Accounting

Study Unit
Assets and End-of-theMonth Activities
Youll discover the accounting activities that occur at the

end of the month, like preparing an end-of-the-month statement and adjusting ledger balances. Well take you step by
step through the end-of-the-month accounting procedures,
like completing a worksheet, which helps you prepare a
formal income statement and a balance sheet.
Companies also need financial reports at the end of their
fiscal year so they can judge the performance of their business. In this study unit, youll learn the necessary
procedures that bookkeepers and accountants carry out at
the end of the fiscal year. Such procedures include completing
a year-end summary worksheet, journalizing adjusting and
closing entries, and closing the subsidiary ledgers.
When you complete this study unit, youll be able to
Distinguish between tangible and intangible assets
Manage all assets in the accounting process through

valuation, amortization, depreciation, asset retirement,
and adjusting book value
Calculate end-of-the-month adjustments and enter them

in the ledgers
Complete end-of-the-month accounting procedures

such as balance the journals, post the amounts to
the ledgers, and balance the ledgers
Prepare end-of-the-month accounting reports such as

the worksheet, the income statement, the balance
sheet, and schedules
Prepare a year-end worksheet and determine the

necessary adjustments
Prepare a year-end income statement, balance sheet,

and a post-closing trial balance
P r ev i ew
In this study unit, were going to take a

more in-depth look at a companys assets,
such as tangible and intangible assets. Well
also discuss amortization and depreciation.
Youll learn how to calculate depreciation
using the straight-line method or the
declining-balance method.
iii
Assets
Depreciation
Straight-Line Method of Depreciation
Declining-Balance Method of Depreciation
Adjusting Entries for Depreciation
Capital Expenditures
Asset Retirement
Book Value
Depreciation Adjustments
End-of-the-Month Accounting Activities

Preparing for the End-of-the-Month Statement
End-of-the-Month Adjustments
Adjusting Accounts
Calculating Adjustments
Adjusting Ledger Balances
End-of-the-Month Accounting Procedures
Preparing the Journal and Worksheet
Year-End Accounting Procedures

Year-End Activities and End-of-the-Month Procedures
Calendar or Fiscal-Year Reports
Year-End Summary Worksheet
Schedules
Adjustments
Journalizing Adjusting and Closing Entries
Posting to the Ledger
Examination
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Contents
Types of Assets
Asset Valuation
Amortization
Assets and End-of-the-Month

Activities
ASSETS
Types of Assets
At the beginning of this program, you learned that assets
were anything of value owned by a business. Now youre
ready for a more complete definition of assets. Assets are any
items, physical or nonphysical, that have a monetary value
and to which a company has legal claim.
According to basic accounting principles, assets owned by a
company can be either physical or nonphysical entities. That
is, they can have nonphysical characteristics that can be
neither seen nor touched (intangible assets), or they can
have physical characteristics that can be seen and touched
(tangible assets).
AssetAny item,
physical or nonphysical, that has a
monetary value and
to which a company
has legal claim.
Intangible Assets
Intangible assets are generally represented by some type of
contract or agreement, and, just like tangible assets, they
have substantial monetary value.
Intangible assets are legal rights, contracts, or agreements
that have no physical form and are expected to be usable
or valuable over an extended period of time (Figure 1).
Intangible assets
Legal rights,
contracts, or agreements that have no
physical form and
are expected to be
usable or valuable
over an extended
period of time.
FIGURE 1A trademark is an intangible asset.
We havent discussed intangible assets so far in the bookkeeping program mainly because theyre generally related
to specialized types of businesses. Assets that fit into the
intangible category include
Patents
Leases
Trademarks
Copyrights
Franchises
Goodwill (a very valuable asset that can legally
be defended)
Assets and End-of-the-Month Activities
Each of the assets just listed fits the definition of intangible

asseta legal claim to something nonphysical that has
substantial monetary value that extends over a long period
of time.
The accounting procedures for long-term assets also apply
to intangible assets. The only major difference is that we
classify intangible assets on the balance sheet as just
thatintangible assets.
Tangible Assets
Since intangible means having no form or substance, tangible
means just the opposite. Therefore, a tangible asset is one
that we can touch and see, and that has value (Figure 2). As
youll soon see, a few items that you cant really touch and
see, like accounts receivable, prepaid insurance, and prepaid
expenses, are traditionally classified by accountants as tangible assets. This is probably because these items are easily
converted into, or result from obvious payments of, something you can touch and see: money. We subdivide tangible
assets into two categories: current tangible assets and longterm tangible assets.
FIGURE 2Tangible Assets
Current tangible
assetsAssets that
have either physical
form or monetary
value and that a
business expects to
convert to cash or
use up in approximately one year.
Current tangible assets. As you already learned, current

refers to any item that a business expects to receive, sell, or
use up within a year. Therefore, current tangible assets are
assets that have either physical form or monetary value and
that a business expects to convert to cash or use up in
approximately one year.
Current tangible assets that we already discussed in previous
study units include
Merchandise inventory
Cash or bank accounts
Petty cash
Accounts receivable
Accrued interest receivable
Supplies
Prepaid insurance
Prepaid expenses
Short-term notes receivable
Long-term tangible
assetsBusiness
assets purchased for
the companys use
with the expectation
that the assets will
retain their value and
usefulness for many
years.
Long-term tangible assets. We use the term long-term

to identify assets that are relatively fixed or permanent in
nature. Companies use long-term tangible assets in the
course of operating the business, and they dont purchase
them for resale. Both real property and personal property fit
into this category, since we define long-term tangible assets
as business assets purchased for the companys use with
the expectation that the assets will retain their value and
usefulness for many years.
The term real property includes land, buildings, trees,
driveways, fences, sidewalks, and any other objects permanently fixed to the land. You should include the cost of all
improvements when calculating the value of real property.
Any type of property (land and buildings) used for the operation of the business is a fixed or permanent asset. Actually,
land is the only real permanent tangible asset, since it never
wears out. However, any asset that has an extended lifetime
is considered fixed or permanent for accounting purposes.
We classify other long-term tangible assets as personal

property, including items purchased specifically for business
use such as furniture, equipment, delivery vehicles, and
machinery.
Asset Valuation
A business should include all expenses associated with the
purchase of a long-term asset in the assets initial cost figure.
For instance, suppose a business decides to expand and
purchases an adjoining piece of property to use as an additional warehouse. The business would include the entire cost
involved in buying the property in the propertys initial cost.
Land Value
Buying land is a complicated transaction. Many costs get
included in its value, including legal fees, title search fees,
brokers fees, and surveyors fees. Also, we should include the
cost of removing any unusable buildings. Its possible that
the initial value of the property could increase by thousands
of dollars due to the miscellaneous fees and costs required
in purchasing the property.
Once the company completes the legalities and transfers the
title of the property to the new owner, the bookkeeper enters
the transaction into the general journal. Its also good practice
to provide separate asset accounts for the land and for the
value of the buildings. This enables the accountant to compute
depreciation, which well discuss later in this unit.
Therefore, if the land cost $50,000 and there were $2,000
in miscellaneous expenses, you would debit the Land asset
account for $52,000. If there was a $10,000 down payment,
you would credit the Cash and Notes Payable accounts for
the payment as follows.
October 10
Land (asset account)
Cash (down payment)
Notes Payable (land balance due)
To record purchase of land
$52,000
$10,000
$42,000
Building Value
Whether a business owner buys an existing building or has
one constructed, every expense related to the structure is
part of its value. Such expenses include sewers, pipelines,
streets and curbs, parking lots, air-conditioning systems,
heating systems, new partitions, title insurance, transfer tax,
transportation for materials and supplies, and professional
fees.
You would enter a total cost of $45,000 for a building (again
assuming a $10,000 down payment) into the journal as follows.
October 10
Building (asset account)
$45,000
Cash (paid on purchase)
Notes Payable (building balance due)
To record cost of new warehouse
$10,000
$35,000
Amortization
Even though long-term assets are fixed and permanent, they
gradually lose their ability to function year after year and
thus lose their productivity. The only exception to this is
land.
Intangible assets such as patents, trademarks, or franchises
also gradually lose their effectiveness over a period of time,
often because of legal limits on their duration, or a change
in manufacturing techniques or marketability of the product.
Whatever the reason, we need to account for the gradual loss
of an assets effectiveness. We do so by amortizing the cost of
the asset. We distribute the cost of the asset over the length
of time estimated as the productive life of the asset. That is,
we expense a specific amount of the cost of the asset each
year throughout the productive life of the asset.
Amortization and depreciation have similar meanings. We
also use depreciation to spread the cost of an asset over the
assets productive years. The main difference between these
two terms is that amortization refers to intangible assets,
whereas depreciation refers to tangible assets.
Amortizing an Intangible Asset

As mentioned, the amount to be amortized each year depends
on the estimated number of years of the assets productive
life. For example, if a company pays $70,000 for a patent
that will expire after 12 years, and the company estimates
that the patents process will serve the company for only
seven years, its acceptable to use seven years as the basis
in computing amortization on the patent.
When computing the amount of the patent to expense, we
divide the cost ($70,000) by the number of years (7). This
results in a yearly cost of $10,000. Most companies wait
until the end of their fiscal year to record amortization, but
some prefer to do so monthly. Such a company would divide
$10,000 by 12, resulting in a monthly amortization figure of
$833.33. Therefore, it costs the company $833.33 each month
to use the patent. In this case, you would use the $833.33
figure each month when preparing the financial statements.
Here are the accounting entries you would make to record (1)
yearly (more common) or (2) monthly amortization.
(1) December 31
Amortization Expense
$10,000
Accumulated AmortizationPatents
To record annual patent amortization
$10,000
(2) September 30
Amortization Expense
$833.33
Accumulated AmortizationPatents
$833.33
To record monthly patent amortization
The Accumulated Amortization Account

Accumulated AmortizationPatents is a contra account related
to the Patents asset account. (A similarly titled accumulated
amortization account is kept for each type of intangible
asset, e.g., trademarks and copyrights.) Therefore, its in the
asset division of the chart of accounts directly below the
Patents account and given a contra account number (0-), following the procedure you learned in previous study units.
Direct Amortization Method

More and more, companies with intangible assets are writing
off amortization expense directly to the intangible asset
account itself rather than using an accumulated amortization contra account. As a bookkeeper, you would use the
method preferred by the company you work for. Heres how
the annual ammortization write-off for our patent would look
using the direct method. (You use the same accounts, but an
$833.33 amount, for monthly recording of amortization.)
December 31
Amortization ExpensePatents $10,000
Patents
To record annual patent amortization
$10,000
Accounting Practice 38
Before going on, please go to your Accounting Practice Workbook 7 and complete
Accounting Practice 38. Place all answers in your workbook. As you work on the
Accounting Practice, you may use this study unit for reference.
DEPRECIATION
After you calculate the cost of a new tangible asset, you
prepare a depreciation schedule. Such a schedule determines
the portion of the assets cost that the business should write
off each month. Obviously, since land doesnt depreciate, you
should calculate the depreciation on buildings only. Therefore,
you set up two asset accounts for real property: one for the
land value and one for the value of the buildings.
The two methods commonly used to calculate depreciation
are the straight-line method and the declining-balance method.
Other acceptable methods of depreciation are units of production and sum of the years digits, in addition to many
other special tax methods. However, companies rarely use
these methods for book purposes, so we wont discuss
them here.
Straight-Line Method of Depreciation

