Why Use an Adjustment Workpaper?
At period-end, an organization may need to record supplies used, depreciation, revenue earned from an advance, or wages incurred but not yet paid. These adjustments update the ledger so its balances reflect the accounting period. A workpaper provides a structured way to collect the unadjusted balances, show the proposed adjustments, and calculate each resulting balance before statements are prepared.
The workpaper is a calculation and review tool; it does not replace the journal or ledger. An approved adjustment must still be recorded in the accounting records. The workpaper helps make the proposed entries visible, makes arithmetic errors easier to find, and produces an adjusted trial balance for the next stage of reporting.
How the Workpaper Is Organized
A common workpaper has an account column and three pairs of money columns: unadjusted trial balance, adjustments, and adjusted trial balance. An adjustment that affects two accounts is entered on two rows, one debit and one credit. If an account has more than one adjustment, combine the applicable amounts to find its adjusted balance, while retaining enough detail to review the individual entries.
For each account, calculate the adjusted balance by combining its unadjusted balance and its adjustments according to their debit or credit sides. An adjustment debit increases a debit-balance account or reduces a credit-balance account; an adjustment credit increases a credit-balance account or reduces a debit-balance account. Do not simply add every adjustment amount to the account's original balance without considering its side.
List every ledger account and place its balance in the debit or credit column. Confirm the two totals agree before proceeding.
Use the account names and debit-credit directions required by the adjustment. Give each entry a brief explanation or reference.
For every proposed entry, verify that its debits equal its credits. Then sum the workpaper adjustment debit and credit columns separately and compare them.
Combine each account’s unadjusted balance with its adjustment, place the resulting balance on the correct side, and verify that adjusted debit and credit totals agree.
The double-entry system explains why the totals should agree. Each complete journal entry has equal debit and credit amounts. If the unadjusted trial balance is balanced and every adjustment entered in the workpaper is balanced, adding those entries preserves equality in the aggregate:
This is a check on arithmetic and entry equality, not proof that the right accounts, amounts, or period have been selected. A balanced workpaper can still contain a complete but incorrect entry, or omit an adjustment entirely.
Worked Workpaper With Several Adjustments
Worked Example: Preparing an Adjusted Trial Balance
At December 31, a hypothetical firm has the following unadjusted balances in dollars: Cash, $12,000 debit; Accounts Receivable, $9,000 debit; Supplies, $3,000 debit; Equipment, $40,000 debit; Accumulated Depreciation, $8,000 credit; Accounts Payable, $6,000 credit; Unearned Revenue, $4,000 credit; Common Stock, $30,000 credit; Retained Earnings, $6,000 credit; Service Revenue, $14,000 credit; and Wages Expense, $4,000 debit. The period-end review identifies $1,200 of supplies used, $2,000 of depreciation, $1,500 of previously unearned revenue now earned, and $700 of wages incurred but unpaid. Prepare the adjustments and adjusted trial balance.
Method. Record each adjustment as a debit-credit pair, then carry the adjusted balance of every affected account into the adjusted trial balance.
1. Check the starting trial balance. Unadjusted debits total $12,000 + $9,000 + $3,000 + $40,000 + $4,000 = $68,000. Credits total $8,000 + $6,000 + $4,000 + $30,000 + $6,000 + $14,000 = $68,000.
2. Enter and check each adjustment. Supplies used: debit Supplies Expense $1,200 and credit Supplies $1,200. Depreciation: debit Depreciation Expense $2,000 and credit Accumulated Depreciation $2,000. Revenue earned from the advance: debit Unearned Revenue $1,500 and credit Service Revenue $1,500. Accrued wages: debit Wages Expense $700 and credit Wages Payable $700. Each entry has equal debits and credits. Total adjustment debits are $1,200 + $2,000 + $1,500 + $700 = $5,400; total adjustment credits are also $5,400.
3. Calculate affected balances. Supplies becomes $3,000 debit less the $1,200 credit adjustment, or $1,800 debit. Accumulated Depreciation becomes $8,000 + $2,000 = $10,000 credit. Unearned Revenue becomes $4,000 less $1,500 = $2,500 credit. Service Revenue becomes $14,000 + $1,500 = $15,500 credit. Wages Expense becomes $4,000 + $700 = $4,700 debit. Wages Payable is $700 credit. The new Supplies Expense and Depreciation Expense balances are $1,200 debit and $2,000 debit, respectively.
