Premium 2011 Month & Year-End Processing

What is month-end/year-end processing? 3 Why do you need to make adjustments at period-end? 4 Adjustments at Period-End - Bank Reconciliation 5 - Office/Store Supplies 6 - Prepaid Insurance 7 - Accrued Wages 8 - Accrued Expenses 9 - Inventory Adjustment 10 - Accrued Interest 13 - Amortization Adjustment 14 Month-End and Year-End Reports 15 - Trial Balance 16 - Income Statement 17 - Balance Sheet 18 - Journal Entries – ALL 20 Contents Slideshow 9

What is month-end/year- end processing? (GAAP: Time Period Principle) A good accounting system is designed to produce periodic reports, usually at the end of each month. At the end of the fiscal year, annual financial statements are prepared. (GAAP: Time Period Principle) The annual reporting period (referred to as a fiscal year) is not always the same as the calendar year ending December 31. A company can adopt a fiscal year consisting of any 12 consecutive months. The time periods covered by financial reports are referred to as accounting periods. Month-end or year-end processing refers to a thorough review of the transactions during the accounting period and making adjustments, if necessary. Click to continue. The economic life of a business can be divided into time periods. Time Period Principle

Why do you need to make adjustments at period-end? (GAAP: Objectivity Principle) (GAAP: Full Disclosure Principle) During an accounting period, financial transactions are entered in the company records according to source documents such as cheques received and issued, invoices received and issued, credit/debit memos, etc. (GAAP: Objectivity Principle) However, some financial events may occur that do not generate source documents. At period-end, these types of transactions should be taken into account before producing period-end reports. (GAAP: Full Disclosure Principle) Click and study examples of financial events that do not generate source documents and would require adjustments. Adjustments normally made during period-end are discussed in the slides that follow. Click to continue. Supplies are recorded in an asset account at the time of purchase. During the accounting period, they are consumed, and therefore the asset account should be adjusted at period-end to reflect the decrease in their value. Decrease in Office/Store Supplies Insurance protection usually covers a specific period of time in the future (e.g., for one or more years). It is recorded as PREPAID INSURANCE when the premium is paid in advance. At period-end, the value of used-up amount for insurance protection should be calculated and recorded. Expiration of Insurance Protection Other prepaid assets that may decrease in value are: Land/building leases. Subscriptions. Equipment leases. Professional or legal fees paid in advance. Expiration of other Prepaid Assets In time, equipment and other assets such as vehicles, etc. may decrease in value. At the time of purchase, each of these assets is recorded in a separate asset account. At period-end, the value of these assets has to be evaluated and adjustments must be made to reflect the decrease in value. Amortization of Equipment and other Assets

Adjustments at Period-End: Bank Reconciliation All adjustments are entered in the General Journal. The complete account (bank) reconciliation process is discussed in Slideshow 12. Step-by-step instructions in using the Reconciliation & Deposits Journal are given in the text in Chapter 12. For illustrative purposes, let us assume that your estimated bank charges for December is $ It is estimated because you had not yet received the bank statement for December. Since the expense is incurred in December but not yet documented, it needs to be recorded as an estimated expense. It should therefore be recorded before year-end closing. Click. Study the appropriate General Journal entry to record the estimated bank charges expense. Click to continue. Company may need to make adjustments in the company records due to: Bank charges/interest charges Interest earned NSF cheques Company’s bookkeeping errors Company may need to adjust the calculation of the cash balance on the bank statement to account for: Outstanding cheques Deposits in transit Bank errors Company cash account = Adjusted bank balance (Adjusted cash balance) Bank (Account) Reconciliation

Matching Principle Expenses are matched with revenues in the period when efforts are made to generate the revenue. Example: An accounting consultant, Faye Anderson, bought $ worth of paper and printing supplies in December. She collected $2, consulting fees from her clients that month. Faye entered $ for paper and printing supplies as prepaid asset. At the end of the month, she calculated that she used up $ worth of the supplies she purchased earlier. When Faye prepares her monthly financial statement for December, she should report the $2, revenue and her expenses to earn the revenue, including $ (not $600.00) for supplies. Original Purchase Journal Entry DR Prepaid Office Supplies CR Accounts Payable Month-End Adjustment DR Office Supplies Expense CR Prepaid Office Supplies Prepaid Office Supplies Office Supplies Expense Dec Dec Dec Balance Adjustments at Period-End: Office/Store Supplies GAAP: Matching Principle, Following the GAAP: Matching Principle, you need to adjust the value of office/store supplies at period-end. Click. Review the Matching Principle and the example at the right. Using the example, Prepaid Office Supplies should be adjusted by $ as an Office Supplies Expense at month-end. Click. Study the original purchase journal entry (purchase of office supplies on credit) and the month-end adjustment to record used office supplies. Click again. Study the effect of the entries on the Office Supplies asset and expense accounts at period-end. Click to continue.

