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Chapter 12 Work Sheet and Adjusting Entries Chapter 12 Performance Objectives: New Adjustments: Adjustment for Supplies Adjustment for merchandise inventory under the periodic inventory system Adjustment of unearned revenue Complete the work sheet with the new adjustments

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Chapter 12 l.jpg

Chapter 12

Work Sheet and Adjusting Entries


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Chapter 12

  • Performance Objectives:

  • New Adjustments:

    • Adjustment for Supplies

    • Adjustment for merchandise inventory under the periodic inventory system

    • Adjustment of unearned revenue

  • Complete the work sheet with the new adjustments

  • Journalize the adjusting entries for a merchandising business under the periodic inventory system


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Adjustments

  • Bring the books “up to date”

  • Adjustments are made every time the financial statements are produced

  • Each adjustment will affect:

  • At least one income statement account

    • Adjusting entries update the I/S accounts so we get a more accurate net income number

  • At least one balance sheet account

    • Adjusting entries update the B/S accounts so we get a more accurate A = L + OE


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Adjustments:

  • First

    • Record adjustments in the worksheet

      • Be sure to label each adjustment entry into the worksheet with a letter reference: a), b), c)… both sides of the entry!

  • Second

    • Record the adjusting journal entries in the general journal


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Data for Adjusting Supplies

  • Debit Supplies when supplies are purchased throughout the period

  • Take inventory to determine the amount of supplies left at the end of the period

  • New Adjustment:

    • Make an adjusting entry for the amount used (total minus amount left)

      • Debit Supplies Expense

      • Credit Supplies


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New Adjustments:Merchandise Inventory

  • What is merchandise inventory?

  • Goods bought with the intention of reselling for a profit

  • Office supplies are not merchandise inventory

    Examples:

    Shoe store?

    Shoes

    Kite store?

    Kites & boomerangs

    Hardware store?

    Hammers, lumber, etc.


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Periodic Inventory System

  • The system under which the buying of merchandise during the year is recorded as:

    • Debit to purchases

    • Credit to accounts payable or cash

  • At the end of the period, a physical count of the stock of goods is taken

    • Adjusting entries are made to record the amount of the physical count


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Prepare An Adjustment For Merchandise Inventory Under The Periodic Inventory System

  • Inventory account sits on books, untouched

  • Buy inventory during period and record it in “purchases”

  • At the end of the period, you perform a physical count

  • Income summaryis used during adjustment process

    • “Put” beginning inventory into income summary (debit)

    • “Put” physical count number into income summary (credit)

    • Both numbers show up on face of income statement as part of COGS calculation

  • Difference shows up as:

    • “Cost of goods sold” (I/S)

    • Merchandise inventory (B/S)


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New Adjustments: Periodic Inventory SystemMerchandise Inventory

  • Step One:

  • Empty out inventory account

    • Credit

  • “Put” it into income summary

    • Debit

  • Step Two:

  • Record the physical count number in inventory account

    • Debit

  • “Put” it into income summary

    • Credit

Brings Inventory Balance to Counted Total!


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After Recording Adjustment In The Work Sheet, Inventory Adjusting Journal Entry:

"Update Accounts"


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Demonstration Problem Adjusting Journal Entry:

We will complete a work sheet and make the adjusting journal entries


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Empty Inventory Account Adjusting Journal Entry:



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When we buy a one year insurance policy, we record: “ Adjusting Journal Entry:prepaid insurance”

Each month, we incur 1/12 of it as insurance expense!

This “updates our accounts” & makes our financial statements more accurate

When the insurance company receives our check, they record: “unearned insurance revenue”

Each month, they earn 1/12 of it as insurance revenue

This “updates their accounts” & makes their financial statements more accurate

New Adjustments: Unearned Revenue

“See both sides of the coin!”

One person’s expense is another person’s revenue!


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Unearned Revenue Adjusting Journal Entry:

  • If Time Magazine receives subscription revenue for the whole year, can they record it all as revenue in the first month?

  • No

  • They must record unearned subscription revenue, and then make adjustments each month

  • Other examples:

    • Sports teams receive ticket sales in advance

    • Health club advance payments


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Asset, Liability Or Owner’s Equity? Adjusting Journal Entry:

  • Unearned revenue?

  • Time Magazine “owes” the customer the magazines, right?

  • The insurance company “owes” the customer the insurance coverage, right?

  • Unearned revenue is a liability!

