1. PowerPoint® Slides to accompany Basic Bookkeeping, Seventh Edition Prepared by JD Chazan CPA, CA National Taiwan University 14-1 Copyright © 2015 by Nelson Education Ltd.

2. 14-2 Chapter 14 At Year End: Preparing to Close the Books Copyright © 2015 by Nelson Education Ltd.

3. Chapter 14: At Year-End: Preparing to Close the Books Chapter Objectives After completing this chapter, you will be able to: prepare a worksheet record year-end adjusting entries in the General Journal Copyright © 2015 by Nelson Education Ltd.14-3

4. Chapter 14: At Year-End: Preparing to Close the Books Before closing the books at year end, it is necessary to: determine an accurate value of inventory on hand determine any necessary year-end adjustments prepare a worksheet that will aid in preparing financial statements and recording year-end closing entries Copyright © 2015 by Nelson Education Ltd.14-4

5. Chapter 14: At Year-End: Preparing to Close the Books Inventory Periodic Inventory A systematic count and valuation of all goods on hand Usually done only once or twice a year Perpetual Inventory A system of monitoring the value of goods on hand as each purchase and sale of merchandise is recorded Copyright © 2015 by Nelson Education Ltd.14-5

6. Chapter 14: At Year-End: Preparing to Close the Books Copyright © 2015 by Nelson Education Ltd.14-6 Items on hand How many on hand Cost value of each item on hand (including shipping and importation costs, if any) Total cost value of each item on the shelf

7. Chapter 14: At Year-End: Preparing to Close the Books Year-End Adjusting Entries Adjustments to recognize revenues and/or expenses that have not yet been recorded in the current year Similar to interim adjustments discussed in Chapter 13 Copyright © 2015 by Nelson Education Ltd.14-7

8. Chapter 14: At Year-End: Preparing to Close the Books Types of Adjusting Entries 1. Prepaid Expenses sometimes called Unexpired Expenses expenses that start as prepaid expenses are transferred to expense accounts as their value is “consumed”. usually recorded monthly; but in small businesses, it is sometimes left until year end. Copyright © 2015 by Nelson Education Ltd.14-8 $1,320 × 5/12 = $550

9. Chapter 14: At Year-End: Preparing to Close the Books 2. Unearned Revenue sometimes called Revenue Received in Advance payment made in advance by a customer or tenant for goods or services that are to be delivered in the near future Copyright © 2015 by Nelson Education Ltd.14-9 Liability account. The tenant paid in advance, so we owe them the use of our space. Value is transferred from the liability account to the revenue account.

10. Chapter 14: At Year-End: Preparing to Close the Books 3. Accrued Expenses expenses that have been incurred and relate to the current year's activities, but have not yet been paid for For example, assume employees are paid every Friday. Year end fell on a Tuesday, so salaries for two working days have accrued to year end. Copyright © 2015 by Nelson Education Ltd.14-10 $400 × 2 days = $800

11. Chapter 14: At Year-End: Preparing to Close the Books 4. Accrued Revenues revenues that have been earned but have not yet been recorded on the books For example, a broker concluded negotiations on behalf of his client for the purchase of specialized equipment and has earned a commission of $2,400. The client has not yet been invoiced for the service because the deal was completed just the day before year end. Copyright © 2015 by Nelson Education Ltd.14-11

12. Chapter 14: At Year-End: Preparing to Close the Books 5. Amortization (or Depreciation) commonly referred to as Capital Cost Allowance (CCA) when used for income tax purposes the costs of assets, such as furniture, equipment, and vehicles, are written off as expenses over the years of the life of each asset because such assets contribute to the ongoing success of the business Copyright © 2015 by Nelson Education Ltd.14-12 A contra-asset account representing the total amount of the asset cost that has so far been written off to expense since the asset was purchased.

13. Chapter 14: At Year-End: Preparing to Close the Books 5. Amortization (or Depreciation) Two methods of calculating amortization: i. Straight Line Amortization: An equal portion of the cost of the asset is allocated to expense each year until the full value of the asset has been amortized. Copyright © 2015 by Nelson Education Ltd.14-13

14. Chapter 14: At Year-End: Preparing to Close the Books 5. Amortization (or Depreciation) i. Straight Line Amortization: For example, a machine is purchased at a cost of $3,500 with an estimated useful life of seven years. The annual amortization would be $3,500 ÷ 7 years = $500 per year. Copyright © 2015 by Nelson Education Ltd.14-14 Dec 31Amortization Expense500.00 Accumulated Amortization – Machine 500.00 To record amortization for one year.

