For to match the forklift usage, or the cost allocated to that usage in the year in which it is being used. So that's going to be the idea of depreciation. So we're going to talk about the methods to calculate that depreciation at a later time. But the most obvious method will be a straight line method, which means we'll take that cost, we'll divide it by the useful life of the forklift, and then we will expense it over that useful life. But we won't go into that calculation in any more detail than that. At this point, they're gonna have to give us the number at this point.

So we have the 330. That is what the depreciation expense is determined to be. So then you would think, Well, why don't we decrease the value of the forklift with a credit by 330? And the reason we don't do that, notice that we did do that in supplies. We said, Hey, supplies went down. We'll just write down supplies from this to that.

Why don't we write down the forklift From this to whatever it is after the decline in value. And the reason is because we want to tell our reader two things we want to tell our reader, hey, we bought the forklift for this amount. We, you know, at the end of the year, there's still one forklift, not like supplies and like I counted supplies, and there's less than one forklift. But we do know that it went down in value, and we need to represent that. So we want to tell you by making this new account, that this is the estimate of the value that we're assuming it went down by. So this is just an estimate, and we're telling our reader, hey, it's just an estimate that it went down by we still have one forklift, that's what it cost.

We're assuming it went back down by this month. That's why this is going to be a contra asset. We're going to call this a contra account a contra asset, meaning that all assets have debit balances. This asset has a credit balance. It's contrary to the norm. Why is it contra to the norm because it's really the credit half of this account.

This account is the debit half and this account is kind of like the credit half so we Took the T, and we broke it out into a seven and like an R. And that's not an exact thing. But that's kind of what happened, this credit belongs to this account. Alright, so then we're going to expense that as we use it. And of course, we're not going to call it office equipment expense, we're gonna call it depreciation expense on the office equipment. So it is related to the deterioration or decline in value of the office equipment or, more precisely, better put probably the allocation of the cost of the office equipment over the life that it will be used over. All right, so that's gonna be 330 on the debit, and of course, on the credit side as well.

So debits have to equal the credits, there's our transaction, make sure to put the negative in the credit or to make this worksheet work properly. And then we're going to go over here and post that. So let's do that and see if it does what we would expect it to do. So we're over here in a high 21 i 21 equals and we'll pull Point to the 330. And that will bring the expense up by 330 put us out of balance brought net income down. Why?

Because the revenue of 31 eight minus the expenses, the expenses have gone up equals the 21 320. Also down here in the taskbar, because we have highlighted it will calculate for us. And so the expense went up bringing net income down. Alright, so then we're going to go over here and note that this, it represents a credit in brackets not not a negative number for us not a loss. It's representing a credit, meaning the revenue are beating the expenses. Now we're going to go to so I 11 equals and point to the credit of 300 in this case, actually, wait that it should be 333 30 credit of 330.

And know what would happen if I if I made that error. Let's make that error and note what would happen If we made that error and I posted this, this would go up. But we'd still be off by $30. Why would we be off by $30? Because this transaction, the debits don't equal the credits off by 30. So then if I change this now to 330, that would put us back in balance.

And notice that happened automatically because we already have that number in the cell. So I can repost it. If that's confusing, we can repost and say that equals the 330 goes from 330, beginning to 660 up by the 330. And so there we have the ending balance of 660. What happened to the book value then? It went from 14 five minus two 313 or 14 172 14, five minus 660 or 13 840. book value went down.

Alright, so next transaction, we're going to have once again on 531 they're all on 531. And this represents the the D here, and we have accrued salaries. So once again, I'm going to ungreen the so we can go through our series of questions. And we can say there's going to be one account above the blue line related to salaries. And if we look through here, how about salaries payable has the word salaries in it. So we're gonna say, I'm assuming that will be affected, how about below the blue line, we're looking for something with salaries, and we have salaries expense, so I'm gonna say that's probably the likely factor, we see that all expenses have debit balances represented by the fact that they do not have brackets, and they all go up expenses generally only go up.

Therefore, we're going to make it go up by doing the same thing to it, which in this case, would be another debit. So I'm going to copy that I'm going to right click and paste it 123. I'm not going to put the number in there yet. We're going to think about the other side, which of course will be the other account being salaries payable. So I'm going to go ahead and copy this salaries payable, and copy that, and I'm gonna put my cursor in C 15, right click and paste it 123. So we can see which way the accounts are going to go and which accounts can be affected pretty much by going through the series questions without knowing what is going on.

