Unit 4

The Accounting Cycle for a

Merchandising Corporation
Chapter 14 Accounting for Sales and Cash Receipts
Chapter 15 Accounting for Purchases and Cash Payments
Chapter 16 Special Journals: Sales and Cash Receipts
Chapter 17 Special Journals: Purchases and Cash Payments
Chapter 18 Adjustments and the Ten-Column Work Sheet
Chapter 19 Financial Statements for a Corporation
Chapter 20 Completing the Accounting Cycle for a Merchandising Corporation
Chapter 21 Accounting for Publicly Held Corporations

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 Chapter 18
Adjustments and the
Ten-Column Work Sheet

What You’ll Learn

 Describe the parts of a ten-column work sheet.
 Generate trial balances and end-of-period
adjustments.
 Determine which general ledger accounts to adjust.
 Calculate the adjustments.
 Prepare a ten-column work sheet.
 Journalize the adjustments.
 Define the accounting terms introduced in this
chapter.

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 Chapter 18, Section 1
Identifying Accounts to Be Adjusted and
Adjusting Merchandise Inventory

What Do You Think?

Why is it important to have up-to-date balances
at period end?

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Main Idea
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.

You Will Learn

 the purpose of the ten-column work sheet.
 how to use the ten-column work sheet for
adjustments.

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Key Terms
 adjustment
 beginning inventory
 ending inventory
 physical inventory

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Completing End-of-Period Work
In addition to account totals, managers, stockholders,
and creditors need to know net income and the value of
stockholders’ equity to make sound business decisions.
In this chapter, you will learn how to prepare a ten-
column work sheet for a merchandising business.

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
The Ten-Column Work Sheet
The ten-column work sheet is prepared in the same way as the six-
column work sheet, but the ten-column work sheet has five amount
sections:
 Trial Balance
 Adjustments
 Adjusted Trial Balance
 Income Statement
 Balance Sheet

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Completing the Trial Balance Section
A trial balance is used to prove the general ledger. Follow these steps
to prepare the trial balance:
 Enter the account name and number for each account in the
Account Name and Number columns.
 Enter the balance in the Debit or Credit column.
 Rule the Debit and Credit columns.
 If the Debit and Credit columns are proven, draw a double-rule
line across both columns.

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 Completing the Trial Balance Section
SECTION 18.1

The Trial Balance section

of the Work Sheet

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Calculating Adjustments
Some changes in account balances result from internal
business operations or the passage of time. Examples
are Supplies and Prepaid Insurance.

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Permanent Accounts and Temporary Accounts
A change in an account balance caused by the internal
operations or the passage of time is recorded through
an adjustment. At the end of the period, adjustments
are made to transfer the costs of assets consumed from
asset accounts to the appropriate expense accounts.

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Determining the Adjustments Needed
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 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Adjusting the Merchandise Inventory Account
Beginning inventory is the merchandise a business has
on hand at the beginning of a period. Ending inventory is
the merchandise on hand at the end of a period. The asset
account Merchandise Inventory’s balance changes only
when a physical inventory, an actual count of all
merchandise on hand and available for sale, is taken.

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Calculating the Adjustment for
Merchandise Inventory
When calculating the adjustment for Merchandise Inventory, you
need to know
 the account’s balance, and
 the physical inventory amount.
Purchases and sales during the period will decrease the account
balance. The reduction in inventory is recorded as an adjustment in
the accounting records.

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SECTION 18.1
Calculating the Adjustment for
Merchandise Inventory

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SECTION 18.1
Calculating the Adjustment for
Merchandise Inventory

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SECTION 18.1
Calculating the Adjustment for
Merchandise Inventory

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Entering the Adjustment for Merchandise Inventory on the
Work Sheet
Adjustments are entered in the Adjustments columns of the work
sheet. To do this, follow these steps:
 In the Adjustments Debit column, enter the debit amount of
the adjustment on the Income Summary line.
 In the Adjustments Credit column, enter the credit amount
of the adjustment on the Merchandise Inventory line.

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SECTION 18.1 Identifying Accounts to Be
Adjusted and Adjusting
Merchandise Inventory
Key Terms Review
 adjustment
An amount that is added to or subtracted from an account
balance to bring that balance up to date.
 beginning inventory
The merchandise a business has on hand at the beginning
of a period.
 ending inventory
The merchandise a business has on hand at the end of a
period.
 physical inventory
An actual count of all merchandise on hand and available
for sale.

