 for us 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 any more detail than that at this point. They're going to 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 a reader two things. We want to tell a reader, hey, we bought the forklift for this amount. We, you know, at the end of the year, there's still one forklift. It's not like supplies and not 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. 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 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 contra 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. All right. 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 going to 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 going to 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 I 21 I 21 equals and will pull a point to the 330. And that will bring the expense up by 330 puts out a balance brought net income down. Why? Because the revenue of 318 minus the expenses, the expenses that have gone up equals the 21, 320, also down here in the task bar, because we have highlighted it will calculate for us. And so the expense went up bringing net income down. All right, so then we're going to go over here and note that this represents a credit in brackets, not a not a negative number for us, not a loss. It's represented in a credit meaning the revenue is 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, it should be 330 330 credit of 330. And note 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 be be off by $30? Because this transaction that debit don't equal the credits off by 30. So then if I change this now to a 330, that would put us back in balance. And notice it happened automatically, because we already had that number in the cell. So I can repost it if that's confusing, we can repost it and say that equals the 330 goes from 330 beginning to 660 up by the 330. And so there we have the any balance of 660 what happened to the book value then it went from 14 5 minus the 330 or 14 170 to 14 5 minus 660 or 13 840 book value went down. All right, 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 these so we can go through our series of questions. And we're going to 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 going to say, I'm assuming that will be affected. How about below the blue line looking for something with salaries. And we have salaries expense. So I'm going to 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 going to right click going to 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 the salaries payable and copy that. And I'm going to 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 are going to be affected pretty much by going through the series of 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 in the most simplistic type of payroll setting, we're going to tell the payroll department or have the payroll department say record payroll more on a cash basis than on a cruel basis. Obviously, 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 earn the revenue. But it doesn't really make sense for the payroll department of course to accrue revenue hourly. That would be a two time consuming and 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 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 on 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 going to happen like one seventh of 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 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 on 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 the 120 coming from now? This in this case, this came from the prior adjusting entry. And there's a couple of different ways we could take care of the 120. One 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 reverse in entry right after the month is over. So we could make it correct and then reverse it right after or we could reverse it, you know, the next time that we do the adjusting entries on the next time around. This one basically where it looks like we're reversing it the next time around. And we'll talk about the next couple options on how to set that up. And that basically, the preference is what is best for the system that we 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 going to say, well, okay, well, 200 minus 120, that's 80. So the adjustments going to have to be 280 to increase this amount. So we're going to say 80 debit, 80 credit. And once we have done that, then this number then should be 80 after we post it. Let's see if that's what happens. We're going to scroll down here. I'm now in cell I18 equals, we're going to point to the $80 debit that's going to go from 800 up by 80 to 880s. We're recognizing that partial period of expenses, even though we have not yet paid it. So now we're over here on cell I13 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 was also going to be on 531 as all adjusting entries are. And we have prepaid rent as of the end of the month being 1,006. 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 prepaid rent possibly. So I'm going to highlight that green. We're just 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 that they 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 C17, right click, hasted 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 did it get there? Why would we have it? Normally we pay rent monthly. So if we rent the office building, then of course we have to pay rent similar to what 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 prepaid the rent and pay for it more than one month at one time. If we were to do that, if we just expensed 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 pay for a year's rent worth this month and then next month of 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 a cruel 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 of 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 in the 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 form of as an expense as of the financial statement date. In this case being May 31st. 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 so we and so we're gonna have to do that. So I'm gonna I'll do that same calculation here. So we're in cell D17 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 gonna say equals and then go point to that debit. That's gonna make the account go from zero up to one six bring net income down. So I'll put this out of bounds 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 19 six on the task bar 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 now number should go down to one six because we reduced it to prepay 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 also going to be recorded on 5 31 and we have unearned that should say unearned fees on May 31st. So we have unearned fees we're going to 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 going to 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 uh prior ones but uh that would be revenue or 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 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 i'm going to copy that and i'm going to put it on the bottom so here's the here's the uh date i'm going to put it on the bottom in cell c 21 because credits traditionally go on the bottom and notice 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 i'm going to put that on top of 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 unearned uh fees unearned revenue how did it get there so not every company's going to have unearned fees so this one's going to be a little confusing because it depends on the type of company that we have for example uh if we're a tax 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 receive the cash we owe something in the future what do we owe we owe our work 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 six thousand five hundred that was unearned 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 one thousand five hundred that should still be unearned that have we have not yet done the work for as of the end of the month as of the cut off date so of the six five we have only one thousand five 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 five thousand so i'm going to do that same calculation over here we're going to say this equals the six five minus one five five thousand that's going to be the debit will also be the credit negative five thousand for the purposes of this worksheet then let's record this we're going to go to the unearned revenue up here in cell i14 equals going to point to the unearned revenue of five thousand 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 in i17 equals we're going to point to the revenue over here of five thousand 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 beating expenses by the 21 640 also represented down here in the final 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