Ch 16 Lecture Guide

1
ACCOUNTING-I

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Chapter 16
Lecture Guide
Accounting for a Partnership Work Sheet for a
Merchandising Business
2
WORK SHEET -- Review

• A work sheet is a tool used to
• prove the accuracy of postings to general ledger
  accounts,
• plan adjustments to account for assets used,
• separate accounts into proper groupings for
  preparation of a Balance Sheet and an Income
  Statement, and
• calculate net income or loss.
• Work Sheets are prepared in pencil.
• A work sheet is completed at the end of each
  fiscal period or as desired to determine the
  financial position and income of a business.

3
WORK SHEET -- General Information

• FOR FURTHER REVIEW
• Chapter 8 introduces instructions for completing
  a work sheet.
• Page 176B provides an illustration of the steps
  in work sheet preparation in an overlay format.
• Page 176-C shows a listing of steps in preparing
  a work sheet.

A WORK SHEET FOR A MERCHANDISING BUSINESS is
different from the work sheet described in
Chapter 8 only in that Merchandise Inventory
Purchases accounts have been added. A WORK SHEET
FOR A PARTNERSHIP is different from the Chapter 8
work sheet because a partnership has accounts for
more than one owner.
16-1 (pp 388-93)
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WORK SHEET HEADING
Use the standard pattern for all accounting
forms Line 1 the name of the business Line 2
the title of the report Line 3 date of the
report
Note The date used for a work sheet is the TIME
SPAN of the fiscal period (usually one year) and
is written For the Year Ended Month, Date,
Year If the fiscal period being reported is a
month, the date is written For the Month
Ended Always spell the name of the month do
not use symbols.
5
TRIAL BALANCE

• List each general ledger account name (in
  account-number order) in the Account Title column
  and the balance of the account (even if the
  balance is 0) in the appropriate Trial Balance
  Dr or Cr column of the worksheet.

16-1 (pp 388-93)
Note DO NOT enter any amount in any other column
of the worksheet until the Trial Balance columns
are balanced and ruled.
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TRIAL BALANCE (cont)

• Draw a single line across both amount columns
  below the last account balance listed.
• Double tape both columns.
• Debits MUST CreditsThats the point of the
  Trial BALANCE!!!
• Enter balanced totals and double rule below them.
• DO NOT write Totals in the Account Titles
  column.

16-2 (p 394)
7
ADJUSTMENTS

• Determine the amount of each adjustment which
  must be made in order to bring accounts to
  correct balances at the end of the fiscal period.
• That means Subtract the end-of-period
  amount-on-hand from the account balance shown in
  the Trial Balance column. The difference is the
  amount of the adjustment.
• To reduce a debit balance, enter the adjustment
  as a credit to reduce a credit balance, enter
  the adjustment as a debit.
• Every adjustment affects two accounts (1 Dr 1
  Cr).

Remember Label the first pair of adjustment
amounts (a), the second pair (b), etc.
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ADJUST MERCHANDISE INVENTORY

• The balance of the Merchandise Inventory account
  (Asset) must be adjusted because no account
  entries are made during the year increases are
  recorded in Purchases, and decreases are recorded
  in Sales.
• Businesses take a physical inventory (actual
  count) of merchandise on hand at the end of each
  fiscal period.
• The Merchandise Inventory account balance must be
  adjusted to the physical inventory amount, the
  amount which will appear on the Balance Sheet.
• THE ADJUSTMENT IS THE DIFFERENCE between the
  Merchandise Inventory account balance shown in
  the Trial Balance Dr column and the physical
  inventory amount.

16-1 (pp 388-93)
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ADJUST MERCHANDISE INVENTORY (MI)

• Calculation MI Trial Balance Dr
• - Inventory on hand
• Adjustment amount
• Adjustment to decrease MI
• Dr Income Summary
• Cr Merchandise Inventory
• Since this is the first adjustment, label both
  the Dr and the Cr amounts (a).

16-3 (p 396)
It is possible, but not likely, the Merchandise
Inventory account balance will be less than the
physical inventory. If so, the adjustment will
be Dr Merchandise Inventory Cr
Income Summary
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ADJUST OFFICE SUPPLIES

• The balance of the SuppliesOffice account
  (Asset) must be adjusted to the dollar value of
  the office supplies on hand at the end of the
  fiscal period.
• Since all purchases of office supplies are
  debited and increase the balance of the office
  supplies account, the adjustment is a credit to
  reduce the account balance to the amount actually
  on hand.
• The value of office supplies on hand will appear
  on the Balance Sheet.
• THE ADJUSTMENT IS THE DIFFERENCE between the
  SuppliesOffice account balance shown in the
  Trial Balance Dr column and the value of supplies
  on hand.

16-1 (pp 388-93)
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ADJUST OFFICE SUPPLIES

• Calculation SuppliesOffice Trial Balance Dr
• - Office Supplies on hand
• Adjustment amount
• Adjustment Dr Supplies ExpenseOffice
• Cr SuppliesOffice
• This is the second adjustment label both the Dr
  and the Cr amounts (b).

