Ch.4 The Accounting Cycle for a Service Business (cont’) 1 Adjusting entries using T-accounts Work with a Worksheet for a service business Prepare Financial Statements Journalizing and posting adjusting entries
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Ch.4 The Accounting Cycle for a Service
Business (cont’)
1
Adjusting entries using T-accounts
Work with a Worksheet for a service
business
Prepare Financial Statements
Journalizing and posting adjusting entries
The Accounting Cycle: Steps 5 Through 8
Step 5 Determine needed adjustments.
Step 6 Prepare a work sheet.
Step 7 Prepare financial statements from a
completed work sheet.
Step 8 Journalize and post adjusting entries.
2
Determine Needed Adjustments
• An adjusting entry is an entry made at the end
of an accounting period to bring up to date the
balance of an account that has become out of
date.
• Adjusting entries are referred to as internal transactions because they do not involve
parties outside the business.
• Adjusting entries never affect the cash
account.
3
Example
Supplies Used
• Assume the Office Supplies account has a balance
before adjustment of $275.
• An inventory account on December 31 shows $230
of supplies still on hand.
• Therefore $45 of supplies have been used during
the accounting period.
4
Example
Adjusting Entry for Supplies Used
5
Office Supplies
Debit Credit
+ -
Balance Amount used
Office Supplies Expense
Debit Credit
+ -
Transferred to
The amount of supplies used is debited to
an expense account (Office Supplies
Expense) and credited to an asset account
(Office Supplies).
Example
Insurance Expired
Assume the Prepaid Insurance account has a
balance before adjustment of $240,
representing a one-year insurance policy,
purchased on Dec. 1.
The amount of insurance will be
$240 per year 12 months = $20 per month.
6
Example
Adjusting Entry for Insurance Expired
7
Prepaid Insurance
Debit Credit
+ -
Balance
Amount of
coverage
expired
Insurance Expense
Debit Credit
+ -
Transferred to
The amount of insurance expired is
debited to an expense account (Insurance
Expense) and credited to an asset
account (Prepaid Insurance).
Depreciation of Office Equipment and Office Furniture
• Depreciation describes the expense that results
from the loss in usefulness of an asset due to
age, wear and tear, and obsolescence.
• The purpose of depreciation accounting is to
spread the cost of an asset over its useful life
rather than treating the asset’s cost as an
expense in the year it was purchased.
8
Depreciation Calculations
• Straight-Line Method
One of the most popular depreciation
methods
Yields the same amount of depreciation for
each full period an asset is used
• Formula:
9
Cost of asset – Trade-in value= Annual depreciation expense
Estimated years of usefulness
Example
Depreciation Calculations
Assume office furniture costs $2,000 and has a
$200 trade-in value.
The office furniture has a useful life of 5 years.
The annual depreciation will therefore be
$1,800 5 years or $360 per year.
The monthly depreciation will be $360 per year
12 months or $30 per month.
10
Example
Depreciation is always recorded by
Debiting an expense account entitled
Depreciation Expense
Crediting an account entitled Accumulated Depreciation
11
The Depreciation Entry
Example
Accumulated Depreciation
A contra asset account
Always has a credit balance
12
The Depreciation Entry
Example
Adjusting Entry for Depreciation
13
Depreciation Expense
Debit Credit
+ -
Accumulated Depreciation
Debit Credit
- +
The Estimated depreciation is always
debited to an expense account
(Depreciation Expense) and credited to a
contra asset account (Accumulated
Depreciation)
Book Value
• The difference between the cost of an asset and its
accumulated depreciation
• Shown on the balance sheet
• Example: Office equipment and office furniture
accounts for Walker and Associates
14
Example
Book Value
15
Example
Assume
A business has 3 employees each earning $150 per day.
Employees are paid every Friday for a 5-day week ending on Friday.
December 31 falls on a Wednesday.
16
Unpaid Salaries
An adjusting entry must be prepared
On Wednesday, December 31 for salaries owed to
employees for Monday, Tuesday, and Wednesday.
