College
Accounting,
by Heintz and Parry
Chapter 5:
Adjusting Entries
and the Work
Sheet
Eddie was ready to do year-end financial statements,
starting with a work sheet, a form that summarizes the
accounts so that financial statements are easy to create. To
do this, he needed to calculate adjusting entries: entries that
reflect changes that occur in the business over time but are
best summarized in one entry (at financial statement time).
For example, Eddie used up supplies during the period, but
didn’t make entries every time he used tape or some
letterhead. He counted the supplies at year end and found
$25 worth, but his supplies account had a $60 debit balance
(the amount he spent).
Questions: 1) What needs to be done to the
supply account (debit or credit) and for what
amount?
2) What new account would be the other half of this
transaction?
Answers:
1)Supplies would get credited (it’s
decreasing) for $35 (60-25), to reduce the balance of $60 to
$25.
2) Supplies expense would get debited (the discarded supplies
represent assets used up when trying to produce revenue).
Supplies Expense
12/31
35
Supplies
11/10 60
Bal.
25
12/31
35
Another adjusting entry is for insurance,
because Eddie paid $120 for 1 year’s Prepaid Insurance in
November, but two of those months have passed. Thus, his
books need to reflect that $20 worth of coverage has been
used up, calculated as follows:
($120/12 months = $10 per month X 2 months = $20)
Questions: 1) What needs to be done to the
Prepaid Insurance account (debit or credit) and for
what amount?
2) What new account would be the other half of this
transaction?
Answers:
1)Prepaid Insurance would get credited (it’s
decreasing) for $20, to reduce the balance to $100.
2) Insurance expense would get debited to show that part of
the asset was used up.
Insurance Expense
12/31
20
Prepaid Insurance
11/10 120
Bal. 100
12/31
20
The third adjusting entry is for unpaid
wages. Most businesses pay hourly wages on a weekly or
biweekly basis, with a few days of delay while the paychecks
are calculated and prepared, so at year end the employees
haven’t been paid for all hours worked. In Eddie’s case, he
hasn’t paid his bandmates for the November gig, so he owes
them $80.
Questions: 1) What needs to be done to the wage
expense account (debit or credit) and for what
amount?
2) What new account would be the other half of this
transaction?
Answers:
1) Wage Expense would get debited (it’s
increasing) for $80.
2) Wages Payable (a liability) would get credited.
Wage Expense
10/19
12/31
Bal.
80
80
160
Wages Payable
12/31
80
The final adjusting entry was to recognize
that the musical instruments, 3 months older than when he
purchased them, have decreased in value, as almost all
long-lived assets do. This decrease in value that comes
with wear and tear (and time) is called depreciation. Monthly
depreciation is calculated as:
Original Cost - Salvage Value
Useful Life (in months)
where salvage value is the amount you expect to sell it for
when you feel it’s at the end of it’s useful life. In this case,
the calculation would be:
$2200 - $400
60 months
and the result is $30 depreciation per month.
The final adjusting entry
would be for $90
($30 X 3 months). Two new accounts are used. Depreciation
Expense-Musical Instruments would get debited, and
Accumulated Depreciation-Musical Instruments would get
credited. We don’t credit Musical Instruments directly because
we want the financial statements to show the original price
paid, especially since depreciation is an estimated number.
Accumulated Depreciation is a contra asset: an account
whose credit balance (the reverse of most assets) is a
subtraction from an asset.
Depreciation Expense-M.I.
12/31
90
Accumulated Depr’n.-M.I.
12/31
90
At this point, Eddie put the adjusting entry
amounts into the appropriate columns of his work
sheet, next to his trial balance:
Eddie and the Losers
Work Sheet
For Year Ended Dec. 31, 1999
Trial Balance
Debits Credits
383
2200
Cash
Musical Instruments
Acc. Depn.-M.I.
Supplies
60
Prepaid Insurance
120
Accts. Payable
Wages Payable
Eddie O’Hare, Capital
Eddie O’Hare, Drawing 12
Gig Revenue
Wage Expense
80
Equip. Rental Expense 30
Supply Expense
Insurance Expense
Depn. Exp.-M.I.
2885
Adjustments
Debits Credits
D) 90
A) 35
B) 20
360
C) 80
2000
525
2885
C) 80
A) 35
B) 20
D) 90
225
225
The next work sheet columns, the
adjusted trial balance, are used to add or subtract the
adjustments and make sure we still balance:
Eddie and the Losers
Work Sheet
For Year Ended Dec. 31, 1999
Trial Balance
Debits Credits
383
2200
Cash
Musical Instruments
Acc. Depn.-M.I.
Supplies
60
Prepaid Insurance
120
Accts. Payable
Wages Payable
Eddie O’Hare, Capital
Eddie O’Hare, Drawing 12
Gig Revenue
Wage Expense
80
Equip. Rental Expense 30
Supply Expense
Insurance Expense
Depn. Exp.-M.I.
2885
360
2000
525
2885
Adjustments Adj. Trial Bal.
Debits Credits Debit Credit
383
2200
D) 90
90
A) 35
25
B) 20
100
360
C) 80
80
2000
12
525
C) 80
160
30
A) 35
35
B) 20
20
D) 90
90
225
225 3055 3055
The 7th and 8th work sheet columns,
the income statement, are used to total the revenue and
expense accounts and calculate net income:
Adj. Trial Balance
Debits Credits
Cash
383
Musical Instruments 2200
Acc. Depn.-M.I.
90
Supplies
25
Prepaid Insurance
100
Accts. Payable
360
Wages Payable
80
Eddie O’Hare, Capital
2000
Eddie O’Hare, Drawing 12
Gig Revenue
525
Wage Expense
160
Equip. Rental Expense 30
Supply Expense
35
Insurance Expense
20
Depn. Exp.-M.I.
90
3055
3055
Net Income
Inc. Statement Bal. Sheet.
Debits Credits Deb. Cred.
160
30
35
20
90
335
190
525
525
525
525
The 9th & 10th work sheet columns,
the balance sheet, list non-income statement accounts
and confirm net income (which should be the difference
between the balance sheet debits and credits):
Adj. Trial Balance
Inc. Statement Bal. Sheet.
Debits Credits
Debits Credits Debit Credit
Cash
383
383
Musical Instruments 2200
2200
Acc. Depn.-M.I.
90
90
Supplies
25
25
Prepaid Insurance
100
100
Accts. Payable
360
360 Wages Payable
80
80 Eddie O’Hare, Capital
2000
2000 Eddie O’Hare, Drawing
12
12
Gig Revenue
Wage Expense
160
Equip. Rental Expense 30
Supply Expense
35
Insurance Expense
20
Depn. Exp.-M.I.
90
3055
Net Income
525
3055
160
30
35
20
90
335
190
525
525
525
525
2720 2530
190
2720 2720
Later on, after the financial
statements are done, Eddie would write the
heading “Adjusting Entries” in the General Journal
and journalize and post the entries. The first one is
listed as an example:
Date
Description
Adjusting Entries
1999
Dec. 31 Supplies Expense
Supplies
P. R.
Debit
Credit
35.00
35.00