topic5 compthe acccycle_robiah

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TOPIC 5

COMPLETING THE ACCOUNTING CYCLE

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LEARNING OBJECTIVES

Explain the importance of periodic reporting and the time period principle

Identify the types of adjustments and their purpose

Prepare and explain adjusting entries Explain and prepare an adjusted trial balance Prepare financial statements from an

adjusted trial balance Statements of Comprehensive Income Statements of Changes in Equity Statements of Financial Position

Describe and prepare closing entries Explain and prepare a post-closing trial

balance

1 2 3 4 5 6 7 8 9 10 11 12

1 2 3 4

Annual

1 2

Monthly

Quarterly

Semiannual

THE ACCOUNTING PERIOD

Jan Feb Mar Apr May

Jun Jul Aug Sep Oct Nov Dec

THE ACCOUNTING PERIOD Calendar year- reporting period of

12 months covering from 1 January to 31 December

Fiscal year- reporting period consisting of any 12 consecutive months, in which the starting month is not necessarily beginning from 1 January. Eg. 1 April 2005 to 31 March 2006

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THE ACCOUNTING CYCLE

SourceDocuments

Journal

LedgerTrial BalanceAdjustments

AdjustedTrial Balance

Financial Statements

Closing Entries

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ACCRUAL VS CASH-BASIS ACCOUNTING

Accrual

Cash-basisrevenue is recorded when cashis received, and expenses are recorded when cash is paid.

revenue and expenses arerecognized at the time theytake place, and not at thetime they are actually paid.

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RECOGNITION OF REVENUE & EXPENSES

REVENUE RECOGNITION

PRINCIPLE

THE MATCHING PRINCIPLE

revenue be recognized in the accounting period in which itis earned.

efforts (expenses) be matched

with accomplishments (revenues).

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THE NEED FOR ADJUSTING ENTRIES

1 Revenues to be recorded in the period in which they are earned.

2 Expenses to be recognized in the period in which they are incurred.

An adjusting entry is recorded to bring an asset or liability

account balance to its proper amount.

ADJUSTING ACCOUNTS

PREPAYMENTS- Paid (or received) cash before expense (or revenue)

recognized

PREPAYMENTS- Paid (or received) cash before expense (or revenue)

recognized

ACCRUALS- Paid (or received) cash after

expense (or revenue) recognized

ACCRUALS- Paid (or received) cash after

expense (or revenue) recognized

Prepaid (Deferred) expenses*

Prepaid (Deferred) expenses*

Unearned (Deferred) revenues

Unearned (Deferred) revenues

AccruedexpenseAccruedexpense

AccruedrevenuesAccruedrevenues

Framework for Adjustments

*including depreciation

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THE BASICS OF ADJUSTING ENTRIES

Prepayments

Prepaid Expenses

Expenses paid in cash and

recorded as assets before

they are used or consumed

Unearned Revenues Cash received and recorded as

liabilities before revenue is earned

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THE BASICS OF ADJUSTING ENTRIES

Accruals

Accrued Revenues

Revenues earned but not yet

received in cash or recorded

Accrued Expenses

Expenses incurred but not yet

paid in cash or recorded

Here is the checkfor my first

6 months’ rent.

Here is the checkfor my first

6 months’ rent.

PREPAYMENT 1. PREPAID (DEFERRED) EXPENSES

Resources paid for prior to

receiving the actual benefits.

Resources paid for prior to

receiving the actual benefits.

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PREPAID EXPENSES

Prior to adjustment, assets are overstated and

expenses are understated.

The adjusting entry results in a debit to an expense

account and a credit to an asset account.

1. ADJUSTING PREPAID (DEFERRED) EXPENSES

Asset Expense

UnadjustedBalance

CreditAdjustment

DebitAdjustment

Dec 31 Expense Acc xx

Asset Acc xx

Journal:

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PREPAID EXPENSES

Supplies

Insurance

Depreciation

Examples

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SUPPLIES

An inventory count reveals that RM1,000 of RM2,500 of supplies are still on hand as at 31st Dec 2010.

