Adjustments and the Worksheet

2. Chapter 5 Adjustments and the Worksheet Section 1: The Worksheet Section Objectives • Complete a trial balance on a worksheet. • Prepare adjustments for unrecorded business transactions.

3. The Adjustments Section of the Worksheet

4. Objective 2 Prepare adjustments for unrecorded business transactions.

5. QUESTION: What are adjustments? ANSWER: Adjustments or adjusting entries are journal entries made to update accounts for items that were not recorded during the accounting period.

6. JT’s Consulting Services Worksheet Month Ended December 31, 2007 INCOME STMT. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 3,000 Prepaid Rent 7,000 22,000 Equipment The process of updating accounts at the end of an accounting period for unrecorded items that belong to the period is referred to as making adjustments or adjusting entries. Accum. Depr.—Equip. 7,000 Accounts Payable Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 500 Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. 132,000 132,000 Totals

7. Carter Consulting Services Worksheet Month Ended December 31, 2007 INCOME STMT. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 3,000 Prepaid Rent 7,000 22,000 Equipment Accum. Depr.—Equip. 7,000 Accounts Payable Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 These adjusting entries are first entered in the Adjustments section of the worksheet. Fees Income 35,000 Salaries Expense 7,000 500 Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. 132,000 132,000 Totals

8. Adjusting for Supplies Used

9. QUESTION: • $3,000 • 2,000 What dollar amount of supplies was used during the month? ANSWER: $1,000 JT’s Consulting Services began the month with $3,000 in supplies. At the end of the month, $2,000 in supplies remained.

10. JT’s Consulting Services must make an adjustment to show that the company used $1,000 in supplies during the month.

11. Adjustment for Supplies Used Which account is credited? Which account is debited? For what amount? For what amount?

12. Adjustment for Supplies Used Supplies Expense Supplies Bal 0 Bal 3,000 Adj. 1,000 1,000 Adj.

13. JT’s Consulting Services Worksheet Month Ended December 31, 2007 INCOME STMT. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 3,000 (a) 1,000 Prepaid Rent 7,000 22,000 Equipment Accum. Depr.—Equip. 7,000 Accounts Payable Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 500 Utilities Expense (a) 1,000 Supplies Expense Rent Expense Depr. Exp.—Equip. 132,000 132,000 Totals

14. Adjusting for Expired Rent

15. QUESTION: • $7,000 • 3,500 What dollar amount of rent was used during the month of December? ANSWER: $3,500 On November 20, 2007, JT’s Consulting Services paid $7,000 for the December and January rent. As of December 31, 2007, one month’s rent had already been used up.

16. JT’s Consulting Services must make an adjustment to show that $3,500 of the prepaid rent has expired.

17. Adjustment for Expired Rent Which account is credited? Which account is debited? For what amount? For what amount?

18. Adjustment for Expired Rent Rent Expense Prepaid Rent Bal 0 Bal 7,000 Adj. 3,500 3,500 Adj.

19. JT’s Consulting Services Worksheet Month Ended December 31, 2007 INCOME STMT. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 3,000 (a) 1,000 Prepaid Rent 7,000 (b) 3,500 22,000 Equipment Accum. Depr.—Equip. 7,000 Accounts Payable Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 500 Utilities Expense (a) 1,000 Supplies Expense Rent Expense (b) 3,500 Depr. Exp.—Equip. 132,000 132,000 Totals

20. Adjusting for Depreciation

21. QUESTION: What is depreciation? ANSWER: Depreciation is the process of allocating the cost of long-term assets over their useful lives.

22. In November, JT’s Consulting Services purchased equipment for $22,000. An adjustment must be made to transfer part of the cost of the equipment to an expense account.

23. The cost of a long-term asset such as equipment . . . $ COST . . . is NOT recorded as an expense at the time of purchase. $ EXPENSE

24. Dec. 2007 Feb. 2008 Jan. 2008 Expense Expense Expense Instead the cost is recorded as an asset and charged to expense over the time the asset is used for the business. $ ASSET This expense is called depreciation.