The set of formulas for computing depreciation using the
straight-line method is as follows.
(Cost Salvage Value) Number of Years =
Yearly Depreciation Expense
Yearly Depreciation Expense 12 =
Monthly Depreciation Expense
Therefore, suppose a building costs $50,000, its estimated
life is 20 years, and the salvage value (the amount for which
a company estimates it can sell a fixed asset at the end of its
useful life) is $10,000. You would calculate the depreciation
as shown in Figure 3. Also shown is the depreciation schedule
for this asset, including the next five years depreciation
expense, using the straight-line method.
STRAIGHT-LINE DEPRECIATION
(Cost
($50,000
Slv. Value)
Number of Years
Yearly
Depr.
Expense
Then,
12
Monthly
Depr. Exp.
20
$2,000
12
$166.67
$10,000)
DEPRECIATION SCHEDULE
Year
0
Yearly
Depreciation
E nd of
Year
Acc. Dep.
(less Salvage Value)
End of Year
Undepreciated
C o st
Yearly
Depreciation
12 =
Monthly
Depreciation
$40,000.00
$2,000.00
$ 2,000.00
$38,000.00
$2,000.00
12 =
$166.67
2
3
4
$2,000.00
$2,000.00
$2,000.00
$ 4,000.00
$ 6,000.00
$ 8,000.00
$36,000.00
$34,000.00
$32,000.00
$2,000.00
$2,000.00
$2,000.00
12 =
12 =
12 =
$166.67
$166.67
$166.67
$2,000.00
$10,000.00
$30,000.00
$2,000.00
12 =
$166.67
FIGURE 3Depreciation Schedule Using the Straight-Line Method
Declining-Balance Method of
Depreciation
Under the declining-balance method, depreciation is not a
constant figure over the life of the asset as it is in the
straight-line method. The declining-balance method gives
larger amounts of depreciation in the early years and smaller
amounts in the later years of the assets life. Look at the
example of the declining-balance method in Figure 4. If a piece
of equipment costs $50,000 and its expected life is five

years, the straight-line depreciation expense is $10,000
($50,000 5), or 20 percent of the cost price each year.
Using the declining-balance rate, if the straight-line rate is
20 percent, the declining-balance rate is twice that percentage, or 40 percent.
For an asset with a life of four years, the declining-balance
rate would be 50 percent [(100% 4) 2]. Remember, when
you use the declining-balance method, you multiply the
current book value (original cost accumulated depreciation)
by the depreciation rate. You dont use the original cost less
salvage value as in the straight-line method. As you can see
in Figure 4, the depreciation for year two is $12,000 [(50,000
20,000) .40 = 12,000].
100%
NO. OF YEARS
100%
YEARLY D EPR. Then,

2 =
RATE
D EC LINING-BALANC E
YEARLY RATE
OR
20%
2 =
40% (of the remai ni ng

balance each year)
OR 40% of $50,00.00 = $20,000.00 (Fi rst Year's D epr. Exp.) 12 = $1,666.67 (monthly rate for fi rst year)
D EPR EC IATION SC H ED U LE
Year
Yearly
D epreciation
E nd of
Year
Accumulated
Depreciation
End of Year
B ook
Value
Yearly
D epreciation
12 =
Monthly
D epreciation
$50,000.00
$20,000.00
$20,000.00
$30,000.00
$20,000.00
12 =
$1,666.67
$12,000.00
$32,000.00
$18,000.00
$12,000.00
12 =
$1,000.00
$ 7,200.00
$39,200.00
$10,800.00
$ 7,200.00
12 =
$ 600.00
$ 4,320.00
$43,520.00
$ 6,480.00
$ 4,320.00
12 =
$ 360.00
$ 2,592.00
$46,112.00
$ 3,888.00
$ 2,592.00
12 =
$ 216.00
FIGURE 4Depreciation Schedule Using the Declining-Balance Method
If you dont use the current book value, the deprecation will
be incorrect. Also, the book value is never allowed to drop
below the salvage value. Suppose the salvage value in
Figure 4 is $5,000. Then the depreciation for year five would
be only $1,480 (6,480 5,000).
Notice also in Figure 4 how the monthly depreciation starts
out at $1,666.67 in the first year and ends up at $216.00
in the last year. Because of the descending amounts of
10
depreciation each month, the declining-balance method is

called an accelerated depreciation method. Most professionals
feel the declining-balance method reflects how assets decline
in value in the real world more so than any other depreciation method.
Adjusting Entries for Depreciation

The date you begin to write off depreciation on an asset
depends on the date the company purchased the asset. If
the company purchased the asset on or before the fourteenth
of the month, the depreciation expense begins during that
month. However, if the company purchased the asset on or
after the fifteenth, the depreciation expense doesnt begin
until the following month.
A small company that owns only one or two fixed assets may
use only one accumulated depreciation account to record the
depreciation on those assets month by month. However,
larger companies may have several accumulated depreciation
accounts (one for each related asset account), such as Office
Equipment, Store Equipment, and Real Property.
When recording the depreciation on tangible assets, you
debit the Depreciation Expense account for the amount of
the depreciation. You credit the appropriate accumulated
depreciation account for the same amount, as illustrated in
the following journal entry.
September 30
Depreciation Expense
$1,666.67
Accumulated Depreciation
Store Equipment
To record depreciation on store equipment
$1,666.67
An accumulated depreciation account for store equipment

is a contra account for the asset account assigned to store
equipment. Remember, the account number for a contra
account is same as the asset account except that it has a
zero in front of the asset account number. For example, if
the asset account number is 13, the accumulated depreciation contra account number would be 013.
11
Its often necessary to upgrade or retool a major piece of
equipment or to refurbish a capital asset to increase its
usefulness or productivity. We call the expense of such
upgrading a capital expenditure. The cost of capital expenditures should be added to the original cost of the asset,
since such changes or additions increase its value. However,
its important to determine whether the change or addition
is actually a capital expenditure or, instead, a revenue
expenditure, which we would treat as an expense.
Revenue Expenditures vs. Capital Expenditures

Any cost or expense required in making a profit or income
during a certain specific accounting period is a revenue
expenditure. We can consider the general repair and maintenance of a piece of machinery required to keep the machine
producing properly a revenue expenditure. We charge expenses
such as these against the income for the same month to
present a clear picture of the net income. (See Accrual
Accounting in the study unit entitled Accounting Systems.)
The major distinction between revenue expenditures and
capital expenditures is the time span over which the change
or addition is expected to benefit the company. If the change
or addition will only last for the current accounting period
and is expected to be repeated next year, its a revenue expenditure, which we would charge to an expense account. If the
change or addition will last for many accounting periods, the
cost of the change or addition is a capital expenditure, which
we must include in the value of the appropriate asset.
Asset Valuation
Improvements that would increase the value of a building are
the installation of an air-conditioning system, the addition of
another room or a partition, or the construction of a fence.
All such additions or changes make the property more useful
and more productive. Therefore, the costs of the improvements
are capital expenditures.
12
Land can also become improved. Adding driveways, parking

lots, trees, and sprinkling systems increases the value of the
land. Therefore, we capitalize such costs and include them in
a Land Improvements account. We then depreciate the assets
in the Land Improvements account in the same manner as
any other tangible asset, other than land.
Depreciation Schedule
When we capitalize or add a capital expenditure to the
original cost of the asset, its important to prepare another
depreciation schedule for the asset. Also, we should calculate
a new depreciation rate that well use from that time forward.
Asset Retirement
A company retires (disposes of) assets periodically throughout its lifetime. Asset retirement occurs for a variety of
reasonsperhaps a piece of equipment wore out or became
obsolete because the company found a more efficient process.
When a piece of equipment is no longer useful to the company,
it must be retired. There are several ways to do this. The
company may sell a piece of equipment, trade it for a new
item, remove it for scrap, or simply throw it into the trash bin.
Once the company removes the asset, both the asset account
and its related accumulated depreciation account must be
zeroed out and a gain or loss recorded in the books as the
result of disposing of the asset.
Book Value
When a company disposes of an asset, it must adjust the
books to reflect the actual book value of the asset. Since
depreciation is calculated at fixed intervals (usually monthly)
while an asset may be disposed of at any time, a company
may have to compute a partial period of depreciation (e.g., a
half month) to determine the actual book value of the asset
on the date it was retired.
Suppose a company bought a piece of equipment for $10,000
on December 31, 20 that had a salvage value of $2,000
and was depreciated at a yearly rate of 20%. The equipment
is sold on September 14, two years later. Figure 5 shows how
we would compute its book value.
13
(Cost
($10,000
Salvage Value)
$2,000)
Rate
(20%)
= Yearly Depr. 12 =
Monthly
Depr.
Actual No.
of Months
(20 1/2)
Actual
Depr.
.20
= $1,600.00 12 =
$133.33
20.5
$2,733.27
The Book Value would be:

C o st o f A sse t
$10,000.00
Less Accumulated Depreciation on day of

sale (12/31/X0 to 9/14/X2 = 20 1/2 months)
Book Value as of 9/14/X2
2,733.27
$ 7,266.73
FIGURE 5Computation of Actual Accumulated Depreciation and Book Value
Depreciation Adjustments
As already mentioned, we compute depreciation expense
monthly to provide an estimate of the expenses accrued
during the period in question. We need this information in
preparing monthly financial statements. During the first
year, you set up an accumulated depreciation account
(sometimes also called an allowance for depreciation account)
for each asset, and the ledger sheet for these accounts
remains blank until the end of the year. Then you actually
transfer and write off the depreciation expense. From that
time on, the accumulated depreciation account will always
carry a balance as long as the company uses the asset.
Once the company retires an asset, you must adjust the
depreciation account to match the actual accumulated total
depreciation on the asset. At that time, you make an adjusting entry to change the accumulated depreciation account
balance. Figure 5 shows how to compute the actual total
depreciation on an asset that cost $10,000.
According to Figure 5, the actual total depreciation on this
asset should have been $2,733.27. However, as shown in
Figure 6, if only regular monthly depreciation entries are
made, only $2,666.60 gets written off to the Accumulated
Depreciation account. Therefore, you must add the difference
of $66.67 to the Accumulated Depreciation account to bring
14
its balance up to the actual total amount. To make the journal

entry for this adjustment, you would debit the Depreciation
Expense account for the additional amount and credit the
Accumulated Depreciation account for the same amount, as
follows.
September 14
Depreciation Expense
$66.67
Accumulated DepreciationEquipment
To adjust depreciation at time of sale
(Cost
($10,000
Salvage Value)
$2,000)
No. of
Years
5
$66.67
Yearly Depr.
12 =
Expense
Monthly
Depr.
Expense
No. of
Adjustments =
Made
Estimated
Depr.
Allowed
= $1,600.00 12 =
$133.33
$2,666.60
20
FIGURE 6Computation of Depreciation and Book Value
Calculating Gain or Loss

Regardless of how a company disposes an assetwhether
selling, trading, or scrappingyou must account for the
value received at its disposition when you remove the asset
from the books. Lets assume that the company sold the
piece of equipment covered in Figure 5 for $8,000. The
difference between the book value of the equipment
($7,266.73) and the money received for its sale ($8,000)
would be $733.27. In this case, the sale price is more than
the book value, so the company made a profit on the sale.
Had the sale price been less than the book value, the
company would have incurred a loss from the sale.
A journal entry to close this retired asset would include
A debit to the Cash account for the amount of
money received
A debit to the Accumulated Depreciation account
for the total amount of depreciation applied
A credit to a revenue account for the amount of
the gain
A credit to the asset account for the amount of the
cost of the equipment
15
The transaction is recorded as follows.