Adjustments at Period-End: Prepaid Insurance A company would usually pay for insurance protection for one or more years. Insurance at the date of subscription is entered as Prepaid Insurance. As each day goes by, some of the insurance protection expires. The value of the expired insurance coverage becomes an expense. For example, the company pays for insurance on December 1 for one year. At the end of December, Prepaid Insurance is reduced by $50.00 ($600/12mos.). This principle also applies to extended warranties on equipment or vehicles. Click. Study the original entry for cash payment of insurance protection and the month-end adjustment. Click again. Study the effect of the entries on the Insurance asset and expense accounts. Click to continue. Original Payment of Insurance Coverage DR Prepaid Insurance CR Cash in Bank Month-End Adjustment DR Insurance Expense CR Prepaid Insurance Prepaid Insurance Insurance Expense Dec Dec Dec Balance

Adjustments at Period-End: Accrued Wages (GAAP: Matching Principle) You learned about accrued wages in Chapter 7. The principle in recording accrued wages is the same as prepaid expenses. (GAAP: Matching Principle) For example, the company pays for wages every other Monday. In this example, the wages payable on December 1, 2014 include wages payable for November 25 to 30 (see right). The corresponding accrued wages have to be entered as an expense in November. Click. Study the appropriate journal entry on November 31, assuming the accrued wages amount to $3, Click to continue. Accrued Wages DR Wages Expense 3, CR Wages Payable 3,600.00Payday

Adjustments at Period-End: Accrued Expenses A good example of accrued expenses is utility bills. Utility companies send bills covering a certain period; e.g., from 15 th of one month to the 14 th of the next month (see underlined dates at right). Assuming that the utility bill averages $500.00, to find the daily consumption rate: $500 /30 days (notice underscored dates for Nov. and Dec.) = $16.13 per day. To find utility expense for December, 2014: $16.67*16 days in November = $ $ is then charged to Utility Expense for November 2014 and ($ for December 2014). Click. Study the journal entry for the utility expense in November It is credited to Accrued Liabilities because the expense is a payable amount at this time. Accrued Liabilities will be explained further in the next slideshow. Click to continue. Utility Expense in November 2014 Journal Entry DR Utility Expense CR Accrued Liabilities

Adjustments at Period-End: Periodic Inventory You learned in Chapter 8 (Slideshow 8B) how to make INVENTORY adjustments in a Perpetual system. You also learned that in a Periodic system, INVENTORY adjustments are based on the physical count of inventory. Study the memo at the right. In order to have a detailed record of the Inventory adjustment (periodic system) for the audit trail, it is best to do the adjustment in two steps: Remove the previous INVENTORY balances. 2. Enter the current INVENTORY balances. You would perform the same procedure for month-end and year- end. Click to continue.

Adjustments at Period-End: Periodic Inventory (continued) To make the adjustment, you would find the balance of the ENDING INVENTORY and INVENTORY OF GOODS accounts in the Trial Balance (see right). Study the appropriate journal entry for Step 1 (Remove the previous INVENTORY balances). To enter the new balances, simply reverse the entry in step 1, using the value of the physical count. Click. Study the journal entry for Step 2 (Enter the new INVENTORY balances). Remember, you would perform the same procedure for month-end and year-end adjustments. Click to continue. Step 1: Remove previous INVENTORY balances. DR Ending Inventory 60, CR Inventory of Goods 60,320.00

Adjustments at Period-End: Periodic Inventory (continued) To make the adjustment, you would find the balance of the ENDING INVENTORY and INVENTORY OF GOODS accounts in the Trial Balance (see right). Study the appropriate journal entry for Step 1 (Remove the previous INVENTORY balances). To enter the new balances, simply reverse the entry in step 1, using the value of the physical count. Click. Study the journal entry for Step 2 (Enter the new INVENTORY balances). Remember, you would perform the same procedure for month-end and year-end adjustments. Click to continue. Step 2: Enter the new INVENTORY balances. DR Inventory of Goods 55, CR Ending Inventory 55,850.00

Adjustments at Period-End: Periodic Inventory (continued) Note the balances of BEGINNING INVENTORY, ENDING INVENTORY and INVENTORY OF GOODS before and after Month- End processing. (M-E means Month-End adjustment). Click to continue. Beginning Inventory - COGS Bal Fwd 48,680 Balance 48,680 Ending Inventory - COGS Bal Fwd 60,320 M-E#1 60,320 M-E#2 55,850 Balance 55,850 Inventory of Goods (B/S Current Asset) Bal Fwd 60,320 M-E#1 60,320 M-E #2 55,850 Balance 55,850

