Topic 4 adjusting and closing the accounts PDF

COMPLETING THE ACCOUNTING CYCLE ADJUSTING & CLOSING THE ACCOUNTS TOPIC 4 PART 1- ADJUSTING ENTRIES... Prepare adjusting entries for prepayments and accruals.. | ACCRUAL vs CASH ACCOUNTI

COMPLETING THE

ACCOUNTING CYCLE

(ADJUSTING & CLOSING THE

ACCOUNTS)

TOPIC 4

PART 1- ADJUSTING ENTRIES

TOPIC 4

PART 1 LEARNING

OBJECTIVES

On completion of this topic, you should be able to:

1 Differentiate between the cash basis and the accrual basis of

accounting.

2 Explain the criteria for revenue recognition and expense

recognition.

3 Explain why adjusting entries are needed and identify the major

types of adjusting entries.

4 Prepare adjusting entries for prepayments and accruals.

5 Describe the nature and purpose of the adjusted trial balance.

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ACCRUAL vs CASH ACCOUNTING

 Most businesses use ACCRUAL accounting

 ACCRUAL accounting is one of the key underlying assumptions that

contributes to providing useful accounting information to decision makers

 Because of ACCRUAL accounting we need to make end of period adjustments

to the accounts

• Transactions are

recorded when income

is earned or expenses

are incurred.

• Revenue & expense

recognition criteria

(Conceptual Framework)

ACCRUAL

• Transactions are recorded when cash is paid or cash is

received.

CASH

Adjusting entries

Closing entries

Date Particulars Post Ref DEBIT CREDIT

GENERAL JOURNAL

110 Accounts Receivable

170 Property, Plant & Equip

200 Accounts Payable

220 Salaries & Wages Payable

300 Share Capital

400 Service Revenue

500 Advertising Expense

530 Depreciation Expense

540 Electricty Expense

570 Printing & Stationery Expense

590 Salaries & Wages Expense

WORKSHEET for period ending 30 June 2017

Trial Balance Kelly Cook e-Travel Pty Ltd

1/6/17

20/6/17

21/6/17

21/6/17

3,300 Cash at Bank

(Prepay 3 mths rent)

100

Cash at Bank

Services Revenue

Salaries and Wages Expense

Cash at Bank

Cash at Bank

Unearned Revenue

(Cash Revenue)

(Salaries Expense)

(Deposit taken)

100 400

590 100

100 210

3,500

3,500

1,200

1,200

2,000

2,000

3,300 3,500

1,200 2,000

3,300

3,500

2,000

1/6/17 21/6/17 20/6/17

1/6/17

20/6/17

21,900 Bal 30/6

12,000 Bal 30/6

21,900 2,000 3,300 10,000

30,000

200 2,000

2,000

12,000 500

400 600 1,100 2,400

44,200 44,200

1,200 21/6/17

Bal 30/6 2,400

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THE

END-OF-PERIOD PROCESS

TWO TYPES OF

ADJUSTING ENTRIES

PREPAYMENTS

Prepaid expenses

Costs/expenses paid before they are consumed e.g prepaid insurances and rent, DEPRECIATION

Revenue received in

advance

Revenues that are collected

or received but not yet earned

e.g unearned services or subscriptions revenue

ACCRUALS

(Unrecorded)

Accrued expenses

Expenses incurred but not yet paid

e.g accrued wages

Accrued revenues

Revenue earned but not yet received

e.g accrued interest on a term deposit

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DEPRECIATIONis the Allocation of the

historic cost of an asset (less any residual)

over the useful life of that asset

Office Furniture & Equipment paying $10,000 in cash.

worthless at the end of this period (zero residual).

accounting periods in which it was used to earn

revenue.

Depreciation Preview

STEP 1: Divide the cost of the asset by the number of

accounting periods in the asset’s useful life (10,000 / 5) =

2,000 per year

STEP 2: Calculate the depreciation expense amount for the

part year e.g 2 month out of 12 (2,000 / 12 *2 = 333)

STEP 3: Do the adjusting entry by crediting the asset’s

CONTRA ACCOUNTS

 A contra account is a

“companion account”.

 Accumulated depreciation is

a contra account to PPE asset account

 A contra account’s normal balance is opposite to that of the companion account.

