Worksheet, trial balance, adjustments, adjusted balance, adjusted trial balance, closing the books, closing entries, post closing entries, operation cycle, merchandising operations, cost of good sold, cost of merchandise, unearned revenues, accrued expenses, josecintron.com, jose cintron, MBA, advance business consulting, mba4help.com, Worksheet, trial balance, adjustments, adjusted balance, adjusted trial balance, closing the books, closing entries, post closing entries, operation cycle, merchandising operations, cost of good sold, cost of merchandise, unearned revenues, accrued expenses, josecintron.com, jose cintron, MBA, advance business consulting,

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Jose Cintron, MBA-CPC
(954) 374-8298
Josecintron.mba@gmail.com
Accounting Principles 1c

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Worksheet
A worksheet is a multiple-column form used in the adjustment
process and in preparing financial statements. As its name suggests,
the worksheet is a working tool. It is not a permanent accounting
record; it is neither a journal nor a part of the general ledger. The
worksheet is merely a device used in preparing adjusting entries and
the financial statements.

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(a) Pioneer debits an additional account, Advertising Supplies Expense, $1,500 for the
cost of supplies used, and credits Advertising Supplies $1,500.
(b) Pioneer debits an additional account, Insurance Expense, $50 for the insurance
that has expired, and credits Prepaid Insurance $50.
(c) The company needs two additional depreciation accounts. It debits Depreciation
Expense $40 for the month's depreciation, and credits Accumulated Depreciation—
Office Equipment $40.
(d) Pioneer debits Unearned Revenue $400 for services provided, and credits Service
Revenue $400.
(e) Pioneer debits an additional account, Accounts Receivable, $200 for services
provided but not billed, and credits Service Revenue $200.
(f) The company needs two additional accounts relating to interest. It debits Interest
Expense $50 for accrued interest, and credits Interest Payable $50.
(g) Pioneer debits Salaries Expense $1,200 for accrued salaries, and credits an
additional account, Salaries Payable, $1,200.
Step 1. Prepare a Trial Balance on the Worksheet
Step 2. Enter the Adjustments in the Adjustments Columns

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Step 3. Enter Adjusted Balances in the
Adjusted Trial Balance Columns
Pioneer determines the adjusted balance of an account by combining the
amounts entered in the first four columns of the worksheet for each
account. For example, the Prepaid Insurance account in the trial balance
columns has a $600 debit balance and a $50 credit in the adjustments
columns. The result is a $550 debit balance recorded in the adjusted trial
balance columns. For each account, the amount in the adjusted trial
balance columns is the balance that will appear in the ledger after
journalizing and posting the adjusting entries

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Step 4. Extend Adjusted Trial Balance Amounts to
Appropriate Financial Statement Columns
The fourth step is to extend adjusted trial balance amounts to the income
statement and balance sheet columns of the worksheet. Pioneer enters
balance sheet accounts in the appropriate balance sheet debit and credit
columns. For instance, it enters Cash in the balance sheet debit column,
and Notes Payable in the credit column. Pioneer extends Accumulated
Depreciation to the balance sheet credit column; the reason is that
accumulated depreciation is a contra-asset account with a credit balance.

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Preparing Financial Statements from a
Worksheet
After a company has completed a worksheet, it has at hand all the data
required for preparation of financial statements. The income statement is
prepared from the income statement columns. The balance sheet and
owner's equity statement are prepared from the balance sheet columns.

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Closing the books
At the end of the accounting period, the company makes the accounts
ready for the next period. This is called closing the books. In closing the
books, the company distinguishes between temporary and permanent
accounts.
Temporary accounts relate only to a given accounting period. They
include all income statement accounts and the owner's drawing account.
The company closes all temporary accounts at the end of the period.

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Closing the books*
In contrast, permanent accounts relate to one or more future accounting
periods. They consist of all balance sheet accounts, including the owner's
capital account.
Permanent accounts are not closed from period to period. Instead, the
company carries forward the balances of permanent accounts into the
next accounting period

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Closing Entries
At the end of the accounting period,
the company transfers temporary
account balances to the permanent
owner's equity account,
Closing entries formally recognize in the ledger the transfer of
net income (or net loss) and owner's drawing to owner's capital.
The owner's equity statement shows the results of these entries.
Closing entries also produce a zero balance in each
temporary account. The temporary accounts are then ready to
accumulate data in the next accounting period separate from the
data of prior periods. Permanent accounts are not closed.

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Closing entries
Companies close the revenue and expense accounts to another temporary
account, Income Summary, and they transfer the resulting net income or
net loss from this account to owner's capital.
Companies record closing entries in the general journal
Then the company posts the closing entries to the ledger accounts.

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Closing entries
Companies generally prepare closing entries directly from the adjusted
balances in the ledger.
1. Debit each revenue account for its balance, and credit Income
Summary for total revenues.
2. Debit Income Summary for total expenses, and credit each expense
account for its balance.
3. Debit Income Summary and credit Owner's Capital for the amount of
net income.
4. Debit Owner's Capital for the balance in the Owner's Drawing
account, and credit Owner's Drawing for the same amount.

