Accounting 11Adjustments

Adjustments on a Work SheetAdjustments are accounting changes recorded to ensure that all account balances are correct. The purpose of adjusting the books is to ensure that the financial statements are accurate.

Prepaid Expenses are expenses that are paid in advance. Often items such as rent, insurance and supplies are prepaid and thus they are considered items of value to the company. They are current assets.

Once they have been used, they no longer have value and therfore are no longer assets. They have changed to expenses and our journal and ledger must reflect these changes.

Prepaid Rent

For example, imagine the company you rent your office building from requires the rent of $1700.00 be paid in advance for 3 months. Therefore, on April 1, a cheque for $5100 is issued on April 1 for April, May and June rents. Since the payment is made in advance, Rent Expense is not debited. Instead an account callled Prepaid Rent is debited.

At the end of April, we need to adjust the books to reflect the fact that one month of rent has been used up. In order to do that we would credit our Prepaid Rent account, $1700.00 and debit our Rent Expense account $1700.00

Adjustments on a Work Sheet

Adjustments are first planned in a work sheet’s Adjustment columns. Just like regular transactions, every adjustment has a debit and credit part and at least two accounts are affected. Adjustments transfer all or part of one account balance to another account.

Journal entries made to bring general ledger accounts up to date are called Adjusting Entries.

Eg. On July 31, before adjustments, Lawnmaster’s supplies account has a balance of $1835.00When Lawnmaster counts the supplies still on hand, he finds that value of supplies to be only $850. Therefore, the supplies used during the month of July,

$1835.00- 850.00$ 985.00

Remember that the supplies account has normal Debit balance. Therefore, Lawnmaster must Credit his Supplies account $985.00. At the same time, he must Debit another account – The Supplies Expense account.

Recording Adjustments on a Work Sheet1. Write the amount, $985.00, in the Adjustment Debit column on the line with the account title Supplies Expense

2. Write the amount, $985.00, in the Adjustments Credit column with the accounttitle Supplies.

3. Label the two parts of this adjustment with a small letter ‘a’ in parenthese to indicate that both the credit and debit are part of the same adjustment.

Eg. On July 31, before adjustments, Lawnmaster’s prepaid insurance account has a balance of $700.00

A review of Lawnmaster’s insurance records shows that $110.00 of insurance was used. Therefore, the insurance that remains after the month of July,

$700.00- 110.00$ 590.00

Remember that the insurance account has normal Debit balance. Therefore, Lawnmaster must Credit his insurance account $110.00. At the same time, he must Debit another account – The Insurance Expense account.

After all adjustments are recorded on a work sheet, the equality of debits and credits for the Adjustment Column is proved.

As with other journals, you must use a single and double line to rule the totals

Extending Work Sheet to make Income Statement** Income statement is created using revenue and

expenses.1. Extend the up-to-date balance of the revenue

account, Sales.• The balance of Sales in the Trial Balance Credit Column

is up-to-date and therefore it can be extended to the Income Statement Credit Column.

2.Extend the up-to-date balance of each expense account• The balance of Advertising, Repair, Misc, Rent and

Utilities in the Trial Balance Debit Column is up-to-date and therefore it can be extended to the Income Statement Debit Column.• The up-to-date balances for Insurance and Supplies is

found in the Adjustment Debit Column. Therefore, these figures can be extended to the Income Statement Debit Column.

Completing a Worksheet

A work sheet is completed by figuring out the net income of net loss for the fiscal period. The difference between total revenue and total expenses when total revenue is greater is called Net Income.

The difference between total revenue and total expenses when total expenses are greater is called Net loss.

AssignmentAssignment

What is the meaning of each of the following:

Fiscal Period Adjusting EntriesWork Sheet Income StatementTrial Balance Net IncomeAdjustments Net Loss

Complete:Complete:Drill 7-D-1 on page 126Drill 7-D 2 on page 127Problem 7-1 on page 128Problem 7-2