Adjusting Entries and

The Worksheet
Expected Learning Outcomes
 List the classifications of the accounts
that occupy each column of a ten-
column worksheet
 Complete a worksheet for a service
enterprise
 Journalize and post adjusting entries
 Prepare statements from worksheet
Fiscal Period
 Period of time covering a complete
accounting cycle through closing entries
 A day, week, month, whenever you want
 Monthly is normal for comparison purposes
 Fiscal year
 Complete cycle for 12 months
 Need not coincide with calendar year
The 10-Column Worksheet
 Working paper
 Simply a tool used for accounting
 To record necessary updates for financial
statements
 Central place for bringing together
information for adjustments
 Ten Column Worksheet

 10 columns for recording peso amounts

 2 columns for each heading (debit/credit)
 Trial balance
 Adjustments
 Adjusted trial balance
 Income Statement
 Balance Sheet
Trial Balance Columns
 You have done this in the groupwork
 A listing of each account in the order
of
 Assets
 Liabilities
 Owner’s equity
 Revenue
 Expenses
10-column Work Sheet

4–7
Trial Balance Columns
 Noting the balance in each account
 Foot the debit and credit columns and
make sure they balance
 If you are not in balance, fix it here
before continuing
Adjustments
 These update the ledger accounts
 Internal transactions where no money
has changed hands….cash is NOT
involved
 Cash account is NEVER used in
adjustment columns
Depreciation
 Depreciation Expense is recorded
every period that an asset was in use
 This “expenses” the cost of the asset
over its useful life
 At the end of its use, an asset has a
“trade-in value” or salvage value.
Depreciation
 The amount in the asset account is the cost
of the asset until disposed
 The amount in the asset account minus the
amount in the Accumulated Depreciation
account is called “book value”
 Depreciation is not deducted directly from
the asset account – a new account called
“Accumulated Depreciation” is created for
each asset. This way, you can see on the
balance sheet how much of the asset has
expired.
Depreciation of Furniture &
Fixtures
 Estimated useful life of 5 years
 Estimated value of F&F at end of 5 years is
P5,000 (salvage value or trade-in value)
 Cost of F&F (P975,000) minus salvage
value (P5,000) divided by the number of
years of use (5) is the annual depreciation
 This annual depreciation is divided by 12 to
get the Depreciation Expense amount for
each month

(continued next slide)

Depreciation Example
Bought Furniture & Fixtures for P975,000
 P975,000 – P5,000 (trade-in) = P970,000
 P970,000 / 5 years = P194,000 per year
 Divide the depreciation for one year by 12 to
get the depreciation for one month (P194,000
per year / 12 = P16,167 per month)
 Each month the depreciation expense is
recorded in Depreciation Expense as a debit of
P16,167 (Income Statement)
 Each month Accumulated Depreciation is
credited P16,167 (Balance Sheet)
 You are matching expenses against revenue for
a certain period
 Depreciation of Fixed Assets
 Durable items, such as appliances and fixtures, are
recorded as Equipment because they will last
longer than one year.
 The cost of these assets should be systematically
spread out over their useful lives.
 This process is called depreciation.

Depreciation Expense

Accumulated Depreciation, Equipment, is

contrary to, or a deduction from, Equipment, so we 4–14
call it a contra account.
Depreciation (review)
 Record assets at the purchase price
 Expense the asset over its useful life
 Expense claimed each period during
the useful life is called Depreciation
Expense
 Each asset has its own Accumulated
Depreciation account (contra account)
 It is still in the asset side on the
Balance Sheet but with credit balance.
 Depreciation of Equipment
On the balance sheet, the balance of Accumulated Depreciation is
deducted from the balance of the related asset account.

4–16
 Adjustments –
Insurance Expense
 End of the reporting period
 You paid premiums in advance which is
good for one year.
 You already used up a portion of your
prepaid insurance.
 Figure out how much you need to
amortize up to the date you are closing
the books
 Debit Insurance Expense account
 Credit Prepaid Insurance account
Insurance Expense Example
End of Month of January
 You paid P40,000 good for one year
 Equals P3,333 per month (40,000/12)
 You ended your calendar month on
January 31
 Insurance Expense debited P3,333
 Prepaid Insurance credited P3,333
What Happens When You amortized the
expense portion of your Prepaid
Insurance?

