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Acct 2021 CH 2 Completion of The Worksheet
Acct 2021 CH 2 Completion of The Worksheet
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Adjustment is necessary under the following three major conditions/circumstances.
1. Deferrals
2. Accruals, and
3. Estimated items
1. Deferrals
They are expenses paid but their incurrence is postponed or revenues received
whose earning is postponed (deferred) to another period.
They can be classified in to two major types:
i. Deferred Expenses/ Prepaid Expenses, and
ii. Deferred Revenues/ Unearned Revenues
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Under this approach, advance receipts are credited to liability accounts up on the
receipt. Here, adjustment is required to record the earned portion as revenue by
reducing the liability account.
B) Revenue approach( Income Statement Approach)
Here, advance receipts are credited to revenue account up on the receipt and
adjustment is required to record the unearned portion as a liability by reducing the
revenue account.
2. Accruals
Literally, to accrue means to accumulate. Therefore, accruals indicate accumulated
revenues or expenses for which cash has not been received or paid. In other words,
accruals refer to revenues earned but not yet received or expenses incurred but not
paid.
Accruals can be classified in to two major types:
i. Accrued Expenses
ii. Accrued Revenues
i. Accrued Expenses
They are expenses that relate to (are used in) the current accounting period but has
not yet been paid and do not yet appear in the accounting records. Thus, to measure
expenses accurately for the period an adjustment is necessary to record the accrued
expense and the corresponding liability account. Examples: Accrued salaries, Accrued
Interest on Notes Payable, Accrued Payroll Taxes etc.
ii. Accrued Revenues
They are revenues that have been earned but not yet received and recorded.
Examples: Accrued Interest on Notes Receivable, Accrued Rents on property rented to
others etc.
3. Estimated items
i. Plant Assets _ Depreciation
All plant assets with the exception of land loss their capacity to provide useful
services. This decrease in usefulness is a business expense, which is called
depreciation. To report the depreciation of the period, the depreciation expense
account will be debited and the accumulated depreciation account would be credited.
Illustration _ 4:
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Based on the information’s those are previously given as well as the additional
information’s presented below for Hiwot Beauty Salon & Training Center; prepare the
adjusting entries that should be made on January 31, 2012.
Additional information’s:
The physical count made by the business at the end of the month shows that
supply on hand is Birr 4,000.
According to the computation that was made by the business, the depreciation
expense of the following plant assets is determined to be:
- Office equipment -------------------- Birr 315
- Furniture ------------------------------ 625
- Machinery ---------------------------- 500
Total -----------------------------Birr 1,440
Solutions:
1. Deferred expenses (prepaid expenses)
a) Supplies
Supplies available (balance of account) --------------- Birr 12,000
Less: Supplies on hand (balance on Jan 31, 2012) ----------- (4,000)
Supplies used up (consumed/expired) --------------- Birr 8,000
2012 Supplies expense------- Birr 8000
Jan. 31 Supplies-------------------------------- Birr 8000
b) The rent payment was for one year, but a one month rent has already been incurred
thus, 20,000 = 12 months
X = 1 month
X = 20,000
12
= Birr 1667
2012 Rent expense------- Birr 1667
Jan. 31 Prepaid rent-----------------------Birr 1667
c) The insurance premium payment was for six months, thus for one month
2400 = 6 months
X = 1 month
X = 2400
6
= Birr 400
2012 Insurance expense------- Br 400
Jan. 31 Prepaid insurance-----------------------Br 400
Activity: if the above adjustments of deferred expenses/prepaid expenses are not
recorded what effects will be seen on:
- The income statement.
- The statement of owners’ equity, and
- The balance sheet of Hiwot Beauty Salon & Training Center.
2. Deferred revenues
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d) Birr 150,000 tuition fee received from trainees was treated as a liability of the
business. However, part of it becomes revenue as of January 31, 2012. Thus,
150,000 = 4 months
X = 1 month
X = 15,000 = Birr 37,500
4
2012 Unearned revenue------- Birr 37,500
Jan. 31 Fees earned-----------------------Birr 37,500
3. Accrued expenses
e) The salary paid at January 26, 2012 is a 26 day salary from January 1 up to January
26; the salary from January 26 up to January 31 is not paid and also recorded.
Therefore, the adjustment is needed for these 5 days
6500 = 26 days
X = 5 days
X= 32,500 = Birr 1250
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2012 Salary expense ------- Br 1250
Jan. 31 Salary payable-----------------------Br 1250
f) At the start of the business Hiwot invested a birr 100,000 bank note @ 12 % interest
rate that will be due in 5 years with an equal yearly installment. Since, an interest
expense is accrued for a month adjustment is needed:
I = prt
I = 100,000 * 0.12 *(1/12) = Birr 1000
2012 Interest expense ------- Br 1000
Jan. 31 Interest payable-----------------------Br 1000
4. Accrued Revenues
They are revenues that have been earned but not yet received and recorded. However,
we have no such an item for Hiwot Beauty Salon & Training Center.
