Chapter 12 Work Sheet and Adjusting Entries Chapter 12 Performance Objectives: 1)New Adjustments: 1.Adjustment for Supplies 2.Adjustment for merchandise

Chapter 12

Work Sheet and Adjusting Entries

Chapter 12• Performance Objectives:1) New Adjustments:

1. Adjustment for Supplies

2. Adjustment for merchandise inventory under the periodic inventory system

3. Adjustment of unearned revenue

2) Complete the work sheet with the new adjustments

3) Journalize the adjusting entries for a merchandising business under the periodic inventory system

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

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

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

New Adjustments:Merchandise 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.

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

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)

Brings Inventory Balance to Counted Total!

DR CR DR CR+ -

bal. 77000 77000 a) a) 77000b) 64900 b) 64900

64900

Merchandise Inventory Income Summary

New Adjustments:Merchandise Inventory

• Step One:Step One:• Empty out

inventory account

– Credit• “Put” it into

income summary

– Debit

DR CR DR CR+ -

bal. 77000 77000 a) a) 770000


• Step Two:Step Two:• Record the

physical count number in inventory account

– Debit• “Put” it into

income summary

– Credit

After Recording Adjustment In The Work Sheet, Inventory Adjusting Journal Entry:

DescriptionPost.Ref. Debit Credit

2002 Adjusting EntriesDec. 31 Income Summary 77,000.00

Merchandise Inventory 77,000.00

31 Merchandise Inventory 64,900.00Income Summary 64,900.00

General Journal Page 1

Date

DR CR DR CR+ -

bal. 77000 77000 a) a) 77000b) 64900 b) 64900

64900


Demonstration Problem

a) Merchandise Inventory at Jan. 1, 2002 $120,500.00

b) Merchandise Inventory at Dec, 31, 2002 $104,682.00

c) Store supplies inventory at December 31 $900.00

d) Insurance expired during the year $2,040.00

e) Salary accrued at Dec. 31 $1,865.00

f) Depreciation of building $2,142.00

g) Depreciation of store equipment $2,731.00

Adjustments for Monty Company

We will complete a work sheet and make the adjusting journal entries

Empty Inventory Account

DR CR DR CR DR CRCash 12500.00Accounts Receivable 2140.00Merchandinse Inventory 120500.00 a) 120500.00Store Supplies 1520.00Prepaid Insurance 3040.00Land 48000.00Building 108000.00Accumulated Depreciation, Building 16600.00Store Equipment 36400.00Accumulated Depreciation, Store Equipment 11600.00Accounts Payable 14650.00Sales Tax Payable 4192.00Notes Payable 5000.00B. Monty, Capital 216135.00B. Monty, Drawing 44200.00Sales 467550.00Sales Returns & Allowances 2634.00Purchases 284719.00Purchases Returns & Allowances 5560.00Purchases Discount 3671.00Freight In 7868.00Salary Expense 58673.00Advertising Expense 7259.00Utilities Expense 5895.00Micellaneous Expense 840.00Interest Expense 770.00

744958.00 744958.00Income Summary a) 120500.00Store Supplies ExpenseInsurance ExpenseDepreciation Expense, BuildingDepreciation Expense, Store EquipmentSalaries Payable

Net Income

Monty CompanyWork Sheet

For Year Ended December 31, 2002

CRDRAdjustments Balance SheetTrial Balance Income Statement

Account Name

Place Counted Inventory Into Merch. Inv. Account

DR CR DR CR DR CRCash 12500.00Accounts Receivable 2140.00Merchandinse Inventory 120500.00 b) 104682.00 a) 120500.00Store Supplies 1520.00Prepaid Insurance 3040.00Land 48000.00Building 108000.00Accumulated Depreciation, Building 16600.00Store Equipment 36400.00Accumulated Depreciation, Store Equipment 11600.00Accounts Payable 14650.00Sales Tax Payable 4192.00Notes Payable 5000.00B. Monty, Capital 216135.00B. Monty, Drawing 44200.00Sales 467550.00Sales Returns & Allowances 2634.00Purchases 284719.00Purchases Returns & Allowances 5560.00Purchases Discount 3671.00Freight In 7868.00Salary Expense 58673.00Advertising Expense 7259.00Utilities Expense 5895.00Micellaneous Expense 840.00Interest Expense 770.00

744958.00 744958.00Income Summary a) 120500.00 b) 104682.00Store Supplies ExpenseInsurance ExpenseDepreciation Expense, BuildingDepreciation Expense, Store EquipmentSalaries Payable

Net Income

Balance SheetTrial Balance Income StatementAccount Name



CRDRAdjustments

New Adjustments: Unearned Revenue

• When we buy a one year insurance policy, we record: “prepaid prepaid insuranceinsurance”

– Each month, we incurincur 1/12 of it as insurance insurance expenseexpense!

