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Lesson 11 (printer-friendly version)

INSTRUCTIONS:

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Chapter 1

Introduction

In Lesson 10, you learned about the year-end financial reports of a business. These reports are extremely valuable in
determining how Children's Capers is progressing as a viable, profit-making business. These four financial statements
show the vitality and strength of Children's Capers. In addition, they can be valuable tools to determine which areas are
weak and need improvement for the ensuing year.

In this lesson, you'll continue completing the year-end work required in a merchandising business. These tasks prepare
the financial records of Children's Capers to begin the new fiscal period. You'll be making adjustments to certain asset
accounts so their balances will accurately reflect the dollar amount of those assets still remaining at the end of the year.

As you near the finish line in Accounting Fundamentals, I would like to invite you to think back on all
the new information and skills you have acquired. In just five short weeks, you have gained the
knowledge that it normally takes a high school student at least three-quarters of a school year to
acquire. Take a moment to congratulate yourself. You certainly deserve it!

Chapter 2

Why Adjusting Entries Are Necessary

Now that you've successfully completed the worksheet for Children's Capers, there's some information from it that must
be journalized and posted to the General Ledger.

You're going to be journalizing the four transactions in the Adjustments columns of the worksheet. These are columns 3
and 4 in the worksheet labeled Adjustments.

I would like to take a minute to explain to you why you're going to journalize these adjusting entries and what these
transactions will do to the General Ledger accounts when they are posted. Let's look at the Merchandise Inventory line
on the worksheet. If you look in column 1, Trial Balance debit, you will see the amount $7,250.00 for the account
Merchandise Inventory. This figure represents the value of merchandise available for sale on January 1, 200-. On that
same line, look to the right at column 3, Adjustments debit. You made a $2,100.00 adjustment in that column. Finally,
look on that same line in column 7, Balance Sheet debit. The amount there is $9,350.00.

If you analyze those three figures, you'll see that the merchandise inventory increased from January 1, 200- to
December 31, 200-. Since Merchandise Inventory has a normal debit balance, you made a debit adjustment for the
amount of the increase from the beginning of the year until the end of the year. Therefore, a debit of $7,250.00 from
column 1 plus a debit adjustment of $2,100.00 from column 3 equals the new debit balance of $9,350.00, the figure in
column 7.

The credit half of this adjusting transaction is entered as a credit to the account Income Summary. Therefore, enter a
credit in column 4 for $2,100.00 on the line which is for the account Income Summary. The account Income Summary is
simply a holding account for various numbers until they are transferred into other General Ledger accounts. When you

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journalize and post the closing entries in Lesson 12, you will see how the amounts in Income Summary are entered and
then zero out at the end of the year.

If you look at the other three transactions in the Adjustments columns of the worksheet, columns 3 and 4, you can
readily see what the adjustments are doing. They are either increasing or decreasing the dollar amount in various
accounts in the General Ledger. The balance in these accounts changes from the beginning of the year to the end of
the year.

Obviously, if you had $912.00 in Office Supplies on January 1, the balance will be different on December 31. You used
some of those supplies and bought more throughout the year. What the adjusting entries are doing is bringing certain
accounts up to date so their balances reflect the actual amount of supplies and/or prepaid insurance on hand at the end
of the year.

Chapter 3

Journalizing Adjusting Entries

Below is an example of how your adjusting entries will look. I have used J & J Auto Repair for this purpose, which was
the business used for examples in Lesson 9 and 10.

Okay, let's journalize those adjusting entries on journal page 15. On the first line of this new journal page, enter
Adjusting Entries, centered in the Account Title section.

Look once more at the Adjustments columns, columns 3 and 4 of the worksheet. The first adjusting entry is a debit of
$2,100.00 to Merchandise Inventory.

On the second line of the journal, enter Merchandise Inventory in the Account Title column and enter $2,100.00 in the
General Debit column, column 1. On the next line, enter Income Summary in the Account Title column and make a
credit entry in column 2 for $2,100.00. That's all that is necessary to journalize the adjustment to Merchandise

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Inventory.