Adjustments at Period-End: Accrued Interest Processing accrued interest is very similar to accrued expenses. For example, the company has a bank loan balance of 8% interest per year; the monthly interest cost is $200. Click. Like accrued expenses, Interest Expense is debited and Accrued Liabilities is credited. Click to continue. Accrued Interest Expense in December 2014 Journal Entry DR Interest Expense CR Accrued Liabilities

Adjustments at Period-End: Amortization (GAAP: Cost Principle). At the time of purchase, an asset is recorded in the company files according to the purchase price (GAAP: Cost Principle). As time goes by, capital assets such as equip- ment, building, machinery, vehicles, etc. depreciate (lessen) in value. An amortization adjustment is usually done monthly, quarterly or yearly. There are various ways of calculating amortization. The Canada Income Tax Act guidelines may be helpful. First, study related terminology. Click. For example, a computer equipment: Cost = $3,000 Salvage Value = $100 Estimated Life = 5 years 3000 – Click. Study the journal entry for the amortization adjustment. Click to continue. Purchase price of the asset. Cost Cost Estimated alue at the end of the estimated life of the asset. Salvage Value The estimated number of years that the company is expected to enjoy benefits from the asset. The Canada Income Tax Act provides guidelines for estimated life for each class of assets, among others. Estimated Life Also referred to as depreciation. It is the value by which an asset is reduced at a specified period of time. Amortization Amortization Adjustment at Year-End DR Amort. Expense – Computer Equip CR Accum. Amort. – Computer Equip = $580 yearly amortization

Month-End Reports To complete your audit trail files, you must print month-end reports (see right). This is a sound practice in order to preserve your reports in case of data loss due to computer glitches. Financial reports give you an overview of your company’s health and cash flow, and can help identify problems in your company’s performance. They give you a snapshot of your assets, liabilities, and equity, showing income, expenses, and net profit or loss over time. Click. An easy way to find the financial report that could help you is through the Report Centre. Study the reports available in the COMPANY Home Report Centre. Click to continue. Month-End Reports 1.Trial Balance 2.Balance Sheet 3.Income Statement 4.Journal Entries – ALL 5.General Ledger Listing - Detail

Month-End Reports: Trial Balance You can find the balance of each G/L account on the Trial Balance. Click. Debits are always equal to Credits. Click. For every prepaid asset, there is a corresponding expense account. Click. For every capital asset that can depreciate, there is a corresponding amortization account. They are called accumulated because the amount represents the total of the reduction of the value of the asset from the time of purchase. Click. Amortization Expense – All is the total of amortization of all capital assets during the current accounting period. Click to continue.

Month-End Reports: Trial Balance You can find the balance of each G/L account on the Trial Balance. Click. Debits are always equal to Credits. Click. For every prepaid asset, there is a corresponding expense account. Click. For every capital asset that can depreciate, there is a corresponding amortization account. They are called accumulated because the amount represents the total of the reduction of the value of the asset from the time of purchase. Click. Amortization Expense – All is the total of amortization of all capital assets during the current accounting period. Click to continue.

Month-End Reports: Income Statement The Income Statement is an itemized list of revenues and expenses. It tells you whether you made a profit (Net Income) or had a loss (Net Loss). This detailed information is important for decision making. Click. Of particular interest in this statement is the section on Cost of Goods Sold. BEGINNING INVENTORY is the cost of merchandise on hand at the beginning of the period. PURCHASES, PURCHASE RETURNS and PURCHASE DISCOUNTS represent the net purchases during the period. ENDING INVENTORY (in a Periodic system) is the value of inventory at the end of the period per the physical count. Study how GOODS AVAILABLE FOR SALE and COST OF GOODS SOLD are calculated. Click to continue.

Month-End Reports: Balance Sheet The Balance Sheet, also referred to as the Statement of Financial Position, provides information that helps users understand a company’s financial status at a given date. TOTAL ASSETS are equal to LIABILITIES and EQUITY, which is why it is called a Balance Sheet. Click to continue. Assets = Liabilities Equity Equity +

Month-End Reports: Balance Sheet (continued) NET INCOME from the Income Statement is carried over to the Equity section of the Balance Sheet via CURRENT EARNINGS. After this is done, the Balance Sheet reflects changes in the Owner’s Equity’s position at the end of the period. Click to continue. Income Statement Balance Sheet

Month-End Reports: ALL General Ledger Report and Journal Entries - ALL It is good practice to print and file all General Ledger Report and Journal Entries – ALL for the whole month at the end of each month, so at year-end, you will have them for the audit trail. Review the type of information you will find in General Ledger Report. Click again. Review a sample Journal Entries – ALL report. Click to continue.

Month-End Reports: ALL General Ledger Report and Journal Entries - ALL It is good practice to print and file all General Ledger Report and Journal Entries – ALL for the whole month at the end of each month, so at year-end, you will have them for the audit trail. Click. Review the type of information you will find in General Ledger Report. Click again. Review a sample Journal Entries – ALL report. Click to continue.

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