September 14
Cash
$8,000.00
Equipment
$2,733.27
Profit on Sale of Equipment
Store Equipment
To record sale of store equipment
$ 733.27
$10,000.00
If a company scraps an asset and theres no sale or cash

involved, the loss amount is equal to the assets book value
(assuming the company wrote off the total applicable depreciation, and closed the asset account and the accumulated
depreciation account). For an asset that cost $5,000 and had
an Accumulated Depreciation account amount of $4,500, its
book value would be $500, and the journal entry to write it
off would be as shown here.
October 10
Equipment
Loss on Disposition of Equipment
Equipment
To record disposition of equipment
$4,500.00
$ 500.00
$5,000.00
In case of damaged or destroyed property, the assets book

value gets reduced or cancelled by the amount of the insurance payment received. If the asset is repairable, you would
write off any expenditure for repairs as a loss when the asset
and its original value are restored.
Full Depreciation
A long-term asset becomes fully depreciated when you write
off all of the applicable depreciation. When this happens, the
accumulated depreciation recorded on the asset should equal
the cost of the asset less its salvage value. As long as the
company continues to use the asset for business purposes,
the asset must remain on the books. You cant write off an
asset account and its related accumulated depreciation
account until the company retires the asset.
16
Accounting Practice 39. Place all answers in your workbook. As you work on the
Accounting Practice, you may use this study unit for reference.
END-OF-THE-MONTH
ACCOUNTING ACTIVITIES
Preparing for the End-of-the-Month
Statement
At the end of each month, its necessary to estimate the
adjustments needed on some ledger balances. You need the
figures to show the months activities on accounts that
involve accruals, prepayment, depreciation, amortization,
inventory (in a periodic system), and unearned revenue. You
use the estimated balances in preparing end-of-the-month
statements.
End-of-the-Month Adjustments
Many accounts need to be adjusted at the end of the month
or accounting period. Weve discussed most of the accounts
that need adjusting previously in the Bookkeeping program;
however, well briefly review them here.
17
Basically, its easy to identify accounts that will need to be

adjusted by looking at their titles. The accounts will have
titles that begin with one of the following words: accrued,
accumulated, allowance, prepaid, or unearned. Inventory
accounts also need adjustment each month to reflect the
estimated change in stock due to sales and purchases for
the month.
Adjusting Entry Philosophy

Accounting procedures for estimating the amount to adjust
each month are basically the same regardless of the type of
account involved. This is because each adjustment is based
on the philosophy that at the end of each accounting period,
all expense and income account balances should include all
transactions that pertain to the current accounting period.
Adjusting Procedures
1.
If theres too much in an account, take out all that

doesnt pertain to the current period.
2.
If theres not enough in an account, put in the amount

that pertains to the current period.
Adjusting the general ledger account balances in this manner provides figures that show a more accurate picture of the
revenue and expenses for the period in question.
FIGURE 7These are the most

common accounts that you
would adjust at the end of each
accounting period.
18
Accrued Interest Income

Accrued Interest Expense
Allowance for Bad Debts
Merchandise Inventory
Store Supply Inventory
Stationery Supply Inventory
Prepaid Insurance
Prepaid Property Taxes
Prepaid Expenses
Accrued Payroll Payable
Accrued Payroll Taxes Payable
Accrued Interest Payable
Unearned Interest
Unearned Rents
Weve discussed many of the accounts listed in Figure 7 in

previous lessons. In this study unit, well introduce the
accounts and adjusting entries that we havent already covered.
Adjusting Accounts
Some of the most common accrual accounts are Accrued
Interest Income, Accrued Payroll Taxes Payable, and Accrued
Interest Payable. The purpose of the Accrued Interest Income
is to record interest on accounts receivable accounts earned
but not received. Accrued Payroll Taxes Payable records
taxes owed to the state or federal government but not due to
be paid until later. Accrued Interest Payable records interest
on an accounts payable account owed but not due to be paid
until later.
Prepaid Accounts
When a company pays in advance for a nonmerchandise
good, or for a service, that it will use up in the ordinary
course of business within one or more accounting periods,
the advanced payment is a prepaid expense. Rent, property
taxes, and insurance and supplies, which weve previously
discussed, are common examples of prepaid expenses.
Usually, if a business pays one of these in advance to cover
the current period only (for example, if it pays the rent for
March on March 1), its treated simply as a current expense,
and no special account is needed. To record the rent example
just given, you would debit Rent Expense, and credit Cash
(or the bank account) as usual. However, if your company
paid rent on March 1 to cover March, April, May, and June,
it would misrepresent current expenses simply to call this
Rent Expense. Here, a special type of asset account, called
a prepaid account, is needed. The prepaid asset account
records the remaining value of the good or service paid for in
advance until its used up by month-to-month expensing.
So, in the four-month rent example above, you would record
the advance rent payment by debiting the asset account
Prepaid Rent for the full amount (say $2,000) and crediting
the Cash (or bank) account. At the end of the month, you
would make an adjusting entry debiting the portion of the
19
rent that applied to that month as an expense, and crediting

Prepaid Rent (to reduce its value) by the same amount.
Assuming the rent applies equally to the four months, you
would debit Rent Expense and credit Prepaid Rent for $500
each.
Several common prepaid accounts are Prepaid Supplies,
Prepaid Expenses, Prepaid Insurance, and Prepaid Property
Taxes. We use Prepaid Supplies (also simply called Supplies,
or Supplies Inventory) to record cash paid for supplies that
will be used later. Prepaid Expenses can record several small,
related items paid for in advance, such as the electric and
cleaning bills for an office. (In the adjusting entry, these items
are expensed by individual account.) Prepaid Insurance
records the remaining cost of insurance purchased for an
entire period after a portion of this cost is expensed each
month. Prepaid Property Taxes does likewise with the amount
of property taxes prepaid to cover an entire period.
Unearned Accounts
Unearned accounts, such as Unearned Rent and Unearned
Sales Revenue are accounts used for money received in
advance from a customer. When a tenant pays a months
rent in advance, you record the transaction in Unearned
Rent until the end of the month the payment covers. When
a customer pays three months in advance, you record the
transaction in Unearned Sales Revenue, and it stays there
until the customer receives what he or she paid for.
Accumulated or Allowance Accounts

Accumulated and allowance accounts are also adjusted each
month to reflect the change that occurred during the current
accounting period. Some of the most common types are
Accumulated Depreciation and Allowance for Bad Debts.
Accumulated Depreciation records the estimated amount
of depreciation written off as expense and Allowance for Bad
Debts records the estimated bad debts amount written off as
bad debts.
Large companies usually have a certain amount of accounts
receivable that they expect to write off as bad debts (perhaps
because the company cant locate the customer, or the
20
customer goes bankrupt or refuses to pay the bill for some

reason).
Therefore, rather than wait until each account becomes
declared uncollectable and written off the books, the company
writes off an estimated percentage of sales each month to bad
debts. This doesnt mean that the company removes each
suspected bad debt account from the books monthly. Each
suspected bad debt account must remain on the books until
its officially declared an uncollectable account. Its just an
estimate of money probably already lost that wont be discovered until the futureanother way of accounting for the
expense when it occurs, rather than any other time.
Calculating Adjustments
There are several ways you can estimate the amount to
adjust off an account each month. We discussed several
methods in this program already. The following formula is
the basic concept for all adjusting entries.
Full Amount Number of Months = Amount per Month
You take the amount of income or expense and divide it by
the number of months to which it applies to get the amount
of the adjustment per month. The adjustment reduces or
increases the account by the amount that applies to the
current period. Figure 8 shows examples of several adjustments and adjusting entries.
Keeping up-to-date schedules on accrual, prepaid, or
unearned accounts, as well as depreciation, amortization,
and allowance accounts, helps you prepare adjusting entries
as quickly as possible.
While there are no standard schedule forms, Figure 9 is an
example of a schedule used extensively in accounting. In the
example, each advertisement contract is added to the schedule on the date the contract is made. Its necessary to start
accounting for the expense on the day the ad runsnot on
the day its paid for. However, not all of the contract applies
to the current month, so a Prepaid Advertising account must
hold the excess expense until you can apply it to the proper
month.
21
(A)
Paid $150.00 for three month's insurance for July, August, and September
Step 1:
Original Journal Entry

Prepaid Insurance (Asset)
Cash or Bank account
Step 2:
$150.00
$150.00
Adjusting Entry (July 31)

Insurance Expense
Prepaid Insurance (Asset)
Analysis:
$ 50.00
$ 50.00
Reduced the Prepaid Insurance account by one month's insurance

the insurance for July.
($150.00 3 = $50.00 each month)
(B)
Received $1,200.00 for July, August, and September rent.

Step 1:
Original Journal Entry

Cash or Bank account
Unearned Rental Income (Liability)
Step 2:
$1,200.00
Adjusting Entry (July 31)

Unearned Rental Income
Rental Income
Analysis:
$1,200.00
$400.00
$400.00
Reduced Unearned Rental Income account by one month's rent now earned.
($1,200.00 3 = $400.00 each month)
(C)
$15.00 Interest due on Note Payable but not due to be paid until December (3 months)
Step 1:
Adjusting Entry (Oct. 31)

Interest Expense
Analysis:
$5.00
$5.00
Increased Interest Expense account for interest that applied to this month.
($15.00 3 = $5.00 each month)
FIGURE 8Calculating Adjustments
Figure 9 also shows that the total advertising expense for

March is $70.00; April, $133.00; May, $218.00; June,
$148.00; and July, $85.00. Of course, the schedule will keep
changing as long as the company continues to advertise in
the same manner.
22
ADVERTISING SCHEDULE
Date
Ad
C ode
Total
Amt.
Time
3/10
B 17
$210
3 mo.
4/3
C 24
$189
3 mo.
5/2
H02
$255
3 mo.
Totals
$ 70
$ 70
$ 70
$ 63
$ 63 $ 63
$ 85 $ 85 $ 85
$ 70 $133 $218 $148 $ 85
FIGURE 9An Accounting Schedule for Prepaid Advertising Expenses
Adjusting Ledger Balances

Lets look at end-of-the-month adjustments for the ledgers.
Inventory Adjustments
You should adjust all inventory balances at the end of the
month for the estimated amount of merchandise or supplies
used or sold during the month. If supplies are easy to keep
track of, a physical count may be taken each month; otherwise, an estimated percentage of the monthly use (that is,
15 percent of their cost) will be used. At the end of the year,
you then adjust the inventory balances to agree with the
actual inventory figures, which are based on a physical
inventory at that time. In between the annual physical
inventories, you calculate the changes in supply balance, as
mentioned above.
For merchandise inventory, estimating adjustments is a bit
more complicated. Note first of all that for perpetual systems,
inventory is tracked constantly, so no estimate is needed.
However, annual physical inventories are still taken to verify
the accuracy of scanning equipment, and to adjust for
possible losses due to theft or breakage. In periodic systems,
estimated adjustments are usually determined only before
preparing financial statements, and by the method youll
learn about in the upcoming section Preparing the Journal
and Worksheet.
23
Payroll Expense Account Adjustments

If a company pays its employees on the last day of the month
and its accounting period ends on the last day of the month,
a payroll adjustment wouldnt be necessary, since payment
would coincide with the end of the accounting period. However,
the accounts for weekly, biweekly, and bimonthly payroll
periods usually need adjustment to fit the accounting period.
For example, if the last pay period of the month was on
Friday the twenty-fifth and the next payday is on the eighth
of the following month, several days wages wont be accounted
for at the end of the month. This will include wages from the
twenty-fifth through the last day of the month (Figure 10).
To account for these expenses, you must adjust the Payroll
Expense account balance for the additional wages due
(earned but not paid). In our example, well assume that
$2,500 in wages are owed for the days May 2831, and that
these wont be paid until June 8.
MAY
S
20
21
22
23
24
25
26
27
28
29
30
31
FIGURE 10You must

adjust for the wages
earned but not paid.
JU N E
10
11
12
13
14
15
16
To adjust the books for the amount of additional wages,

debit the Payroll Expense account and credit the Accrued
Payroll Payable account for the amount of the liability ($2,500).
May 31
Payroll Expense
$2,500.00
Accrued Payroll Payable
$2,500.00
To adjust the Payroll Expenses for May
24
Employers Payroll Tax Adjustment

Although the employers share of the months payroll taxes
may not be due for payment until the end of each quarter
(every three months), its necessary to
1.
Determine the employers share of the taxes
2.
Transfer the correct amount to a Payroll Taxes Payable

account to record the funds owed until the payment
goes to the proper agencies
Be sure to use only the payroll figures that apply to the

current month when computing the employers share of the
taxes.
Using the following tax rates, you would calculate the
employers share on a gross payroll of $15,963.04 as shown
here.
FICA 7.65%
FUTA .8%
SUTA 5.4%
$15,963.04 =
$15,963.04 =
$15,963.04 =
$1,221.17
$ 127.70
$ 862.00
$2,210.87
An adjustment for the preceding example would include a

debit to the Payroll Expense account and a credit entry to
the Accrued Payroll Tax Payable account.
December 31, 20
Payroll Expense
$2,210.87
Accrued Payroll Tax Payable
$2,210.87
To record the employers share of payroll taxes
Bad Debt Adjustment Procedures

