Copyright 2006 Pearson Education Canada Inc. 5-1
Copyright 2006 Pearson Education Canada Inc. 5-2
OutlineAdjusting the Trial Balance: Step 5Adjusting Entries: Need and PurposesPrepayments Inventory AdjustmentsUnearned RevenueBad DebtsThe WorksheetThe Adjusted Trial BalancePreparing the Financial Statement Worksheet:
6 Steps
Copyright 2006 Pearson Education Canada Inc. 5-3
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
Copyright 2006 Pearson Education Canada Inc. 5-4
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
Copyright 2006 Pearson Education Canada Inc. 5-5
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
Copyright 2006 Pearson Education Canada Inc. 5-6
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
Copyright 2006 Pearson Education Canada Inc. 5-7
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
Copyright 2006 Pearson Education Canada Inc. 5-8
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
Copyright 2006 Pearson Education Canada Inc. 5-9
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
Copyright 2006 Pearson Education Canada Inc. 5-10
Reporting Furniture and Equipment on the Balance Sheet
Furniture and Equipment $61,000
Less Accumulated depreciation 2,000
Net Furniture and Equipment $59,000
Copyright 2006 Pearson Education Canada Inc. 5-11
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
Copyright 2006 Pearson Education Canada Inc. 5-12
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
Copyright 2006 Pearson Education Canada Inc. 5-13
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
Copyright 2006 Pearson Education Canada Inc. 5-14
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
Copyright 2006 Pearson Education Canada Inc. 5-15
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)
Copyright 2006 Pearson Education Canada Inc. 5-16
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
Copyright 2006 Pearson Education Canada Inc. 5-17
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
Copyright 2006 Pearson Education Canada Inc. 5-18
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
Copyright 2006 Pearson Education Canada Inc. 5-19
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
Copyright 2006 Pearson Education Canada Inc. 5-20
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 (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
Neat RestaurantsFinancial Statement Worksheet
For the year ended July 31, 2005
Copyright 2006 Pearson Education Canada Inc. 5-21
Trial Balance Adjustments Income Statement Balance Sheet
Account Name Debits Credits Debits Credits Debits Credits Debits Credits Debits Credits
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
Neat RestaurantsFinancial Statement Worksheet
For the year ended July 31, 2005
Copyright 2006 Pearson Education Canada Inc. 5-22
Account Name Debits Credits Debits Credits Debits Credits Debits Credits Debits Credits
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