Adjustments and The Worksheet

Financial statements are completed as soon as possible in order to be useful. One way to speed the preparation of financial statements is to use a worksheet. A worksheet is a form used to gather all data needed at the end of an accounting period to prepare the financial statements. Preparation of the worksheet is the fourth step in the accounting cycle.

Example

The example shows a common type of worksheet. The heading shows the company name, report title, and period covered. In addition to the Account Name column, this worksheet contains five sections: Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, and Balance Sheet. Each section includes a Debit column and a Credit column. The worksheet has 10 columns in which to enter dollar amounts.

The Trial Balance Section

1. Enter the general ledger account names.
2. Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section.
3. Total the Debit and Credit columns to prove that the trial balance is in balance.
4. Place a double rule under each Trial Balance column to show that the work in that column is complete.

Notice that the trial balance has four new accounts: Accumulated Depreciation—Equipment, Supplies Expense, Rent Expense, and Depreciation Expense—Equipment. These accounts have zero balances now, but they will be needed later as the worksheet is completed.

The Adjustments Section

Usually, account balances change because of transactions with other businesses or individuals. For Wells' Consulting Services, the account changes recorded in the The General Journal and the General Ledger course were caused by transactions with the firm's suppliers, customers, the landlord, and employees. It is easy to recognize, journalize, and post these transactions as they occur.

Some changes are not caused by transactions with other businesses or individuals. They arise from the internal operations of the firm during the accounting period. Journal entries made to update accounts for previously unrecorded items are called adjustments or adjusting entries. These changes are first entered on the worksheet at the end of each accounting period. The worksheet provides a convenient form for gathering the information and determining the effects of the changes. Let's look at the Supplies adjustment made by Wells' Consulting Services on December 31, 2013.

Adjusting For Supplies Used

On November 28, 2013, Wells' Consulting Services purchased $1,500 of supplies. On December 31, the trial balance shows a $1,500 balance in the Supplies account. This amount is too high because some of the supplies were used during December.

An adjustment must be made for the supplies used. Otherwise, the asset account, Supplies, is overstated because fewer supplies are actually on hand. The expense account, Supplies Expense, is understated. The cost of the supplies used represents an operating expense that has not been recorded.

On December 31, Carlos Valdez counted the supplies. Remaining supplies totaled $1,000. This meant that supplies amounting to $500 were used during December ($1,500 — $1,000 = $500). At the end of December, an adjustment must be made to reflect the supplies used. The adjustment reduces the Supplies account to $1,000, the amount of supplies remaining. It increases the Supplies Expense account by $500 for the amount of supplies used. Notice that the adjustment for supplies is based on actual usage.

Adjustment

Let’s review the adjustment on the worksheet: a debit of $500 to Supplies Expense and a credit of $500 to Supplies. Both the debit and credit are labeled (a) to identify the two parts of the adjustment.

Supplies is a type of prepaid expense. Prepaid expenses are items that are acquired and paid for in advance of their use. Other common prepaid expenses are prepaid rent, prepaid insurance, and prepaid advertising. When cash is paid for these items, amounts are debited to Prepaid Rent, Prepaid Insurance, and Prepaid Advertising; all are asset accounts. As prepaid expenses are used, an adjustment is made to reduce the asset accounts and to increase the related expense accounts.

Business Transaction

Analysis
The expense account, Supplies Expense, is increased by $500. The asset account, Supplies, is decreased by $500.

Debit-Credit Rules
Debit – Increases to the expense accounts are recorded as debits. Debit Supplies Expense for $500.

Credit – Decreases to asset accounts are recorded as credits. Credit Supplies for $500.

T-Account Presentation

Review

Let's review the effect of the adjustment on the asset account, Supplies. Recall that the Supplies account already had a balance of $1,500. If no adjustment is made, the balance would remain at $1,500, even though only $1,000 of supplies are left.