Dr. Supplies Expense 1,500Cr. Office Supplies 1,500

Dr. Office Supplies 2,500Cr. Cash 2,500

Entries when the supplies is purchased:

Adjusting entries req at end of the prd:

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SUPPLIES

Office Supplies

Supplies Expense

Cash 2,500 Supp. Exp 1,500

Off. Supp. 1,500

2,5002,500

Bal. 1,000

Bal. 1,000

Cash

Supplies 2,500

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INSURANCE

Insurance premium paid for one year amounting to RM1,200; Expires every month RM100.

Dr. Insurance Expense 100Cr. Prepaid Insurance 100

Entries when the insurance is purchased:

AdjustingEntries req at end of the prd:

Dr. Prepaid Insurance 1,200Cr. Cash 1,200

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INSURANCE

Prepaid Insurance

Insurance Expense

Cash 1,200 Insur. Exp 100

Prpd Insur. 100

1,2001,200

Bal. 1,100

Bal. 1,100

Cash

Prpd Insur 1,200

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DEPRECIATION

Depreciation is the allocation of the cost of an asset to

expense over its useful life in a rational and systematic

manner.

Depreciation is an estimate rather than a factual measurement of the cost that has expired.

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DEPRECIATION

In recording depreciation, Depreciation Expense is debited and a contra asset account, Accumulated Depreciation, is credited

The difference between the cost of any depreciable

asset and its related accumulated depreciation is

referred to as the book value of the asset.

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DEPRECIATION

DepreciationMethods

1. Straight Line Method

2. Reducing Balance Method

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DEPRECIATION

Straight-line depreciation allocates equal amount of anassets net cost to depreciation during the estimateduseful life.

Eg: A machine costing RM26,000, estimated to have a useful life of 4 years and expected to be sold for RM8,000 at the end of the 4th year.

Formula: Cost - Scrap Value

Estimated useful life

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DEPRECIATION

Calculation: RM26,000 - RM8,000

4 years

= RM4,500 per year

AdjustingEntries to record depn exp:

Dr. Depreciation Expense 4,500 Cr. Accumulated Depn.

(Machine) 4,500

Depn Exp:

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DEPRECIATION

Depreciation Expense

Accum. Depn. (Machine)

AccumDeprec

(Machine) 4,500

Depreciation.

Expense. 4,500

ContraAccount

Machine 26,000

Less: Accum deprecn (4,500)

Machine 21,500

Statement of Financial Position

SYKT. BATIKPARTIAL BALANCE SHEETAS AT 31 DECEMBER 2006

Non-current assets Equipment 26,000$ Acc Dep-Equipment 4,500 21,500

Current assets Cash $ -Total Assets 21,500$

ADJUSTING FOR DEPRECIATION

Equipment is shown net of accumulated depreciation.

RM

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DEPRECIATION

Reducing Balance depreciation :

Eg: Equipment costing RM35,000, accumulated depreciation RM5,250. The depreciation rate is 15% on book value.

Formula: Net Book Value x Depreciation rate

(Cost - Accumulated Depn) x Depreciation rate

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DEPRECIATION

Calculation: (RM35,000 - RM5,250) x 15%

= RM4,463 per year

Adjustingentries:

Dr. Depreciation Expense 4,463

Cr. Accumulated Depn. 4,463

Buy your season tickets forall home basketball games NOW!

PREPAYMENT 2 - UNEARNED (DEFERRED) REVENUES

Cash received in advance of providing products or services.

Cash received in advance of providing products or services.

Liability RevenueUnadjusted

BalanceCredit

AdjustmentDebit

Adjustment

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UNEARNED REVENUES

Prior to adjustment, liabilities are overstated and

revenues are understated.

The adjusting entry results in a debit to a liability account

and a credit to a revenue account.

Examples of unearned revenues include rent, magazine

subscriptions, and customer deposits for future services.

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UNEARNED REVENUESRM2,000 subscription fees has been earned, out of RM5,000 unearned subscription fees that has been received last month.