– This “updates our accounts” & makes our financial statements more accurate

• When the insurance company receives our check, they record: “unearned insurance unearned insurance revenuerevenue”

– Each month, they earnearn 1/12 of it as insurance insurance revenuerevenue

– This “updates their accounts” & makes their financial statements more accurate

““See both sides of the coin!”See both sides of the coin!”One person’s One person’s expenseexpense is another person’s is another person’s revenuerevenue!!

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

Asset, Liability Or Owner’s 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

Unearned Revenue

• Revenue received in advance for goods or services to be delivered later

• Considered to be a liability until the revenue is earned

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:

Description Debit Credit2002Jan 1 Cash 1,200.00

Unearned Insurance Revenue 1,200.00Receive check # 3287 from customer for 1 year truck insurance

Date


2002 Adjusting EntriesJan 31 Unearned Insurance Revenue 100.00

Insurance Revenue 100.00

Date


Journal Entries& Posting (T-Accounts Demo)


2002

Jan 1 Cash 1,200.00Unearned Insurance Revenue 1,200.00

Receive check # 3287 from customer for 1 year truck insurance

Adjusting Entries31 Unearned Insurance Revenue 100.00

Insurance Revenue 100.00


Date

= +

DR CR DR CR DR CR+ - - + - +

bal. 50001-Jan 1200 31-Jan 100 1200 1-Jan 100 31-Jan

Cash (1100) Unearned Insurance Revenue (2110) Insurance Revenue (4110)

Owner's EquityLiabilitiesAssets

1100

2110

2110

4110

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

Demonstration Problem

a) Merchandise Inventory at Jan. 1, 2002 $120,500.00

b) Merchandise Inventory at Dec, 31, 2002 $104,682.00

c) Store supplies inventory at December 31 $900.00

d) Insurance expired during the year $2,040.00

e) Salary accrued at Dec. 31 $1,865.00

f) Depreciation of building $2,142.00

g) Depreciation of store equipment $2,731.00

Adjustments for Monty Company

We will complete a work sheet and make the adjusting journal entries

Work Sheet

DR CR DR CR DR CRCash 12500.00Accounts Receivable 2140.00Merchandinse Inventory 120500.00Store Supplies 1520.00Prepaid Insurance 3040.00Land 48000.00Building 108000.00Accumulated Depreciation, Building 16600.00Store Equipment 36400.00Accumulated Depreciation, Store Equipment 11600.00Accounts Payable 14650.00Sales Tax Payable 4192.00Notes Payable 5000.00B. Monty, Capital 216135.00B. Monty, Drawing 44200.00Sales 467550.00Sales Returns & Allowances 2634.00Purchases 284719.00Purchases Returns & Allowances 5560.00Purchases Discount 3671.00Freight In 7868.00Salary Expense 58673.00Advertising Expense 7259.00Utilities Expense 5895.00Micellaneous Expense 840.00Interest Expense 770.00

744958.00 744958.00Income SummaryStore Supplies ExpenseInsurance ExpenseDepreciation Expense, BuildingDepreciation Expense, Store EquipmentSalaries Payable

Net Income



Balance Sheet ColumnTrial Balance Income Statement ColumnAccount Name CRDR

Adjustments

Empty Inventory Account

DR CR DR CR DR CRCash 12500.00Accounts Receivable 2140.00Merchandinse Inventory 120500.00 a) 120500.00Store Supplies 1520.00Prepaid Insurance 3040.00Land 48000.00Building 108000.00Accumulated Depreciation, Building 16600.00Store Equipment 36400.00Accumulated Depreciation, Store Equipment 11600.00Accounts Payable 14650.00Sales Tax Payable 4192.00Notes Payable 5000.00B. Monty, Capital 216135.00B. Monty, Drawing 44200.00Sales 467550.00Sales Returns & Allowances 2634.00Purchases 284719.00Purchases Returns & Allowances 5560.00Purchases Discount 3671.00Freight In 7868.00Salary Expense 58673.00Advertising Expense 7259.00Utilities Expense 5895.00Micellaneous Expense 840.00Interest Expense 770.00