No matter how carefully a companys credit department
screens prospective credit customers, large companies are
bound to have some customers who dont pay their bills.
Many times its because the customers business failed,
became overextended, or moved out of the area. Companies
that do a lot of credit business should expect to have some
bad debt accounts, which a company treats as one of the
expenses of doing business.
25
To follow GAAP and the matching principle, you must make

an estimate of bad debts each accounting period. There are
four methods used to estimate bad debt expense.
1. Percentage of net credit sales
2. Percentage of net sales
3. Aging of accounts receivable
4. Percentage of accounts receivable
The percentage of net credit sales method uses a percentage
of credit sales as the bad debt expense. Below is a calculation to figure the average percentage of net credit sales that
were actual bad debts. An average based on three or more
previous years is typically used (since any one year might be
unusually good or bad). Well use this average percentage to
calculate the estimated bad debt for 20X4 (Figure 11).
Over the past three years, the actual bad debt has been 7
percent of net credit sales. Net credit sales are credit sales
less credit sales returns and allowances and credit sales
discounts. If the net credit sales for 20X4 were $1,000,000,
then the estimated bad debt expense would be $70,000. The
entry to record this transaction is as follows.
Bad Debt Expense
Allowance for Bad Debts
$70,000
$70,000
Note: Allowance for Bad Debts is a contra asset account to

Accounts Receivable.
Net C redit Sales
Actual Losses
from D oubtful Accou nts
0 1
$ 400,00
$ 20,00 0
0 2
$ 450,00
$ 10,00 0
0 3
$ 600,00
$ 75,00 0
$1,450,000
$105 ,000
Year
FIGURE 11Average
Percentage of Net Credit
Sales
26
7%*
*105,0 00/1,450,000 = .07 = 7%
The percentage of net sales method uses the same basic procedure as the net credit sales method except it uses all sales.
You can use the percentage of net sales method only if cash
sales are minimal or are a constant percentage from one year
to the next; otherwise, its unreliable.
Most professionals agree that the best method to estimate
bad debts is the aging of accounts receivable method. This
method analyzes each customers account and categorizes
each sale by the days outstanding (not paid). Usually the
more days outstanding a credit sale is, the less likely the
business will collect money owed. For example, a business
may fail to collect only 10 percent of accounts that are 30
days past due, but wont collect 50 percent of accounts that
are over 90 days past due. Each company must compute the
percentage of estimated doubtful accounts for each time
interval based on past bad debt experiences. Figure 12
shows an example of the aging of accounts receivable
method.
Amount Due
Percent of Estimated
Doubtful Accounts
Amount
Not yet due
$100,000
5%
$ 5,000
130 days past due
$ 25,000
10%
$ 2,500
3160 days
$ 20,000
15%
$ 3,000
6190 days
5,000
30%
$ 1,500
Over 90 days
2,000
50%
$ 1,000
Time Interval
Estimated bad debt
$13,000
FIGURE 12Aging of Accounts Receivable Method
The final method is the percentage of accounts receivable,

which is similar to the percentage of net credit sales and the
percentage of net sales methods. You calculate an average
percentage based on the actual amounts uncollected in
recent past years as compared to each years ending
accounts receivable balance (Figure 13).
27
FIGURE 13Percentage
of Accounts Receivable
Year-End A/R
Balance
Actual Amounts
Written
Off During Period
0 4
$100,00
$ 5,000
0 5
$125,00
$ 7,000
0 6
$175,00
$11,000
$400,000
$23,000
Year End
Percentage
6%*
*$23,000/$400,000 = .0575 = 6%
This percentage (6%) is multiplied by the Accounts Receivable balance at 12/31/X7
$200,000 .06 = $12,000
$12,000 i s the bad debt expense for 12/31/X7
Its important to remember that the purpose of the four

methods is to estimate the bad debt expense, which has
nothing to do with actual customers that dont pay. When a
company decides that a customer isnt going to pay, it makes
the following entry. Assume bad debt is $1,000.
Allowance for Bad Debt
Accounts ReceivableDevon Silva
$1,000
$1,000
Companies dont use Bad Debt Expense in actual write-offs

because they use it in the estimated write-off entry, which
affects the income statement. The actual write-off affects
the balance sheet. Companies use the Accounts Receivable
account when they remove a particular customers uncollectable debt.
End-of-the-Month Accounting
Procedures
The end-of-the-month accounting procedures are basically
the same for all types of businesses. You used the same procedures when you closed the books for the Golden Stationery
StoreRetail Division, in July. Although we discussed new
procedures and information in the study units since that
time, the end-of-the-month procedures remain the same. The
only new item is the 10-column worksheet, which compiles
all the data needed to prepare the financial statements.
28
The following series of steps describes the basic routine for

end-of-the-month activities. Read each step carefully and, if
necessary, review any section of the program that covers an
area still unclear to you.
Step 1:
Balance and rule all journals. Prove the totals.

(Debits should equal credits.)
Step 2:
Post each individual account amount and each

summary column balance in the journals to the
appropriate ledger accounts. Be sure to post to
the subsidiary ledgers where necessary. Foot and
balance the ledger accounts.
Step 3:
Balance and prove the subsidiary ledgers. Each

should balance with its respective control account
in the general ledger.
Step 4:
Take a trial balance. Transfer all general ledger

balances to the first two columns of a multicolumn
worksheet. Balance and rule the trial balance.
(Debits must equal credits.)
Step 5:
Analyze and compute the end-of-the-month

adjusting entries. List the adjustments in the
Adjustments columns of the worksheet. Balance
and rule the Adjustments columns. (Debits must
equal credits.)
Step 6:
Take an adjusted trial balance. Transfer all Trial

Balance column amounts without adjustments
directly to the Adjusted Trial Balance columns in
the worksheet. Make the required adjustments to
the accounts that need them and enter each
resulting balance in the appropriate Adjusted Trial
Balance column. Balance and rule the adjusted trial
balance. (Debits must equal credits.)
Step 7:
Transfer all revenue and expense balances in the

Adjusted Trial Balance columns to the Income
Statement columns. Balance and rule the Income
Statement columns.
29
Step 8:
Compute the net income or net loss (the difference

between the two income statement columns). If the
debit column balance is largerits a net loss. If
the credit column balance is largerits a net
profit.
Step 9:
Enter the net profit or net loss amount into the

Income Statement column that has the smaller
balance. Balance and rule the columns. (Debits
must equal credits.)
Step 10: Prepare an end-of-the-month income statement,

using the figures in the income statement column
of the worksheet.
Step 11: Transfer the net income or net loss amount in
the Income Statement column to the appropriate
Balance Sheet column.
A net profit requires a Balance Sheet credit entry.
A net loss requires a Balance Sheet debit entry.
Step 12: Transfer all asset, liability, and owners equity
balances in the Adjusted Trial Balance columns
to the Balance Sheet columns. Balance and rule
the Balance Sheet columns. (Debits must equal
credits.)
Step 13: Prepare an end-of-the-month balance sheet using
the balances in the Balance Sheet columns in the
worksheet.
30
GENERAL JOURNAL
DATE
20
(a) July
(b)
ACCOUNT TITLES AND EXPLANATION

31
31
Doc.
No. P.R.
DEBIT
Office Supplies
1 3 1 08
Office Supplies Expense
2 3 9 14
CREDIT
Office Supplies
2 3 9 14
1 3 1 08
Rent Expense
5 0 0 00
Prepaid Rent
(c)
(d)
31
31
5 0 0 00
Depr. ExpenseOffice Equip.
1 0 42
Depr. ExpenseStore Equip.
7 0 00
Accum. Depr.Office Equip.
1 0 42
Accum. Depr.Store Equip.
7 0 00
Salaries Expense
1 4 8 34
Salaries Payable
(e)
(f)
31
31
1 4 8 34
Expense and Revenue Summary
1 7 1 7 9 30
1 1 2 9 28
7 1 7 9 30
1 1 2 9 28
Interest Expense
Accured Interest Payable
3 0 00
3 0 00
FIGURE 14End-of-the-Month Adjusting Entries for the Golden Stationery Store
31
Golden Stationery StoreRetail Division
P age 1
Worksheet for Month Ending July 31, 20
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
C a sh
Accounts Receivable
Office Supplies
Mdse. Inventory
Prepaid Rent
Office Equipment
Accum. Depr.Office Eq.
Store Equipment
Accum. Depr.Store Eq.
Accounts Payable
Notes Payable
Sales Tax Payable
FICA Tax Payable
Federal Income Tax Payable
State Tax Payable
FUTA Taxes Payable
SUTA Taxes Payable
M. J. Rolands, Capital
M. J. Rolands, Drawing
Sales
Sales Discount
Sales Ret. and Allow.
PurchasesMdse.
Purchases Discount
Purchases Ret. and Allow.
Rent Expense
Utilities Expense
Telephone Expense
Salaries Expense
Depr. ExpenseOffice Eq.
Depr. ExpenseStore Eq.
A/C
No.
101
102
103
104
105
106
0106
107
0107
201
202
203
204
205
206
207
208
209
301
0301
401
402
403
501
502
503
601
602
603
604
605
606
4
1
TRIAL BALANCE
DEBIT
CREDIT
1 9 5 9 23
6 8 0 1 83
2 3 9 14
7 1 7 9 30
1 5 0 0 00
1 3 7 9 00
4 0 0 00
0 1 2 0 00
8 2 0 00
4 7 3 8 92
3 2 9 0 51
7 9 7 67
5 5 9 88
9 7 2 07
2 0 3 75
1 1 1 97
4 5 56
4 7 32
4 4 8 8 5 96
4 0 4 0 00
6 8 2 5 8 12
1 4 4 56
1 2 5 90
5 2 6 4 58
4 4 2 00
8 0 00
1 2 0 0 00
4 5 9 58
1 9 4 68
5 0 4 5 93
ADJUSTMENTS
DEBIT
CREDIT
5 0 0 00
1 4 8 34
1 0 42
7 0 00
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
2 3 9 14
33
13 1 08 34
1 4 8 34 35
1 1 1 2 9 28 36
a
e
1 3 1 08
1 1 1 2 9 28
c
c
12 5 6 5 3 73
12 5 6 5 3 73
2 3 9 14
1 7 1 7 9 30
5 0 0 00
1 0 42
7 0 00
3 0 00
a
e
12 5 6 5 3 73
12 5 6 5 3 73
33
34 Office Supplies Expense
607
35 Salaries Payable
210
36 Expense and Revenue Summary
302
1 7 1 7 9 30
37 Interest Expense
608
3 0 00
37
38
39
40 Net Profit
41
42
38
2
2
9 4 3 7 56
9 4 3 7 56
2 9 4 3 7 56
2 9 4 3 7 56
39
40
41
42
FIGURE 15A Multicolumn Worksheet with End-of-the-Period Adjustments for Golden Stationery
StoreRetail Division
32
ADJUSTED TRIAL BALANCE