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 Chapter 18, Section 2
Adjusting Supplies, Prepaid Insurance,
and Federal Corporate Income Tax

What Do You Think?

Why are some accounts not up to date?

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax
Main Idea
Adjustments show the dollar amount of assets
consumed during the period. They also recognize the
corporation’s income tax expense.

You Will Learn

 how and why the Supplies account is adjusted.
 how and why the Prepaid Insurance account is
adjusted.
 how and why the Federal Corporate Income
Tax Expense account is adjusted.

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax
Key Term
 prepaid expense

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax
Adjusting the Supplies Account
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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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax
Adjusting the Prepaid Insurance Account
A prepaid expense is an expense paid in advance.
Insurance premiums are a prepaid expense. An
adjustment records the expired portion as a business
expense.

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax
Adjusting the Federal Corporate Income Tax
Accounts
Corporations pay federal corporate income taxes on its net income.
A corporation estimates its federal corporate income taxes for the
coming year and pays that amount to the government in quarterly
installments.
When the exact tax amount is determined, the company may find it
is required to pay additional taxes or it may qualify for a tax refund.

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SECTION 18.2 Adjusting Supplies, Prepaid
Insurance, and Federal Corporate
Income Tax
Key Term Review
 prepaid expense
An expense paid in advance.

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 Chapter 18, Section 3
Completing the Work Sheet and Journalizing
and Posting the Adjusting Entries

What Do You Think?

How do adjustments affect net income?

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Main Idea
Adjustments affect the amount of net income
(or net loss).

You Will Learn

 how to complete the ten-column work sheet.
 how to journalize and post the adjusting entries.

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Key Term
 adjusting entries

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Extending Work Sheet Balances
The amounts for each account must be extended to or
carried over to the Adjusted Trial Balance, the Income
Statement, and the Balance Sheet sections.

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Completing the Adjusted Trial Balance Section
The balance of each Trial Balance account is combined
with the adjustments in the Adjustments section. The
new balance is entered in the appropriate Adjusted Trial
Balance column.
If there is no adjustment, the balance is transferred to
the same column in the Adjusted Trial Balance section.

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 Completing the Adjusted
SECTION 18.3
Trial Balance Section

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Extending Amounts to the Balance Sheet and
Income Statement Sections
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

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Completing the Work Sheet
A single rule is drawn across the four columns in the
Balance Sheet and Income Statement sections. The
columns are totaled. Net income or net loss is recorded
on the work sheet. The sections are proven if the two
Income Statement sections are equal and the two
Balance Sheet sections are equal.

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SECTION 18.3 Completing the Work Sheet
and Journalizing and Posting
the Adjusting Entries

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Journalizing and Posting Adjusting Entries
Adjusting entries update the general ledger accounts
at the end of a period. These entries come from the
Adjustments section of the work sheet.

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Journalizing Adjustments
The following entries are recorded in the Adjustments columns:
 adjusting merchandise inventory
 adjusting supplies
 adjusting insurance
 adjusting income tax
The debit part of the entry is recorded first. The date for adjusting
entries is the last day of the period.

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Posting Adjusting Entries to the
General Ledger
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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 Posting Adjusting Entries to
SECTION 18.3
the General Ledger

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SECTION 18.3 Posting Adjusting Entries to
the General Ledger

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SECTION 18.3 Posting Adjusting Entries to
the General Ledger

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SECTION 18.3 Completing the Work Sheet and
Journalizing and Posting the
Adjusting Entries
Key Term Review
 adjusting entries
Journal entries that update the general ledger
accounts at the end of a period.

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CHAPTER 18 Chapter 18 Review

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?

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CHAPTER 18 Chapter 18 Review

Answer 1
Step 1: The accounts Merchandise Inventory and
Income Summary are affected.
Step 2: Merchandise Inventory is an asset account.
Income Summary is a stockholder’s equity
account.
Step 3: Merchandise Inventory is decreased by $6,645
($139,400 - $132,755). This amount is transferred
to Income Summary.
Step 4: To transfer the decrease in Merchandise
Inventory, debit Income Summary for $6,645
Step 5: Decreases in asset accounts are recorded as
credits. Credit Merchandise Inventory for $6,645.

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CHAPTER 18 Chapter 18 Review

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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CHAPTER 18 Chapter 18 Review

Answer 2
The adjustments that need to be made are shown below:

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CHAPTER 18 Chapter 18 Review

Question 3
Explain the matching principle and why it is
important to accounting.

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CHAPTER 18 Chapter 18 Review

Answer 3
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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