744958.00 744958.00Income Summary a) 120500.00Store Supplies ExpenseInsurance ExpenseDepreciation Expense, BuildingDepreciation Expense, Store EquipmentSalaries Payable

Net Income




Account Name

Place Counted Inventory Into Merch. Inv. Account

DR CR DR CR DR CRCash 12500.00Accounts Receivable 2140.00Merchandinse Inventory 120500.00 b) 104682.00 a) 120500.00Store Supplies 1520.00Prepaid Insurance 3040.00Land 48000.00Building 108000.00Accumulated Depreciation, Building 16600.00Store Equipment 36400.00Accumulated Depreciation, Store Equipment 11600.00Accounts Payable 14650.00Sales Tax Payable 4192.00Notes Payable 5000.00B. Monty, Capital 216135.00B. Monty, Drawing 44200.00Sales 467550.00Sales Returns & Allowances 2634.00Purchases 284719.00Purchases Returns & Allowances 5560.00Purchases Discount 3671.00Freight In 7868.00Salary Expense 58673.00Advertising Expense 7259.00Utilities Expense 5895.00Micellaneous Expense 840.00Interest Expense 770.00

744958.00 744958.00Income Summary a) 120500.00 b) 104682.00Store Supplies ExpenseInsurance ExpenseDepreciation Expense, BuildingDepreciation Expense, Store EquipmentSalaries Payable

Net Income




CRDRAdjustments

Record All Adjustments

DR CR DR CR DR CRCash 12500.00Accounts Receivable 2140.00Merchandinse Inventory 120500.00 b) 104682.00 a) 120500.00Store Supplies 1520.00 c) 620.00Prepaid Insurance 3040.00 d) 2040.00Land 48000.00Building 108000.00Accumulated Depreciation, Building 16600.00 f) 2142.00Store Equipment 36400.00Accumulated Depreciation, Store Equipment 11600.00 g) 2731.00Accounts Payable 14650.00Sales Tax Payable 4192.00Notes Payable 5000.00B. Monty, Capital 216135.00B. Monty, Drawing 44200.00Sales 467550.00Sales Returns & Allowances 2634.00Purchases 284719.00Purchases Returns & Allowances 5560.00Purchases Discount 3671.00Freight In 7868.00Salary Expense 58673.00 e) 1865.00Advertising Expense 7259.00Utilities Expense 5895.00Micellaneous Expense 840.00Interest Expense 770.00

744958.00 744958.00Income Summary a) 120500.00 b) 104682.00Store Supplies Expense c) 620.00Insurance Expense d) 2040.00Depreciation Expense, Building f) 2142.00Depreciation Expense, Store Equipment g) 2731.00Salaries Payable e) 1865.00

234580.00 234580.00Net Income




Account Name

Carry Over To I/S Column

DR CR DR CR DR CRCash 12500.00Accounts Receivable 2140.00Merchandinse Inventory 120500.00 b) 104682.00 a) 120500.00Store Supplies 1520.00 c) 620.00Prepaid Insurance 3040.00 d) 2040.00Land 48000.00Building 108000.00Accumulated Depreciation, Building 16600.00 f) 2142.00Store Equipment 36400.00Accumulated Depreciation, Store Equipment 11600.00 g) 2731.00Accounts Payable 14650.00Sales Tax Payable 4192.00Notes Payable 5000.00B. Monty, Capital 216135.00B. Monty, Drawing 44200.00Sales 467550.00 467550.00Sales Returns & Allowances 2634.00 2634.00Purchases 284719.00 284719.00Purchases Returns & Allowances 5560.00 5560.00Purchases Discount 3671.00 3671.00Freight In 7868.00 7868.00Salary Expense 58673.00 e) 1865.00 60538.00Advertising Expense 7259.00 7259.00Utilities Expense 5895.00 5895.00Micellaneous Expense 840.00 840.00Interest Expense 770.00 770.00

744958.00 744958.00Income Summary a) 120500.00 b) 104682.00 120500.00 104682.00Store Supplies Expense c) 620.00 620.00Insurance Expense d) 2040.00 2040.00Depreciation Expense, Building f) 2142.00 2142.00Depreciation Expense, Store Equipment g) 2731.00 2731.00Salaries Payable e) 1865.00