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
DEBIT
1 9 5 9
4 6 8 0 1
1 3 1
1 1 1 2 9
1 0 0 0
1 3 7 9
CREDIT
CREDIT
BALANCE SHEET
DEBIT
1 9 5 9
4 6 8 0 1
1 3 1
1 1 1 2 9
1 0 0 0
1 3 7 9
CREDIT
23
83
08
28
00
00
4 1 0 42
4 1 0 42
1 0 1 2 0 00
1 0 1 2 0 00
8 90
4 7 38
3 2 90
7 97
5 59
9 72
2 03
1 11
45
00
92
51
67
88
07
75
97
56
8 9
4 7 3
3 2 9
7 9
5 5
9 7
2 0
1 1
4
7 7 32
4 4 8 8 5 96
1 4 4 56
1 2 5 90
3 5 2 6 4 58
6 8 2 5 8 12
1 4 4 56
1 2 5 90
3 5 2 6 4 58
4 4 2 00
8 0 00
0
5
9
9
0
9
4
4
4 4 2 00
8 0 00
00
58
68
27
34
1 0 8 06
17 0
4 5
19
5 19
0
9
4
4
00
58
68
27
1 0 42
7 0 00
1 0 8 06
6 0 5 0 02
3 0 00
12 5 9 1 2 49
12 5 9 1 2 49
4
4
9 3 5 2 07
9 3 5 2 07
1 9 4 2 8 05
6 8 7 8 0 12
18
19
20
21
22
23
24
25
26
27
28
29
30
34
1 4 8 34
6 0 5 0 02
3 0 00
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
31
32
33
1 4 8 34
12 5 9 1 2 49
12 5 9 1 2 49
00
92
51
67
88
07
75
97
56
4 0 4 0 00
6 8 2 5 8 12
1 7
4
1
5 1
0
8
0
7
9
2
3
1
5
7 7 32
4 4 8 8 5 96
4 0 4 0 00
1 0 42
7 0 00
39
40
41
42
DEBIT
23
83
08
28
00
00
31
32
33
35
36
37
38
INCOME STATEMENT
6
6
8 7 8 0 12
8 7 8 0 12
6 8 7 8 0 12
7
7
6 5 6 0 42
6 5 6 0 42
7 6 5 6 0 42
5
5
7 1 3 2 37
7 1 3 2 37
1 9 4 2 8 05
7 6 5 6 0 42
35
36
37
38
39
40
41
42
FIGURE 15Continued
33
Preparing the Journal and Worksheet

Before examining the various accounting reports, lets take a
close look at how to record adjusting entries, such as those
in Figure 14, on a multicolumn worksheet, as in Figure 15.
Note that there are three parts to the heading of the
worksheet.
1. The name of the company
2. The title, Worksheet
3. The time period represented by the worksheet
The worksheet has columns for the account titles and the
account numbers. It also has 10 amount columns alternately
titled Debit and Credit. To complete the worksheet, perform
the following steps.
Step 1:
The title of first two amount columns is Trial

Balance. We provided the trial balance in this
example. Normally, you would enter the balance
of each account from the general ledger to the
appropriate Debit or Credit column for the
corresponding account title and number.
Step 2:
The title of the third and fourth columns is

Adjustments. Record the adjustments required
at the end of an accounting period in these
columns.
Note: The debit and credit for an adjustment are often widely
separated on the worksheet. Therefore, its helpful to identify
them by placing a letter in parentheses at the left of each
amount. Also, some accounts needing an adjustment may
not appear in the trial balance. If not, add these accounts at
the end of the worksheet as needed.
After you accurately complete the entire worksheet, you
journalize the adjusting entries from the worksheet in the
general journal and post them to the general ledger. The
adjusting entries arent recognized as legitimate entries
until we journalize and post them.
The adjusting entries for Golden Stationery Store are similar
to those discussed earlier. You would determine the adjustments and enter them on the worksheet as described in the
following sections.
34
Supplies: The office supplies on hand are worth $131.08,

determined by a physical count.
When dealing with supplies inventory or merchandise inventory, the opening value (on the trial balance) for inventory
must be completely removed. You replace it by the current
inventory value.
Place the amounts of this entry on the appropriate lines, in
the appropriate columns in the adjustment section of the
worksheet. Then label the adjustments (a), as in Figure 15.
Note the Office Supplies Expense account added to the
bottom of the worksheet below the trial balance totals.
Rent: The adjusting entry made to any prepaid account at
the end of the month shows how much of that prepaid
amount has been used that month. In our example, the
prepaid rent is for three months.
Once a prepaid account (or a portion of it) has been used,
that amount becomes an expense. In our example, one
months rent expense is $500 ($1,500 3 = $500).
Depreciation: Office equipment purchased last year has an
estimated life of 12 years. The depreciation cost is $125.04
annually according to the straight-line method. Similarly,
store equipment purchased two years ago has an estimated
life of 10 years, and the depreciation cost is $840 annually.
Like the prepaid amounts, a portion of depreciation becomes
an expense. The August depreciation cost for office equipment
is $10.42 ($125.04 12 = $10.42). August depreciation for
store equipment is $70 ($840 12 = $70). The adjusting
entry shows an increase in Depreciation Expense and an
increase in Accumulated Depreciation, as shown in Figure 14.
We then transferred the amounts in the entry to the worksheet, as shown in Figure 15.
Salaries: Salaries are an expense of the period in which
they arise. Therefore, when the end of the month falls
between pay periods, you write off the salaries due to each
employee as an expense. Make a note that the salaries will
be paid at some future date.
In our example, salaries due but not paid amount to $148.34.
Note that you must add the Salaries Payable account to the
bottom of the worksheet.
35
Merchandise inventory: You determine the cost of merchandise sold using an estimated percentage, say 40% of
net sales, as the gross margin percentage.
You must find the current estimated inventory balance
before you can make an adjustment. There are three steps
in the procedure for finding it.
1. Compute the cost-of-merchandise-sold percentage.
100% Gross Margin Percentage = Cost of
Merchandise Sold percentage
100% 40% = 60%
2. Compute the cost of merchandise sold.
Net Sales Cost of Merchandise % = Cost of
Merchandise Sold
$67,987.66 .60 = $40,792.60
3. Compute the current inventory balance.
Opening Inventory Balance + Net Purchases Cost of
Merchandise Sold = Current Inventory Balance
$17,179.30 + $34,742.58 $40,792.60 = $11,129.28
Note that you can find the amount for the opening inventory
balance, and the figures needed to calculate net sales and
net purchases, on the trial balance of the worksheet. Recall
that both Sales and Purchases must be decreased by the
amounts in their respective discount and returns and
allowances contra accounts to find net sales and net purchases. This was done above.
Once you calculate the current inventory balance, you make
an adjusting entry. The entry is similar to the one for the
office supplies inventory. The old inventory is completely
removed and replaced with the new inventory. One part of
the entry shows the removal of the old inventory and the
transfer of its expense to the Expense and Revenue
Summary account. The other part of the entry deals with
placing the new inventory on the books and the use of its
cost to decrease expenses. (Thats why the cost of the new
inventory is a credit to Expense and Revenue Summary.)
Though the expense portion of these entries is made directly
to Expense and Revenue Summary, it really shows the effect
36
of a change in inventory, a component of cost of merchandise

sold, on net income. But in a periodic system, cost of merchandise sold, while calculated for the income statement,
isnt kept as an account, so thats why Expense and Revenue
Summary is the account used here.
Accrued interest: The interest is due but not paid on the
$4,000 note at 9%. Although the interest isnt yet paid, like
salaries, you must account for it as an expense in the period
its incurred. You calculate the monthly interest as follows.
1
$4,000 .09 =
12
1
360 =
12
360
= $30.00
12
Suppose you had a $50,000 60-day note at 10% interest
issued on August 15. Well use the exact interest method to
calculate the interest, which uses the 365 day year. Since we
expense interest on a monthly basis, well also calculate the
interest for the remainder of August and for September.
60
$50,000 0.1 () =
365
60
5,000 () =
365
300,000 365 =
$821.9178 (interest for 60 days)
Now calculate the interest for August. First, divide 821.9178
by 60 to find the interest per day.
821.9178 60 = 13.69863
Now multiply by 16 (the number of days remaining in the
month of August).
13.69863 16 = 219.17808
The interest for August is $219.18 (rounded)
The interest for September is as follows.
13.69863 30 = 410.9589
The interest for September is $410.96 (rounded). Note that
you add the interest expense to the bottom of the worksheet.
Step 3:
Prove the balance of the debits and credits by

totaling and ruling the two columns. Doing so
completes the adjustments columns.
37
The title of the fifth and sixth columns is Adjusted Trial

Balance. The entities in the trial balance and the adjustments
columns are now combined and entered in the Adjusted Trial
Balance columns. You do so for each account title listed,
beginning at the top of the worksheet and proceeding with
each account in order.
In Figure 15, the Cash account has a debit balance of
$1,959.23 in the Trial Balance columns, and the Adjustments
columns are blank. No adjustment occurred in the Cash
account. Therefore, you carry over the $1,959.23 amount
as a debit in the Adjusted Trial Balance columns. You do
the same for the balance in the Accounts Receivable account.
The Office Supplies account has a debit balance of $239.14
in the Trial Balance column, a credit adjustment of $239.14,
and a debit adjustment of $131.08 in the Adjustments column.
This leaves an adjusted debit balance of $131.08 that youll
carry over to the debit side of the Adjusted Trial Balance
columns. Use the same rule as you learned in an earlier study
unit when extending balances: when you have two debits,
add; when you have two credits, add; when you have a
debit and a credit, subtract.
You continue the procedure until youve entered all account
balances, with or without adjustments, in the Adjusted Trial
Balance columns. To complete the Adjusted Trial Balance
columns, total and rule the debit and credit columns to
prove their balance.
Step 4:
38
The title of the seventh and eighth columns is

Income Statement and the title of the ninth and
tenth columns is Balance Sheet. Each amount
entered in the Adjusted Trial Balance columns
is extended (carried over) to one of the remaining
four columns. Likewise, asset, liability, and capital
accounts are extended (carried over) to the Balance
Sheet columns, and revenue and expense accounts
are extended to the Income Statement columns.
All debit balances in the Adjusted Trial Balance
columns will then appear in either the Balance
Sheet debit column or the Income Statement debit
column, and all credit balances will likewise
appear in the appropriate credit columns.
After all of the balances have been extended, you total the
four columns. You then determine the amount of the net
income or the net loss for the period by the amount of the
difference between the totals of the two Income Statement
columns. If the credit column total is greater than the debit
column total, the difference is the net profit. If the debit
column total is greater than the credit column total, that
difference is the amount of net loss. Following is the computation for the worksheet presented for Golden Stationery
Store in Figure 15.
Total of credit column (revenue)
Total of debit column (expenses)
Net profit (revenue exceeds expenses)
$68,780.12
$49,352.07
$19,428.05
In Figure 15, youll see the balance of $19,428.05 shown on

the worksheet by an entry in the Income Statement debit
column and an entry in the Balance Sheet credit column.
The words Net Profit identify the entry in the Account Titles
column. The columns are then totaled and ruled, as shown
in the worksheet.
The totals of the two Income Statement columns are equal
because the net profit, $19,428.05, is the difference between
the original totals of these columns. The totals of the Balance
Sheet debit and credit columns are also equal because,
after you transfer the net profit to the capital account,
Assets = Liabilities + Capital.
If total expenses of the period exceed total revenue, the
subtotal of the Income Statement debit column will be
greater than the subtotal of the credit column. The difference
between the two amounts would be the net loss for the
period. Since losses decrease capital, you would enter the net
loss in the Income Statement credit column and you would
transfer it to the Balance Sheet debit column as a decrease
in capital.
The worksheet isnt a formal statement and doesnt take the
place of the formal balance sheet and income statement. Since
you wouldnt present the worksheet to the owner, manager,
or others interested in the business, you can prepare it in
pencil. The income statement and balance sheet prepared
from the worksheet for Golden Stationery Store appear in
Figures 16 and 17.
39
GOLDEN STATIONERY STORERETAIL DIVISION

INCOME STATEMENT
FOR MONTH ENDING JULY 31, 20
Revenue from Sales:
Sales
Less: Sales Discounts
$68,258.12
$ 144.56
Sales Returns and Allowances
125.90
270.46
Net Sales
$67,987.66
Cost of Merchandise Sold:

Merchandise Inventory 7/1/20
Purchases
Less: Purchase Discounts
$17,179.30
$ 442.00
Purchase Ret. and Allow
80.00
$35,264.58
522.00
Net Purchases
$34,742.58
Merchandise Available for Sale
$51,921.88
Less: Merchandise Inventory 7/31/20
11,129.28
Cost of Merchandise Sold
40,792.60
Gross Profit on Sales
$27,195.06
Operating Expenses:
Rent Expense
$ 1,700.00
Utilities Expense
459.58
Telephone Expense
194.68
Salaries Expense
5,194.27
Depreciation ExpenseOffice Equipment
10.42
Depreciation ExpenseStore Equipment
70.00

Interest Expense
Total Operating Expenses
Net Profit
108.06
30.00
7,767.01
$19,428.05
FIGURE 16Income Statement
40
FIGURE 17Balance Sheet
41
When you satisfactorily complete the worksheet, you journalize

and post the adjusting entries. Then you complete the
income statement and balance sheet.
Financial statements reflect a companys growth and change
throughout its lifetime, and its necessary to change the style
and format of these statements to fit the picture of the company as the company changes. Figure 16 is an example of a
formal income statement, which provides as much information as possible. You can adapt the statement form to fit any
situation, regardless of the type of business involved.
You may also need to change or modify the style and format
of the balance sheet to represent each companys business
structure in the most effective way. Figure 17 illustrates the
formal method of preparing a balance sheet.
Accounting Practice 40. Place all answers in your workbook. As you work on
the Accounting Practice, you may use this study unit for reference.
Year-End Accounting Procedures

Year-End Activities and End-of-theMonth Procedures
Basically, year-end procedures are the same as end-of-themonth activities. You prepare a worksheet and determine the
necessary adjustments; prepare some of the basic schedules,
such as those for accounts receivable, accounts payable,
and operating expenses; and prepare an income statement
42
and balance sheet. In addition to the basic activities, its

necessary to close the revenue and expense accounts in the
general ledger, prepare a post-closing trial balance, and
prepare statements showing the changes and financial
position of the company at the end of the year.
Calendar or Fiscal-Year Reports

If the company you work for uses a fiscal calendar date
other than December 31, you would prepare the year-end
closing activities as of the last day of the fiscal year. However,
although the company uses a fiscal year, its also necessary
to prepare December 31 financial statements, which would
resemble other month-end statements since there would be
no year-end closing activities involved.
Year-End Summary Worksheet

The year-end worksheet is similar to the end-of-the-month
worksheet, with the exception of an additional pair of columns
at the end for the post-closing trial balance figures (Figure 18).
Schedules
Schedules are another tool youll use to prepare statements
at the end of the accounting period. Schedules also provide
management with a more detailed look at specific areas of
the companys books.
Looking at the worksheet for Fremont Prefabricated Products
in Figure 18, it would appear that the person who prepared
this worksheet needed several schedules. See if you can
discover for which accounts you would need schedules.
43
Fremont Prefabricated Products

Worksheet
For Year Ending December 31, 20
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
ACCOUNT
A/C
No.
Coast Bank
Accts. Rec.
Mdse. Inv.
Store Sup. Inv.
Office Sup. Inv.
Prepaid Ins.
Store Equip.
Accum. Dp. Store
Office Equip.
Acc. Depr.Office
Buildings
Acc. Depr.Bldg.
Land
Accts. Payable
Notes Payable
Accr. P/R Tax
Mtg. Notes Pay.
T. Eldridge, Cap.
T. Eldridge, Dr.
Exp. & Rev. Sum.
Sales
Sales Ret. & All.
Sales Discount
Purchases
Purch. Discount
SalesPayroll Exp.
Advertising Exp.
Depr. Exp. Equip.
Ins. Exp. Sales
Store Sup. Exp.
Misc. Sales Exp.
Office P/R Exp.
Interest Expense
Depr. Exp.Bldg.
Depr. Exp.Office
Ins. Exp.Gen.
Office Sup. Exp.
Misc. Gen. Exp.
101
102
103
104
105
106
107
0107
108
0108
109
0109
110
201
202
203
205
301
0301
302
401
0401
0402
501
0501
601
602
603
605
606
608
609
610
611
612
613
618
620
TRIAL BALANCE
DEBIT
8 5 9 0
6 9 8 3
19 7 0 0
9 7 0
4 8 0
9 9 7
10 2 0 0
CREDIT
00
00
00
00
00
00
00
ADJUSTMENTS
DEBIT
ADJUSTED
CREDIT
2 2 1 5 0 00
5 5 0 00
2 8 0 00
19 7
9
4
4
0
7
8
5
0
0
0
0
DEBIT
00
00
00
00
4 6 0 0 00
1 1 0 0 00
2 2 3 0 00
4 9 0 00
9 4 0 0 00
1 5 0 0 00
5 5 7 0 00
8 5 9 0
6 9 8 3
22 15 0
5 5 0
2 8 0
54 7
10 2 0 0
00
00
00
00
00
00
00
5 5 7 0 00
4 1 0 0 0 00
4 1 0 0 0 00
3 0 0 0 00
3 0 0 0 00
7 4 2 0 00
1 5 0 0 00
2 9 6 00
7 5 0 0 00
4 8 8 7 1 00
1 2 0 0 0 00
1 2 0 0 0 00
1 9 7 0 0 00
2 2 1 5 0 00
1 6 2 7 3 6 00
2 1 4 0 00
1 8 2 2 00
1 0 5 2 8 0 00
2 1 4 0 00
1 8 2 2 00
1 0 5 2 8 0 00
1 5 2 5 00
1 5 7 4 8 00
3 4 6 0 00
2 9 6 00
4 0 0 00
1 1 0 0 00
1 8 0 00
9 7 0 00
5 5 0 00
1 5
4
2
4
00
00
00
00
2 8 0 00
4 7 9 6 6 00
4 7 9 6 6 00
2 3 0 00
5 0 3 2 00
1 8 1 0 00
6 0 00
3 1 0 00
2 4 5 7 8 2 00
2 4 5 7 8 2 00
Net Profit
0
9
7
8
0
0
0
0
16 04 4
34 6 0
1 10 0
5 8 0
4 2 0
2 3 0
5 0 3 2
18 10
15 0 0
4 9 0
3 3 0
2 0 0
3 10
2 5 16 18
00
00
00
00
00
00
00
00
00
00
00
00
00
00
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
53
36
37
38
39
40
41
FIGURE 18Year-End Summary Worksheet
44
TRIAL
BALANCE
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
1
2
3
4
5
6
7
8
9
10
11
12
DEBIT
CREDIT
8 5 9 0 00
6 9 8
2 2 1 5
5 5
2 8
5 4
10 2 0
3
0
0
0
7
0
6 9 8
2 2 1 5
5 5
2 8
5 4
10 2 0
2 7 2 0 00
11
12
4 1 0 0 0 00
1 0 9 0 0 00
0 00
0 00
6 00
0 00
1 00
1 0 9 0 0 00
5 7 0 0 00
2 7 2 0 00
3 0 0 0 00
2
0
9
0
7
2 7 2 0 00
2
3
4
5
6
7
8
9
10
5 5 7 0 00
4 1 0 0 0 00
1 0 9 0 0 00
3 00
0 00
0 00
0 00
7 00
0 00
5 7 0 0 00
5 5 7 0 00
74
15
2
75
4 88
POST-CLOSING TRIAL
BALANCE
DEBIT
CREDIT
8 5 9 0 00
00
00
00
00
00
00
5 7 0 0 00
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
BALANCE SHEET
3 0 0 0 00
74
15
2
75
488
2 0 00
0 0 00
9 6 00
0 0 00
7 1 00
13
7 4 2 0 00
1 5 0 0 00
2 9 6 00
7 5 0 0 00
6 2 8 3 4 00
1 2 0 0 0 00
2 4 5 0 00
1 6 2 7 3 6 00
2 4 5 0 00
16 2 7 3 6 00
2 1 4 0 00
1 8 2 2 00
1 0 5 2 8 0 00
1 5 2 5 00
2 5 1 6 1 8 00
15 2 5 00
16 0 4 4 00
3 4 6 0 00
1 1 0 0 00
5 8 0 00
4 2 0 00
2 3 0 00
5 0 3 2 00
1 8 1 0 00
1 5 0 0 00
4 9 0 00
3 3 0 00
2 0 0 00
3 1 0 00
1 4 0 7 4 8 00
2 5 9 6 3 00
1 6 6 7 1 1 00
16 6 7 1 1 00
1 1 0 8 7 0 00
16 6 7 1 1 00
1 1 0 8 7 0 00
8 4 9 0 7 00
2 5 9 6 3 00
1 1 0 8 7 0 00
9 8 8 7 0 00
9 8 8 7 0 00
9 8 8 7 0 00
9 8 8 7 0 00
FIGURE 18Continued
45
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
SCHEDULE OF THE DEPRECIATION EXPENSE

FOR YEAR ENDING DECEMBER 31, 20
A sse t
Store Equipmnet
Office Equipment
Buildings
[Cost
[$10,200.00
[$5,570.00
[$41,000.00
Salvage
Value]
$3,600]
$1,650]
$11,000]
Number
of Years
6 yrs.
8 yrs.
20 yrs.
Total
AMOUNT
Allied Chemicals
Elliot Engineering
Taylor Industrial Equipment
Tompkins Electronics
$2,459.00
$1,932.00
$1,112.00
$1,480.00
Total
$6,983.00
SCHEDULE OF INSURANCE EXPENSE

Property Insured
Store Equipment
Office Equipment
Buildings
Total
SCHEDULE OF NOTES PAYABLE

Anthony Investment Corporation
Westwood Federal Savings
Total
Depreciation
for the Year
$1,100.00
$490.00
$1,500.00
$3,090.00
SCHEDULE OF ACCOUNTS RECEIVABLE

ACCOUNT
=
=
=
=
Expense for year

$115.00
$107.00
$108.00
$330.00
SCHEDULE OF ACCOUNTS PAYABLE

ACCOUNT
$1,500.00
$7,500.00
$9,000.00
AMOUNT
Gilbert Electronics
Hendricks Conduits
Sullivan Manufacturing
$2,439.00
$3,902.00
$1,079.00
Total
$7,420.00
SCHEDULE OF SUPPLIES USED

A sse t
Account
Balance
January 1, 20
Amount on Hand
December 31, 20
Expense for Year
Store Supplies
Office Supplies
$970.00
$480.00
$550.00
$280.00
$420.00
$200.00
$620.00
Total
FIGURE 19Sample Schedules for Fremont Prefabricated Products
46
If you picked control accountssuch as Accounts Receivable,

Accounts Payable, and Notes Payableas areas where you
would prepare schedules, youre right. Other schedules that
would also prove helpful would be one for the three depreciation expense accounts, Supplies Expense, and Insurance
Expense. These are areas where management will want more
specific information to make decisions in the companys best
interest. Other companies may need schedules for Bad Debts
and Accrued Interest Income, as well.
Figure 19 shows examples of schedules prepared for the
Fremont Prefabricated Products company. Each schedule
provides an itemized list of the items and related amounts
that make up the general ledger account balance as listed
on the worksheet shown in Figure 18.
Adjustments
Using the worksheet in Figure 18 as a source document, its
possible to prepare journal entries quickly and accurately
another advantage of using a multicolumn worksheet. The
order in which you enter the adjusting entries into the
journal isnt terribly important. However, theres less chance
of forgetting entries if you list them in the same order as
they appear on the worksheet.
Journalizing Adjusting and Closing

Entries
The Multicolumn Journal
Figure 20 shows a more complex form of the general journal.
The multicolumn journal can help you journalize various
entries throughout the year. As you can see, journal
entries on the multicolumn journal take less than half the
space required in the two-column journal. This is because
you write them on only one line, which condenses the
entriesyet the entries provide the same information as
two-column journal entries.
47
The first (1) and second (2) entries in the journal in Figure 20
adjust the Merchandise Inventory account balance to agree
with the physical inventory balance as of December 31.
Using the two-column journal method, the same journal
entries would take at least six lines, as shown in Figure 21.
You can see why a bookkeeper would choose the multicolumn
journal form over the two-column journal, as the multicolumn journal cuts the end-of-the-year work in half.
48
Fremont Prefabricated Products

