported in the period in which they are
earned and incurred.

Without adjustments, the financial statements

present an incomplete and misleading picture of the
company’s financial performance.

4-38
 At the end of the
period, we need to
make adjusting entries
to get the accounts up
to date for the financial
statements.
 Adjusting Entries

Adjusting Every
entries are adjusting
needed whenever entry involves a
revenue or expenses change in either a
affect more than one revenue or expense
accounting and an asset
period. or liability.
 Types of Adjusting Entries

 Converting  Converting
assets to liabilities to
expenses revenue

 Accruing  Accruing
unpaid uncollected
expenses revenues
 Converting Assets to Expenses
End of Current Period
Prior Periods Current Period Future Periods

Transaction Adjusting Entry

Paid future  Recognize portion
expenses in of asset consumed
advance
(creates an as expense, and
asset).  Reduce balance of
asset account.
 Converting Assets to Expenses

Examples Include:
Depreciation
Supplies
Expiring Insurance Policies
 Converting Assets to Expenses

$2,400 Insurance Policy

Coverage for 12 Months

$200 Monthly Insurance Expense

Jan. 1 Dec. 31

On January 1, Webb Co. purchased a one-

year insurance policy for $2,400.
 Converting Assets to Expenses

Initially, costs that benefit more than one

accounting period are recorded as assets.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jan. 1 Unexpired Insurance 2,400
Cash 2,400
Purchase a one-year insurance policy.
 Converting Assets to Expenses

The costs are expensed as they are used to

generate revenue.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Monthly Adjusting Entry for Insurance
Jan. 31 Insurance Expense 200
Unexpired Insurance 200
Insurance expense for January.
 Converting Assets to Expenses
Balance Sheet Income Statement
Cost of assets Cost of assets
that benefit used this period to
future periods. generate revenue.

Unexpired Insurance Insurance Expense

1/1 2,400 1/31 200 1/31 200
Bal. 2,200
 The Concept of Depreciation
Depreciable assets are physical objects
that retain their size and shape but lose
their economic usefulness over time.

Depreciation is the systematic allocation

of the cost of a depreciable asset to
expense.
 The Concept of Depreciation
The portion of an asset’s utility that is used
up must be expensed in the period used.

Fixed The asset’s Accumulated

Asset usefulness is Depreciation
(debit) partially (credit)
consumed
On date during the
period. At end of
when initial
payment is period . . .
made . . . Depreciation
Cash Expense
(credit) (debit)
 Depreciation Is Only an Estimate
On May 2, 2003, JJ’s Lawn Care Service
purchased a lawn mower with a useful
life of 50 months for $2,500 cash.
Using the straight-line method, calculate
the monthly depreciation expense.
Depreciation
Cost of the asset
expense (per =
Estimated useful life
period)

$50 = $2,500
50
 Depreciation Is Only an Estimate

JJ’s Lawn Care Service would make the

following adjusting entry.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Depreciation Expense: Tools & Eq. 50
Accumulated Depreciation: Tools & Eq. 50
To record one month's depreciation.

Contra-asset
 Depreciation Is Only an Estimate

JJ’s $15,000 truck is depreciated over 60

months as follows:

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 31 Depreciation Expense: Truck 250
Accumulated Depreciation: Truck 250
To record one month's depreciation.

$15,00060 months = $250 per month

 Converting Liabilities to Revenue

Balance Sheet Income Statement

Liability for Revenue earned
future periods. this period.

Unearned Rental Revenue Rental Revenue

1/31 500 1/1 6,000 1/31 500
Bal. 5,500
 Accruing Unpaid Expenses
End of Current Period
Prior Periods Current Period Future Periods

Adjusting Entry Transaction

 Recognize expense Liability will
incurred, and be paid.
 Record liability for
future payment.
 Steps in Preparing a Worksheet
P4-1A The trial balance for Undercover Roofing for the month ended March
31, 2008, is as follows.
Trial Balance Other data:
Account Titles Dr. Cr.
Cash $ 2,500 1. Supplies on hand total $140.
Accounts Receivable 1,800 2. Depreciation for March is $200.
Roofing Supplies 1,100
Equipment 6,000 3. Unearned revenue amounted to
Accumulated Depreciation $ 1,200 $130 on March 31.
Accounts Payable 1,400
Unearned Revenue 300 4. Accrued salaries are $350.
I. Spy, Capital 7,000
I. Spy, Drawing 600 Instructions
Service Revenue 3,000
Salaries Expense 700 a. Prepare and complete the
Miscellaneous Expense 200 worksheet.
Totals $ 12,900 $ 12,900

LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500
Accounts Receivable 1,800
Roofing Supplies 1,100
Equipment 6,000
Accumulated Depreciation 1,200
Accounts Payable 1,400
Unearned Revenue 300
I. Spy, Capital 7,000
I. Spy, Drawing 600
Service Revenue 3,000
Salaries Expense 700
Miscellaneous Expense 200
Totals 12,900 12,900
Trial balance amounts
come directly from ledger
Include all accounts.
accounts with
balances.

LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500
Accounts Receivable 1,800
Roofing Supplies 1,100 (a) 960
Equipment 6,000 Adjustments Key:
Accumulated Depreciation 1,200 (b) 200
Accounts Payable 1,400 (a) Supplies used.
Unearned Revenue 300 (c) 170
I. Spy, Capital 7,000
(b) Depreciation expense.
I. Spy, Drawing 600 (c) Service revenue earned.
Service Revenue 3,000 (c) 170
Salaries Expense 700 (d) 350 (d) Salaries accrued.
Miscellaneous Expense 200
Totals 12,900 12,900
Supplies Expense (a) 960
Depreciation Expense (b) 200
Salaries Payable (d) 350
Totals 1,680 1,680 Enter adjustment amounts,
total adjustments columns,
Add additional and check for equality.
accounts as
needed.
LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500
Accounts Receivable 1,800 1,800
Roofing Supplies 1,100 (a) 960 140
Equipment 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400
Accounts Payable 1,400 1,400
Unearned Revenue 300 (c) 170 130
I. Spy, Capital 7,000 7,000
I. Spy, Drawing 600 600
Service Revenue 3,000 (c) 170 3,170
Salaries Expense 700 (d) 350 1,050
Miscellaneous Expense 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960
Depreciation Expense (b) 200 200
Salaries Payable (d) 350 350
Totals 1,680 1,680 13,450 13,450

Total the adjusted trial

balance columns and
check for equality.
LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500
Accounts Receivable 1,800 1,800
Roofing Supplies 1,100 (a) 960 140
Equipment 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400
Accounts Payable 1,400 1,400
Unearned Revenue 300 (c) 170 130
I. Spy, Capital 7,000 7,000
I. Spy, Drawing 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d) 350 1,050 1,050
Miscellaneous Expense 200 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960 960
Depreciation Expense (b) 200 200 200
Salaries Payable (d) 350 350
Totals 1,680 1,680 13,450 13,450 2,410 3,170

Extend all revenue and expense

account balances to the income
statement columns.
LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500 2,500
Accounts Receivable 1,800 1,800 1,800
Roofing Supplies 1,100 (a) 960 140 140
Equipment 6,000 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400 1,400
Accounts Payable 1,400 1,400 1,400
Unearned Revenue 300 (c) 170 130 130
I. Spy, Capital 7,000 7,000 7,000
I. Spy, Drawing 600 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d) 350 1,050 1,050
Miscellaneous Expense 200 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960 960
Depreciation Expense (b) 200 200 200
Salaries Payable (d) 350 350 350
Totals 1,680 1,680 13,450 13,450 2,410 3,170 11,040 10,280

Extend all asset, liability, and equity

account balances to the balance sheet
columns.
LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500 2,500
Accounts Receivable 1,800 1,800 1,800
Roofing Supplies 1,100 (a) 960 140 140
Equipment 6,000 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400 1,400
Accounts Payable 1,400 1,400 1,400
Unearned Revenue 300 (c) 170 130 130
I. Spy, Capital 7,000 7,000 7,000
I. Spy, Drawing 600 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d) 350 1,050 1,050
Miscellaneous Expense 200 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960 960
Depreciation Expense (b) 200 200 200
Salaries Payable (d) 350 350 350
Totals 1,680 1,680 13,450 13,450 2,410 3,170 11,040 10,280
Net Income 760 760
Totals 3,170 3,170 11,040 11,040

Compute Net income or Net loss.

Lecture #14: Adjusting Entries &
Worksheet LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Review Question
Net income is shown on a work sheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance sheet
debit column.
d. income statement debit column and balance sheet
credit column.

LO 1 Prepare a worksheet.
 Preparing Financial Statements from a Worksheet
Worksheet
Income statement is prepared from the income
statement columns.

Balance sheet and owner’s equity statement are

prepared from the balance sheet columns.

Companies journalize and post adjusting entries.

LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
b. Prepare an income statement for the month ended March 31,
2008.
Undercover Roofing
Income Statement
For the Month Ended March 31, 2008
Revenues $ 3,170
Service revenues
Expenses
Salaries expense $ 1,050
Supplies expense 960
Depreciation expense 200
Miscellaneous expense 200
Total expenses 2,410
Net income $ 760

LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
b. Prepare an owner’s equity statement for the month ended March
31, 2008.

Undercover Roofing
Statement of Owner's Equity
For the Month Ended March 31, 2008
I. Spy, Capital, March 1 $ 7,000
Add: Net income 760
Less: Drawings (600)
I. Spy, Capital, March 31 $ 7,160

LO 1 Prepare a worksheet.
 Preparing Financial Statements from a Worksheet
b. Prepare a balance sheet as of March 31, 2008.

Undercover Assets
Current assets
Roofing Cash $ 2,500
Accounts receivable 1,800
Balance Sheet Roofing supplies 140
Total current assets 4,440
March 31, 2008 Property, plant, and equipment
Equipment 6,000
Less: Accumulated depreciation 1,400 4,600
Total assets $ 9,040

Liabilities and Owner's Equity

Current liabilities
Accounts payable $ 1,400
Salaries payable 350
Unearned revenue 130
Total current liabilities 1,880
Owner's equity
I. Spy, Capital 7,160
Total liabilities and owner's equity $ 9,040

LO 1 Prepare a worksheet.
Preparing Adjusting Entries from a Worksheet

Adjusting Entries
The adjusting entries are prepared from the
adjustments columns of the worksheet.

Journalizing and posting of adjusting entries follows

the preparation of financial statements when a
worksheet is used.

LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
c. Journalize the adjusting entries from the adjustments
columns of the worksheet.

Date Account Title Ref. Debit Credit

Mar. 31 Supplies expense 960
Roofing supplies 960

Depreciation expense 200

Accumulated depreciation 200

Unearned revenue 170

Service revenue 170

Salaries expense 350

Salaries payable 350

LO 1 Prepare a worksheet.
 Summary
1. Identify annual accounting activities that make year-end the “busy
season”
2. Explain the purpose of adjusting entries.
3. Describe and prepare the basic four types of adjusting entries.
4. Explain practically the concept of “materiality”.
5. Explain the concept of adequate disclosure.

6. Explain how interim financial statements are prepared in a

business that closes its accounts only at year-end.

7. Preparing a worksheet and explain its usefulness.