Ch.4 The Accounting Cycle for a Service Business (cont )

Transcription

1 Ch.4 The Accounting Cycle for a Service Business (cont ) Adjusting entries using T-accounts Work with a Worksheet for a service business Prepare Financial Statements Journalizing and posting adjusting entries 1

2 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

3 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entry is an entry made at the end of an accounting period to bring up to date the balance of an account that has become out of date.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

4 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

5 Example Adjusting Entry for Supplies Used Office Supplies Debit Credit + - Office Supplies Expense Debit Credit + - Balance Amount used Transferred to The amount of supplies used is debited to an expense account (Office Supplies Expense) and credited to an asset account (Office Supplies). 5

6 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

7 Example Adjusting Entry for Insurance Expired Prepaid Insurance Debit Credit + - Insurance Expense Debit Credit + - Balance Amount of coverage expired Transferred to 7 The amount of insurance expired is debited to an expense account (Insurance Expense) and credited to an asset account (Prepaid Insurance).

8 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

9 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: Cost of asset Trade-in value Estimated years of usefulness = Annual depreciation expense 9

10 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

11 Example The Depreciation Entry Depreciation is always recorded by Debiting an expense account entitled Depreciation Expense Crediting an account entitled Accumulated Depreciation 11

12 Example The Depreciation Entry Accumulated Depreciation A contra asset account Always has a credit balance 12

13 Example Adjusting Entry for Depreciation 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) 13

14 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

15 Example Book Value 15

16 Example Unpaid Salaries 16 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. 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.

17 Example Unpaid Salaries The adjusting entry for unpaid salaries includes A debit to Salaries Expense A credit to Salaries Payable 17

18 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

19 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

20 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

21 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

22 Placement of Items on a Work Sheet 22

23 23

24 24 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

25 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

26 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

27 27 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.

28 Financial Statements 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. 28

29 Financial Statements The date of the balance sheet is the last day of the accounting period. 29

30 Example Assume a company uses $45 of office supplies during the current accounting period. Prepare the adjusting entry as follows: General Journal Date Account Title P.R. Debit Credit 20X1 Dec. 31 Office Supplies Expense 45 Office Supplies 45 30

31 Example Assume expired insurance for the current period is $20. Prepare the adjusting entry as follows: General Journal Date Account Title P.R. Debit Credit 20X1 Dec. 31 Insurance Expense 20 Prepaid Insurance 20 31

32 Example Assume depreciation on office furniture for the current period is $30. Prepare the adjusting entry as follows: General Journal Date Account Title P.R. Debit Credit 20X1 Dec. 31 Depreciation Expense Office Furniture 30 Accumulated Depr. Office Furniture 30 32

33 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: General Journal Date Account Title P.R. Debit Credit 20X1 Dec. 31 Salaries Expense 1,350 Salaries Payable 1,350 33