GENERAL JOURNAL FOR MONTH OF DECEMBER 20
P age 2
DEBIT
CREDIT
EXPENSES
ACCOUNT TITLE
LEDGER
LEDGER
OR
AMOUNT
DAY
DESCRIPTION
302
1 9 7 0 0 00
31
Inv. Beg. Bal. & Sum.
103
2 2 1 5 0 00
Current Inv. Bal.
104
5 5 0 00
105
2 8 0 00
AMOUNT
ACCOUNTS
PAYABLE
NO.
NO.
AMOUNT
103
1 9 7 0 0 00
302
2 2 1 5 0 00
NO.
Adusting Entries
606
9 7 0 00
4
5
618
4 8 0 00
6
7
605
1 8 0 00
613
2 7 0 00
603
1 1 0 0 00
612
4 9 0 00
10 611
1 5 0 0 00
11 601
2 9 6 00
5 2 8 6 00
Beg. Bal. to Expense
104
9 7 0 00
Current Inv. Bal.
606
5 5 0 00
Beg. Inv. to Exp.
105
4 8 0 00
Current Inv. Bal.
618
2 8 0 00
Prepaid Insurance
106
4 5 0 00
Depr.Store
0107
1 1 0 0 00
Depr.Office
0108
4 9 0 00
Depr.Bldg.
0109
1 5 0 0 00
Accr. P/R Taxes
203
4 2 6 8 0 00
2 9 6 00
4 7 9 6 6 00
Closing Entries
12
401
1 6 2 7 3 6 00
31
Sales
13
Sales Ret. & All.
0401
2 1 4 0 00
14
Sales Discount
0402
1 8 2 2 00
Purchases
501
1 0 5 2 8 0 00
15
31
16
0501
1 5 2 5 00
Purchases Disc.
17
Sales P/R Exp.
601
1 6 0 4 4 00
18
Advertising Exp.
602
3 4 6 0 00
1 1 0 0 00
19
Depr. ExpStore
603
20
Insur. ExpSales
605
5 8 0 00
21
Store Supplies Exp.
606
4 2 0 00
22
Misc. Sales Exp.
608
2 3 0 00
23
Office P/R Exp.
609
5 0 3 2 00
24
Interest Expense
610
1 8 1 0 00
25
Depr. Exp.Bldg.
611
1 5 0 0 00
26
Depr Exp.Office
612
4 9 0 00
27
Ins. Exp.Gen.
613
3 3 0 00
28
Office Supplies Exp.
618
2 0 0 00
29
Misc. Gen. Exp.
620
3 1 0 00
30
Exp. & Rev. Sum.
302
2 3 5 1 3 00
31
302
2 5 9 6 3 00
31
T. Eldridge, Cap.
301
1 3 9 6 3 00
33
T. Eldridge, Draw
0301
1 2 0 0 0 00
2 3 2 9 0 4 00
( )
Exp. & Rev. Summary
32
5 2 8 6 00
2 3 8 1 9 0 00
()
FIGURE 20General Journal
49
December 31
To write off January 1 inventory balance
December 31
To enter December 31 inventory balance
$19,700.00
$19,700.00
$22,150.00
$22,150.00
FIGURE 21Journal Entries, Two-Column Method
Journalizing Techniques
Making entries to the multicolumn journal is basically the
same as previous journalizing techniques you already
learned, with a few modifications, as follows.
One debit part, one credit part. Write an entry with one
debit part and one credit part of equal amounts on one line.
Items 16 and 811 are one-line entries.
One or more debit parts or one or more credit parts.
Item 7 is a two-line entry with only one descriptive statement. Items 1233 are entries using two or more lines with
each account identified.
Nonindented description notations. Unlike the twocolumn journal, theres no need to indent the description
notations on the multicolumn general journal.
Date. You write the date only once for each journal entry,
to show where each entry begins.
Account number. You enter the account number at the
time you make the journal entry, and place a checkmark in
the column next to the entry amount when you post the item
to the ledger.
Column checkmarks. The checkmark at the bottom of each
column indicates that all of the individual entries within the
column have been posted to their respective ledger accounts.
Note: If there were a subsidiary ledger for expense accounts,
you would post each entry in the Expenses column to the
individual accounts in the subsidiary ledger and post the
column total to the control account in the general ledger.
50
Then you would note the control accounts number at the

bottom of the Expenses column in the journal instead of
using a checkmark.
Capital account entry. The closing entry, which transfers
the net profit or net loss to the Capital account, is always the
last entry in the journal at the end of the year.
Posting to the Ledger

You post to the ledger in the same manner as you already
learned. However, you must remember that when posting
closing entries, you balance and rule the ledger accounts.
Closing the Subsidiary Ledgers

When using subsidiary ledgers for large groups of similar
accounts such as operating expenses, its important to
remember that once you close the control account in the
general ledger, you must also close the individual accounts
in the subsidiary ledger. The total of each subsidiary ledger
must equal the control accounts balance at all times.
General Ledger Summary Accounts

In most cases, you use summary accounts, such as an
Expense and Revenue Summary account, only at the end of
the business year to summarize the details of expense and
revenue accounts. Summary accounts may be used more
frequently, if quarterly or monthly financial statements are
desired. Once you post the closing entries, these ledger summary account balances return to zero and remain that way
throughout the next year, except where more frequent financial statements are prepared.
51
Accounting Practice 41. Place all answers in your workbook. As you work on
the Accounting Practice, you may use this study unit for reference.
52
EXAMINATION NUMBER:
39002101
Whichever method you use in submitting your exam
answers to the school, you must use the number above.
For the quickest test results, go to
http://www.takeexamsonline.com
When you feel confident that you have mastered the material in
this study unit, complete the following examination. Then submit
only your answers to the school for grading. Send your answers for
this examination as soon as you complete it. Do not wait until
another examination is ready.
Questions 125: Select the one best answer to each question.
From the inventory information in Exam Figure 1, prepare a depreciation schedule using Exam Figure 2.
Examinat
io n
Examination
53
FIXED ASSET INVENTORY

Item
Plant Equipment
Lathe (new)
Power Drill (new)
Press (used)
Total Plant Equipment
Office Equipment
Computers (2)
Calculators
File Cabinets (3)
Bookcases(3)
Desks (2)
Check Printer
Office Chairs (2)
NCR Bookeeping Machine
Total Office Equipment
Buildings
Office/Plant Building
Remodeling (Plant)
Total Buildings
Purchase
Date
Total
C o st
Salvage
Value
Depr.
Method
Life
1/16/00
3/1/00
3/1/00
$ 4,000
2,000
4,200
$10,200
$ 500
250
750
St. Ln.
St. Ln.
St. Ln.
10 years
10 years
10 years
1/10/00
2/1/00
1/10/00
3/20/00
1/10/00
1/31/00
1/10/00
3/20/00
$ 4,000
800
300
300
400
500
200
1,070
$ 7,570
600
200
150
150
100
150
70
350
St. Ln.
St. Ln.
St. Ln.
St. Ln.
St. Ln.
St. Ln.
St. Ln.
St. Ln.
10
10
15
15
15
10
10
15
1/3/00
7/8/00
$27,000
14,000
$41,000
5,000
5,000
St. Ln.
St. Ln.
25 years
25 years
years
years
years
years
years
years
years
years
EXAM FIGURE 1Fixed Asset Inventory
DEPRECIATION SCHEDULE
Purchase
Date
Item
First 12
Months
of Depr.
Monthly Depreciation
Ending
Date
Total Depreciation
Jan.
F eb.
Mar.
Apr.
May
Jun.
Jul.
EXAM FIGURE 2Depreciation Schedule
54
Examination
Using the depreciation schedule you prepared in Exam Figure 2, select the correct answer to
questions 18.
1. What is the first 12 months depreciation for the lathe purchased on 1/16?
A. $291
B. $320
C. $350
D. $400
2. What is the first 12 months depreciation for the computers purchased 1/10?
A. $200
B. $250
C. $340
D. $400
3. What will be the monthly depreciation for the calculators purchased on 2/1, beginning with
the month of February?
A. $1.66
B. $5.00
C. $6.66
D. $8.00
4. What is the book value of the check printer after its depreciated over a 10-year period?
A. $150
B. $350
C. $500
D. $650
5. What is the monthly depreciation on the building purchased on 1/3?

A. $73.33
B. $90
C. $103.33
D. $106.67
6. What is the total depreciation for plant equipment for the month of May?
A. $43.33
B. $43.75
C. $72.50
D. $175.49
7. What is the total depreciation for office equipment for the month of May?
A. $28.83
B. $44.66
C. $72.50
D. $175.49
8. What is the total depreciation expense for the month of May?

A. $127.33
B. $170.66
II.
C. $190.49
D. $205.49
Compute the adjustment of Payroll Expense for the end of May. (The 5/5 and 5/20
payrolls have already been posted to the books.) Also, refer to the Payroll Chart in
Exam Figure 3 in computing your answers. (The bimonthly payroll was paid on the
fifth and the twentieth.)
Examination
55
MAY
S
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
JU N E
PAYROLL
ENDING
GROSS
FICA
FEDERAL
STATE
N ET
5/5
$ 5,261.52
$402.51
$ 584.20
$292.10
$3,982.71
11,576.32
869.38
1,329.73
664.86
8,712.35
(Includes only 5/15/5)
5/20
DAILY PAYROLL
5/21
5/22
5/23
5/24
5/25
5/28
5/29
5/30
5/31
6/1
6/4
6/5
6/5
922.41
925.96
921.95
928.60
929.40
916.43
921.49
925.02
912.43
925.43
919.20
924.33
$ 11,072.65
$ 69.27
69.54
69.24
69.74
69.80
68.82
69.20
69.47
68.52
69.50
69.03
_ 69.42
$..831.55
98.43
96.79
92.43
91.65
94.83
94.49
98.43
96.79
89.45
98.45
98.16
97.95
$. 1,147.85
47.20
45.95
46.52
46.09
45.98
42.99
46.85
49.70
45.98
46.02
47.15
46.98
$ 557.41
707.51
713.68
713.76
721.12
718.79
710.13
707.01
709.06
708.48
711.46
704.86
709.98
$ . 8,535.84
EXAM FIGURE 3Payroll Expense
From the adjustments for Payroll Expense that you computed from Exam Figure 3,
select the best answer to questions 911.
9. What is the gross payroll accrued for the period 5/21 through 6/5?
A. $8,688.64
B. $11,072.65
C. $13,456.66
D. $31,222.61
10. What is the gross payroll accrued for 6/1, 6/4, and 6/5?
A. $925.43
B. $2,164.52
56
C. $2,768.96
D. $8,303.69
Examination
11. What is the gross payroll accrued through 5/31?

A. $8,303.69
B. $8,688.64
C. $11,072.65
D. $33,991.57
Compute the adjustment for employer taxes for the payroll up to and including May 31,
using the figures in Exam Figure 3 and the tax rates listed below.
5/5 Payroll
5/20 Payroll
6/5 Payroll
Less 6/1, 6/4, 6/5
Payroll of 5/31
FICA7.65%
$_________
$_________
$ _________
$ _________
$ _________
FUTA.8%
SUTA5.4%
7.65% =
$_______
.8%
= $_______
5.4%
= $_______
Total Employer Taxes
$_______
From the adjustments for Employer Taxes that you just computed, select the one best answer to
questions 12 and 13.
12. What is the gross payroll as of 5/31 (for May only)?
A. $11,072.65
B. $19,880.01
C. $25,141.53
D. $33,991.57
13. What are the total employer taxes for May?