| Account | Unadjusted balance | Adjustment | Adjusted balance |
|---|---|---|---|
| Cash | $12,000 Dr | — | $12,000 Dr |
| Accounts Receivable | $9,000 Dr | — | $9,000 Dr |
| Supplies | $3,000 Dr | $1,200 Cr | $1,800 Dr |
| Equipment | $40,000 Dr | — | $40,000 Dr |
| Accumulated Depreciation | $8,000 Cr | $2,000 Cr | $10,000 Cr |
| Accounts Payable | $6,000 Cr | — | $6,000 Cr |
| Unearned Revenue | $4,000 Cr | $1,500 Dr | $2,500 Cr |
| Wages Payable | — | $700 Cr | $700 Cr |
| Common Stock | $30,000 Cr | — | $30,000 Cr |
| Retained Earnings | $6,000 Cr | — | $6,000 Cr |
| Service Revenue | $14,000 Cr | $1,500 Cr | $15,500 Cr |
| Wages Expense | $4,000 Dr | $700 Dr | $4,700 Dr |
| Supplies Expense | — | $1,200 Dr | $1,200 Dr |
| Depreciation Expense | — | $2,000 Dr | $2,000 Dr |
4. Verify the adjusted totals. Adjusted debits are $12,000 + $9,000 + $1,800 + $40,000 + $4,700 + $1,200 + $2,000 = $70,700. Adjusted credits are $10,000 + $6,000 + $2,500 + $700 + $30,000 + $6,000 + $15,500 = $70,700. The adjusted trial balance is in balance.
Check. The unadjusted totals agree, every adjustment is balanced, and the adjusted totals agree. The workpaper is arithmetically consistent; the underlying estimates and cutoff judgments still require appropriate support.
Accruals and Prepayments in the Workpaper
An adjustment often recognizes an expense or revenue in the period it relates to, even though cash was paid or received in a different period. For example, recognizing wages owed requires a debit to Wages Expense and a credit to Wages Payable. No cash account is included because the amount is unpaid at the reporting date. Similarly, earning part of a customer advance reduces Unearned Revenue and increases the appropriate revenue account; it does not create a second cash receipt.
A prepayment adjustment reallocates the part of an asset that has been consumed. If insurance coverage has expired, the workpaper debits Insurance Expense and credits Prepaid Insurance. A supplies adjustment works the same way: the amount used becomes an expense, while the remaining supplies stay as an asset. The calculation must follow the facts and the account balance; the adjustment is not automatically equal to the full original payment or purchase.
Worked Example: Combining Accrued and Prepaid Adjustments
A hypothetical organization has these December 31 unadjusted balances: Cash, $8,000 debit; Accounts Receivable, $3,000 debit; Prepaid Insurance, $1,200 debit; Equipment, $12,000 debit; Accumulated Depreciation, $2,000 credit; Accounts Payable, $1,500 credit; Common Stock, $15,000 credit; Retained Earnings, $2,000 credit; and Service Revenue, $3,700 credit. The policy review finds that $300 of insurance has expired, $900 of service has been performed but not billed, and $450 of wages are owed. Record the adjustments and check the adjusted trial balance.
Method. Match each item to its period-end account effect. Expired insurance is an expense; unbilled earned service is a receivable and revenue; unpaid wages are an expense and liability.
1. Check unadjusted totals. Debits equal $8,000 + $3,000 + $1,200 + $12,000 = $24,200. Credits equal $2,000 + $1,500 + $15,000 + $2,000 + $3,700 = $24,200.
2. Record the three adjustment pairs. Debit Insurance Expense $300 and credit Prepaid Insurance $300. Debit Accounts Receivable $900 and credit Service Revenue $900. Debit Wages Expense $450 and credit Wages Payable $450. The adjustment columns total $300 + $900 + $450 = $1,650 on each side.
3. Calculate the adjusted balances. Prepaid Insurance is $1,200 − $300 = $900 debit. Accounts Receivable is $3,000 + $900 = $3,900 debit. Service Revenue is $3,700 + $900 = $4,600 credit. Insurance Expense is $300 debit, Wages Expense is $450 debit, and Wages Payable is $450 credit. Other accounts remain unchanged.
4. Check the adjusted trial balance. Adjusted debits equal $8,000 + $3,900 + $900 + $12,000 + $300 + $450 = $25,550. Adjusted credits equal $2,000 + $1,500 + $450 + $15,000 + $2,000 + $4,600 = $25,550.
Check. The workpaper balances at $25,550 per side. In particular, the unbilled service adjustment increases Accounts Receivable, not Cash, and the unpaid wages adjustment creates Wages Payable, not a cash payment.
A Balanced Trial Balance Is Not a Complete Audit
Debits equaling credits is necessary, but it does not show that an adjustment is accurate. An entry may debit and credit the wrong accounts by the same amount. An amount may be based on an unsupported estimate, recorded in the wrong period, or omitted altogether. A workpaper review therefore checks both arithmetic and the substance of each adjustment: its support, amount, accounts, and period.