234580.00 234580.00 498556.00 581463.00Net Income 82907.00

581463.00 581463.00




CRDRAdjustments

Carry Over To B/S Column

DR CR DR CR DR CRCash 12500.00 12500.00Accounts Receivable 2140.00 2140.00Merchandinse Inventory 120500.00 b) 104682.00 a) 120500.00 104682.00Store Supplies 1520.00 c) 620.00 900.00Prepaid Insurance 3040.00 d) 2040.00 1000.00Land 48000.00 48000.00Building 108000.00 108000.00Accumulated Depreciation, Building 16600.00 f) 2142.00 18742.00Store Equipment 36400.00 36400.00Accumulated Depreciation, Store Equipment 11600.00 g) 2731.00 14331.00Accounts Payable 14650.00 14650.00Sales Tax Payable 4192.00 4192.00Notes Payable 5000.00 5000.00B. Monty, Capital 216135.00 216135.00B. Monty, Drawing 44200.00 44200.00Sales 467550.00 467550.00Sales Returns & Allowances 2634.00 2634.00Purchases 284719.00 284719.00Purchases Returns & Allowances 5560.00 5560.00Purchases Discount 3671.00 3671.00Freight In 7868.00 7868.00Salary Expense 58673.00 e) 1865.00 60538.00Advertising Expense 7259.00 7259.00Utilities Expense 5895.00 5895.00Micellaneous Expense 840.00 840.00Interest Expense 770.00 770.00

744958.00 744958.00Income Summary a) 120500.00 b) 104682.00 120500.00 104682.00Store Supplies Expense c) 620.00 620.00Insurance Expense d) 2040.00 2040.00Depreciation Expense, Building f) 2142.00 2142.00Depreciation Expense, Store Equipment g) 2731.00 2731.00Salaries Payable e) 1865.00 1865.00

234580.00 234580.00 498556.00 581463.00 357822.00 274915.00Net Income 82907.00 82907.00

581463.00 581463.00 357822.00 357822.00




Account Name

Work Sheet

DR CR DR CR DR CRCash 12500.00 12500.00Accounts Receivable 2140.00 2140.00Merchandinse Inventory 120500.00 b) 104682.00 a) 120500.00 104682.00Store Supplies 1520.00 c) 620.00 900.00Prepaid Insurance 3040.00 d) 2040.00 1000.00Land 48000.00 48000.00Building 108000.00 108000.00Accumulated Depreciation, Building 16600.00 f) 2142.00 18742.00Store Equipment 36400.00 36400.00Accumulated Depreciation, Store Equipment 11600.00 g) 2731.00 14331.00Accounts Payable 14650.00 14650.00Sales Tax Payable 4192.00 4192.00Notes Payable 5000.00 5000.00B. Monty, Capital 216135.00 216135.00B. Monty, Drawing 44200.00 44200.00Sales 467550.00 467550.00Sales Returns & Allowances 2634.00 2634.00Purchases 284719.00 284719.00Purchases Returns & Allowances 5560.00 5560.00Purchases Discount 3671.00 3671.00Freight In 7868.00 7868.00Salary Expense 58673.00 e) 1865.00 60538.00Advertising Expense 7259.00 7259.00Utilities Expense 5895.00 5895.00Micellaneous Expense 840.00 840.00Interest Expense 770.00 770.00

744958.00 744958.00Income Summary a) 120500.00 b) 104682.00 120500.00 104682.00Store Supplies Expense c) 620.00 620.00Insurance Expense d) 2040.00 2040.00Depreciation Expense, Building f) 2142.00 2142.00Depreciation Expense, Store Equipment g) 2731.00 2731.00Salaries Payable e) 1865.00 1865.00

234580.00 234580.00 498556.00 581463.00 357822.00 274915.00Net Income 82907.00 82907.00

581463.00 581463.00 357822.00 357822.00




Account Name

Journal Entries Before Posting


1 Adjusting Entries2 20023 December 31 Income Summary 120,500.004 Merchandinse Inventory 120,500.0056 31 Merchandinse Inventory 104,682.007 Income Summary 104,682.0089 31 Store Supplies Expense 620.00

