Adjustment Worksheet, Exercises of Accounting

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Adjustment Worksheet

Accompanies Chapter 6 of the E-book

The Accounting Cycle

First we have to summarize the General Ledger There are several goals in summarizing the General Ledger:

1. Ensure its in balance  Total Debits = Total Credits (Trial Balance Step)
2. Bring General Ledger accounts up to date as of the end of the month – certain adjustments are needed for this, which we will review
3. Separate General Ledger Accounts for Financial Statement preparation – split into Balance Sheet and Income Statement accounts
4. Calculate the financial performance for the period – a net income or loss

When does this work occur? End of the fiscal period or accounting period This is usually at the end of the calendar month, but smaller companies may do it less frequently

Make period end adjustments (2 columns to make adjustments to selected accounts) Remember: Expenses and income should appear in the period in which they occurred Certain accounts will not be accurate at month, without adjustment See the example for Supplies on the next page.

In the example at right. Assume the following:

1. We purchased supplies of $620 during the month, and recorded those as a debit to the supplies account.
2. A count of supplies at month end shows there is only $90 worth of supplies left.
3. Therefore, $530 in supplies was used in the month. $ 620 - X = $ 90 X = $ (beginning bal. – X = month ending bal. per count)
4. A month-end adjustment is needed to get to the correct supplies balance: Dr. Supplies Expense $ Cr. Supplies $
5. This adjustment will correct the balance of supplies to $90 and record expense of $530 for supplies used in the month

The Balance Sheet

columns are populated

with all of the Assets,

Liabilities and Owner’s

Equity balances, +/-

adjustments, if any.

• Notice that Supplies

and Prepaid Insurance

were adjusted here.

We do the same for

the Income

Statement, carrying

the Income

Statement Account

balances across from

the trial balance.

Record Net Income or Loss: Notice a few things about what’s been done. After getting the initial totals (step #2) , a Net Income line is added to “settle up” the difference in the two sets of accounts, Balance Sheet and Income Statement (step #3/4). If done properly the new sets of totals for Balance Sheet and Income Statement will be equal (step #6).

The Income Statement There are 3 primary sections of the Income Statement: (Pay attention to how these are displayed.) The top section shows the amount of money taken in for the sale of products and services – Revenue/Sales The middle section shows Expenses incurred to earn those revenues/sales. (The book lists these alphabetically, but most companies list them by order of size or importance.)

• Notice that the expenses are offset, so they can be added up, and the total displayed under total sales. The final section (or result) is the Net Income or Expense , shown immediately below the total expenses. This is the performance for the month.

Prepare the Trial Balance Columns:

• Accounts are listed in numerical order on worksheet
• Balances from the General Ledger are displayed as debit or credit
• Balances are ruled and totaled in the trial balance columns
• Check: Total debits = Total credits

What adjustments do we need and why? Supplies – we bought supplies during the period. What probably happened to some of those supplies (they were used up) Insurance – We bought insurance for the full year. What adjustment should we make (the insurance for the month is no longer of value, its been used up)

Closing out the Income Statement The point of the last step on the previous slide is to increase or decrease owner’s equity by Net Income/Loss – this is the amount we owe to the owner. During the month we record income and expense in their respective accounts; now we are summarizing and moving the net amount to Owner’s Equity.