Chapter 5 - Adjustments and the Worksheet

1) Complete a trial balance on a worksheet

1. Enter the general ledger account names. 2. Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section. 3. Total the Debit and Credit columns to prove that the trial balance is in balance. 4. Place a double rule under each Trial Balance column to show that the work in that column is complete. Notice that the trial balance has four new accounts: Accumulated Depreciation—Equipment, Supplies Expense, Rent Expense, and Depreciation Expense—Equipment.

Account Form Balance Sheet

A balance sheet that lists assets on the left and liabilities and O/E on the right.

Report Form Balance Sheet

A balance sheet that lists the asst accounts first, followed by liabilities, and O/E.

Worksheet

A form used to gather all data needed at the end of an accounting period to prepare financial statements

Adjusting Entries

A journal entries made to update accounts for items that were not recorded during the accounting period

5) Journalize and post the adjusting entries.

After the financial statements have been prepared, the accountant must make permanent entries in the accounting records for the adjustments shown on the worksheet. The adjusting entries are then posted to the general ledger.

4) Prepare an Income Statement, Statement or O/E, and balance sheet from the completed worksheet.

All figures needed to prepare the financial statements are properly reflected on the completed worksheet. The accounts are arranged in the order in which they must appear on the income statement and balance sheet.

Straight-line Deprecation

Allocation of an asset's cost in equal amounts to each accounting period of the asset's useful life D = Cost - Salvage Valve / Estimated useful life

Depreciation

Allocation of the cost of a long-term asset to operations during it's expected useful life

Contra Account

An account with a normal balance that is opposite that of a related account.

Contra Asset Account

An asset account with a credit balance, which is contrary to the normal balance of an asset. -Allowance for Doubtful Accounts

Salvage Value

An estimate of the amount that could be received by selling or disposing of an asset at the end of its useful life.

Prepare adjustments for depreciation

Depreciation is the process of allocating the cost of a long-term tangible asset to operations over its expected useful life. Part of the asset's cost is charged off as an expense at the end of each accounting period during the asset's useful life. Depreciation Expense - Item (Debit) Accumulated Depreciation - Item (Credit)

Prepaid Expenses

Expense items acquired, recorded, and paid for in advance of their use.

2) Prepare adjustments for unrecorded business transactions

Some changes arise from the internal operations of the firm itself. Adjusting entries are made to record these changes. Any adjustments to account balances should be entered in the Adjustments section of the worksheet. Prepaid expenses are expense items that are acquired and paid for in advance of their use. At the time of their acquisition, these items represent assets and are recorded in asset accounts. As they are used, their cost is transferred to expense by means of adjusting entries at the end of each accounting period.

Book Value

That portion of an asset's original cost that has not yet been depreciated.

The Balance Sheet Summary

The balance sheet is prepared from the data in the Balance Sheet section of the worksheet and the statement of owner's equity. The balance sheet reflects the assets, liabilities, and owner's equity of the firm on the balance sheet date. The assets section of the statement is prepared first. The asset account titles are obtained from the Account Name column of the worksheet. The balance of each asset account is obtained from the Debit column of the Balance Sheet section of the worksheet. The liability and owner's equity section is prepared next. The liability and owner's equity account titles are obtained from the Account Name column of the worksheet. The balance of each liability account is obtained from the Credit column of the Balance Sheet section of the worksheet. The ending balance for the owner's capital account is obtained from the statement of owner's equity. Total liabilities and owner's equity must equal total assets.

Income statement Summary

The income statement is prepared directly from the data in the Income Statement section of the worksheet. The revenue section of the statement is prepared first. The revenue account name is obtained from the Account Name column of the worksheet. The balance of the revenue account is obtained from the Credit column of the Income Statement section of the worksheet. The expenses section of the income statement is prepared next. The expense account titles are obtained from the Account Name column of the worksheet. The balance of each expense account is obtained from the Debit column of the Income Statement section of the worksheet. Determine net lost or net income.

3) Complete the worksheet

The next task is to prepare the Adjusted Trial Balance section. 1. Combine the figures from the Trial Balance section and the Adjustments section of the worksheet. Record the computed results in the Adjusted Trial Balance columns 2. Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits. Once the Debit and Credit columns have been totaled and ruled, the Income Statement and Balance Sheet columns of the worksheet are completed. The net income or net loss for the period is determined, and the worksheet is completed.

Statement of O/E Summary

The statement of owner's equity is prepared from the data in the Balance Sheet section of the worksheet and the general ledger capital account. The statement of owner's equity is prepared before the balance sheet so that the amount of the ending capital balance is available for presentation on the balance sheet. The statement begins with the capital account balance at the beginning of the period. Next, the increase or decrease in the owner's capital account is determined. The increase or decrease is computed by adding the net income (or net loss) for the period to any additional investments made by the owner during the period and subtracting withdrawals for the period. The increase or decrease is added to the beginning capital balance to obtain the ending capital balance.