10 Store Supplies 620.001112 31 Insurance Expense 2,040.0013 Prepaid Insurance 2,040.001415 31 Depreciation Expense, Building 2,142.0016 Accumulated Depreciation, Building 2,142.001718 31 Depreciation Expense, Store Equipment 2,731.0019 Accumulated Depreciation, Store Equipment 2,731.002021 31 Salary Expense 1,865.0022 Salaries Payable 1,865.0023

General Journal

Date

Page 43Line #

Steps For Completing The Work Sheet

1. Place account totals in trial balance column

– Total and rule (DR = CR)

2. Record adjustments in work sheet

– Letter references: a), b)…

– Total and rule (DR = CR)

3. Place I/S & B/S amounts into I/S and B/S columns, total at bottom (DR ≠ CR)


4. 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


5. In the balance sheet column, calculate net income/loss

– Subtracting the smaller side from the larger side

– “Plug” this number to get DR = CR

Chapter 13

Financial Statements, Closing Entries, And Reversing Entries

Chapter 13• Performance objectives:1. Prepare a classified income statement for a

merchandising firm– Net sales

– Cost of goods sold

– Gross profit

– Income from operations

2. Prepare a classified balance sheet for any type of business– Current assets

– Plant & equipment

– Current liabilities

– Long-term liabilities

Chapter 13

• Performance objectives:

3. Compute working capital and current ratio

4. Journalize the closing entries for a merchandising firm

5. Determine which adjusting entries can be reversed, and journalize the reversing entries

Frank's Shoe MartIncome Statement


Net Sales - Cost of Goods Sold = Gross Profit - Operating Expenses = Income From Operations + Other Income - Other Expenses = Net Income

Prepare A Classified Income Statement For Merchandising Co.

(“Multi-Step Income Statement”)

• Single step income statement

• Multi-step income statement



Revenues - Expenses = Net Income

Revenues from Sales:Sales 301,010.00$ Less: Sales Returns & Allowances 3,000.00$ Sales Discounts 24,300.00 27,300.00

Net Sales 273,710.00$ Cost of Goods Sold:

Merchandise Inventory, Jan. 1, 2001 55,500.00$ Purchases 215,000.00$ Less: Purchases Returns & Allowances 3,450.00$

Purchases Discount 2,400.00 5,850.00 Net Purchases 209,150.00$ Add Freight In 7,000.00 Delivered Cost of Purchases 216,150.00 Goods Available for Sale 271,650.00$ Less Merchandise Inventory, Dec. 31, 2002 53,400.00 Cost of Goods Sold: 218,250.00

Gross Profit 55,460.00$ Operating Expenses:

Wages Expense 28,270.00$ Advertising Expense 3,900.00 Rent Expense 8,400.00 Store Supplies Expense 300.00 Insurance Expense 615.00 Depreciation Expense, Store Equipment 6,395.00 Total Operating Expenses 47,880.00

Income From Operations 7,580.00 Other Income:

Investment Income 3,900.00$ Other Expenses:

Investment Expenses 250 3,650.00 Net Income 11,230.00$

Bay Air ToolsIncome Statement

For the Year Ended December 31, 2002

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

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

Template for Classified Income Statement



Net Sales - Cost of Goods Sold = Gross Profit - Operating Expenses = Income From Operations + Other Income - Other Expenses = Net Income

Calculate Net Sales


Net Sales 273,710.00$



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

Cost of Goods Sold

• Good Diagram on page 457

Cost of Goods Sold:Merchandise Inventory, Jan. 1, 2001 55,500.00$ Purchases 215,000.00$ Less: Purchases Returns & Allowances 3,450.00$

Purchases Discount 2,400.00 5,850.00 Net Purchases 209,150.00$ Add Freight In 7,000.00

+ Delivered Cost of Purchases 216,150.00 = Goods Available for Sale 271,650.00$ - Less Merchandise Inventory, Dec. 31, 2002 53,400.00 = Cost of Goods Sold: 218,250.00

Merchandise Inventory, Jan. 1, 2001 + Delivered Cost of Purchases = Goods Available for Sale - Less Merchandise Inventory, Dec. 31, 2002 = Cost of Goods Sold:

Calculate COGS







Calculate Gross Profit





Gross Profit 55,460.00$



Calculate Income From Operations



Income From Operations 7,580.00

Calculate Other Income & Expenses





Investment Expenses 250 3,650.00

Calculate Net Income

















Statement Of Owner’s Equity

• After we complete the income statement, we are ready to make the statement of owner’s equity