    • The customer has a claim against the company for the goods or services until the goods are delivered or the services are rendered


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Unearned Revenue Adjusting Journal Entry:

  • Revenue received in advance for goods or services to be delivered later

  • Considered to be a liability until the revenue is earned


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After Recording Adjustment In The Work Sheet, Unearned Revenue Adjusting Entry:

  • (Recorded earlier in the year) insurance company receives cash for a one year insurance policy:

  • Time passes & insurance company earns one months revenue:


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Journal Entries Revenue Adjusting Entry:& Posting (T-Accounts Demo)

1100

2110

2110

4110


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Worksheet Revenue Adjusting Entry:

  • Tool used by accountants to help prepare the financial statements

  • Chapter 12:

    • Adjusted trial balance is gone

  • Why?

  • Because we can carry the updated account numbers straight to either the:

    • Income statement column

    • Balance sheet column


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Demonstration Problem Revenue Adjusting Entry:

We will complete a work sheet and make the adjusting journal entries


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Work Sheet Revenue Adjusting Entry:


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Empty Inventory Account Revenue Adjusting Entry:



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Record All Adjustments Revenue Adjusting Entry:


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Carry Over To I/S Column Revenue Adjusting Entry:


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Carry Over To B/S Column Revenue Adjusting Entry:


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Work Sheet Revenue Adjusting Entry:


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Journal Entries Before Posting Revenue Adjusting Entry:


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Steps For Completing The Work Sheet Revenue Adjusting Entry:

  • Place account totals in trial balance column

    • Total and rule (DR = CR)

  • Record adjustments in work sheet

    • Letter references: a), b)…

    • Total and rule (DR = CR)

  • Place I/S & B/S amounts into I/S and B/S columns, total at bottom (DR ≠ CR)


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Steps For Completing The Work Sheet Revenue Adjusting Entry:

  • In the income statement column, calculate net income/loss

    • Subtract the smaller side from the larger side

    • “Plug” this number to get DR = CR

    • If there is net income, the credit side of the columns will be larger and you will place net income on the debit side

    • If there is net loss, the debit side of the columns will be larger and you will place net loss on the credit side


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Steps For Completing The Work Sheet Revenue Adjusting Entry:

  • In the balance sheet column, calculate net income/loss

    • Subtracting the smaller side from the larger side

    • “Plug” this number to get DR = CR


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Chapter 13 Revenue Adjusting Entry:

Financial Statements, Closing Entries, And Reversing Entries


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Chapter 13 Revenue Adjusting Entry:

  • Performance objectives:

  • Prepare a classified income statement for a merchandising firm

    • Net sales

    • Cost of goods sold

    • Gross profit

    • Income from operations

  • Prepare a classified balance sheet for any type of business

    • Current assets

    • Plant & equipment

    • Current liabilities

    • Long-term liabilities


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Chapter 13 Revenue Adjusting Entry:

  • Performance objectives:

  • Compute working capital and current ratio

  • Journalize the closing entries for a merchandising firm

  • Determine which adjusting entries can be reversed, and journalize the reversing entries


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Single step income statement Revenue Adjusting Entry:

Multi-step income statement

Prepare A Classified Income Statement For Merchandising Co.(“Multi-Step Income Statement”)

Why

multi-step

I/S?

Provides better info.

for decision making!


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Performance Measures Revenue Adjusting Entry:

  • Different measure on the classified income statement tell us different things:

    • Gross profit:

      • How profitable the company is after only subtracting COGS

      • Common measure used to compare companies (GP%)

    • Operating income:

      • How profitable the company is from its ordinary operations, before any “other revenue/expenses”

      • Common measure used in estimating future profitability

    • Net income:

      • The bottom line

      • Profit for the period


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Other Income, Or Expenses Revenue Adjusting Entry:

  • Not related to ordinary operations

    • Examples:

      • Interest revenue

      • Rent Revenue

      • Interest expense

      • Cash Sort & Over

        • (If Firm decides to classify it as such)

        • Spa Magic classifies it as such



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Calculate Net Sales Revenue Adjusting Entry:


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Cost Of Goods Sold Revenue Adjusting Entry:(COGS)

  • Cost of all the goods sold during the period

  • Example:

    • Shoe store sells shoes and accessories

    • At the end of the period, the accountants must determine the cost of all the shoes sold during the period in order to match it with the shoe sales revenue


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Cost of Goods Sold Revenue Adjusting Entry:

  • Good Diagram on page 457


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Calculate COGS Revenue Adjusting Entry:


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Calculate Gross Profit Revenue Adjusting Entry:


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Calculate Income From Operations Revenue Adjusting Entry:


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Calculate Other Income & Expenses Revenue Adjusting Entry:


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Calculate Net Income Revenue Adjusting Entry:


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Statement Of Owner’s Equity Revenue Adjusting Entry:

  • After we complete the income statement, we are ready to make the statement of owner’s equity

  • Preparation is the same as earlier chapters

  • Look on page 460


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Balance Sheet Classifications Revenue Adjusting Entry:

  • Current Assets

  • Plant and Equipment

  • Current Liabilities

  • Long-Term Liabilities


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Current Assets Revenue Adjusting Entry:

  • Cash and any other assets or resources that are expected to be realized in cash or to be sold or consumed during the normal operating cycle* of the business

    • One year, if the normal operating cycle is less than twelve months

  • Listed on balance sheet in the order of liquidity (how quickly can it be converted to cash):

    • Cash

    • N/R (current)

    • A/R

    • Inventory

    • Prepaid items (supplies, prepaid insurance)


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Notes Receivable (Current) Revenue Adjusting Entry:

  • Written promises to pay the seller/lender the amount due in a period of less than one year


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Calculate Current Assets Revenue Adjusting Entry:


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Plant And Equipment Revenue Adjusting Entry:

  • Long-lived assets that are held for use in the production or sale of other assets or services

    • Also called fixed assets

  • Order on Balance Sheet:

    • Rank according to length of life

      • Longest life first



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Current Liabilities Revenue Adjusting Entry:

  • Debts that will become due within the normal operating cycle of a business

    • Usually within one year

  • Normally paid from current assets

  • Listed on balance sheet in the order they will be paid off:

    • Mortgage payable (current portion)

    • A/P

    • N/P

    • Wages payable

    • Unearned revenue


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Calculate Current Liabilities Revenue Adjusting Entry:


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Long-Term Liabilities Revenue Adjusting Entry:

  • Debts payable over a comparatively long period

    • Usually more than one year

  • For sole-proprietorship only LTL:

    • Mortgage payable (LT portion)



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Liquidity Revenue Adjusting Entry:

  • “How quickly an asset can be converted to cash”

  • The ability of an asset to be quickly turned into cash, either by selling it or by putting it up as security for a loan

    • Banks want to know if the firm can make its interest payments

    • Managers want to know if they have enough money to pay the bills and buy assets

    • Cash is queen! (Cash is king)


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Current Assets & Current Liabilities Revenue Adjusting Entry:

  • Current assets (CA)

    • Get cash soon

  • Current liabilities (CL)

    • Pay cash soon

  • Short term cash management measures (liquidity measures):

    • Working capital

    • Current ratio


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Total CA & Total CL Revenue Adjusting Entry:


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Liquidity Measures: Revenue Adjusting Entry:

  • Current Ratio

    • A firm’s current assets divided by its current liabilities

      • Because of the division, the number can be used to compare with other companies

    • Portrays a firm’s short-term debt-paying ability

      • Ability to pay current liabilities with current assets

  • CA/CL = Current Ratio


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CA/CL Revenue Adjusting Entry:


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Liquidity Measures: Revenue Adjusting Entry:

  • Working Capital

    • A firm’s current assets less its current liabilities

    • The amount of capital a firm has available to use or to work with during a normal operating cycle

  • CA – CL = Working Capital


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Working Capital Revenue Adjusting Entry:


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Closing Entries For Merchandising Co. Revenue Adjusting Entry:

  • Close all temporary (nominal) accounts with a credit balance (except income summary line)

    • Debit nominal accounts

      • Revenues & contra expenses like purchase discounts

    • Credit income summary

  • Close all temporary (nominal) accounts with a debit balance (except income summary line)

    • Credit nominal accounts

      • Expenses & contra revenues like sales discounts

    • Debit income summary

  • Close income summary to capital

  • Close drawings to capital


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Step 1 Revenue Adjusting Entry:


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Step 2 Revenue Adjusting Entry:


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Steps 3 and 4 Revenue Adjusting Entry:


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Reversing Entries Revenue Adjusting Entry:

  • The reverse of certain adjusting entries, recorded as of the first day of the following fiscal period

  • Make it easier for the accountant next period

    • Next period the accountant does not need to worry about compound entries for payables and receivables where the cash is paid or is received

  • The use of reversing entries is optional


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Determine Which Adjusting Entries Can Be Reversed Revenue Adjusting Entry:

  • Must be first day of the period after you made adjusting entries

  • Look at all adjusting entries and find entries that meet all three qualifications:

    • An asset or liability was increased

    • The asset or liability did not have a previous balance

    • Entry does not involve merchandise inventory or contra accounts

  • Reverse it by making a new journal entry with the reverse debits and credits

    • When you post, don’t forget to write “reversing” in item column in the ledger accounts

  • Example


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Adjusting Entries Revenue Adjusting Entry:


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Journalize the Reversing Entries Revenue Adjusting Entry:



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Posting Reversing Entries to Wages Expense Account Revenue Adjusting Entry:

Notice that posting of $2,000 wages expense results in an $800 balance.


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