Chapter 14
Accounting Theory
Worksheet
 Used to plan adjustments and summarize
information for financial statements
 Can be done as many times as necessary for a
business (done at least once a year)
 Extensions


Moving over numbers from the trial balance and adjustments
to the balance sheet and income statement columns
Dividing line is income summary
Everything above income summary go to balance sheet
 Everything income summary and below goes to the income
statement

Adjustments
 Some ledger accounts need to be brought up-to-date
 Matching Expenses with Revenue
 Recording expenses in the fiscal period in which the expenses
contribute to earning revenue
 Planning for adjustments is done in the worksheet
 Accounts are not brought up-to-date by the
worksheet….journal entries still need to be made to
bring accounts up-to-date
Required adjustments
Debit
1.
2.
3.
4.
5.
6.
7.
8.
Supplies Expense-Office
Supplies Expense-Store
Insurance Expense
Uncollectable Accounts
Expense
Depreciation Expense-Office
Equip.
Depreciation Expense-Store
Equipment
Income
Summary/Merchandise
Inventory
Federal Income Tax Expense
Credit
1.
2.
3.
4.
5.
6.
7.
8.
Supplies-Office
Supplies-Store
Prepaid Insurance
Allowance for
Uncollectables
Accumulated DepreciationOffice Equip.
Accumulated DepreciationStore Equip.
Income
Summary/Merchandise
Inventory
Federal Income Tax Payable
Supplies/Prepaid Insurance
 The value of supplies on hand and prepaid
insurance not expired are during a fiscal period are
assets to the business
 To calculate the adjustment:
 Take the January 1 (trial balance amount) and
subtract out the December 31 balance (the amount
given in the directions)
 The difference is the amount of the adjustment
Uncollectable accounts
 When businesses sell merchandise on account, they
take the risk that customers won’t pay their
accounts.


Uncollectable accounts…accounts receivable not collected
Must report expense in same period that the revenue is earned
 The uncollectable amount is estimated as a
percentage of sales

There is not a required percentage…it varies based on past
experience
 Accounts receivable book value
 Reflects the amount the business expects to collect in the
future (after uncollectables)
Merchandise Inventory
 Merchandise inventory keeps track of the amount of
goods on hand for sale to customers
 Trial Balance represents the amount of inventory on
hand on January 1

Adjustment has to made to show the difference between the
purchases and sales as well as account for theft
 If the Dec. 31 amount is more than the Jan. 1, then a
debit must be made to Merchandise inventory
 If the Dec. 31 amount is less than the Jan. 1, then a credit
must be made to Merchandise inventory
 The other account in the adjustment is income summary
(a temporary account) to calculate net income/loss
Depreciation Expense
 Straight line depreciation
 Original cost – salvage value
Years of useful life
 Book value
 Assets account balance – related contra account
Net Income/Federal Income Tax
 Net Income
 Amount is entered into the income statement debit column and balance
sheet credit column
 Net loss
 Amount is entered into the income statement credit column and
balance sheet debit column
 Federal Income Tax
 Estimated income tax is paid in quarterly installments
 The federal income tax increases as net income before federal income tax
increases
 To calculate federal income tax:



Take the total from the income statement debit column (not including federal
income tax expense) and subtract the total from the income statement credit
column
Use the percentage table to calculate tax payable
Subtract this total from the planned federal income tax expense
Miscellaneous
 Trial balance
 All accounts are listed whether they have a balance or not
 General ledger accounts are listed in the worksheet’s account
title column in the same order in which they appear in the
general ledger
 Total the columns of a worksheet
 Adding up the totals of the worksheets income statement and
balance sheet columns
 The totals in the income statement will not equal the totals in
the balance sheet