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Chapter 12

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Chapter 12

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  1. Chapter 12 Work Sheet and Adjusting Entries

  2. Chapter 12 • Performance Objectives: • New Adjustments: • Adjustment for Supplies • Adjustment for merchandise inventory under the periodic inventory system • Adjustment of unearned revenue • Complete the work sheet with the new adjustments • Journalize the adjusting entries for a merchandising business under the periodic inventory system

  3. Adjustments • Bring the books “up to date” • Adjustments are made every time the financial statements are produced • Each adjustment will affect: • At least one income statement account • Adjusting entries update the I/S accounts so we get a more accurate net income number • At least one balance sheet account • Adjusting entries update the B/S accounts so we get a more accurate A = L + OE

  4. Adjustments: • First • Record adjustments in the worksheet • Be sure to label each adjustment entry into the worksheet with a letter reference: a), b), c)… both sides of the entry! • Second • Record the adjusting journal entries in the general journal

  5. Data for Adjusting Supplies • Debit Supplies when supplies are purchased throughout the period • Take inventory to determine the amount of supplies left at the end of the period • New Adjustment: • Make an adjusting entry for the amount used (total minus amount left) • Debit Supplies Expense • Credit Supplies

  6. New Adjustments:Merchandise Inventory • What is merchandise inventory? • Goods bought with the intention of reselling for a profit • Office supplies are not merchandise inventory Examples: Shoe store? Shoes Kite store? Kites & boomerangs Hardware store? Hammers, lumber, etc.

  7. Periodic Inventory System • The system under which the buying of merchandise during the year is recorded as: • Debit to purchases • Credit to accounts payable or cash • At the end of the period, a physical count of the stock of goods is taken • Adjusting entries are made to record the amount of the physical count

  8. Prepare An Adjustment For Merchandise Inventory Under The Periodic Inventory System • Inventory account sits on books, untouched • Buy inventory during period and record it in “purchases” • At the end of the period, you perform a physical count • Income summaryis used during adjustment process • “Put” beginning inventory into income summary (debit) • “Put” physical count number into income summary (credit) • Both numbers show up on face of income statement as part of COGS calculation • Difference shows up as: • “Cost of goods sold” (I/S) • Merchandise inventory (B/S)

  9. New Adjustments:Merchandise Inventory • Step One: • Empty out inventory account • Credit • “Put” it into income summary • Debit • Step Two: • Record the physical count number in inventory account • Debit • “Put” it into income summary • Credit Brings Inventory Balance to Counted Total!

  10. After Recording Adjustment In The Work Sheet, Inventory Adjusting Journal Entry: "Update Accounts"

  11. Demonstration Problem We will complete a work sheet and make the adjusting journal entries

  12. Empty Inventory Account

  13. Place Counted Inventory Into Merch. Inv. Account

  14. When we buy a one year insurance policy, we record: “prepaid insurance” Each month, we incur 1/12 of it as insurance expense! This “updates our accounts” & makes our financial statements more accurate When the insurance company receives our check, they record: “unearned insurance revenue” Each month, they earn 1/12 of it as insurance revenue This “updates their accounts” & makes their financial statements more accurate New Adjustments: Unearned Revenue “See both sides of the coin!” One person’s expense is another person’s revenue!

  15. Unearned Revenue • If Time Magazine receives subscription revenue for the whole year, can they record it all as revenue in the first month? • No • They must record unearned subscription revenue, and then make adjustments each month • Other examples: • Sports teams receive ticket sales in advance • Health club advance payments

  16. Asset, Liability Or Owner’s Equity? • Unearned revenue? • Time Magazine “owes” the customer the magazines, right? • The insurance company “owes” the customer the insurance coverage, right? • Unearned revenue is a liability! • The customer has a claim against the company for the goods or services until the goods are delivered or the services are rendered

  17. Unearned Revenue • Revenue received in advance for goods or services to be delivered later • Considered to be a liability until the revenue is earned

  18. After Recording Adjustment In The Work Sheet, Unearned Revenue Adjusting Entry: • (Recorded earlier in the year) insurance company receives cash for a one year insurance policy: • Time passes & insurance company earns one months revenue:

  19. Journal Entries& Posting (T-Accounts Demo) 1100 2110 2110 4110

  20. Worksheet • Tool used by accountants to help prepare the financial statements • Chapter 12: • Adjusted trial balance is gone • Why? • Because we can carry the updated account numbers straight to either the: • Income statement column • Balance sheet column

  21. Demonstration Problem We will complete a work sheet and make the adjusting journal entries

  22. Work Sheet

  23. Empty Inventory Account

  24. Place Counted Inventory Into Merch. Inv. Account

  25. Record All Adjustments

  26. Carry Over To I/S Column

  27. Carry Over To B/S Column

  28. Work Sheet

  29. Journal Entries Before Posting

  30. Steps For Completing The Work Sheet • Place account totals in trial balance column • Total and rule (DR = CR) • Record adjustments in work sheet • Letter references: a), b)… • Total and rule (DR = CR) • Place I/S & B/S amounts into I/S and B/S columns, total at bottom (DR ≠ CR)

  31. Steps For Completing The Work Sheet • In the income statement column, calculate net income/loss • Subtract the smaller side from the larger side • “Plug” this number to get DR = CR • If there is net income, the credit side of the columns will be larger and you will place net income on the debit side • If there is net loss, the debit side of the columns will be larger and you will place net loss on the credit side

  32. Steps For Completing The Work Sheet • In the balance sheet column, calculate net income/loss • Subtracting the smaller side from the larger side • “Plug” this number to get DR = CR

  33. Chapter 13 Financial Statements, Closing Entries, And Reversing Entries

  34. Chapter 13 • Performance objectives: • Prepare a classified income statement for a merchandising firm • Net sales • Cost of goods sold • Gross profit • Income from operations • Prepare a classified balance sheet for any type of business • Current assets • Plant & equipment • Current liabilities • Long-term liabilities

  35. Chapter 13 • Performance objectives: • Compute working capital and current ratio • Journalize the closing entries for a merchandising firm • Determine which adjusting entries can be reversed, and journalize the reversing entries

  36. Single step income statement Multi-step income statement Prepare A Classified Income Statement For Merchandising Co.(“Multi-Step Income Statement”) Why multi-step I/S? Provides better info. for decision making!

  37. Performance Measures • Different measure on the classified income statement tell us different things: • Gross profit: • How profitable the company is after only subtracting COGS • Common measure used to compare companies (GP%) • Operating income: • How profitable the company is from its ordinary operations, before any “other revenue/expenses” • Common measure used in estimating future profitability • Net income: • The bottom line • Profit for the period

  38. Other Income, Or Expenses • Not related to ordinary operations • Examples: • Interest revenue • Rent Revenue • Interest expense • Cash Sort & Over • (If Firm decides to classify it as such) • Spa Magic classifies it as such

  39. Template for Classified Income Statement

  40. Calculate Net Sales

  41. Cost Of Goods Sold(COGS) • Cost of all the goods sold during the period • Example: • Shoe store sells shoes and accessories • At the end of the period, the accountants must determine the cost of all the shoes sold during the period in order to match it with the shoe sales revenue

  42. Cost of Goods Sold • Good Diagram on page 457

  43. Calculate COGS

  44. Calculate Gross Profit

  45. Calculate Income From Operations

  46. Calculate Other Income & Expenses

  47. Calculate Net Income

  48. Statement Of Owner’s Equity • After we complete the income statement, we are ready to make the statement of owner’s equity • Preparation is the same as earlier chapters • Look on page 460