A. $1,913.95
B. $2,913.07
C. $3,482.10
D. $5,280.62
Compute the adjustment necessary for Property Taxes Expense for the month of May.
4/01
Prepaid Property Taxes $1,594.78

Bank
$1,594.78
Paid six months property taxes for the period 4/01 through 10/31
______________
______________
______________
14. From your computation for the adjustment for Property Taxes Expense, select the correct
answer below for the amount of Property Taxes Expense for the month of May.
A. $265.80
B. $270.91
Examination
C. $531.60
D. $1,594.78
57
Compute the estimated Allowance for Bad Debts for the month of May using a percentage figure of .5% on the net sales of $97,500.00.
15. What is the Bad Debts Expense for the month of May?
A. $48,750.00
B. $4,875.00
C. $487.50
D. $48.75
Compute the amount of money spent on capital expenditures and revenue expenditures
during the period by determining which of the following should be classified as capital
expenditures and revenue expenditures. Use the form provided in Exam Figure 4.
(A) Overhauled and reconstructed lathe motor to produce more parts per hour $500.00
(B) Yearly computer maintenance contract
150.00
(C) Constructed walls to divide the store offices
350.00
(D) Poured a concrete walkway between the offices
250.00
(E) Semiannual maintenance checkup on the press
250.00
(F) Installed a new adapter system on the lathe
750.00
(G) Fixed a leak in the roof of the office building
250.00
(H) Paid the city to trim the trees in front of the office building
175.00
Revenue Expenditures
$
$
$
$
$
$
$
$
_______________________
$
______________________
$
FIGURE 4Expenditure Form
From the computations you made for capital expenditures and revenue expenditures, select the
one correct answer to each of the following questions.
16. What is the total amount of capital expenditures?
A. $2,675
B. $1,850
C. $825
D. $0
17. What is the total amount of revenue expenditures?

A. $2,675
B. $1,850
58
C. $825
D. $0
Examination
18. The term amortization means to write off

A. business expenses.
B. the cost of tangible assets.
C. the cost of intangible assets.

D. decreases in inventory.
19. Which of the following statements is true regarding the declining-balance method
of depreciation?
A.
B.
C.
D.
It provides larger depreciation expense write-offs in the first years.

It isnt authorized for federal income tax purposes.
Its mandatory for small businesses.
It uses a higher salvage deduction than the straight-line method.
20. Which of the following statements is true regarding inventory balances for end-of-themonth adjustments?
A.
B.
C.
D.
They may be estimated by computing the cost of merchandise sold.

They must be determined by a physical inventory.
Theyre not important.
They include only major purchases.
21. Suppose the actual bad debt for a business for the three previous years is 5%. If the net
credit sales is $2,000,000, then what is the estimated bad debt expense for the next year?
A. $10,000
B. $20,000
C. $100,000
D. $200,000
Enter the following prepaid, inventory, and accrual adjustments in the adjustments columns
of the worksheet in Exam Figure 5. Extend the adjusted account balances to the adjusted
trial balance, income statement, and balance sheet columns; compute the net profit; balance
and rule the columns.
(A) Bad Debt Expense$118
(B) March 31, 20X2 Physical Inventory
Merchandise$21,056
Store Supplies 1,136
Office Supplies 492
(C) Insurance Expense
Store
$753
Office
441
(D) Property Tax Expense
Store$1,356
Office 486
(E) Depreciation Expense
Store Equipment
Office Equipment
Buildings
Examination
$1,350
738
8,122
59
(F)
Payroll Tax Expenses for end of the period:

Store$43
Office 42
(G) Payroll Expenses for end of the period:
Store$570
Office 319
60
Examination
Fremont Hardware Store

Worksheet
For Year Ending March 31, 20
ACCOUNT
A/C
No.
TRIAL BALANCE
DEBIT
CREDIT
101
1 0 3 9 6 00
5 9 0 6 00
3 8 4 9 5 00
2
3
4
5
Coast Bank
2
3
4
5
Accts. Rec. Cur.

90 days
1021
1022
Allow for Bd. Debts.
0102
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
Merchandise Inv.
2 2 4 7 8 00
Store Sup. Inv.
104
1 5 9 7 00
Office Sup. Inv.

Prepaid Insurance
105
106
7 5 9 00
1 5 0 0 00
Prepaid Taxes
1061
2 8 9 5 00
Store Equipment
107
0107
Office Equipment
108
Acc. Depr.Office
0108
Buildings
109
Acc. Depr.Bldg.
Land
6
7
8
9
1 3 5 0 0 00
2 5 4 9 00
7 3 7 8 00
6 7 9 00
5 6 0 0 0 00
0109
110
1 2 9 7 00
3 0 0 0 0 00
Accounts Payable
201
2 5 9 5 5 00
Notes PayCurrent
2021
1 0 4 6 0 00
Long Term 2022
2 5 0 0 0 00
Accr. P.R. Taxes
203
Accr. P.R. Pay.
204
Mortgage Pay.
205
7 5 0 0 00
T. V. Eldridge, Cap
301
8 4 9 0 9 00
T. V. Eldridge, Draw
0301
Exp. & Rev. Sum.

Sales
302
4011
4012
Sales Ret & Allow
04011
04012
2 9 7 8 00
9 9 5 00
040111
3 8 5 0 00
040121
2 9 5 8 00
Sales Disc.
Purchases
501
1 5 0 0 0 00
1 3 2 6 8 9 00
1 4 8 4 6 0 00
1 5 7 9 6 3 00
Purchases Disc.
05011
1 8 1 1 3 00
Purch. Ret & Allow.
05012
5 2 8 2 00
35 Transport In
36
37
38
39
40 Carried Forward
41
42
502
ADJUSTED
DEBIT
7 6 9 00
103
Acc. Depr.Store
ADJUSTMENTS
DEBIT
CREDIT
1 3 8 7 4 00
3 8 8 5 2 2 00
4 6 3 6 6 2 00
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
EXAM FIGURE 5Worksheet
Examination
61
TRIAL
BALANCE
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
POST CLOSING TRIAL

BALANCE
DEBIT
CREDIT
2
3
4
5
6
7
8
2
3
4
5
6
7
8
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
FIGURE 5Continued
62
Examination
Fremont Hardware Store

Worksheet
For Year Ending March 31, 20
ACCOUNT
A/C
No.
1 Carried Forward
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
TRIAL BALANCE
DEBIT
CREDIT
3 8 8 5 2 2 00
Store Payroll
601
2 0 5 6 0 00
Advertising Exp.
Depr. Exp.Store
602
603
6 7 2 4 00
Property TaxStore
604
Insur. Exp.Store
605
Store Supplies Exp.
606
7 8 9 00
Utilities Exp. Store

Misc. Store Exp.
607
608
4 8 7 6 00
4 9 6 00
Office Payroll
609
1 2 4 6 0 00
Interest Expense
Depr. Exp.Office
610
611
2 1 4 6 00
Depr. Exp.Bldg.
612
Office Supplies Exp.

Property TaxOff.
613
614
Bad Debt Exp.
615
616
8 9 2 4 00
Rent Expense
617
1 5 0 0 0 00
Insur. Exp. Office
618
Utilities Exp. Off.
619
Misc. Off. Exp.
620
1
2
3
4
5
6
7
8
9
1 5 9 2 00
6 2 5 00
4 6 3 6 6 2 00
ADJUSTED
DEBIT
4 6 3 6 6 2 00
9 4 8 00
Auto Expense
ADJUSTMENTS
DEBIT
CREDIT
4 6 3 6 6 2 00
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
33
34
35
36
37
38
39
40
41
42
38
39
40
41
42
FIGURE 5Continued
Examination
63
TRIAL
BALANCE
CREDIT
INCOME STATEMENT
DEBIT
CREDIT
BALANCE SHEET
DEBIT
CREDIT
POST CLOSING TRIAL

BALANCE
DEBIT
CREDIT
2
3
4
5
6
7
8
2
3
4
5
6
7
8
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
FIGURE 5Continued
64
Examination
Refer to the adjustment entries you made in the worksheet and general journal and select the
correct answer to the following questions.
22. The entries required in the adjustments column of the worksheet to adjust the payroll tax
expenses are a debit of $43 to the Store Payroll account, a debit of $42 to the Office
Payroll account, and a
A.
B.
C.
D.
debit of $85 to Accrued Payroll Taxes Payable.

debit of $85 to Accrued Payroll Payable.
credit of $85 to Accrued Payroll Taxes Payable.
credit to the Store Payroll account.
23. Which of the following shows the correct entries required in the adjustments column of the
worksheet to adjust the Merchandise Inventory account?
Adjustments
A. Merchandise Inventory
B. Merchandise Inventory
C. Merchandise Inventory
D. Merchandise Inventory
Debit
Credit
$21,056
22,478
22,478
21,056
22,478
0
0
22,478
$22,478
21,056
21,056
22,478
0
22,478
22,478
0
24. Which of the following shows the entries required in the adjustments column of the worksheet to adjust the Depreciation ExpenseBuilding account?
Adjustments
A. Accumulated DepreciationBuilding
Depreciation ExpenseBuilding
B. Accumulated DepreciationBuilding
C. Accumulated DepreciationBuilding
D. Buildings
Debit
Credit
$8,122
0
1,287
8,122
0
8,122
0
8,122
0
$8,122
8,122
1,287
8,122
0
8,122
0
25. What is the net income for Fremont Hardware Store from the worksheet you prepared?
A. $30,298
B. $30,289
Examination
C. $30,829
D. $30,299
65

Accounting

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Study Unit

Assets and End-of-theMonth Activities

Youll discover the accounting activities that occur at the

When you complete this study unit, youll be able to

Distinguish between tangible and intangible assets

Manage all assets in the accounting process through

Calculate end-of-the-month adjustments and enter them

Complete end-of-the-month accounting procedures

Prepare end-of-the-month accounting reports such as

Prepare a year-end worksheet and determine the

Prepare a year-end income statement, balance sheet,

In this study unit, were going to take a

End-of-the-Month Accounting Activities

Year-End Accounting Procedures

Assets and End-of-the-Month

FIGURE 1A trademark is an intangible asset.

Assets and End-of-the-Month Activities

Each of the assets just listed fits the definition of intangible

FIGURE 2Tangible Assets

Assets and End-of-the-Month Activities

Current tangible assets. As you already learned, current

Long-term tangible assets. We use the term long-term

Assets and End-of-the-Month Activities

We classify other long-term tangible assets as personal

Assets and End-of-the-Month Activities

Assets and End-of-the-Month Activities

Amortizing an Intangible Asset

To record monthly patent amortization

The Accumulated Amortization Account

Assets and End-of-the-Month Activities

Direct Amortization Method

Assets and End-of-the-Month Activities

Straight-Line Method of Depreciation

(less Salvage Value)

FIGURE 3Depreciation Schedule Using the Straight-Line Method

Assets and End-of-the-Month Activities

of equipment costs $50,000 and its expected life is five

YEARLY D EPR. Then,

40% (of the remai ni ng

FIGURE 4Depreciation Schedule Using the Declining-Balance Method

Assets and End-of-the-Month Activities

depreciation each month, the declining-balance method is

Adjusting Entries for Depreciation

An accumulated depreciation account for store equipment

Assets and End-of-the-Month Activities

Revenue Expenditures vs. Capital Expenditures

Assets and End-of-the-Month Activities

Land can also become improved. Adding driveways, parking

Assets and End-of-the-Month Activities

The Book Value would be:

Less Accumulated Depreciation on day of

FIGURE 5Computation of Actual Accumulated Depreciation and Book Value

Assets and End-of-the-Month Activities

its balance up to the actual total amount. To make the journal

FIGURE 6Computation of Depreciation and Book Value

Calculating Gain or Loss

Assets and End-of-the-Month Activities

The transaction is recorded as follows.

If a company scraps an asset and theres no sale or cash

In case of damaged or destroyed property, the assets book

Assets and End-of-the-Month Activities

Assets and End-of-the-Month Activities

Basically, its easy to identify accounts that will need to be

Adjusting Entry Philosophy