5. Estimated items:
g) Plant assets _ Depreciation
As it was clearly indicated in the additional information the plant assets of the
business presented below are depreciated with the following amounts.
- Office equipment -------------------- Birr 315
- Furniture ------------------------------ 625
- Machinery ---------------------------- 500
Total -----------------------------Birr 1,440
2012 Depreciation expense ------------------ Birr 1440
Jan. 31 Acc. Deprn -Equp’t---------------------------- Birr 315
Acc. Deprn -Furniture------------------------- 625
Acc. Depr – Machinery----------------------
n
500
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Worksheet is a Multi – Columnar sheet of paper used to gather and summarize data
needed for preparation of financial statements. It is a type of working paper frequently
used by accountants prior to preparation of financial statements. The worksheet is
identified by (1) the name of the business, (2) the nature of the form (worksheet), (3) the
period of time involved.
Illustration _ 5: prepare a worksheet for Hiwot Beauty Salon & Training center.
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Solution for the worksheet
Hiwot Beauty Salon & Training center
Worksheet
For the month ended January 31, 2012
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 142,300 142,300 142,300
A/Receivable 7,000 7,000 7,000
Supplies 12,000 (a) 8000 4000 4000
Prepaid Rent 20,000 (b) 1667 18333 18333
Prepaid Insurance 2,400 (c) 400 2000 2000
Office Equipment 25,000 25,000 25,000
Furniture 50,000 50,000 50,000
Machinery 35,000 35,000 35,000
Land 60,000 60,000 60,000
Account Payable 10,000 10,000 10,000
Notes Payable 100,000 100,000 100,000
Unearned Revenue 150,000 (d) 37500 112500 112500
Hiwot ,Capital 90,000 90,000 90,000
Hiwot, Drawing 5000 5000 5000
Fees Earned 17,000 (d) 37500 54500 54500
Salary Expenses 6,500 (e) 1250 7750 7750
Utility Expense 1,000 1,000 1,000
Miscellaneous Expense 800 800 800
Totals 367,000 367,000
Supplies expense (a) 8000 8000 8000
Rent expense (b) 1667 1667 1667
Insurance expense (c) 400 400 400
Salary payable (e)1250 1250 1250
Interest expense (f) 1000 1000 1000
Interest payable (f)1000 1000 1000
Depreciation expense (g)1440 1440 1440
Accumulated deprn- Equipment (g)315 315 315
Accumulated depr - Furniture
n
(g)625 625 625
Accumulated deprn- Machinery (g)500 500 500
Totals 51257 51257 370,690 370,690 22057 54500 348633 316190
Net Income 32443 32443
Balance 54500 54500 348633 348633
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2.11. Preparations of Financial Statements
Illustration _ 6: prepare the following financial statements for Hiwot Beauty Salon &
Training center.
a) Income statement
b) Statement of owner’s equity
c) Balance sheet
Solutions:
a) Income statement
c) Balance sheet
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Hiwot Beauty Salon & Training Centre
Balance Sheet
January 21, 2012
Assets:
Current Assets:
Cash…………………………………………Birr 142,300
Accounts Receivable…………………………….. 7,000
Supplies…………………………………………… 4,000
Prepaid rent…………………………………… ...18,333
Prepaid insurance…………………………………2,000
Total current assets……………………………………………Birr 173,633
Liabilities:
Current liabilities:
Accounts payable……………………………..Birr 10,000
Unearned revenue……………………………. 112,500
Salary payable………………………………… 1,250
Interest payable………………………………. 1,000
Total current liabilities………………………………………….. Birr 124,750
Non-current liabilities:
Notes payable…………………………………………………………………..100,000
Total liabilities……………………………………………………..Birr 224,750
Owner’s equity
Hiwot, Capital ………………………………………………………………… 117443
Total liability and owners equity………………………………Birr 342,193
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At the end of the accounting period, the adjusting entries appearing in the
worksheet are recorded in the journal and posted to the ledger. This procedure brings
the ledger in to agreement with the data reported on the financial statements. Each
entry may be supported by an explanation; however, a suitable caption above the first
adjusting entry is sufficient.
Illustration _7: Journalize and post the adjusting entries of Hiwot Beauty Salon &
Training center.
