COLLEGE ACCOUNTING

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College Accounting First Canadian
Edition Price Haddock Brock Hahn
Reed
McGraw-Hill Ryerson
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CHAPTER 5
ADJUSTING ENTRIES AND THE WORKSHEET
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OBJECTIVE 1 Describe the principles underlying
the accrual basis of accounting.
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ACCRUAL BASIS

• A system of accounting by which all revenues and
  expenses are matched and reported on statements
  for the applicable period, regardless of when the
  cash related to the transaction is received or
  paid.

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A-to-Z Legal Services Trial Balance December 31,
20X4 ACCOUNT
NAME
DEBIT CREDIT Cash
28,624.00
Notes Receivable 1,200.00
Accounts Receivable
26,136.00 Interest Receivable 0.00
Prepaid Insurance
3,600.00 Prepaid Interest
225.00 Supplies
6,300.00 Law Library
12,000.00 Accumulated Amortization Law
library

0.00 Office Equipment
3,500.00 Accumulated Amortization
Office equipment 0.00 Notes
Payable 2,000.00 Accounts Payable
4,129.00 Interest Payable 0.00
Unearned Legal Fees
5,000.00 Wages Payable 0.00 Donald
Wolfe, Capital
54,620.00 Donald Wolfe, Drawing
24,000.00 Legal
Fees Earned 350,786.00
Interest Revenue 0.00 Salaries
Expense 107,490.00 Wages
Expense 76,500.00
Advertising Expense
7,550.00 Supplies Expense

0.00 Amortization
Expense
0.00
Rent Expense

113,500.00 Insurance Expense
0.00 Utilities Expense
3,925.00 Telephone Expense
1,975.00 Interest
Expense
0.00 Totals
416,535.00 416,535.00
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OBJECTIVE 2 Compute and journalize adjustments
for accrued and prepaid expenses.
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ADJUSTMENT FOR PREPAID EXPENSES

• Prepaid or deferred expenses are expense items
  that are paid for and recorded in advance of
  their use.

• At the end of each fiscal period, an adjustment
  is made to transfer the cost of the portion used
  during the period from the asset account to an
  expense account.

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ADJUSTMENT FOR AMORTIZATION

• Amortization is recorded for long-term assets.

• A long-term asset is defined as having a useful
  life of more than one year.

Amortization allocates the value of long-term
assets over their useful life. For example, if
an asset has a useful life of five years, we
would calculate the total amortization over a
five year period.
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STRAIGHT-LINE METHOD OF AMORTIZATION
COST - SALVAGE VALUE
YEARLY AMORTIZATION

USEFUL LIFE
Salvage Value - How much the item can be sold for
when the firm disposes of it at the end of its
useful life.
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STRAIGHT-LINE METHOD OF AMORTIZATION
LAW LIBRARY
12,000 (COST)
1,500 (SALVAGE VALUE)
2,100 (YEARLY AMORTIZATION)
5 YEARS (USEFUL LIFE)
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ADJUSTMENTS FOR ACCRUED EXPENSES

• Accrued expenses are expense items that relate to
  the current period but have not yet been paid for
  and do not yet appear in the accounts.

• Because accrued expenses involve amounts that
  must be paid in the future, the necessary
  adjustment for each item consists of a debit to
  an expense account and a credit to a liability
  account.

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CALCULATION FOR AMOUNT OF ACCRUED INTEREST
Interest (I) Principal (P) x Rate (r) x Time (t)
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OBJECTIVE 3 Compute and journalize adjustments
for accrued and deferred revenues.
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ADJUSTMENT FOR ACCRUED REVENUE

• Accrued revenue is revenue that has been earned
  but not yet received or recorded

• At the time a trial balance is prepared, the
  appropriate revenue account must be credited,
  with an offsetting debit made to an asset
  account.

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REVENUE RECOGNITION PRINCIPLE

• Revenue is recorded when it is earned,
  regardless of when cash is collected.

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ADJUSTMENT FOR UNEARNED REVENUE

• Unearned revenue is revenue that is received
  before it is earned.

• Any portion of a firms revenue that has been
  received but not earned during a fiscal period
  should not be reported on the income statement
  prepared for the period.

