Presentation on theme: "Completing the Accounting Cycle for a Service Business"— Presentation transcript:
1Completing the Accounting Cycle for a Service Business Chapter 6Completing the Accounting Cycle for a Service Business
2Adjustments End of period ledger is not accurate Need to bring accounts up to dateAccounts needing updating:Prepaid Expenses, e.g., Prepaid Rent and Insurance (current assets)Fixed Assets, e.g., they decline in value, known as depreciation
3Prepaid Rent Company prepays for six months rent on November 1, $12000 Dr Prepaid RentCr CashAdjusting entry at December 31, 2006Dr Rent Expense 4000Cr Prepaid Rent2/6 x $12000
4Supplies The ledger shows a balance for Supplies of $500 A check of the supplies cupboard shows only $350 worth of supplies remainingAdjusting entry:Dr Supplies Expense 150Cr Supplies
5Prepaid Insurance Adjustment at December 31, 2004 Buy insurance for one year on April 1, 2004Dr Prepaid InsuranceCr CashAdjustment at December 31, 2004Dr Insurance ExpenseCr Prepaid Insurance 180009/12 x $24000
6Depreciation Two methods: Straight-line: record decrease in value of fixed asset evenlyDep = Cost – Salvage ValueYears of Useful LifeDeclining Balance: accelerated decrease in value in early years where greater useDep = Book value x CCA allowance %Where Book value = Cost – Accumulated Dep’nCCA = Capital Cost % allowed by government, e.g., Autos 30%, Equipment 20%, Buildings (brick 5%), Buildings (wood) 10%, etc.
7Depreciation Adjustment: Straight Line Automobile cost $20000, salvage (residual) value $4000, 8 useful yearsCalculate first year’s depreciation and adjusting entry:Dr. Depreciation Expense, AutoCr. Accumulated Depreciation, Auto*( )/8* A contra account – see two slides later
8Depreciation Adjustment: Declining Balance Automobile with cost $20000 and accumulated depreciation of $4000 is adjusted for a six month period:Dr. Depreciation Expense, Auto 2400Cr. Accumulated Depreciation, Auto 2400( ) x 30% x 6/12
9Contra AccountsAccumulated Depreciation is an asset with a credit balance which is shown opposite its associated asset on Balance Sheet:Fixed AssetsAutomobileLess: Accumulated DepreciationLedger account numbers follow the main accounts,e.g., if Auto is 140, Acc. Dep’n, Auto is 141
11Closing EntriesAll revenues and expenses must be reduced to zero to allow new entries next periodUse the REID formula:R: close revenues to Income SummaryE: close expenses to Income SummaryI: close Income Summary to CapitalD: close Drawings to Capital
12Close Revenues Close Expenses Cr Income Summary 50000 Dr Fees IncomeDr Management Revenue 20000Cr Income SummaryClose ExpensesDr Income SummaryCr Advertising Expense Wages General Expense
13Close Income Summary Close Drawings Dr Income SummaryCr J. Schmoo, CapitalClose DrawingsDr J. Schmoo, Capital 5000Cr J. Schmoo, Drawings 5000
14GAAP Matching Principle re adjustments Materiality Principle – include all information that affects decisions by users of financial statementsConservatism Principle – when faced with choices, select the treatment resulting in lower net income and net assets
15NotesAll adjusting entries must be journalized and posted to the ledger!Ten column worksheets include two adjusted trial balance columns:Add the adjustments to the trial balance accounts then move to is and bsAfter all adjusting and closing entries have been posted “take off” a post-closing trial balance to ensure readiness for next period … capital account should be last!