Dr. Unearned Subscription Fees 2,000Cr. Subscription Fees 2,000

Dr. Cash 5,000Cr. Unearned

Subscription Fees 5,000

Entries when cash received in advanced: AdjustingEntries req at end of the prd:

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UNEARNED REVENUES

Unearned Subcrptn Fees

Subscription Fees

Cash 5,000SubcrptnFees 2,000

UnearnedSubcrptn 2,000

5,0005,000

Bal. 3,000

Bal. 3,000

Cash

Unearned SubscriptionFees 5,000

Yes, I’ve completed yourtax return, but have not had

time to bill you yet.

Yes, I’ve completed yourtax return, but have not had

time to bill you yet.

ACCRUALS 1- ACCRUED REVENUESRevenues

earned in a period that

are both unrecorded and not yet received.

Revenues earned in a period that

are both unrecorded and not yet received.Asset Revenue

CreditAdjustment

DebitAdjustment

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ACCRUED REVENUES

Prior to adjustment, assets and revenues are understated.

Accrued revenues may accumulate with the passing of time

or through services performed but not billed or collected.

The adjusting entry requires a debit to an asset account

and a credit to a revenue account.

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ACCRUED REVENUES

Asset Revenue

Debit Adjustment

Credit Adjustment

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ACCRUED REVENUES

The company has completely performed the audit service but has not bill the customer yet, RM7,000.

Dr. Account Receivable 7,000Cr. Audit Fees 7,000

Adjustingentries:

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ACCRUED REVENUES

Account Receivable 7,000

Audit Fees

Audit Fees 7,000

Account Receivable

We’re about one-halfdone with this job and

want to be paid forour work!

We’re about one-halfdone with this job and

want to be paid forour work!

Costs incurred in a period that are

both unpaid and unrecorded.

Costs incurred in a period that are

both unpaid and unrecorded.

ACCRUALS2- ACCRUED EXPENSES

Expense LiabilityCredit

AdjustmentDebit

Adjustment

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ACCRUED EXPENSES

Prior to adjustment, liabilities and expenses

are understated.

The adjusting entry results in a debit to an expense

account and a credit to a liability account.

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ACCRUED EXPENSES

Expense Liability

Debit Adjustment

Credit Adjustment

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ACCRUED EXPENSES

Salaries accrued (not paid)at the end of the month RM4,000.

Dr. Salary Expense 4,000Cr. Salary Payable 4,000

Adjustingentries:

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ACCRUED EXPENSES

Salary Exp. 4,000

Salary PayableSalary Payable 4,000

Salary Expense

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SUMMARY OF ADJUSTING ENTRIESTypes of Accounts Before AdjustingEntriesAdjustments Adjustments

Prepaid Expenses

Assets overstatedExpenses understated

Dr. Expense Cr. Asset

UnearnedRevenues

Liabilities overstatedRevenues understated

Dr. Liability Cr. Revenue

AccruedRevenues

Dr. Asset Cr. Revenue

Dr. Expense Cr. Liability

Assets understatedRevenues understated

AccruedExpenses

Liabilities understatedExpenses understated

SourceDocuments

Journal




Closing Entries

The Accounting Cycle

ADJUSTED TRIAL BALANCE

List of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger.

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THE ADJUSTED TRIAL BALANCE

An Adjusted Trial Balance is prepared after all

adjusting entries have been journalized and posted.

Its purpose is to prove the equality of the total debit

and credit balances in the ledger after all adjustments

have been made.

Financial statements can be prepared directly from

the adjusted trial balance.

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PREPARING THE FINANCIAL STATEMENTS

• The Statement of Comprehensive Income (summary) is

prepared from the revenue and expense accounts.

• The Statement of Changes Equity is derived from the owner’s capital and drawing accounts and the net income (or net loss) from the Statement of Comprehensive Income.

• The Statement of Financial Position is then prepared

from the asset and liability accounts and the ending

owner’s capital balance as reported in the owner’s

equity statement.