16-4 (p 398)
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ADJUST STORE SUPPLIES
The adjustment for SuppliesStore follows the
same analysis and application pattern as the
SuppliesOffice adjustment.
Review
Continue
13
ADJUST STORE SUPPLIES

• Calculation SuppliesStore Trial Balance Dr
• - Store Supplies on hand
• Adjustment amount
• Adjustment Dr Supplies ExpenseStore
• Cr SuppliesStore
• This is the third adjustment label both the Dr
  and the Cr amounts c.

16-4 (p 398)
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ADJUST PREPAID INSURANCE

• The balance of the Prepaid Insurance account
  (Asset) must be adjusted to the dollar value of
  prepaid insurance at the end of the fiscal
  period.
• Since all payments for insurance are debited and
  increase the balance of the prepaid insurance
  account, the adjustment is a credit to reduce the
  account balance to the actual value of prepaid
  insurance at the end of the fiscal period.
• The value of prepaid insurance on hand will
  appear on the Balance Sheet.
• THE ADJUSTMENT IS THE DIFFERENCE between the
  Prepaid Insurance account balance shown in the
  Trial Balance Dr column and the value of prepaid
  insurance at the end of the fiscal period.

15
ADJUST PREPAID INSURANCE

• Calculation Prepaid Insurance Trial Balance Dr
• - Value of Prepaid Insurance
• Adjustment amount
• Adjustment Dr Insurance Expense
• Cr Prepaid Insurance
• This is the fourth adjustment label both the Dr
  and the Cr amounts (d).

16-5 (p 399)
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BALANCE THE ADJUSTMENTS COLUMNS

• Double tape the Adjustments Dr column and Cr
  column.
• If the totals are not in balance, locate and
  correct all errors.
• When the Adjustment columns are in balance,
  extend the single line below the Trial Balance
  columns across both Adjustment columns.
• Enter the balanced Dr Cr column totals.
• Extend the double lines below the Trial Balance
  columns across both Adjustment columns.

16-6 (p 400)
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Audit Your Understanding (p 398)
1. What is the purpose of a work sheet? 2. Why is
a trial balance prepared? 3. What account must a
merchandising business adjust that a service
business does not? 4. Which accounts are used to
adjust merchandise inventory?
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EXTEND ACCOUNT BALANCES

• Extend Asset, Liability, and Owners Equity
  account balances to the Balance Sheet columns.
• Extend Operating Revenue (Sales), Cost of
  Merchandise (Purchases), and Operating Expenses
  account balances to the Income Statement columns.

16-6 (p 400)
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INCOME OR LOSS?

• Double tape both Income Statement (IS) columns.
• Double tape both Balance Sheet (BS) columns.
• The difference between the Income Statement Dr
  Cr columns MUST be the same as the difference
  between the Balance Sheet Dr Cr columns. If
  the difference is not the same, locate and
  correct all errors.
• NET INCOME
• IS Cr column total gt IS Dr column total
• NET LOSS
• IS Dr column total gt IS Cr column total

Since the balance of the Sales account (Income)
is a credit, the IS credit column should be
greater than the IS debit column (expenses) in
order to achieve Net Income!
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COMPLETE THE WORK SHEET

• Extend the single line below the Trial Balance
  and Adjustment columns across the Income
  Statement (IS) Balance Sheet (BS) columns.
• Enter IS BS column totals on the next line.
• Enter the amount of the Net Income/Loss below (1)
  the smaller of the IS column totals and (2) the
  smaller of the BS column totals such that, when
  the Net Income or Loss amount is added to each
  total, the IS columns are in balance and the BS
  columns are in balance
• Net Income IS Dr BS Cr columns
• Net Loss IS Cr BS Dr columns

16-6 (p 400)
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COMPLETE THE WORK SHEET (cont)

• In the Account Title column, enter Net Income
  or Net Loss on the line where the differences
  are entered.
• Draw a single line across the IS BS columns
  below the differences.
• Add the differences to the previous column
  totals, and enter the balanced totals of the
  Income State-ment Balance Sheet columns below
  the single line.
• Draw a double line across the Income Statement
  Balance Sheet columns below the balanced totals.

16-6 (p 400)
THATS IT!!! The work
sheet is complete!!! Income Statement and Balance
Sheet account balances will be used to prepare
reports in Chapter 17.
22
10-COLUMN WORK SHEET
16-8 (pp 404-5)

• A 10-column work sheet is different from an
  8-column work sheet only in that two additional
  columns (Adjusted Trial Balance Dr Cr) are used
  to combine Trial Balance amounts and Adjustment
  amounts prior to extending balances to the Income
  Statement and Balance Sheet columns.
• A 10-column work sheet is used by many businesses
  because it ensures the accuracy of adjustments
  and reveals errors prior to extending account
  balances.
• However, completing the extra columns is very
  time consuming and can result in additional
  errors in re-writing amounts.
• When few adjustments are needed, the 10-column
  work sheet is a less efficient option.

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Audit Your Understanding (p 399)
1. To what column is the Income Summary amount
extended? 2. When does a net loss appear on a
work sheet? 3. In which Balance Sheet column does
a net loss appear? In which Balance Sheet
column does net income appear? 4. In which Income
Statement column does a net loss appear? In
which Income Statement column does net income
appear?
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WORK SHEET SUMMARY
See Illustration 16-7, p 402.
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CREDITS
Based on Century 21 Accounting Ross, Hanson,
et al Southwestern Publishing Company, 1995
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