Ch. 5 Adjusting Entries And The Work Sheet

Front 1

Adjusting entries

Back 1

Journal entries made at the end of an accounting period to reflect changes in account balances that are not the direct result of an exchange with an outside party. I.e equipment wearing out, prepaid insurance and supplies being used up, and employees earning wages that have not yet been paid.

Adjustments are made at the end of the accounting period for items that do not involve exchanges with an outside party.

Front 2

Two important principles of adjusting entries

Back 2

1. Revenue recognition principle

2. Matching principle

Front 3

Revenue recognition principle

Back 3

Revenues should be recognized when earned, regardless of when cash is received from the customer.

Revenues are considered earned when a service is provided or a product is sold.

Front 4

Matching principle

Back 4

Requires the matching of revenues earned during an accounting period with the expenses incurred.

Provies the best measure of net income.

Necessitates accounts be brought up to date before financial statments are prepared.

Front 5

Reasons to adjust the trial balance

Back 5

1. Report all revenues earned during the accounting period.

2. Report all expenses incurred to produce the revenues earned in the accounting period.

3. Accurately report the assets on the balance sheet date. Some assets may have been used up during the period.

4. Accurately report the liabilities on the balance sheet date. Expenses may have been incurred but not yet paid.

Front 6

Fiscal year

Back 6

12 month period of time used in an accounting period. Most businesses schedule fiscal year to end when business is slow. Does not need to be the same as a calendar year.

Front 7

Adjusting supplies account

Back 7

As supplies are used, an expense is incurred. It's practical to make one adjusting entry at the end of the period to reflect the expense incurred for the use of supplies for the entire month. Inventory to determine the amount of supplies on hand.

Make an entry that debits Supplies Expense and credit Supplies. Taking the amount of supplies used out of supplies and putting it in supplies expense.

Front 8

Adjusting Prepaid insurance account

Back 8

Need to adjust the prepaid insurance account to remove the cost of that period's insurance used.

Divide the prepaid amount of the premium by the term of the premium ($200/8 for an 8 month policy = $25/month).

Debit Insurance Expense and credit Prepaid Insurance by the amount for the period.

Front 9

Adjusting Wage expense account

Back 9

Recognizing wages earned but haven't been paid at end of the period.

Wages payable a liabilities account is established (normal credit balance). And the wage expense account is debited.

Front 10

Historical cost principle

Back 10

Requires assets be recorded at their actual cost. Not adjusted for changes in the market values. The cost remains on the books for as long as the business owns the asset.

Front 11

Useful life

Back 11

The period of time that an asset is expected to help produce revenues. Useful life expires as a result of wear and tear or because it no longer satisfies the needs of the business.

As this happens, depreciation expense should be recognized and the value of the asset should be reduced.

Front 12

Depreciation expense

Back 12

Method of matching an asset's original cost against the revenue produced over the useful life.

Many method's. Will be using the Straight-line method.

Based upon estimates of useful lives and salvage values.

Front 13

Salvage value

Back 13

Expected market value of the asset at the end of its useful life.

Front 14

Depreciable cost

Back 14

Original cost minus the salvage value. It is this amount that is subject to depreciation.

Front 15

Straight line depreciation

Back 15

Original cost- Salvage vale = Depreciable cost

Depreciable cost/Estimated useful life = depreciation amount per accounting period (month or year, etc.)

Front 16

Salvage value

Back 16

Expected market value or selling price of asset at the end of its useful life. This amount is subject to depreciation.

Front 17

Straight-line depreciation

Back 17

Original cost - Salvage value= Depreciable Cost

Depreciable cost/Estimated useful life = Amount to depreciated per accounting period (years, months etc, whatever period was used for the estimated useful life)

Front 18

Plant assets

Back 18

Assets of a durable nature that are expected to provide benefits over several years or more. Depreciation handled differently then assets consumed (prepaid insurance, supplies, etc.) USES CONTRA-ASSET accounts.

Front 19

Contra-asset

Back 19

An account with a credit balance that is deducted from the related asset account on the balance sheet. Allows for the historical cost of the asset to remain in the appropriate asset account. Has a credit balance.

Debit to Depreciation Expense account and credit to Accumulated Depreciation account.

Carries the same account number as the related asset but has a ".1" suffix, on the chart of accounts. If delivery account is 185 then the Accumulated Depreciation account is 185.1

Front 20

Position of Accumulated Depreciation account in accounting equation.

Back 20

Shown in the asset section directly beneath the asset being depreciated. I.E. Delivery Equipment shown along side Accumulated Depreciation-- Delivery Equipment.

Front 21

Book value/ undepreciated cost

Back 21

Cost of plant assets -- accumulated depreciation = book value

Book value is the value in the accounting records. Does NOT represent market value or selling price of the asset.

Front 22

10 column work sheet

Back 22

10 columns grouped into five pairs. Major column headings; trial balance, adjustments, adjusted trial balance, income statement and balance sheet.

Generally prepared in excell, is not a financial statment, and not a formal part of the accounting system. Only the accountant uses and views. Pulls together all the inof needed to enter adjusting entries and prepare financial statements.

Front 23

Steps to preparing the work sheet

Back 23

1. Prepare the trial balance

2. Prepare the adjustments

3. Prepare the adjusted trial balance

4. Extend adjusted balances to the income statement and balance sheet columns

5. Complete the work sheet.

Front 24

Adjusted trial balance columns

Back 24

When an account balance is not affected by entries in the adjustment columns, the amount in the trial balance columns is extended directly to the adjusted trial balance columns.

Accounts affected by an entry in the adjustment columns, the account balance to be entered in the adjusted trial balance column increases or decreases by the amount of the adjusting entry.

Front 25

Income statement columns

Back 25

Shows the amounts that will be reported in the balance sheet and the statement of owner's equity. (Revenue accounts to the credit column, and expense accounts to the debit column).

Front 26

Balance sheet columns

Back 26

Asset, liability, drawing, and capital accounts are extended to the balance sheet columns. These columns of the work sheet show the amounts that will be reported in the balance sheet and statement of owner's equity.

Front 27

Journalizing adjusting entries

Back 27

Adjustments must be entered in the ledger, you may enter in the worksheet first. Simply copy the adjustments from the work sheet into the journal.

Entries are dated the last day of the accounting period. Instead of an explanation after each adjusting entry, "Adjusting entries" is written before the first adjusting entry.

Front 28

Methods of accounting

Back 28

1. Cash basis of accounting

2. Modified cash basis of accounting

3. Accrual basis of accounting

Front 29

Accrual basis of accounting

Back 29

Revenues are recorded when earned. Expenses are recorded when incurred. Recognizes receivables and payables. Offers the best matching of revenues and expenses. (Best method of measuring income for most businesses. Smaller service organizations often use the cash or modified cash basis),

Front 30

Cash basis of accounting

Back 30

Revenues are recorded when cash is recieved. Expenses are recorded when cash is paid. Similar to accrual basis there if are few receivables, payables, and assets. Can vary significantly if a business has many receivables, payables and assets.

Front 31

Modified cash basis of accounting

Back 31

Combines aspects of the cash and accrual methods. A business uses the cash basis for recording revenues and most expenses. Exceptions are made when cash is paid for assets with useful lives greater than one accounting period. If cash is pad for equipment, buildings, supplies, or insurance these are recorded as assets and adjustments are made each period as under the accrual basis.