Categories of a Classified Balance SheetAssets Liabilities and Equity

Current Assets Current LiabilitiesNoncurrent Assets Noncurrent Liabilities

Long-Term Investments EquityFixed AssetsIntangible Assets

Current items are those expected to come due (both collected and owed) within the longer of one year or the

company’s normal operating cycle.

CLASSIFIED STATEMENT OF FINANCIAL POSITION

SNOWBOARDING COMPONENTSSTATEMENT OF FINANCIAL POSITION

AS AT 31 JANUARY 2006Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200

223,400$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Intangible assets 10,000 Total non-current assets 300,900$

Cash $6,500 Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400

$42,900

Current Assets

Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.


31 JANUARY 2006Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200

$223,400Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500Intangible assets 10,000 Total assets $300,900

Current Assets Cash 6,500 Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500

Long-term investments are expected to be held for the longer of one year or the operating cycle.


31 JANUARY 2006Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200

$223,400Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500Intangible assets 10,000

$300,900Current assets Cash $6,500 Short-term investments 2,100 Accounts receivable 4,400

Non-current assets are tangible long-lived assets used to produce or sell products and services.

Intangible assets 10,000 $300,900

Current Assets Cash 6,500 Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$

Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000

LIABILITIESIntangible assets are long-term resources used to produce or sell products and services and that lack physical form.

Current liabilities are obligations due within the longer of one year or the company’s operating cycle.


AS AT 31 JANUARY 2006Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities $29,000


AS AT 31 JANUARY 2006

Equity and liabilitiesT.Hawk, Capital $164,800

Non-current liabilities Notes payable (net of current portion) $150,000

Current liabilitiesNon-current liabilities are obligations not due within the longer of one year or the company’s operating cycle.

SourceDocuments

Journal




Closing Entries

The Accounting Cycle

Resets revenue, expense and withdrawal account balances to zero at the end of the period.

Helps summarize a period’s revenues and expenses in the Income Summary account.

Identify accounts for closing.

Record and post closing entries.

Prepare post-closing trial balance.

CLOSING PROCESS

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CLOSING ENTRIES

Temporary /Nominal Accounts

Permanent /Real Accounts

All Revenue accounts

All Expense accounts

Owner’s Drawings

All Asset accounts

All Liability accounts

Owner’s Equity account

CLOSED‘0’

A/C Balance

A=L+EBalance

Sheet

Let’s see how the closing process

works!

RECORDING CLOSING ENTRIES

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.

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CLOSING ENTRIES

Revenues

Expenses

IncomeSummary

Drawings

Owner’sCapital

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CLOSING ENTRIES

Revenues

Expenses

Dr. Revenue Account

Cr. Income Summary

Dr. Income Summary

Cr. Expense Account

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CLOSING ENTRIES

Drawings Dr. Owner’s Capital

Cr. Drawings Account

IncomeSummary

Loss

ProfitDr. Income Summary

Cr. Owner’s Capital

Dr. Owner’s Capital

Cr. Income Summary

Balances before closing.

Income Summary

Owner's Capital30,000

30,000

Revenue Accounts25,000

25,000

Withdrawals Account5,000

5,000

Expense Accounts10,000

10,000

CLOSING PROCESS

Income Summary25,000

25,000

Close Revenue accounts to

Income Summary.

Owner's Capital30,000

30,000

Revenue Accounts25,000 25,000

-


5,000

Expense Accounts10,000

10,000

CLOSING PROCESS

Income Summary10,000 25,000

15,000 Owner's Capital30,000

30,000


-


5,000

Close Expense accounts to

Income Summary.

Expense Accounts10,000 10,000

-

CLOSING PROCESS

The balance in Income Summary equals profit for

the period

The balance in Income Summary equals profit for

the period

Owner's Capital30,000 15,000

45,000


45,000


5,000


5,000

Close Income Summary to

Owner’s Capital.


