CHAPTER TWENTY ONE WORKSHEET ADJUSTMENTS McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

CHAPTER TWENTY ONE

WORKSHEET ADJUSTMENTS

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1. Explain the need for worksheet adjustments.

2. Describe how adjustments are calculated and recorded on the worksheet.

3. Explain the procedure for writing off an uncollectible account receivable.

4. Complete the Adjusted Trial Balance section of the worksheet.

WORKSHEET ADJUSTMENTS

Objectives:

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The Need for Adjustments

It is important that the financial statements present a complete picture of the results of operations and the condition of the business. The revenues and expenses for the period must be matched in order to accurately determine the net income or net loss. This is the matching principle of accounting.

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The Adjustment for Merchandise Inventory

When the trial balance is prepared, the General Ledger shows the amount of merchandise inventory that was on hand at the start of the accounting period. Changes occurred during the period because goods were purchased and sold -- those changes need to be recorded.

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The Adjustment for Supplies Used

The cost of the inventory of supplies on hand at the end of the month are subtracted from the cost of supplies available during the month. The resulting figure is the cost of supplies used during the month.

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The Adjustment for Expired Insurance

An adjustment must be made to charge the cost of the expired insurance to the operations of the period.

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The Adjustment for Depreciation

The cost of each long-term asset must be charged to operations. The amount that is charged to operations is called depreciation.

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The Adjustments for Uncollectible Accounts

Estimated uncollectible amounts owed by credit customers are referred to as uncollectible accounts, or bad debts. As an expense for the business they must be recorded.

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Writing Off a Customer’s Account

If efforts to collect money owed the business are not successful, the customer’s account is written off by recording the following entry in the general journal.

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Entry to Record the Writing Off of a Customer’s Account

Post Ref Debit Credit

20 xx

Aug 30 65 Accounts Receivable/Central Realty 65 Write-off uncollectible accoubt

Date Description

Allowance for Doubtful Accounts

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Completing the Adjustments Section of the Worksheet

After the adjustments are entered on the worksheet of Maddalon Office Supply, the Adjustments section can be completed.

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The Adjusted Trial Balance Section of the Worksheet

The worksheet provides a special section for preparing an adjusted trial balance. The amounts in the Adjustments section must be combined with the amounts in the Trial Balance section to determine the new account balances.

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Accounting Terminology

•Adjustments

•Beginning inventory

•Book value

•Contra account

•Depreciation

•Disposal value

•Uncollectible accounts

•Ending inventory

•Inventory Sheet

•Long-term assets

•Matching principle

•Physical inventory

•Prepaid Insurance

•Property, plant, and equipment

•Straight-line method

•Useful life

•Worksheet

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Chapter Summary

• Adjustments must be entered on the worksheet to provide the information on the account changes for the financial statements.

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Chapter Summary (continued)

• The financial statements should present a complete picture of the results of operations and the condition of the business.

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Chapter Summary (continued)

• The revenues and expenses for the accounting period must be matched in order to determine the net income or net loss accurately. This is known as the matching principle.

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Chapter Summary (continued)

• The Merchandise Inventory account must be updated to show the value of the ending inventory.

• Determining the ending inventory involves counting all merchandise on hand, completing inventory sheets, computing the cost of each item, and computing the total cost of all the merchandise.

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Chapter Summary (continued)

Adjustments must be made for:

•Inventory

•Supplies

•Insurance

•Depreciation

•Uncollectible accounts

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Chapter Summary (continued)

• The Merchandise Inventory account is adjusted by two entries: (a) debit Income Summary and credit Merchandise Inventory for the cost of the beginning inventory and (b) debit Merchandise Inventory and credit Income Summary for the cost of the ending inventory.

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Chapter Summary (continued)

• An adjustment must be made for the amount of supplies used during the accounting period. The Supplies Expense account is debited, and the Supplies account is credited.

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Chapter Summary (continued)

• When insurance is purchased, the amount paid is debited to an asset account -- the Prepaid Insurance account. At the end of each accounting period an adjustment must be made for expired insurance.

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Chapter Summary (continued)

• The Insurance Expense account is debited, and the Prepaid Insurance account is credited.

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Chapter Summary (continued)

• An adjustment must be made to record depreciation for each long-term asset at the end of the account period. A depreciation expense account is debited, and an accumulated depreciation account is credited.

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Chapter Summary (continued)

• When a customer’s account is found to be uncollectible, it is written off. Allowance for Uncollectible Accounts is debited. Two accounts are credited --the Accounts Receivable account in the General Ledger and the customer’s account in the Accounts Receivable ledger.

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Chapter Summary (continued)

• The ten-column worksheet has special sections for recording adjustments and preparing an adjusted trial balance.

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Investigating on the Internet

As a research assignment, access the WDC® web site and report sources of information that might concern worksheets.

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1. The Merchandise Inventory account must be updated to show the value of the ending inventory.

2. Financial statements must provide an accurate picture of the financial condition of the business.

3. When insurance is purchased, the amount paid is debited to an asset account -- the Prepaid Insurance account.

Topic QuizAnswer the following true/false questions:

TRUE

TRUE

TRUE