• Preparation is the same as earlier chapters

• Look on page 460

Balance Sheet Classifications

• Current Assets

• Plant and Equipment

• Current Liabilities

• Long-Term Liabilities

AssetsCurrent Assets:

Cash 5,400.00$ Accounts Receivable 14,100.00 Merchandise Inventory 103,400.00 Store Supplies 390.00 Prepaid Insurance 2,900.00 Total Current Assets $126,190.00

Plant & Equipment:Land $105,000.00Building 190,000.00$

Less Accumulated Depreciation 125,000.00 65,000.00Shop Equipment 43,900.00$

Less Accumulated Depreciation 31,200.00 12,700.00Trucks 34,500.00$

Less Accumulated Depreciation 12,750.00 21,750.00Total Plant & Equipment 204,450.00

Total Assets $330,640.00

LiabilitiesCurrent Liabilities:

Mortgage Payable (Current Portion) 20,200.00$ Accounts Payable 47,500.00Wages Payable 1,270.00Unearned Rent Revenue 4,500.00Total Current Liabilities 73,470.00$

Long-Term LiabilitiesMortgage Payable 127,500.00

Total Liabilities $200,970.00

Owner's EquityM.R. Short, Capital 129,670.00Total Liabilities & Owner's Equity $330,640.00

Bay Air ToolsBalance Sheet

December 31, 2002

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)

Notes Receivable (Current)

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

Calculate Current Assets




December 31, 2002

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

Calculate Plant & Equipment & Total Assets









December 31, 2002

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

Calculate Current Liabilities



Long-Term Liabilities

• Debts payable over a comparatively long period

– Usually more than one year

• For sole-proprietorship only LTL:

– Mortgage payable (LT portion)

Calculate Total Liabilities & Owner’s Equity



















December 31, 2002

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)

Current Assets & Current Liabilities

• Current assets (CA)– Get cash soon

• Current liabilities (CL)– Pay cash soon

• Short term cash management measures (liquidity measures):1. Working capital

2. Current ratio

Total CA & Total CL

Cash 5,400.00$ Mortgage Payable (Current Portion) 20,200.00$ Accounts Receivable 14,100.00$ Accounts Payable 47,500.00$ Merchandise Inventory 103,400.00$ Wages Payable 1,270.00$ Store Supplies 390.00$ Unearned Rent Revenue 4,500.00$ Prepaid Insurance 2,900.00$ Total CA 126,190.00$ Total CL 73,470.00$

Current Assets Current Liabilities

Liquidity Analysis

Liquidity Measures:

• Current Ratio

– A firm’s current assets divided by its current liabilities

• Because of the division, the number can be used to compare with other companies

– Portrays a firm’s short-term debt-paying ability

• Ability to pay current liabilities with current assets

• CA/CL = Current Ratio

CA/CL


Current Ratio = CA/CL = 126,190/73470 = Current Ratio = 1.7175718


Liquidity Analysis

Liquidity Measures:

• Working Capital– A firm’s 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

Working Capital


Current Ratio = CA/CL = 126,190/73470 = Current Ratio = 1.7175718

Working Capital - CA - CL = 126,190 - 73470 = Working Capital = 52,720.00$


Liquidity Analysis

Closing Entries For Merchandising Co.1. 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

2. 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

3. Close income summary to capital4. Close drawings to capital

Step 1

Step 2

Steps 3 and 4

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

Determine Which Adjusting Entries Can Be Reversed

1. Must be first day of the period after you made adjusting entries

2. Look at all adjusting entries and find entries that meet all three qualifications:

1. An asset or liability was increased

2. The asset or liability did not have a previous balance

3. Entry does not involve merchandise inventory or contra accounts

3. Reverse it by making a new journal entry with the reverse debits and credits

– When you post, don’t forget to write “reversing” in item column in the ledger accounts

• Example

Adjusting Entries


20- Adjusting EntriesDec. 31 Wage Expense 1,200.00

Wages Payable 1,200.00


Date

Journalize the Reversing Entries

Posting Reversing Entries to Wages Payable Account

Posting Reversing Entries to Wages Expense Account

Notice that posting of $2,000 wages expense results in an $800 balance.

Documents

Chapter 12 Work Sheet and Adjusting Entries Chapter 12 Performance Objectives: 1)New Adjustments: 1.Adjustment for Supplies 2.Adjustment for merchandise