Find the next adjusting entry in columns 3 and 4 of the worksheet. It is a $190.00 credit to Office Supplies and a
$190.00 debit to Supplies Expense/Office. Using the next two lines in the journal, enter a $190.00 credit to Office
Supplies on one line and a $190.00 debit to Supplies Expense/Office on another line. Use columns 1 and 2, General
Debit and Credit, to journalize all the adjusting transactions.

The next transaction in the Adjustment columns is a $297.00 credit to Store Supplies and a $297.00 debit to Supplies
Expense/Store. Using the next two lines of the journal, journalize this transaction using the General Debit and Credit
columns.

The last adjusting entry in columns 3 and 4 of the worksheet is a $100.00 credit to Prepaid Insurance and a $100.00
debit to Insurance Expense. On the next two lines of the journal, enter this transaction, once again using only the
General Debit and Credit columns.

That's all there is to journalizing the adjusting entries. You should have used nine lines on your new journal page,
including the line on which you wrote Adjusting Entries.

Chapter 4

Posting the Adjusting Entries

Now you must post those adjusting entries to the General Ledger accounts.

Post the transactions, one line at a time, make sure to enter 15 in the General Ledger Post Ref. column. This stands for
page 15 of the journal. Also, be sure to enter the account number to which you posted the adjusting transaction in the
Post Ref. column of the journal.

Let's do the first one together. Looking at your journal page, you can see that the first entry is a $2,100.00 debit to
Merchandise Inventory. Go to the Merchandise Inventory account in the General Ledger and enter $2,100.00 in the
Debit column. Now for another "amazing fact" of accounting!

After you refigure the balance in the Merchandise Inventory account, look at column 7 on the worksheet for
Merchandise Inventory. The amount in column 7 on the worksheet should be the same debit balance that is now
showing in the Merchandise Inventory account in the General Ledger. How about that!

Merchandise Inventory account in the worksheet and General Ledger

Go ahead and post the rest of the adjusting entries from the journal to their respective General Ledger accounts. The

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new balance in the General Ledger accounts should be the same number that is in column 7 of the worksheet for each
asset account title, i.e. Supplies—Office, Supplies—Store, and Prepaid Insurance.

You can now see how you're bringing the General Ledger accounts up to date for the next fiscal period. In other words,
the ending balance in these accounts will be the beginning balance for the next year.

As usual, if you have problems, the solutions to this lesson are in the Supplementary Material section.

Chapter 5

Conclusion

This chapter has shown you some very important end-of-year activities: how to journalize and post adjusting entries.
With only one lesson remaining in this course, you realize that there is very little work remaining to complete all the
accounting duties for a business. You can now see the finish line ahead of you, so go forward with the confidence that
you have done an excellent job and have gained a tremendous amount of knowledge in just six short weeks.

As usual, when you feel ready, there is a short, multiple-choice quiz I would like you to take (famous last words!).

Supplementary Material

Lesson 11 Solutions
/crs/pix/fun/L11-Solutions.pdf
All finished? Click here to check your work against this lesson's
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear
sideways, so printing may be your better option. If you don't mind
tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper!

Note: Only those forms and accounts with new entries in them will
appear in each lesson's solutions. If you're curious about a
transaction in a previous lesson, you'll have to go back to that
lesson's Solutions link.

FAQs

Q: Why are adjusting entries needed in a business?

A: Adjusting entries are necessary so that certain accounts in the general ledger are brought
up-to-date for the beginning of the new year.

Q: What is the Income Summary account in the general ledger used for?

A: Income Summary is a holding account. Figures are entered in Income Summary until they
can be properly posted to other accounts in the general ledger. At the end of the fiscal
period, the Income Summary account zeros out and has no balance.

Q: How is it possible for Merchandise Inventory to have either a debit adjustment or a credit
adjustment?

A: Merchandise Inventory would have a debit adjustment if the inventory was higher at the
end of the year than it was at the beginning. A credit adjustment would indicate that
merchandise inventory was lower at the end of the year than it was as the beginning.

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