Chapter 4
1
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
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© 2011 Cengage Learning
Fiscal Period
 A fiscal period is any period of time covering
a complete accounting cycle.
 A fiscal year is a fiscal period consisting of
twelve consecutive months.
 A fiscal year does not have to coincide with
the calendar year.
 For income tax purposes, any period of 12
consecutive months may be selected.
However, you must be consistent from year to
year.
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The Accounting Cycle
Sequence of steps in the accounting process completed during the fiscal period.
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The Work Sheet
 The work sheet is a tool (working paper)
used by accountants to record necessary
adjustments and provide up-to-date account
balances needed to help in preparing
financial statements.
 The heading consists of three lines: (1) the
name of the company, (2) the title of the
working paper, and (3) the period of time
covered.
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Work Sheet for Conner’s
Whitewater Adventure
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The Columns of the Work Sheet
Trial Balance Columns
Assuming normal balances, the account
classifications are listed in the Trial Balance Debit
and Credit columns of the work sheet as follows:
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The Columns of the Work Sheet
Adjusted Trial Balance Columns
The adjusted trial balance columns are merely
extensions of the Trial Balance Columns, plus or
minus any adjustment amounts.
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The Columns of the Work Sheet
Income Statement Columns
 An income statement contains the revenues minus the
expenses.
 Revenue accounts have credit balances, so they are
recorded in the Income Statement Credit column.
 Expense accounts have debit balances, so they are recorded
in the Income Statement Debit column.
Assets
The Columns of the Work Sheet




Balance Sheet Columns
Asset accounts have debit balances, so they are
recorded in the Balance Sheet Debit column.
Liability accounts have credit balances, so they
are recorded in the Balance Sheet Credit
column.
The Capital account has a credit balance, so it is
recorded in the Balance Sheet Credit column.
Drawing is a deduction from Capital, thus it has
a debit balance and is recorded in the Balance
Sheet Debit column.
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Adjustments
 Adjustments are a way of updating the ledger
accounts.
 Adjustments may be considered internal
transactions.
 They are determined after the trial balance
has been prepared.
 Adjustments are first recorded on the work
sheet when using a manual accounting
system.
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Prepaid Insurance
(a) The $1,875 balance in Prepaid Insurance
represents the premium paid in advance for a
three-month liability insurance policy.
$1,875 per year ÷ 3 months = $625 per month
Prepaid Insurance
Cost of insurance that
remains paid in advance
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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.
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Depreciation of Equipment
 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,
Equipment
Accumulated Depreciation, Equipment, is contrary to, or a
deduction from, Equipment, so we call it a contra account.
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Example of Depreciation of Equipment
(b) The Equipment account has a balance of $51,300. Conner
estimates that the equipment will have a useful life of seven
years, with a trade-in (salvage) value of $8,292 at the end
of that time. Using straight-line depreciation, Conner
determines the depreciation for one month is $512.
STEP 1.
STEP 2.
STEP 3.
Subtract the trade-in (salvage) value from the cost to get
the full depreciation.
$51,300 – $8,292 = $43,008
Divide the full depreciation by the number of years in the
asset’s useful life to get the depreciation for one year.
$43,008 ÷ 7 = $6,144
Divide the depreciation for one year by 12 to get the
depreciation for one month.
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$6,144 ÷ 12 = $512
Depreciation of Equipment
On the balance sheet, the balance of
Accumulated Depreciation is deducted from the
balance of the related asset account.
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Wages Expense
This adjustment necessary because the end of the
pay period rarely falls on the same day as the
end of the fiscal period.
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Wages Expense
(c) The amount of wages for the month of June for Conner
Whitewater Adventures is $2,360 (or $78.67 per day
based on 30 days). The last payday was June 24.
Using Wages Expense and Wages Payable accounts,
update the ledger accounts for unpaid (or accrued) wages
owed to employees for the time between the end of the last
pay period and the end of the fiscal period.
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Net Income
Net income (or net loss) is the difference
between revenue and expenses.
When revenue is larger than expenses, net income
is placed in the Income Statement Debit column.
It is also placed in
the Balance Sheet
Credit column.
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Net Loss
When revenue is smaller than expenses,
the net loss is placed in the Income
Statement Credit column.
It is also placed in the
Balance Sheet Debit
column.
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Mixed Accounts
 Each adjusting entry contains an income
statement account (revenue or expense)
and a balance sheet account (asset, contra
asset, or liability).
 Accountants refer to these accounts as
mixed accounts, which are accounts with
balances that are partly income statement
and partly balance sheet amounts.
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Steps in Completion of the Work Sheet
1.
2.
3.
4.
Complete the Trial Balance columns, total, and rule.
Complete the Adjustments columns, total, and rule.
Complete the Adjusted Trial Balance columns, total, and rule.
Record balances in the Income Statement and Balance
Sheet columns and total each column.
5. Record net income or net loss in the Income Statement
columns by subtracting the smaller side from the larger side
and adding the differences to the smaller side, total, and rule.
6. Record net income or net loss in the Balance Sheet columns
by subtracting the smaller side from the larger side and
adding the difference to the smaller side, total, and rule.
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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.
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Completion of the
Financial Statements
Since we have completed the work sheet
for Conner’s Whitewater Adventures, we
can now prepare the income statement, the
statement of owner’s equity, and the
balance sheet by taking the figures directly
from the work sheet.
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to Statement of
Owner’s Equity
(continued)
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from the Income
Statement
to the Balance
Sheet
(continued)
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from the Statement of
Owner’s Equity
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Journalizing Adjusting Entries
 The work sheet is not a journal, so we must
journalize adjusting entries to update the
ledger accounts.
 Take the information for these entries directly
from the Adjustments columns of the work
sheet.
 Debit and credit exactly the same accounts
and amounts from the work sheet to the
journal.
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Journalizing Adjusting Entries
Note that the
entries have
been posted
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Posting Adjusting Entries
When you post the adjusting entries to the ledger
accounts, write the abbreviation “Adj.” in the Item
column of the ledger account.
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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.
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Income Statement Involving
More Than One Revenue
Account and a Net Loss
 When an organization has more than
one distinct source of revenue, a
separate revenue account is set up for
each source.
 Harris Miniature Golf’s income
statement is an example of a company
has more than one revenue account.
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Note that expenses are
greater than revenues,
resulting in a net loss.
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Statement of Owner’s Equity
with an Additional Investment
and a Net Income
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Statement of Owner’s Equity
with an Additional Investment
and a Net Loss
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Income Statement for Preparing
Balance Sheet
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Balance Sheet for a Business Having
More Than One Accumulation
Depreciation Account
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Balance Sheet with Statement
of Owner’s Equity Included
 The information normally shown in the
statement of owner’s equity is sometimes
included as part of the owner’s equity
section of the balance sheet.
 Computerized accounting programs
frequently do not produce a separate
statement of owner’s equity.
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