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Part B: Analyze, Record & Post Adjusting Entries,
Prepare Adjusted Trial Balance - Slides 11-23

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Slides 11-13 (1m:45s)

Slide 11

This is part B of the video titled analyze, record and post adjusting entries, and prepare adjusted trial balance. In part A, we worked through items 1-6 and recorded those adjusting entries.

Slide 12

This is now part B where we will work through items 7-20 and prepare the adjusted trial balance.

Slide 13

$300 of equipment depreciation needs to be recorded. Depreciation is simply the expensing of a long lived asset over the periods that are benefitted. If we depreciate $300 of equipment, assets will go down and expenses will go up thus decreasing equity. The account we are dealing with is equipment which shows a debit balance of $2,000, we’re saying that we need to reduce it by $300, but rather than crediting the equipment account itself we are going to have a contra-asset account called accumulated depreciation. What this is it’s just an account that helps us keep track of how much of this equipment we’ve depreciated. The related account is depreciation expense; therefore, we should have $300 of depreciation expense debit at the end of the year, and accumulated depreciation for equipment should be a credit of $300. How do we go from the wrong pre-adjusted numbers to the right adjusted numbers? We would have to increase our depreciation expense $300 and increase the contra asset accumulated depreciation $300. On the balance sheet, the equipment will be recorded at $2,000 minus the $300 of accumulated depreciation. So the net book value of equipment on the balance sheet will only show $1,700.

Slide 14 (1m:01s)

Slide 14

This is another depreciation example. We need to reduce buildings by $6,000 of depreciation thus reducing assets and, due to that additional expense, reduces owners’ equity. The account we’re dealing with is building, debit $200,000, which we need to reduce by crediting it $6,000, but as with receivables we use a contra asset account, accumulated depreciation-building into which we’ll put that $6,000 reduction. So whether the credit is up here in building or the credit is down here in accumulated depreciation, the net effect is the same. Depreciation expense already shows the $300 of depreciation from the equipment and we need to compute what the ending balance should be. It should be $6,300, which would include this depreciation on the building, and accumulated depreciation on the building should be a credit of $6,000. How do we go from the wrong numbers to the right numbers? We would have to debit depreciation expense and credit accumulated depreciation building.

Slide 15 (0m:51s)

Slide 15

We estimated that $350 of utility were used but not yet billed. If that’s the case we would have to show that we owe $350 more of an accrued expense and since it’s an expense we will have to reduce our equity. The pre-adjusted balance and utilities expense is $3,040 which probably represents 9 months so far in the year X1. We know that it should increase by another $350 so the ending utilities expense should be $3,390. We haven’t paid yet so our ending accrued expenses, which is a liability account needs to a credit of $350. The adjusting entry that would take us from the wrong number to the right number would be a debit to utilities expense thus increasing expenses and a credit to accrued expenses thus increasing liabilities.

Slide 16 (0m:58s)

Slide 16

Interest at 5% needs to be accrued on the note payable. We had a $160,000 note payable so we would have to accrue interest on that, our liabilities will go up because we haven’t paid interest on that yet and since we have more interest expense we will have to reduce equity. Our opening balances in these accounts is 0, the math to compute interest expense would be the $160,000 loan times the 5% annual interest rate times 10 out of the 12 months of the year have expired. Therefore $6,667 of interest expense should be accrued and still payable. That would be the ending balances for interest expense and interest payable. The adjusting journal entries to go from the wrong numbers to the right numbers would be a debit to interest expense $6,667 and a credit to interest payable $6,667. I’ve rounded this to the nearest dollar just for display purposes.

Slide 17 (0m:51s)

Slide 17

2% commission has not yet been recorded on a $1,000 sale. If we haven’t recorded it yet, that also means we haven’t paid it yet so we’d have to increase our liabilities for that commissions payable and due to the increase commissions expense we’d have to reduce equity. The accounts involved are commission payable and commission expense. By taking a $1,000 times 2% we would show that we need to record $20 of commission expense. If we were to tack that commission expense onto the opening balance of $4,020, we would have an ending commission expense of $4,040 as a debit and we would show that we have a $320 credit balance payable in our commission payable. The adjusting entry would have to be a commission expense debit 20 and a commission payable credit of 20.

Slides 18-19 (1m:19s)

Slide 18

One last thing we need to compute income tax expense. The way you compute income tax expense, is you determine net income before taxes and then you multiply it by the appropriate tax rate, it’s a little more complicated than that but we’ll simplify it here. Total adjusted revenues are $200,800 and total expenses are $81,307, so the income before taxes is $119,493, assuming a 40% tax rate that comes out to $47,797 in income taxes for the year.

Slide 19

The journal entry therefore would increase our liabilities as income taxes payable and the increased expense would reduce our owners’ equity. The accounts involved are income taxes payable and income tax expense, which open with 0 balances. But the adjusted trial balance should show income tax expense debit of $47,797, and since we haven’t paid yet income tax payable should show $47,797 as a credit. The adjusting entry to get to the right balances would be debit to income tax expense $47,797 and credit to income taxes payable $47,797. We’ve just gone through a whole bunch of adjusting journal entries and now let’s summarize and see what we’ve done.

Slide 20-23 (1m:22s)

Slide 20

Let’s see what we’ve accomplished. We’ve analyzed recorded and posting the adjusting journal entries, and now we are going to look at preparing the adjusted trial balance.

Slide 21

This is an example of a trial balance work sheet that some companies use in preparing their adjusted trial balance. They bring in their pre-adjusted trial balance numbers and then they show the debits and credits that they think they need to properly adjust the accounts and compute what the adjust balances are, then they go back and make sure the journal entries are properly recorded and posted in the actual accounting system. This visually lets them know what the number should be. So here’s the first page…

Slide 22

…and here’s the second page. The debit’s of all the entries on page 1 and page 2 equal the credit of all entries from page 1 and page 2, and the adjusted trial balance with debits showing as positive numbers and credits showing as negative numbers adds up to 0 showing that we have an adjusted trial balance that balances. This is the adjusted trial balance that will now be used to prepare the company’s financial statements, which we will discuss in the next video.

Slide 23

I know there was a lot packed into here but I hope you see the flow of the accounting cycle. We will now move on to preparing the actual financial statements based on the adjusted trail balance. So I hope you get the big picture and that you’re ready to take the quiz.