 Users of financial statements use this information in

decision making

Date Particulars Post Ref DEBIT CREDIT

GENERAL JOURNAL

ADJUSTING ENTRIES

30/6/17

30/6/17

30/6/17

30/6/17

30/6/17

Rent Expense

Prepaid Rent

(Adjust for one month’s rent)

580 120

530 175

210 400

590 220

110 400

Unearned Revenue

Depreciation Expense

Accumulated Depreciation PPE

Service Revenue

Salaries and Wages Expense

Salaries and Wages Payable

Accounts Receivable

Revenue

(Record earned revenue) (Adjust for 1 month’s depreciation)

(Record accrued wages)

(Record revenue receivable)

1,100

1,100

333

333

500

500

300

300

400

400

1,100 30/6/17

1,100 30/6/17

30/6/17

30/6/17 333

333

30/6/17

30/6/17 500

500 300

300 30/6/17

30/6/17 400

400 30/6/17

30/6/17 1,500

2,400 Bal 30/6

Bal 30/6

12,900 Bal 30/6

2,200 Bal

30/6

Bal 30/6 2,200

2,700 Bal 30/6

30-June-2017 Account for expiry of one month's rent

30-June-2017 Account for 2 months' depreciation of office furniture - straight line over 5 years

30-June-2017 Account for $500 service revenue from legal firm previously unearned, now earned

30-June-2017 Account for accrued salaries & wages for one week - $300

30-June-2017 Account for accrued service revenue of $400 from a customer, that is earned but not recorded

ADJUSTING ENTRIES

Account DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

100 Cash at Bank 21,900

110 Accounts Receivable 2,000

120 Prepaid Rent 3,300

170 Property, Plant & Equip 10,000

175 Accum Depn - PPE

200 Accounts Payable 200

210 Unearned Revenue 2,000

220 Salaries & Wages Payable

300 Share Capital 30,000

320 Dividends 2,000

400 Service Revenue 12,000

500 Advertising Expense 500

530 Depreciation Expense

540 Electricty Expense 400

570 Printing & Stationery Expense 600

580 Rent Expense 1,100

590 Salaries & Wages Expense 2,400

44,200 44,200

Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017 Trial Balance Adjustments Adjusted Trial Balance Profit & Loss Balance Sheet

400

1,100

900 333

333

1,100 500

300

300

2,633 2,633 45,233 45,233

21,900 2,400 2,200 10,000

333 200 1,500 300 30,000

2,700

333 400 600 2,200

2,000

12,900 500

Complete Worksheet ready

for next stage – Preparing

the Financial Statements

Account DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

110 Accounts Receivable 2,000 400 2,400 2,400

120 Prepaid Rent 3,300 1,100 2,200 2,200

170 Property, Plant & Equip 10,000 10,000 10,000

175 Accum Depn - PPE 333 333 333

200 Accounts Payable 200 200 200

210 Unearned Revenue 2,000 500 1,500 1,500 220 Salaries & Wages Payable 300 300 300

300 Share Capital 30,000 30,000 30,000 320 Dividends 2,000 2,000 2,000 400 Service Revenue 12,000 900 12,900 12,900 500 Advertising Expense 500 500 500

530 Depreciation Expense 333 333 333

540 Electricty Expense 400 400 400

570 Printing & Stationery Expense 600 600 600

580 Rent Expense 1,100 1,100 2,200 2,200

590 Salaries & Wages Expense 2,400 300 2,700 2,700

44,200 44,200 2,633 2,633 45,233 45,233 6,733 12,900 38,500 32,333

6,167 6,167

12,900 12,900 38,500 38,500

Trial Balance Adjustments Adjusted Trial Balance Profit & Loss Balance Sheet

Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017

COMPLETING THE

ACCOUNTING CYCLE

(ADJUSTING & CLOSING THE

ACCOUNTS)

TOPIC 4

PART 2- PREPARING THE FINANCIAL

STATEMENTS &

CLOSING ENTRIES

TOPIC 4

PART 2 LEARNING

OBJECTIVES

On completion of this topic, you should be able to:

1 Prepare the financial statement's from the

completed worksheet

2 Explain the purpose of closing entries.

3 Prepare the closing entries.

4 Describe the required steps in the accounting cycle.

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110 Accounts Receivable 2,000 400 2,400 2,400