For 3 employees $150 per day 3 days = $1,350.
Example
The adjusting entry for unpaid salaries includes
• A debit to Salaries Expense
• A credit to Salaries Payable
17
Unpaid Salaries
Matching Principle
• Revenue and expenses are recorded in the
accounting period in which they occurred.
• Adjusting entries are needed to properly match
expenses and revenue.
• Although adjusting entries may be made any
time, they are normally adjusted at the end of a
month or the end of the year.
18
The Work Sheet
• Informal working paper
• Used in preparing the financial statements and
completing the work of the accounting cycle
• The work sheet is used to
Organize data
Lessen the possibility of overlooking an adjustment
Provide an arithmetical check on the accuracy of
work
Arrange data in logical form for the preparation of
financial statements
19
Steps in Completing the Work Sheet
1. Enter the heading.
2. Enter the current trial balance in the Trial
Balance columns.
3. Enter the adjustments in the Adjustments
Debit and Credit columns.
4. Complete the Adjusted Trial Balance columns.
20
Steps in Completing the Work Sheet
5. Complete the Income Statements columns.
6. Complete the Balance Sheet columns.
7. Total the Income Statement and Balance
Sheet columns.
8. Determine the amount of net income or net
loss, and balance the statement columns.
21
Placement of Items on a Work Sheet
22
23
The Income Statement
• Summary of revenue and expenses showing net
income or net loss for an accounting period
• Prepared directly from data in the Income
Statements columns of the work sheet
• Typically prepared at the end of each month,
quarter, or year; however, can be prepared for
any period of time
• Dated to cover a period of time
• The revenue and expenses shown occurred over
the entire period, not just the last date
24
The Statement of Owner’s Equity
• Summarizes the changes that have occurred in
owner’s equity during an accounting period, such as
a month or a year.
• Prepared from the information on the work sheet:
The owner’s capital account balance in the
Balance Sheet Credit column
The owner’s drawing account balance in the
Balance Sheet Debit column
The amount of net income or net loss, shown at
the bottom of the Income Statement section
25
The Balance Sheet
• Shows that assets = liabilities + owner’s equity
• Data come from the Balance Sheet columns of
the work sheet
• The up-to-date amount for owner’s equity on
the balance sheet is taken from the statement
of owner’s equity
26
Preparing the Financial Statements
1. Prepare the income statement
The net income or net loss calculated on the
income statement is shown on the statement of
owner’s equity.
2. Prepare the statement of owner's equity
The ending equity is shown on the balance
sheet.
3. Prepare the balance sheet using the ending
equity calculated on the statement of owner’s
equity.
27
Financial Statements
28
The dates of the income
statement and the statement
of owner’s equity cover a
period of time.
On the income
statement, expenses
are usually arranged in
order of highest to
lowest.
Financial Statements
29
The date of the
balance sheet is the
last day of the
accounting period.
Example
Assume a company uses $45 of office supplies during
the current accounting period.
Prepare the adjusting entry as follows:
30
General Journal
Date Account Title P.R. Debit Credit
20X1
Dec.31 Office Supplies Expense 45
Office Supplies 45
Example
Assume expired insurance for the current period is
$20.
Prepare the adjusting entry as follows:
31
General Journal
Date Account Title P.R. Debit Credit
20X1
Dec.31 Insurance Expense 20
Prepaid Insurance 20
Example
Assume depreciation on office furniture for the current
period is $30.
Prepare the adjusting entry as follows:
32
General Journal
Date Account Title P.R. Debit Credit
20X1
Dec.31 Depreciation Expense —Office
Furniture30
Accumulated Depr. —
Office Furniture
30
Example
Assume December 31 is a Wednesday and accrued salaries owed to employees for Monday through Wednesday amount to $1,350.
Prepare the adjusting entry as follows:
33
General Journal
Date Account Title P.R. Debit Credit
20X1
Dec.31 Salaries Expense 1,350
Salaries Payable 1,350
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