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Closing Entries Journalized

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Posting Closing Entries

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Classified Balance Sheet

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Merchandising Operations
They buy and sell merchandise rather than
perform services as their primary source of
revenues.

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Operating circle
The operating cycle of a merchandising company ordinarily is longer
than that of a service company

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Merchandising Operations*
Merchandising companies that purchase and sell directly to consumers
are called retailers. Merchandising companies that sell to retailers are
known as wholesalers

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Journal Entries
Recording purchases of merchandise on credit for resale.
Inventory 1000
Account Payable 1000
Recording payment of merchandise purchased.
Account payable 1000
Cash 1000
Sold the merchandise on credit.
Account Receivable 2000
Sales Revenue 2000
To show the real amount of inventory available.
Cost of Goods sold 1000
Inventory 1000
To record the collection of receivables
Cash 2000
Account Receivable 2000

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Cost of goods sold under a
periodic inventory system
1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting period.

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Costs for a merchandising
The flow of costs for a merchandising company is as follows: Beginning
inventory is added to the cost of goods purchased to arrive at cost of
goods available for sale. Cost of goods available for sale is assigned to
the cost of goods sold (goods sold this period) and ending inventory
(goods to be sold in the future). Companies use one of two systems to
account for inventory: a perpetual inventory system or a periodic
inventory system.

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Unearned revenues
Companies record cash received before revenue is earned by increasing
a liability account called unearned revenues. Examples are rent,
magazine subscriptions, and customer deposits for future service.
Unearned revenues are the opposite of prepaid expenses. A landlord will
have unearned rent revenue when a tenant has prepaid rent.
When a company receives cash for future services, it increases (credits)
an unearned revenue account (a liability) to recognize the liability.

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Unearned Revenue
Pioneer Advertising Agency received $1,200 on October 2 from R. Knox
for advertising services expected to be completed by December 31.
Pioneer credited the payment to Unearned Service Revenue; this account
shows a balance of $1,200 in the October 31 trial balance. Analysis
reveals that the company earned $400 of those fees in October. Thus, it
makes the following adjusting entry.

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Unearned Revenue
Oct. 31 Unearned Revenue 400
Service Revenue 400
(To record monthly depreciation)
The liability Unearned Revenue now shows a balance of $800.
At the same time, Service Revenue shows total revenue of $10,400
earned in October.

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Unearned Revenue
Without this adjustment, revenues and net income are understated by
$400 in the income statement. Also, liabilities are overstated and owner's
equity understated by $400 on the October 31 balance sheet.

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Accrued Expenses
Expenses incurred but not yet paid or recorded at the statement date are
accrued expenses. Interest, rent, taxes, and salaries are typical accrued
expenses

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Accrued Expenses
Oct. 31 Interest Expense 50
Interest Payable 50
(To record interest on notes
payable)

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Accounting for accrued Revenues

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Accrued revenues
In October Pioneer Advertising Agency earned $200 for advertising
services that have not been recorded. Pioneer makes the following
adjusting entry on October 31.
Oct. 31 Accounts Receivable 200
Service Revenue 200
(To record revenue for services provided)
Nov. 10 Cash 200
Accounts Receivable 200
(To record cash collected on account)

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Accrued Salaries
Companies pay for some types of expenses after the services have been
performed. Examples are employee salaries and commissions. Pioneer
last paid salaries on October 26; the next payday is November 9. As the
calendar

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Accrued Salaries
At October 31, the salaries for the last three days of the month represent
an accrued expense and a related liability. The employees receive total
salaries of $2,000 for a five-day work week, or $400 per day. Thus,
accrued salaries at October 31 are $1,200 ($400 × 3). Pioneer makes the
following adjusting entry:
Oct. 31 Salaries Expense 1,200
Salaries Payable 1,200
(To record accrued salaries)

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Accrued Salaries
The next payday is November 9, when the company will again pay total
salaries of $4,000. The payment will consist of $1,200 of salaries payable
at October 31 plus $2,800 of salaries expense for November
Nov. 9 Salaries Payable 1,200
Salaries Expense 2,800
Cash 4,000
(To record November 9 payroll)

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Adjusting Entries-Accrual
1. At August 31, Calvin and Hobbes owed employees $800 in salaries
that the company will pay on September 1.
2. On August 1, Calvin and Hobbes borrowed $30,000 from a local
bank on a 15-year note. The annual interest rate is 10%.
3. Service revenue on account unrecorded in August totaled $1,100.
Make adjusting entries at the end of the period for revenues earned and
expenses incurred in the period needed at Aug. 31, 2010.

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Solution
Adjusting entries for accruals will increase both a balance sheet and an
income statement account.
1. Salaries Expense 800
Salaries Payable 800 (To record accrued salaries)
2. Interest Expense 250
Interest Payable 250 (To record interest)
($30,000 × 10% × 1/12 = $250)
3. Accounts Receivable 1,100
Service Revenue 1,100 (To record revenue for services provided)

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