175 Accum Depn - PPE 333 333 333

200 Accounts Payable 200 200 200

210 Unearned Revenue 2,000 500 1,500 1,500 220 Salaries & Wages Payable 300 300 300

300 Share Capital 30,000 30,000 30,000 320 Dividends 2,000 2,000 2,000 400 Service Revenue 12,000 900 12,900 12,900 500 Advertising Expense 500 500 500

530 Depreciation Expense 333 333 333

540 Electricty Expense 400 400 400

570 Printing & Stationery Expense 600 600 600

580 Rent Expense 1,100 1,100 2,200 2,200

590 Salaries & Wages Expense 2,400 300 2,700 2,700

44,200 44,200 2,633 2,633 45,233 45,233 6,733 12,900 38,500 32,333

6,167 6,167

12,900 12,900 38,500 38,500

Trial Balance Adjustments Adjusted Trial Balance Profit & Loss Balance Sheet

Kelly Cook e-Travel Pty Ltd WORKSHEET for month ending 30 June 2017

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DEBIT CREDIT

12,900

500

333

400

600

2,200

2,700

6,733 12,900 6,167

12,900 12,900 Profit & Loss Account DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 100 Cash at Bank 21,900 21,900 21,900 110 Accounts Receivable 2,000 400 2,400 2,400 120 Prepaid Rent 3,300 1,100 2,200 2,200 170 Property, Plant & Equip 10,000 10,000 10,000 175 Accum Depn - PPE 333 333 333

200 Accounts Payable 200 200 200

210 Unearned Revenue 2,000 500 1,500 1,500 220 Salaries & Wages Payable 300 300 300

300 Share Capital 30,000 30,000 30,000 320 Dividends 2,000 2,000 2,000 400 Service Revenue 12,000 900 12,900 12,900 500 Advertising Expense 500 500 500

530 Depreciation Expense 333 333 333

540 Electricty Expense 400 400 400

570 Printing & Stationery Expense 600 600 600

580 Rent Expense 1,100 1,100 2,200 2,200

590 Salaries & Wages Expense 2,400 300 2,700 2,700

44,200 44,200 2,633 2,633 45,233 45,233 6,733 12,900 38,500 32,333

6,167 6,167

12,900 12,900 38,500 38,500

Trial Balance Adjustments Adjusted Trial Balance Profit & Loss Balance Sheet

WORKSHEET for period ending 30 June 2017

Account

100 Cash at Bank

110 Accounts Receivable

120 Prepaid Rent

170 Property, Plant & Equip

175 Accum Depn - PPE

200 Accounts Payable

210 Unearned Revenue

220 Salaries & Wages Payable

300 Share Capital

320 Dividends

400 Service Revenue

500 Advertising Expense

530 Depreciation Expense

540 Electricty Expense

570 Printing & Stationery Expense

580 Rent Expense

590 Salaries & Wages Expense

Revenue

Expenses

Advertising Expense 500 Depreciation Expense 333 Electricty Expense 400 Printing & Stationery Expense 600

Salaries & Wages Expense 2,700

Profit $ 6,167

Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for period May - June 2017

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Account DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

100 Cash at Bank 21,900 21,900 21,900

110 Accounts Receivable 2,000 400 2,400 2,400

120 Prepaid Rent 3,300 1,100 2,200 2,200

170 Property, Plant & Equip 10,000 10,000 10,000

175 Accum Depn - PPE 333 333 333

200 Accounts Payable 200 200 200

210 Unearned Revenue 2,000 500 1,500 1,500 220 Salaries & Wages Payable 300 300 300

300 Share Capital 30,000 30,000 30,000 320 Dividends 2,000 2,000 2,000 400 Service Revenue 12,000 900 12,900 12,900 500 Advertising Expense 500 500 500