Solutions:
1. Journalizing Adjusting Entries
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Account: Supplies Account number 113
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 7 1 5,000 00 5,000 00
20 1 7,000 00 12,000 00
31 adjusting 3 8,000 00 4,000 00
31
2012
Jan. 31 adjusting 3 400 00 400 00
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Jan. 31 adjusting 3 1,000 00 1,000 00
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closed, to owner’s capital/retained earnings account. The periodic closing (clearing
out) of the balance of temporary/nominal accounts is done by using closing entries.
Closing entries have two major purposes:
1. To transfer net income or loss to owner’s capital/retained earnings account.
2. To establish a zero balance in each of temporary accounts to start the next
accounting period.
An account titled income summary is used for summarizing the data in the
revenue and expense accounts. It is used only at the end of accounting period and is
both opened and closed during the closing process. The other name of income
summary account is revenue and expenses summary account, or Profit and loss
summary account.
Illustration _8: Journalize and post the closing entries of Hiwot Beauty Salon & Training
center.
Solutions:
1. Journalizing Closing Entries
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Date Description PR Debit Credit
Closing entries
2012 Fees Earned 411 54,500 00
Jan. 31 Income Summary 313 54,500 00
Income Summary 313 22,057 00
Supplies Expense 511 8,000 00
Salary Expense 512 7,750 00
Rent Expense 513 1,667 00
31 Depreciation Expense 516 1,440 00
Interest Expense 515 1,000 00
Utility Expense 517 1,000 00
Insurance Expense 514 400 00
Miscellaneous Expense 518 800 00
Income Summary 313 32,443 00
31 Hiwot, Capital 311 32,443 00
Hiwot, Capital 311 5,000 00
31 Hiwot, Drawing 312 5,000 00
2. Posting Closing Entries
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Account: Supplies Expense Account number 511
Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 31 adjusting 3 8,000 8,000 00
31 closing 4 8,000 00 - -
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Balance
Date Item P.R Debit Credit Debit Credit
2012
Jan. 31 adjusting 3 400 00 400 00
31 closing 4 400 00 - -
Illustration _8: Prepare a post closing trial balance for Hiwot Beauty Salon & Training
center.
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Solution:
Hiwot Beauty Salon and Training Center
Post Closing Trial balance
January 31, 2012
Cash 142,300 00
A/Receivable 7,000 00
Supplies 4,000 00
Prepaid Rent 18,333 00
Prepaid Insurance 2,000 00
Office Equipment 25,000 00
Accumulated depr -Equipment
n.
315 00
Furniture 50,000 00
Accumulated deprn.- Furniture 625 00
Machinery 35,000 00
Accumulated depr - Machinery
n.
500 00
Land 60,000 00
Account Payable 10,000 00
Unearned Revenue 112,500 00
Salary Payable 1,250 00
Interest Payable 1,000 00
Notes Payable 100,000 00
Hiwot ,Capital 117,443 00
Total 343,633 00 343,633 00
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Adjustment Supplies………..xx
Supplies expense…..xx
Exercises:
Q_1: Assume that Z – Company acquired a supply at the cost of br.5, 000 on January
1, 2004. But at the end of 2004, the cost of supplies used was determined to be
Br.4450.Record all the necessary journal entries, adjusting entries, and reversing
entries; using both balance sheet and income statement approaches.
Q_2: XYZ Company received Br. 300,000 on cash for its building as a rent from its
customers in advance during year 1. However, Br. 50,000 represents payment for
which a house rent service to be delivered in the subsequent period. Record all the
necessary journal entries, adjusting entries, and reversing entries; using both balance
sheet and income statement approaches.
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Q_3: Suppose the following facts for an enterprise that pays salaries weekly and ends
its fiscal year on Dec 31 of each year. Salaries are paid on Friday for the 5 (five) day
week ending on Friday. The balance in salary expense as of Friday Dec 27 is Br. 62,500.
Salaries accrued for Monday and Tuesday Dec 30 and Dec 31, total Br.500. Salaries paid
on Friday, Jan 3 of the following year total Br.1, 250.
Instructions
a. Journalize adjusting entry on Dec 31.
b. What will be the balance of salary expense and salary payable after the adjusting
entries has been posted?
c. Record reversing entry for accrued salaries.
d. Record payment of salary on Friday (Jan 3 of the following year) , assume no
reversing entry was made(no transaction “c”)
e. Record payment of salary on Friday (Jan 3 of the following year), assuming
reversing entry was made (transaction “c” was recorded and posted).
Q_4: Assume that an enterprise has a note receivable on which Br. 6,000 of interest is
due every six months. If Br. 4,000 of interest income has been earned (accrued) on
Dec31, the end the year.
Required:
a. Record adjusting entries
b. Record receipt of cash without reversing entry.
c. Record reversing entry.
d. Record receipt of cash with reversing entry.
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