So now let's talk about what's going on. What is salaries payable? Why is there something in it? How does it get there? If we think about salaries expense, note that we in the most simplistic type of payroll setting, we're going to tell the payroll department or our have the payroll department say, record payroll more on a cash basis than an accrual basis. Obviously, we work if we work hourly, we're making money hourly, the payroll isn't generally going to be recorded hourly, we know that if I worked today, and I get paid Friday, that when I work, I earned the revenue.

But it doesn't really make sense for for the payroll Department Of course to accrue revenue hourly, that would be too time consuming not practical. So what we're going to say is if the payroll department for a hypothetical purposes, pays people on Friday, every Friday they pay people, we're just going to say, hey, payroll department, when you pay people, you just debit, the salaries expense, and you credit, wages payable, and that's fine. But when we make the financial statements as of the cutoff date, as of 531, we want to be in a perfectly accrual basis as of that time period. And therefore, we want to make sure that we're recording any discrepancy. So what's the likelihood then, of Friday landing on the 31st? Right, it's probably not gonna happen like one seventh.

So that means if Friday landed on any other day than the 31st, then we're going to have some days worked for which we have not yet paid the employees. For example, if Friday landed on Wednesday, if the 31st landed on on a Wednesday, then as of the 31st. In that scenario, we would have three days of payroll, that where people have worked, we owe the money, but we're not going to pay it until the next month, because we're going to pay it off Friday. This may seem trivial, but when you talk about a lot of employees, that can be fairly significant. So as of the financial statement date, we're just going to say, okay, we're just going to make it right as of this cutoff date. And you may be saying, Well, where's that 120 coming from now, this in this case, this came from the prior adjusting entry.

And there's a couple different ways we could take care of the 121 is that we could tell the payroll department, we want you to reverse this entry next time you run payroll, that's not always a great thing to do, because that confuses the payroll department. We could have a reversing entry right after the month is over so we could make it correct and then reverse it right after or or we could reverse You know, the next time that we do the adjusting entries on the next time around this one, basically we're looks like we're reversing it the next time around. And we'll talk about the next couple options on how to how to set that up. And that basically, the preference is what what is best for the system that we are, are using in our particular accounting department. So in this case, we have 120 in there already.

And this accrued salaries means that it should be 200 as of that time period, so this 120 needs to be basically adjusted to 200 at this time frame. So if we take out the calculator, we're gonna say well, okay, well 200 minus 120, that's 80. So the adjustments gonna have to be 280 to increase this amount, so we're gonna say 80, debit 80 credit. And once we have done that, then this number then should be at after we posted. Let's see if that's what happens. So we're going to scroll down here I'm now in cell I 18 equals, we're going to point to the $80 debit, that's going to go up from a from 800 up by 80 to 80. we're recognizing that partial period of expenses, even though we have not yet paid it.

So now we're over here on cell I 13. equals, and we will then point to the salaries payable. And that will make this credit balance go up in the credit direction to 200, which is what we determined that the accrued salaries should be, that's what we owe as of the cutoff date, the end of May in this case. All right. Now we're going to go to E which is also going to be in 531. It has all adjusting entries are and we have prepaid rent as of the end of the month being 1006. All right, so let's clear off the green here and we can go through our series of questions.

So we're going to have one balance sheet account above the Blue Line related to rent in this case, and we see Hmm, prepaid rent, possibly. So I'm going to highlight that green line is going to be one account below the blue line related to rent. How about rent expense in this case. And we know that expense accounts all have debit balances represented by the fact if you do not have brackets, and they all generally only go up, and therefore we're going to make it go up by doing the same thing to it, which in this case would be another debit. So I'm going to copy that. I'm going to put that on top in cell C 17.

Right click, paste it 123. So we're going to debit the rent expense, therefore we must be crediting the prepaid rent. So I'm going to copy that. I'm going to put that on the bottom. We can see what we're doing without really knowing why we're doing it. If we go through that series of questions now let's talk about why we're doing it.

What is prepaid rent? How do they get there? Why would we have it? Normally we put we pay rent monthly so we rent the office building then of course we have to pay rent similar to if we were renting An apartment or something like that. And if we paid it monthly, we might just expense the rent. However, it is very possible for us to pay prepaid rent and pay for more than one month at one time.

If we were to do that, if we just expense it when the payment happened, then that would make net income go down by a lot by the amount of multiple rent payments. And again, it would kind of mess up the comparison if we if we pay for a year's rent worth this month. And then next month, obviously we didn't, then the net income would be reduced by a year's worth of rent in one month. And then the following month, we would have we'd be looking a lot better because we would have no rent expense. And from an accrual basis of the matching principle. That doesn't make sense because we want to allocate the rent as it's being used in the time period, not necessarily as it's being paid.

