chap05-completing the accounting cycle

Chapter 5

Completing the accounting cycle

PowerPoint presentation by Anne AbrahamUniversity of Wollongong

©2009 John Wiley & Sons Australia, Ltd

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THE COMPLETE ACCOUNTING CYCLE

1. Recognise and record transactions

1. Recognise and record transactions

2. Journalise transactions2. Journalise transactions

3. Post to ledger accounts3. Post to ledger accounts

4. Prepare unadjusted trial balance of GL

4. Prepare unadjusted trial balance of GL

Source documentsSource documents

General journalGeneral journal

General ledgerGeneral ledger

Trial balance (unadjusted)

Trial balance (unadjusted)

Continued next slide

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THE COMPLETE ACCOUNTING CYCLE continued

5. Determine adjusting entries and/or journalise

5. Determine adjusting entries and/or journalise

6. Post adjusting entries to general ledger

6. Post adjusting entries to general ledger

7. Prepare adjusted trial balance of GL (adjusted)

7. Prepare adjusted trial balance of GL (adjusted)

8. Journalise closingentries

8. Journalise closingentries

General journal

General journal

General ledger(accounts adjusted)

General ledger(accounts adjusted)

Trial balance(adjusted)

Trial balance(adjusted)


Continued next slide

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THE COMPLETE ACCOUNTING CYCLE continued

9. Post closing entries to GL 9. Post closing entries to GL

10. Prepare post closing trial balance

10. Prepare post closing trial balance

11. Prepare financial statements

11. Prepare financial statements

12. Journalise reversing entries12. Journalise reversing entries

GL – temporary accounts closed

GL – temporary accounts closed

Trial balance(post closing)

Trial balance(post closing)

Financial statementsFinancial statements


worksheet

13. Post reversing entries to GL13. Post reversing entries to GL GL – temporary accounts opened

GL – temporary accounts opened

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CLOSING TEMPORARY ACCOUNTS

• Income and expense accounts must be closed at the end of each period to determine the profit or loss for the period

• They begin and end each accounting period with a zero balance

• Profit and loss summary account is used to facilitate closing process and determination of profit

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USING THE WORKSHEET

• Gathers information together in one place• Enables preparation of interim financial

statements• Adjusting entries easily reflected• Facilitates closing journal preparation

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Recording adjusting entries

• From worksheet formal adjusting entries are entered in general journal

• Entries are dated the last day of the accounting period

• Data for determining the entity’s closing entries for the period are found in income statement columns of worksheet which contain temporary income and expense accounts

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THE CLOSING PROCESS

• Income accounts closed to P & L summary– Debit income

– Credit P & L summary

• Expense accounts closed to P & L summary– Debit P & L summary

– Credit expense

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THE CLOSING PROCESS continued

• Profit & Loss summary balances to determine profit/loss then closed to capital– Debit P & L summary (assuming a profit)

– Credit capital account

• Drawings closed to capital– Debit capital account

– Credit drawings account

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THE CLOSING PROCESS continued

P & L SUMMARY

CAPITAL ACCOUNT

INCOME 12,000 7,500 9,000

SALARY EXP 1,500 1,800

RENT EXP

800

SUPPLIES EXP350

28,500 28,500

(CLOSE INCOME ACCOUNT)

24,050

24,050

(CLOSE P & L SUMMARY)

DRAWINGS 2,500

3,300

4,450

(CLOSE EXPENSE ACCOUNTS)

350

800

24,050

2,500

(CLOSE DRAWINGS ACCOUNT)

2,500

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Account balances after the closing process

• All income accounts have nil balances• All expense accounts have nil balances• The drawings account has a nil balance• The capital account has been increased or

decreased by the profit or loss and decreased by the drawings

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The post-closing trial balance

• Reflects all accounts with balances after the closing process– Assets

– Liabilities

– Equity

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ACCRUAL ENTRIES IN SUBSEQUENT PERIODS

• Adjusting entries are made at the end of the accounting period to record accruals

• Cash received or paid in subsequent periods for accruals must be analysed to correctly apportion amount between the two periods

– e.g. payment for salaries

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ACCRUAL ENTRIES IN SUBSEQUENT PERIODS continued

• Adjusting entry (30 June)

• Normal entry (6 July)Jul 6 Salary Payable 1 990

Salary Expense 1 710 Cash at Bank 3

700(To record payment of salaries from 23 June to 6 July)

Jun 30 Salary Expense 1 990 Salary Payable 1 990

(To accrue salaries owing to 30 June)

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REVERSING ENTRIES

• Reversal of accrual entries– Dated the first day of the subsequent

accounting period

– Exactly reverse certain adjusting entries

– An accounting technique used to simplify the recording of regular transactions in the next period

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REVERSING ENTRIES continued

• Adjusting entry

• Reversing entry

• July 6 entry

Jul 1 Salary Payable 1 990 Salary Expense 1 990

(To reverse the adjusting entry to accrue unpaid salaries at end of previous month)

Jul 6 Salary Expense 3 700 Cash at Bank 3 700 (Payment of salaries for period 27 June to 6 July)

Jun 30 Salary Expense 1 990 Salary Payable 1 990

(To accrue salaries owing to 30 June)

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• Not required for all adjusting entries• Only used where adjustment is temporary– Accrued expenses

– Accrued income

– Prepayments originally recorded as expenses

– Unearned income originally recorded as income

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• Reversal of deferral entries– Adjusting entries are made for prepaid

expenses and unearned or precollected revenue

– Need for reversal entries depends on whether initial recording occurred in a permanent account

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ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY

• Accounting for a partnership– Separate capital and drawings accounts for

each partner

– Profit/loss at the end of the period is allocated to each partner in accordance with the partnership agreement

– Each drawings account is closed off to the partner’s capital account

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continued

• Accounting for a company– Owners are referred to as shareholders

– Owner’s interests are called ‘share capital’

– Not all profits/losses are distributed to shareholders

– Share capital represents retained profits (or accumulated losses) + share of assets

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continued

• Profits distributed as ‘dividends’

INTELLECT MANAGEMENT SERVICES LTDStatement of Changes in Equity

For the year ended 31 December 2010

Share Capital, 1 January 2010 $120 000Share Capital, 31 December 2010 120 000Retained earnings, 1 January 2010 --Add: Profit for the year 25 000

25 000Less: Cash dividends for the year 12 000Retained earnings, 31 December 2010 $13 000

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continued

• Equity section of balance sheet

INTELLECT MANAGEMENT SERVICES LTDBalance Sheet (extract)as at 31 December 2010

Share capital (120 000 shares issued for $1) $120 000Retained earnings 13 000Total equity $133 000

chap05-completing the accounting cycle

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