•Debit – Insurance Expense •Credit – Prepaid Insurance

Insurance Expense Prepaid Insurance

40,000 3,333
3,333
36,667

If you credit Prepaid Insurance here then you will

be reducing the amount until at the end of its 1
year term it will have zero balance.
 Recording the
Adjustment on the Work Sheet
 Label the debit and credit amounts of the adjustment with (a) in
the Adjustment columns.

 Extend the new amount in the Prepaid Insurance account to the

Balance Sheet Debit column.

 Extend the new amount for the Insurance Expense account to

the Income Statement Debit column.

4–20
 The Worksheet Adjustment
Columns
 Post your adjusting entries in your
adjustments columns
 Make sure that debits equal credits here
 Label each adjusting entry with letter
labels, for example, (a) for each debit and
credit adjustment to insurance, (b) for
each adjustment to depreciation, etc.
 Write notes explaining each adjustment,
labeled by letter, at the bottom of the
Account Name column on the worksheet.
Adjusted Trial Balance
 You have added the columns (up
and down) up until now.
 Now you are going to add/subtract
the rows (across) from the trial
balance and adjustments
 This gives you the current status of
the accounts (Adjusted Trial
Balance)
Income Statement Column
 Copy the figures from the adjusted
trial balance for all accounts that go
into the Income Statement
 Revenue and expenses only
 Foot the columns – and debits will
NOT equal credits – why not?
 You haven’t considered profit
Balance Sheet Column
 Copy the balances from all other than
Income Statement accounts from the
adjusted trial balance column to
these accounts
 Foot the columns and they will not
balance….why not?
Balance Sheet Column
 We haven’t considered profit
 The difference here will be the exact
same difference from the Income
Statement columns
Steps in Completing the
Worksheet
1. Complete trial balance columns, foot
and double underline if in balance
(rule)
2. Complete the adjustments columns,
foot and rule
3. Complete adjusted trial balance, foot
and rule
Steps in Completing the
Worksheet
4. Record balances in the Income
Statement and Balance Sheet
columns, foot
5. Record net income or net loss in
Income Statement columns by
subtracting the smaller side from the
larger side and adding the difference
to the smaller side, foot and rule
Steps in Completing the
Worksheet
6. Record net income or net loss in
Balance Sheet column by subtracting
the smaller side from the larger side
and adding the difference to the
smaller side, foot and rule
7. The numbers in step 5 and 6 should
be the same
4–29
4–30
 Finding Errors in the Income Statement and
Balance Sheet Columns
1. Check to see that the amount of the net income or loss is
recorded in the correct columns.
2. Verify the addition of all the columns.
3. Look to see if the appropriate amounts have been recorded
in the Income Statement and Balance Sheet columns.
4. Verify, by adding or subtracting across each line, that the
amounts carried over from the Trial Balance columns
through the Adjustments columns into the Adjusted Trial
Balance columns are correct.
5. Verify that the correct amounts of the revenue and expense
accounts are transferred to the Income Statement columns.
6. Verify that the correct amounts of assets, liabilities, and
owner’s equity accounts are transferred to the Balance
Sheet columns. 4–31
4–32
4–33
 Matching Principle

In adjusting accounts, notice that

the intent is to make sure the
expenses recorded match up or
compare with the revenues of the
same period of time. This is called
the matching principle.

4–34
 Completing Financial
Statements
 The worksheet helps us do this
 The Income Statement is taken
directly from the Income
Statement columns of the
worksheet
 Completing Financial
Statements
 When completing the Statement of
Owner’s Equity – you need to look at
the ledger account…NOT the
worksheet for the beginning total
 The Balance Sheet figures come
directly from the Balance Sheet
columns EXCEPT Capital, which is
taken the Statement of Owner’s
Equity
 After Completing the
Statements
 Journalize and post adjustments
 You do this by looking at the
adjustment columns on the
worksheet and making the
journal entries. Then post the
journal entries to your ledger
accounts to update your books.
Depreciation Accounts
 Contra Assets
 Are on the Balance Sheet following
the asset
 Depreciation of Equipment
On the balance sheet, the balance of Accumulated Depreciation is
deducted from the balance of the related asset account.

4–39
Balance Sheet for a Business Having
More Than One Accumulation
Depreciation Account

4–40
Learning Outcomes Review
 List the classifications of the accounts
that occupy each column of a ten-
column worksheet
 Complete a worksheet for a service
enterprise
 Journalize and post adjusting entries
 Prepare statements from worksheet