So that we can measure performance in a more precise way. So that means that we have to we have to, if we pay for more than one month's rent, then we should have the account department once again, say, whenever you pay the rent, don't put it into rent expense, put it into prepaid rent, then we in the adjusting department will go into prepaid rent and say, Okay, how many months have passed, and how much of that rent then should be consumed in the in the form of an expense, as of the financial statement date, in this case been may 31. So if in this case, it says prepaid rent as of the end of the month, so that's what it should be as of the end of the month as of 531. So if we take out our calculator, then we need this number here to be that number there.

So the 3002 minus the one six means that we need one six, it's half and two. So we're going to have to do that. So I'm going to I'll do that same calculation here. So we're in cell D 17 equals 3002 minus one, six, equals one, six, we're gonna have a credit for the same amount, a credit of one, six. And there's our transaction. So let's go ahead and post this out.

So I'm going to go over here in I 19. And we're going to say equals, and then go point to that debit. That's going to make the account go from zero up to one, six, bring net income down. So that puts us out of balance brings net income down. And because the expense went up, brings that income down, how do we calculate net income? It's the credit of revenue less all the expenses comes out to 1960 on the taskbar, which is also on this formula as well.

Then let's go up to I eight equals, and we're gonna go to the credit of one six. And once we hit enter, this number should go down To one six, because we reduced it to prepaid rent what it should be as of the end of the time period. All right, so let's clean off the green again and go to the next area. The last and final adjusting journal entry before we have to stop this exercise it's also going to be recorded on 531. And we have an earned that should say unearned fees on May 31. So we have unearned fees, we're gonna do our same thing.

What's going to be the account above the blue line? And yes, this is not a trick question. It's gonna be unearned fees. And so we're going to put that here. And we could call unearned fees, we could call it unearned income is really what we're talking about in this case, because fees in a service company would be income. So that in mind having that in mind, what would be the account below the blue lines a little bit more tricky than some of the fire prior ones, but that would be revenue income.

So we're talking about unearned fees being fees being income. And then the other side then would be revenue or income. If we look at the accounts below the blue line, revenue and expenses, revenue expenses, income statement accounts only go up. This one is an income account, which has a credit balance, it only goes up, how do we make something go up, we do the same thing to it, which in this case, would be another credit. So we're going to credit this account. So I'm going to copy that.

And I'm going to put it on the bottom. So here's the here's the date, I'm going to put it on the bottom in cell C 21. Because credits traditionally go on the bottom. And note, this is the first one really, that we're dealing with the income half here, right. And then we have the other account, which has got to be unearned revenue, unearned fees. In this case, I'm going to copy that and put that on top, that will be the debit so we can see which way they go, what accounts will be affected if we go through this line of question without really knowing what's going on.

Now let's talk about what's going on. What is under fees unearned revenue? How do they get there? So not every company is going to have unearned fees. This ones can be a little confusing because it depends on the type of company that we have. For example, if we're attacked practice off, oftentimes we're going to do the work before we send out the bill.

If on the other hand, we sell something like magazine subscriptions, then we're also we're often going to get paid before we send out the magazine. In a situation like that. If we get paid before we do the work, that's when we would have this situation of unearned revenue, meaning people paid us for services we're going to do in the future. If that happens, then our accounting department over here, they would have received the cash, but they couldn't record a credit to revenue. They would have to record a credit to unearned revenue. Because it's a liability.

We received the cash. We owe something in the future. What do we owe we owe artwork. So we're going to say okay, they're just going to put it into unearned revenue. In the accounting department in the adjusting process, then we have to say okay of that 6500 that was on earned that we had not yet done work for how much had we done work for. And in this case, we're saying that we have 1500 that should still be unearned that we have not yet done the work for as of the end of the month as of the cutoff date.

So of the six five, we have only 1005 left that has not yet been earned as of the end of the month. Therefore, we need to make this amount go down to the one five, which is a subtraction problem of six five minus one five gives us the 5000. So I'm going to do that same calculation over here we're going to say this equals the six five minus 155 thousand that's going to be the debit will also be the credit negative 5000. For the purposes of this worksheet, then let's record this, we're going to go to the unearned revenue up here in cell I 14 equals going to point to the unearned revenue of 5000. Bringing the amount from here down to one five, which is what we determined it should be. So that looks correct.

Then we're going to go to the revenue side and I 17 equals, we're going to point to the revenue over here of 5000. It's going to go from 31, eight up in the revenue direction to 36. Eight, what happened to net income? It went up in that case, why? Because revenue went up, net income is revenue minus expenses. So we have revenue being expenses by the 21 640, also represented down here in the formula bar of 24 640.

So we now have the adjusted trial balance, that should be as correct as we can make it as of the cutoff date being 531. Now we can use that information to make the financial statements.