530 Depreciation Expense 333 333 333

540 Electricty Expense 400 400 400

570 Printing & Stationery Expense 600 600 600

580 Rent Expense 1,100 1,100 2,200 2,200 590 Salaries & Wages Expense 2,400 300 2,700 2,700 44,200 44,200 2,633 2,633 45,233 45,233 6,733 12,900 38,500 32,333 6,167 6,167 12,900 12,900 38,500 38,500 Trial Balance Adjustments Adjusted Trial Balance Profit & Loss Balance Sheet Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017 Account 100 Cash at Bank 110 Accounts Receivable 120 Prepaid Rent 170 Property, Plant & Equip 175 Accum Depn - PPE 200 Accounts Payable 210 Unearned Revenue 220 Salaries & Wages Payable 300 Share Capital 320 Dividends 400 Service Revenue 500 Advertising Expense 530 Depreciation Expense 540 Electricty Expense 570 Printing & Stationery Expense 580 Rent Expense 590 Salaries & Wages Expense DEBIT CREDIT 21,900

2,400

2,200

10,000

333

200

1,500

300

30,000

2,000

38,500 32,333 6,167

38,500 38,500

Balance Sheet

Current Assets

Cash 21,900 Accounts Receivable 2,400 Prepaid rent 2,200

Total Current Assets 26,500

Non-current Assets

PPE 10,000 Less Acc Dep 333

Totsl Non-current Assets 9,667

Liabilites

Accounts Payable 200 Unearned Revenue 1,500 Salaries Payable 300

Total Current Liabilites 2,000

NET ASSETS 34,167

Equity

Capital 30,000 Retained Earnings 4,167

Kelly Cook eTravel Pty Ltd Statement of Financial Position

as at 30 June 2017

Beginning Retained Earnings 0 Add Profit 6,167 Less Dividends 2,000 Ending Retained Earnings 4,167

Kelly Cook eTravel Pty Ltd Calculation of Retained Earnings

A = L + E

A – L = E Net Assets = Equity

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CLOSING THE (TEMPORARY) ACCOUNTS

1 Close all income accounts (debit entry

as have credit balances), and credit the

total to the Profit & Loss (Income)

Summary account.

2 Close all expense accounts (credit

entry as have debit balances), and

debit the total to the Profit & Loss

Summary account.

3 Close the Profit & Loss summary

account (also called Income Summary)

by transferring the balance to the

retained earnings account

4 Close the dividends account to the

retained earnings account

Date Particulars Post Ref DEBIT CREDIT

CLOSING ENTRIES GENERAL JOURNAL

DEBIT CREDIT DEBIT CREDIT

Bal 31/5 20,900 200 Bal

3,300 1/6/17 20/6/17 3,500

1,200 21/6/17 30/6/17 500 2,000 21/6/17

Bal 30/6 21,900

300 30/6/17

Bal 2,000

30/6/17 400 30,000 Bal Bal 30/6 2,400

Bal 2,000 1/6/17 3,300 1,100 30/6/17

8,500 Bal 31/5

3,500 20/6/17

Bal 10,000 500 30/6/17

400 30/6/17

12,900

333 30/6/17 Bal 500

Bal 400

30/6/17 333

Bal 600

Bal 1,100 30/6/17 1,100 2,200

Bal 1,200 21/6/17 1,200 30/6/17 300

2,700

Print & Stationery #570

Rent #580

Salaries & Wages # 590

Electricity #540

Retained Earnings #310

Depreciation #530

Advertising #500

P & L Summary #600

PPE #150

Accum Dep PPE #175

Dividends #320 Prepaid Rent #120

Revenue #400

GENERAL LEDGER T-ACCOUNTS

Cash @ Bank #100 Accts Pay #200

Unearned Revenue #210

Salaries payable #220

Accts Rec #110

Capital #300

600

12,900

12,900 P/L Summary A/C

30/6/17

30/6/17

30/6/17

30/6/17

12,900 30/6/17

12,900

500 530 540 570 580 590

Advertising

Depreciation

Electricity

Printing & Stationery

Rent

Salaries & Wages

6,733

500 333 400 600 2,200 2,700

30/6/17 30/6/17

30/6/17 30/6/17 30/6/17

30/6/17

30/6/17

500

400 333 600

2,200

2,700

P/L Summary A/C

Retained Earnings

600 310

6,167

6,167

30/6/17

6,733 6,167

6,167 30/6/17

Retained Earnings

Dividends

310 320

2,000

2,000

30/6/17

30/6/17 2,000

2,000

4,167 Bal 30/6

27,800 27,800