25. QUESTION: What is straight-line depreciation? Cost - salvage value Estimated months of useful life ANSWER: Straight-line depreciation (S/L) allocates an asset’s cost in equal amounts to each accounting period of its useful life. S/L depreciation = There are several methods to calculate depreciation. JT’s Consulting Services uses the straight-line method.

26. QUESTION: What is salvage value? ANSWER: Salvage value is an estimate of the amount that may be received by selling or disposing of an asset at the end of its useful life.

27. QUESTION: What dollar amount of depreciation expense should be recorded for the month? Cost - salvage value Estimated months of useful life $22,000 - $0 60 months ANSWER: JT’s Consulting Services purchased equipment in November, 2007. · Cost = $22,000 · Useful life = 5 yrs or 60 months (5 yrs x 12 months) · Salvage value = $0 $367

28. Adjustment for Depreciation As the cost of the equipment is gradually transferred to expense, its recorded value as an asset must be reduced. This cannot be carried out by directly decreasing the balance in the asset account. Equipment + - 22,000 367

29. Adjustment for Depreciation Instead of decreasing the asset account directly, the adjustment for depreciation is recorded in a contra account named Accumulated Depreciation—Equipment. Equipment Accumulated Depreciation— Equipment + + Contra asset account has a normal credit balance Asset account has a normal debit balance

30. JT’s Consulting Services must make an adjustment for $367 depreciation on the equipment.

31. Adjustment for Depreciation Which account is credited? Which account is debited? For what amount? For what amount?

32. Adjustment for Depreciation Depreciation Expense— Equipment Accumulated Depreciation— Equipment 0 Bal Bal 0 Adj. 367 367 Adj.

33. JT’s Consulting Services Worksheet Month Ended December 31, 2007 INCOME STMT. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 3,000 (a) 1,000 Prepaid Rent 7,000 (b) 3,500 22,000 Equipment (c) 367 Accum. Depr.—Equip. 7,000 Accounts Payable Jason Taylor, Cap. 90,000 Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 500 Utilities Expense (a) 1,000 Supplies Expense Rent Expense (b) 3,500 Depr. Exp.—Equip. (c) 367 132,000 132,000 Totals

34. JT’s Consulting Services Worksheet Month Ended December 31, 2007 INCOME STMT. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 3,000 (a) 1,000 Prepaid Rent 7,000 (b) 3,500 22,000 Equipment (c) 367 Accum. Depr.—Equip. 7,000 Accounts Payable Jason Taylor, Cap. 90,000 When all adjustments are entered, total and rule the Adjustments columns. Jason Taylor, Draw. 4,000 Fees Income 35,000 Salaries Expense 7,000 500 Utilities Expense (a) 1,000 Supplies Expense Rent Expense (b) 3,500 Depr. Exp.—Equip. (c) 367 132,000 132,000 Totals 4,867 4,867

35. QUESTION: What is book value? ANSWER: Book value is the portion of an asset’s original cost that has not yet been depreciated. Long-term assets are shown on the financial statements at their book value.

36. Equipment Accumulated Depreciation— Equipment 22,000 367 Original cost of equipment Record of all depreciation taken on equipment Book value = Original cost – Accumulated depreciation = 22,000 – 367 = 21,633

37. R E V I E W SECTION Complete the following sentences: A form used to gather all data needed at the end of an accounting period to prepare financial statements is the___________. worksheet The general ledger account balances are transferred to the Debit and Credit columns of the _____ _______ section of the worksheet. Trial Balance adjustment Depreciation is one type of ___________ that is made at the end of an accounting period to update accounts for items that were not yet recorded.

38. R E V I E W SECTION Complete the following sentences with either “debit” or “credit”: credit To record expired rent, you ___________ the Prepaid Rent account. debit To record depreciation, you _________ the Depreciation Expense account. credit To record depreciation, you _________ the Accumulated Depreciation account.

39. Thank You for using College Accounting, 11th Edition Price • Haddock • Brock