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OBJECTIVE 4 Complete a 10-column worksheet.
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A worksheet is an accounting form with many
columns used to gather all the data needed at the
end of an accounting period to prepare the
financial statements.
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A-TO-Z LEGAL SERVICES Partial
Worksheet For the Year Ended December 31,
20X4
TRIAL BALANCE
ADJUSTMENTS
ACCOUNT NAME DEBIT
CREDIT DEBIT
CREDIT Cash
28,634.00 Notes Receivable 1,200.00
Accounts Receivable
26,136.00
(h)
30,000.00 Interest Receivable
(g) 11.84 Prepaid Insurance
3,600.00
(b)
2,700.00 Prepaid Interest 225.00
Supplies
6,300.00
(a) 4,975.00 Law Library
12,000.00 Accumulated Amort. Law
Library
(c) 2,100.00 Office Equipment
3,500.00
Accumulated
Amort-Office Equip.


(d) 600.00 Notes Payable
2,000.00 Accounts
Payable 4,129.00 Interest Payable
(f)
13.15 Wages Payable
(e) 1,500.00 Unearned Legal
Fees 5,000.00
(i) 3,000.00 Donald
Wolfe, Capital
54,620.00 Donald Wolfe,
Drawing 24,000.00 Legal Fees
Earned 350,786.00
(h)
30,000.00 (i) 3,000.00
Interest Revenue
(g) 11.84 Salaries
Expense
107,490.00 Wages Expense
76,500.00 (e)
1,500.00 Advertising Expense
7,550.00 Supplies Expense

(a) 4,975.00 Amortization
Expense
(c) 2,100.00
(d) 600.00 Rent Expense
113,500.00 Insurance Expense
(b) 2,700.00 Utilities
Expense
3,925.00 Telephone Expense
1,975.00 Interest Expense

(f) 13.15
Totals 416,535.00
416,535.00
44,899.99
44,899.99
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A-TO-Z LEGAL SERVICES PARTIAL WORKSHEET For the
Year Ended December 31, 20X4
Adjusted Trial Balance Income
Statement Balance Sheet
Debit Credit Debit
Credit Debit
Credit 28,634.00 1,200.00 56,136.00
11.84 900.00 225.00 1,325.00
12,000.00 2,100.00 3,500.00
600.00 2,000.00 4,129.00
13.15 1,500.00
2,000.00 54,620.00 24,000.00
383,786.00 11.84
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A-TO-Z LEGAL SERVICES PARTIAL WORKSHEET For the
Year Ended December 31, 20X4
Adjusted Trial Balance Income
Statement Balance Sheet
Debit Credit Debit
Credit Debit
Credit 107,490.00 78,000.00 7,550.00
4,975.00 2,700.00 113,500.00
2,700.00 3,925.00 1,975.00
13.15 450,759.00 450,759.99
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OBJECTIVE 5 Prepare an income statement,
statement of owners equity and balance sheet
from the complete worksheet.
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A-TO-Z LEGAL SERVICES Income
Statement For the Year Ended December 31,
20X4 Revenue Legal Fees Earned
383,7860.00 Expenses Salaries Expense
107,490.00 Wages Expense
78,000.00 Advertising Expense 7,550.00
Supplies Expense
4,975.00 Amortization Expense
2,700.00 Rent Expense
113,500.00 Insurance Expense
2,700.00 Utilities Expense 3,925.00
Telephone Expense 1,975.00 Interest
Expense 13.15 Total Expenses
322,828.15 Net Income 60,969.69
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QUESTION FREQUENTLY ASKED BY MANAGEMENT
How much profit did the firm make? (Look at the
Net Income on the last line of the Income
Statement.)
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A-to-Z Legal Services Statement of Owners
Equity For the Year Ended December 31,
20X4 Donald Wolfe, Capital, January 1, 20X4
54,620.00

Net Income 60,969.69 Withdrawa
ls 24,000.00 Increase in Capital
39,969.69
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ARROW ACCOUNTING SERVICES
Balance Sheet December 31, 20X5
Assets Cash
16,200.00 Accounts Receivable
2,000.00 Supplies
500.00 Prepaid Rent 17,500.00
Equipment 15,000.00 Accumulated
Depreciation 250.00
14,750.00 Total Assets
50,950.00 Liabilities and Owners
Equity Liabilities Accounts Payable
4,000.00 Owners Equity John Arrow,
Capital 46,950.00 Total Liabilities
and Owners Equity 50,950.00
QUESTION FREQUENTLY ASKED BY MANAGEMENT
How much cash does the business have? (Look at
the Cash account in the Assets Section of the
Balance Sheet.)
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