Transcript cH. 2 - Central Magnet School
CH. 2
A C C O U N T I N G 2
ADJUSTMENTS
Adjustments transfer the cost of “used up” assets to expense accounts. Adjustments for changes in merchandise inventory are made directly to the Income Summary account.
Key Terms Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory
adjustment
beginning inventory
ending inventory
physical inventory
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COMPLETING END-OF PERIOD WORK Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Managers, stockholders, and creditors need to know net income and the value of stockholders’ equity to make sound business decisions.
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THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Trial Balance Adjustments Five amount sections in the ten-column work sheet Adjusted Trial Balance Income Statement Balance Sheet Glencoe Accounting
THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory At the end of the period, adjustments are made to transfer the costs of assets consumed from asset accounts to the appropriate expense accounts.
adjustment An amount that is added to or subtracted from an account balance to bring that balance up to date .
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THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory If a balance is not up to date
as of the last day of the fiscal period
, it must be adjusted.
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Section 18.1
THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Three Types of Inventory Beginning Inventory Ending Inventory Physical Inventory beginning inventory The merchandise a business has on hand at the beginning of a period .
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THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Three Types of Inventory Beginning Inventory Ending Inventory Physical Inventory ending inventory The merchandise a business has on hand at the end of a period .
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Section 18.1
THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Three Types of Inventory Beginning Inventory Ending Inventory Physical Inventory physical inventory An actual count of all merchandise on hand and available for sale .
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THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory When calculating the adjustment for Merchandise Inventory, you need to know The account’s balance The physical inventory amount Glencoe Accounting
THE TEN-COLUMN WORK SHEET Identifying Accounts to be Adjusted and Adjusting Merchandise Inventory Adjusting the Merchandise Inventory Account Adjustment To adjust the Merchandise Inventory account (bal. 84,921) to reflect the physical inventory amount ($81,385), the following transaction is recorded.
See pages 524 –525
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No normal balance Glencoe Accounting
Glencoe Accounting
Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Key Term prepaid expense Glencoe Accounting
ADJUSTING THE SUPPLIES ACCOUNT Adjusting Supplies, Prepaid Insurance, Section 18.2
and Federal Corporate Income Tax As supplies are used, they become expenses of the business.
A physical inventory is taken at the end of the period to make an adjustment to the Supplies account.
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ADJUSTING THE SUPPLIES ACCOUNT Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Adjusting the Supplies Account Adjustment Record the adjustment for supplies. Beg bal. $5,749 – on-hand $1,839 – supplies used up $3,710 Glencoe Accounting
ADJUSTING THE PREPAID INSURANCE ACCOUNT Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Insurance premiums are an example of a prepaid expense.
prepaid expense An expense paid in advance .
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ADJUSTING THE PREPAID INSURANCE ACCOUNT Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Adjusting the Prepaid Insurance Account Adjustment Record the adjustment for the expiration of one half month’s insurance coverage.
$1,500 for a 6 month premium = $250/month purchased Dec 15 Glencoe Accounting
ADJUSTING THE FEDERAL CORPORATE INCOME TAX ACCOUNTS Adjusting Supplies, Prepaid Insurance, and Federal Corporate Income Tax Additional tax may need to be paid.
When the exact amount of federal corporate income tax is determined: The company may qualify for a refund.
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Section 18.3
Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Key Terms adjusting entries Glencoe Accounting
EXTENDING WORK SHEET BALANCES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries The amounts for each account must be extended to or carried over to these sections: The Adjusted Trial Balance The Income Statement The Balance Sheet Glencoe Accounting
EXTENDING WORK SHEET BALANCES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Each account in the Adjusted Trial Balance section is extended to one of the following sections: The Income Statement section, containing temporary account balances The Balance Sheet section, containing permanent account balances Glencoe Accounting
JOURNALIZING AND POSTING ADJUSTING ENTRIES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Adjusting entries come from the Adjustments section of the work sheet.
adjusting entries Journal entries that update the general ledger accounts at the end of a period .
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Section 18.3
JOURNALIZING AND POSTING ADJUSTING ENTRIES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Entries Recorded in the Adjustments Column Adjusting Merchandise Inventory Adjusting Supplies Adjusting Insurance Adjusting Income Tax Glencoe Accounting
Section 18.3
JOURNALIZING AND POSTING ADJUSTING ENTRIES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Adjusting entries are recorded in the general journal and then posted to the general ledger accounts. This will cause the general ledger account balances to agree with the Income Statement and Balance Sheet sections.
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Section 18.3
JOURNALIZING AND POSTING ADJUSTING ENTRIES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Posting Adjusting Entries to the General Ledger Glencoe Accounting
Section 18.3
JOURNALIZING AND POSTING ADJUSTING ENTRIES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Posting Adjusting Entries to the General Ledger Glencoe Accounting
Section 18.3
JOURNALIZING AND POSTING ADJUSTING ENTRIES Completing the Work Sheet and Journalizing and Posting the Adjusting Entries Posting Adjusting Entries to the General Ledger Glencoe Accounting
Question 1 After taking a physical inventory, you determined that the business has $132,755 of inventory on hand. The general ledger shows the Merchandise Inventory account with a balance of $139,400. What steps are needed to record the adjusting entry?
Step 1: Step 2: Step 3: Step 4: Step 5: The accounts Merchandise Inventory and Income Summary are affected.
Merchandise Inventory is an asset account. Income Summary is a stockholder’s equity account.
Merchandise Inventory is decreased by $6,645 ($139,400 - $132,755). This amount is transferred to Income Summary.
To transfer the decrease in Merchandise Inventory, debit Income Summary for $6,645 Decreases in asset accounts are recorded as credits. Credit Merchandise Inventory for $6,645.
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Question 2 Given the following information, determine what adjustments need to be made to the accounts. Indicate the amounts of the adjustments.
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Question 2 The adjustments that need to be made are shown below: Glencoe Accounting
Question 3 Explain the
matching principle
and why it is important to accounting.
The matching principle requires recording revenues in the period they are earned and recording expenses that were incurred to make those revenues in the same period. This may not be when expenses or revenues are paid or collected. By matching expenses and revenues, the matching principle provides an accurate measure of net income. For example, if you pay for (prepay) six months of insurance on one date, that expense is spread over the six months in which the policy is in effect. The cost of each month’s portion of the policy’s premium must be expensed in that month (1/6 of the total cost) so that records accurately reflect expenses. Having this information allows comparisons to be made for similar periods.
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