-


-

Income Summary10,000 25,000 15,000

-

CLOSING PROCESS


45,000


15,000

40,000


5,000

Withdrawals Account5,000 5,000

-


-


-

Income Summary10,000 25,000 15,000

-

CLOSING PROCESS

Close Withdrawals account to

Owner’s Capital.

FASTFORWARDADJUSTED TRIAL BALANCE

31 DECEMBER 2006Cash $3,950Accounts receivable 1,800Supplies 8,670Prepaid insurance 2,300Equipment 26,000Accumulated depreciation-Equip. $375Accounts payable 6,200Salaries payable 210Unearned consulting revenue 2,750C. Taylor, Capital 30,000C. Taylor, Withdrawals 600Consulting revenue 7,850Rental revenue 300Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230Totals $47,685 $47,685

Using the adjusted trial balance, let’s prepare the

closing entries for

FastForward.

Close Revenue

accounts to Income

Summary.



CLOSE REVENUE ACCOUNTS TO INCOME SUMMARY

Dec. 31 Consulting revenue 7,850 Rental revenue 300

Income summary 8,150

Now, let’s look at the ledger accounts after posting this closing entry.

CLOSE REVENUE ACCOUNTS TO INCOME SUMMARY

Consulting Revenue7,850 7,850

-

Rental Revenue300 300

-

Income Summary7,850

300

Close Expense

accounts to Income

Summary.

FASTFORWARDADJUSTED TRIAL BALNCE



CLOSE EXPENSE ACCOUNTS TO INCOME SUMMARY

Dec. 31 Income summary 4,365Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230

Income Summary4,365 7,850

300 3,785

Utilities Expense230 230

-

Rent Expense1,000 1,000

-

Profit for the period

CLOSE EXPENSE ACCOUNTS TO INCOME SUMMARY

Close Expense Accounts to Income Summary

Close Expense Accounts to Income Summary

Supplies Expense1,050 1,050

-

Depreciation Expense- Eq.

375 375 -

Salaries Expense1,610 1,610

-

Insurance Expense100 100

-

Close Income Summary to

Owner’s Capital.


31 DECEMBER 2006Cash $3,950Accounts receivable 1,800Supplies 8,670Prepaid insurance 2,300Equipment 26,000Accumulated depreciation-Equip. $375Accounts payable 6,200Salaries payable 210Unearned consulting revenue 2,750C. Taylor, Capital 30000C. Taylor, Withdrawals 600Consulting revenue 7,850Rental revenue 300Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230Totals $47,685 $47,685


CLOSE INCOME SUMMARY TO OWNER’S CAPITAL

Dec. 31 Income summary 3,785C. Taylor, Capital 3,785

C. Taylor, Capital30,000 3,785

33,785

CLOSE INCOME SUMMARY TO OWNER’S CAPITAL

Close Income Summary to Owner’s Capital

Close Income Summary to Owner’s Capital

Income Summary4,365 7,850 3,785 300

-

Close Withdrawals to Owner’s

Capital.




CLOSE WITHDRAWALS TO OWNER’S CAPITAL

Dec. 31 C. Taylor, Capital 600C. Taylor, Withdrawals 600

C. Taylor, Capital600 30,000

3,785

33,185

C. Taylor, Withdrawals

600 600

-

CLOSE WITHDRAWALS TO OWNER’S CAPITAL

Let’s look at FastForward’s post-closing trial balance.

POST-CLOSING TRIAL BALANCE

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

FASTFORWARDPOST-CLOSING TRIAL BALANCE

31 DECEMBER 2006Cash $3,950Accounts receivable 1,800Supplies 8,670Prepaid insurance 2,300Equipment 26,000Accumulated depreciation-Equipment $375Accounts payable 6,200Salaries payable 210Unearned consulting revenue 2,750C.Taylor, Capital 33,185Totals $42,720 $42,720

POST-CLOSING TRIAL BALANCE

topic5 compthe acccycle_robiah

Documents

balance depreciation

straightline depreciation

recording depreciation

depreciation expense

liabilityaccount balance

theaccounting period

balance method

entries whenthe insurance