15. Chapter 14: At Year-End: Preparing to Close the Books 5. Amortization (or Depreciation) ii. Declining-Balance Amortization: Amortization is calculated on the book value each year rather than on the original cost value. Book value is the cost of the asset that has not yet been amortized. Copyright © 2015 by Nelson Education Ltd.14-15

16. Chapter 14: At Year-End: Preparing to Close the Books 5. Amortization (or Depreciation) ii. Declining-Balance Amortization: For example, a delivery truck is purchased for $20,000 with amortization to be calculated at an annual rate of 25%. Copyright © 2015 by Nelson Education Ltd.14-16 This calculation would continue year after year on an ever-decreasing book value. Year 1 Dec 31Amortization Expense5000.00 Accumulated Amortization – Truck 5000.00 To record amortization for Year 1. Year 2 Dec 31Amortization Expense 3750.00 Accumulated Amortization – Truck 3750.00 To record amortization for Year 2.

17. Chapter 14: At Year-End: Preparing to Close the Books 5. Amortization (or Depreciation) At the end of each year, the balance sheet will show the original cost of the asset and its accumulated amortization. Copyright © 2015 by Nelson Education Ltd.14-17 Net book value: the unamortized value of the asset.

18. Chapter 14: At Year-End: Preparing to Close the Books 6. Bad Debts An estimate of the amount of current receivables that will become uncollectible in the near future (as discussed in Chapter 12) Copyright © 2015 by Nelson Education Ltd.14-18

19. Chapter 14: At Year-End: Preparing to Close the Books 7. Inventory Three accounts are used to represent inventory values: i. Inventory: An asset account to show the value of merchandise on hand at the time the financial statements are prepared, usually at year-end. This balance will appear on the Balance Sheet. Copyright © 2015 by Nelson Education Ltd.14-19

20. Chapter 14: At Year-End: Preparing to Close the Books 7. Inventory ii. Opening Inventory: An expense account to show what the value of inventory was at the beginning of the current operating year. This balance will appear on the Income Statement. Copyright © 2015 by Nelson Education Ltd.14-20

21. Chapter 14: At Year-End: Preparing to Close the Books 7. Inventory iii. Closing Inventory: A contra-expense (negative- expense) account to show the value of goods on the shelf at year end. This balance also appears on the Income Statement. It is the same value as the asset Inventory account. Since these goods have not yet been sold, their cost cannot be recognized as an operating expense this year. The value is deducted from this year's expenses and carried over to the next operating year when the goods are expected to be sold. Copyright © 2015 by Nelson Education Ltd.14-21

22. Chapter 14: At Year-End: Preparing to Close the Books 7. Inventory Two adjusting entries are needed for inventory at year end: 1.To remove the old value from the Inventory account since this was the balance a year ago. This value will be transferred to the Opening Inventory account. 2.To record the current inventory balance in the Inventory account, and also in the Closing Inventory account. Copyright © 2015 by Nelson Education Ltd.14-22

23. Chapter 14: At Year-End: Preparing to Close the Books 7. Inventory Two adjusting entries are needed at year end: Copyright © 2015 by Nelson Education Ltd.14-23

24. Chapter 14: At Year-End: Preparing to Close the Books The Worksheet a multi-column page (similar to a spreadsheet) designed to arrange systematically all the accounting data that will be needed for the preparation of financial statements (the Income Statement and the Balance Sheet) and for closing the revenue and expense accounts at year end Copyright © 2015 by Nelson Education Ltd.14-24

25. Chapter 14: At Year-End: Preparing to Close the Books Copyright © 2015 by Nelson Education Ltd.14-25 The end-of-year trial balance is the starting point for organizing the worksheet information. Adjustments are organized here. Adjusting journal entries will be recorded based on these amounts. These are the balances after adjustments have been added or subtracted. Revenue and expense account balances are extended to these columns. These will be used to prepare the Income Statement later. Asset, liability, and equity account balances are extended to these columns. These will be used to prepare the Balance Sheet later.

26. Chapter 14: At Year-End: Preparing to Close the Books Copyright © 2015 by Nelson Education Ltd.14-26 Each pair of columns is totalled and balanced before proceeding with the next pair. The difference between debits and credits is the profit or loss. The same difference should be found here as well.

27. Chapter 14: At Year-End: Preparing to Close the Books Recording Adjusting Journal Entries Adjustments are recorded in the General Journal, based on the adjustments entered in the Adjustments columns of the worksheet. Keyed entries, such as (a), (b), (c), etc., make it easy to find the debit and credit sides of each adjustment. Copyright © 2015 by Nelson Education Ltd.14-27

28. Chapter 14: At Year-End: Preparing to Close the Books Copyright © 2015 by Nelson Education Ltd.14-28 For example: Find the debit and credit sides of the adjustment keyed as (a). The debit is Insurance Expense. The credit is Insurance Prepaid.

29. Chapter 14: At Year-End: Preparing to Close the Books Then enter the adjustment in the General Journal as usual. Copyright © 2015 by Nelson Education Ltd.14-29

30. Chapter 14: At Year-End: Preparing to Close the Books End of Chapter 14 Copyright © 2015 by Nelson Education Ltd.14-30