Worked Example: A Balanced but Incorrect Depreciation Entry
A hypothetical firm’s unadjusted trial balance includes Cash, $10,000 debit; Accounts Receivable, $8,000 debit; Equipment, $30,000 debit; and Supplies, $2,000 debit. Credits are Accumulated Depreciation, $2,600; Accounts Payable, $7,400; Unearned Revenue, $5,000; Common Stock, $25,000; and Retained Earnings, $10,000. The firm needs to record $2,400 of depreciation and $600 of supplies used. A preparer correctly records the supplies adjustment but proposes to debit Depreciation Expense and credit Cash for the depreciation.
Method. Compare the proposed accounts with the economic effect of depreciation, then check the resulting workpaper totals. Depreciation for the period increases expense and accumulated depreciation; it does not itself represent a cash payment.
1. Verify the starting balance. Unadjusted debits are $10,000 + $8,000 + $30,000 + $2,000 = $50,000. Credits are $2,600 + $7,400 + $5,000 + $25,000 + $10,000 = $50,000.
2. State the correct entries. The depreciation entry is debit Depreciation Expense $2,400 and credit Accumulated Depreciation $2,400. The supplies entry is debit Supplies Expense $600 and credit Supplies $600. Each entry is balanced, and total adjustment debits and credits are both $3,000.
3. Calculate correct adjusted balances. Supplies becomes $2,000 − $600 = $1,400 debit. Depreciation Expense is $2,400 debit and Supplies Expense is $600 debit. Accumulated Depreciation becomes $2,600 + $2,400 = $5,000 credit. The other listed balances do not change.
4. Verify the correct adjusted totals. Debits are $10,000 + $8,000 + $30,000 + $1,400 + $2,400 + $600 = $52,400. Credits are $5,000 + $7,400 + $5,000 + $25,000 + $10,000 = $52,400.
Common mistake and correction. If the proposed but incorrect depreciation entry were used, cash would be $10,000 − $2,400 = $7,600 debit, and Accumulated Depreciation would remain $2,600 credit. Including the correctly adjusted Supplies and the two expenses, adjusted debits would be $7,600 + $8,000 + $30,000 + $1,400 + $2,400 + $600 = $50,000. Credits would be $2,600 + $7,400 + $5,000 + $25,000 + $10,000 = $50,000. The adjusted totals would still be $50,000 on each side, but the account balances would be wrong. The trap is to treat a balanced trial balance as evidence that an entry used the correct accounts.
Reviewing the Workpaper Before It Is Used
A practical review distinguishes three questions: Did the unadjusted trial balance balance? Does each proposed adjustment make sense and have equal debits and credits? Do the adjusted balances and their totals follow correctly from the workpaper? Checking only the final totals can miss an account substitution, an omitted adjustment, or a mistake in the balance carried forward.
Before using the adjusted trial balance for financial statement preparation, confirm that every account is included once, each adjusted amount is placed on its proper side, and the adjustment column has not been confused with the adjusted-balance column. A credit adjustment to a debit-balance asset, for example, usually reduces the asset’s debit balance; it does not turn the adjustment itself into a debit.
Check Your Understanding
For each situation, determine the requested adjustment or adjusted amount. Each problem is hypothetical.
- A firm has Supplies of $1,600 debit before adjustment. A count shows $450 of supplies were used. What is the supplies adjustment, and what is the adjusted Supplies balance? (Answer: Debit Supplies Expense $450, credit Supplies $450; Supplies is $1,150 debit.)
- A $2,400 rent prepayment covers 12 months beginning October 1. At December 31, how much rent has expired, and what is the remaining Prepaid Rent balance? (Answer: $600 Rent Expense and $1,800 Prepaid Rent.)
- A business received $7,200 on November 1 for six equal months of service, November through April. At December 31, two months of service have been performed. What amount is earned, and what unearned balance remains? (Answer: Debit Unearned Revenue and credit Service Revenue $2,400; $4,800 remains unearned.)
- An unadjusted trial balance has debit and credit totals of $38,500. Adjustments include $1,250 of accrued consulting revenue and $900 of depreciation. What are the total adjustment debits, total adjustment credits, and adjusted trial balance totals, assuming the starting trial balance is balanced? (Answer: Adjustment debits and credits are each $2,150; adjusted debit and credit totals are each $40,650.)
- A preparer records $800 of unpaid wages by debiting Wages Expense and crediting Cash. What entry should have been recorded instead, and how do the two affected adjusted account balances differ from those produced by the incorrect entry? (Answer: Debit Wages Expense $800 and credit Wages Payable $800. Relative to the incorrect entry, correct Cash is $800 higher and correct Wages Payable is $800 higher; the trial balance can balance under either entry.)