ACCOUNTING 2 CH. 2
Jan 02, 2016
ADJUSTMENTS
Adjustments transfer the cost of “used up” assets to expense accounts.
Adjustments for changes in merchandise inventory are made directly to the Income Summary account.
Glencoe Accounting
Key Terms
adjustment
beginning inventory
ending inventory
physical inventory
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
COMPLETING END-OF-PERIOD WORK
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
Managers, stockholders, and creditors need
to know net income and the value of
stockholders’ equity to make sound
business decisions.
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
Five amount sections in the ten-column work
sheet
Trial Balance
Adjustments
Adjusted Trial Balance
Income Statement
Balance Sheet
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
adjustmentAn amount that is added to or subtracted from an account balance to bring that balance up to date.
At the end of the period, adjustments are made to transfer the costs of assets consumed from asset accounts to the appropriate
expense accounts.
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
If a balance is not up to date as of the last day of the fiscal period, it must be adjusted.
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
Section 18.1
Three Types of Inventory
BeginningInventory
EndingInventory
PhysicalInventory
beginning inventoryThe merchandise a business has on hand at the
beginning of a period.
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
Three Types of Inventory
BeginningInventory
EndingInventory
PhysicalInventory
ending inventoryThe merchandise a business has on hand at the
end of a period.
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
Section 18.1
Three Types of Inventory
BeginningInventory
EndingInventory
PhysicalInventory
physical inventoryAn actual count of all merchandise on hand
and available for sale.
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
When calculating the adjustment for Merchandise Inventory, you need to know
The account’s balance
The physical inventory amount
THE TEN-COLUMN WORK SHEET
Glencoe Accounting
Identifying Accounts to be Adjusted and AdjustingMerchandise Inventory
Adjusting the Merchandise Inventory Account
Adjustment
To adjust the Merchandise Inventory account (bal. 84,921) to reflect the physical inventory amount ($81,385), the following transaction is recorded.
See pages 524–525
Glencoe Accounting
Key Term
prepaid expense
Adjusting Supplies, Prepaid Insurance, and Federal
Corporate Income Tax
ADJUSTING THE SUPPLIES ACCOUNT
Glencoe Accounting
Adjusting Supplies, Prepaid Insurance, and Federal
Corporate Income TaxSection 18.2
As supplies are used, they become expenses of
the business.
A physical inventory is taken at the end of the period to make an
adjustment to the Supplies account.
ADJUSTING THE SUPPLIES ACCOUNT
Glencoe Accounting
Adjusting Supplies, Prepaid Insurance, and Federal
Corporate Income Tax
Adjusting the Supplies Account
Adjustment
Record the adjustment for supplies.
Beg bal. $5,749 – on-hand $1,839 – supplies used up $3,710
ADJUSTING THE PREPAID INSURANCE ACCOUNT
Glencoe Accounting
Adjusting Supplies, Prepaid Insurance, and Federal
Corporate Income Tax
Insurance premiums are an example of a prepaid expense.
prepaid expenseAn expense paid in advance.
ADJUSTING THE PREPAID INSURANCE ACCOUNT
Glencoe Accounting
Adjusting Supplies, Prepaid Insurance, and Federal
Corporate Income Tax
Adjusting the Prepaid Insurance Account
Adjustment
Record the adjustment for the expiration of one-half month’s insurance coverage.
$1,500 for a 6 month premium = $250/month purchased Dec 15
ADJUSTING THE FEDERAL CORPORATE INCOME TAX ACCOUNTS
Glencoe Accounting
Adjusting Supplies, Prepaid Insurance, and Federal
Corporate Income Tax
When the exact
amount of federal
corporate income
tax is determined:
Additional tax may need to be paid.
The company may qualify for a refund.
Glencoe Accounting
Key Terms
adjusting entries
Completing the Work Sheetand Journalizing and Posting
the Adjusting EntriesSection 18.3
EXTENDING WORK SHEET BALANCES
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Completing the Work Sheetand Journalizing and Posting
the Adjusting Entries
The amounts for each account must be extended to or carried over to these sections:
The Adjusted Trial Balance
The Income Statement
The Balance Sheet
EXTENDING WORK SHEET BALANCES
Glencoe Accounting
Completing the Work Sheetand Journalizing and Posting
the Adjusting Entries
Each account in
the Adjusted Trial
Balance section is
extended to one
of the following
sections:
The Income Statement section, containing temporary account
balances
The Balance Sheet section, containing permanent account
balances
JOURNALIZING AND POSTING ADJUSTING ENTRIES
Glencoe Accounting
Completing the Work Sheetand Journalizing and Posting
the Adjusting Entries
Adjusting entries come from the Adjustments section of the work sheet.
adjusting entriesJournal entries that update the general ledger
accounts at the end of a period.
JOURNALIZING AND POSTING ADJUSTING ENTRIES
Glencoe Accounting
Completing the Work Sheetand Journalizing and Posting
the Adjusting EntriesSection 18.3
Entries Recorded in the Adjustments Column
Adjusting Merchandise Inventory
Adjusting Supplies
Adjusting Insurance
Adjusting Income Tax
JOURNALIZING AND POSTING ADJUSTING ENTRIES
Glencoe Accounting
Completing the Work Sheetand Journalizing and Posting
the Adjusting EntriesSection 18.3
Adjusting entries are recorded in the general journal and
then posted to the general ledger accounts.
This will cause the general ledger account balances to
agree with the Income Statement and Balance Sheet
sections.
JOURNALIZING AND POSTING ADJUSTING ENTRIES
Glencoe Accounting
Completing the Work Sheetand Journalizing and Posting
the Adjusting EntriesSection 18.3 Posting Adjusting Entries to the General Ledger
JOURNALIZING AND POSTING ADJUSTING ENTRIES
Glencoe Accounting
Completing the Work Sheetand Journalizing and Posting
the Adjusting EntriesSection 18.3 Posting Adjusting Entries to the General Ledger
JOURNALIZING AND POSTING ADJUSTING ENTRIES
Glencoe Accounting
Completing the Work Sheetand Journalizing and Posting
the Adjusting EntriesSection 18.3 Posting Adjusting Entries to the General Ledger
Glencoe Accounting
Question 1
After taking a physical inventory, you determined that the business has $132,755 of inventory on hand. The general ledger shows the Merchandise Inventory account with a balance of $139,400. What steps are needed to record the adjusting entry?
Step 1: The accounts Merchandise Inventory and Income Summary are affected.
Step 2: Merchandise Inventory is an asset account. Income Summary is a stockholder’s equity account.
Step 3: Merchandise Inventory is decreased by $6,645 ($139,400 - $132,755). This amount is transferred to Income Summary.
Step 4: To transfer the decrease in Merchandise Inventory, debit Income Summary for $6,645
Step 5: Decreases in asset accounts are recorded as credits. Credit Merchandise Inventory for $6,645.
Glencoe Accounting
Question 2
Given the following information, determine what adjustments need to be made to the accounts. Indicate the amounts of the adjustments.
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Question 3
Explain the matching principle and why it is important to accounting.
The matching principle requires recording revenues in the period they are earned and recording expenses that were incurred to make those revenues in the same period. This may not be when expenses or revenues are paid or collected. By matching expenses and revenues, the matching principle provides an accurate measure of net income. For example, if you pay for (prepay) six months of insurance on one date, that expense is spread over the six months in which the policy is in effect. The cost of each month’s portion of the policy’s premium must be expensed in that month (1/6 of the total cost) so that records accurately reflect expenses. Having this information allows comparisons to be made for similar periods.