Chapter 9 – Completing the Accounting Cycle

Name: Chapter 9 – Completing the Accounting Cycle
Uploaded: 2017-07-06T16:03:08+00:00
Duration: PTM17S31
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Description: Chapter 9 – Completing the Accounting Cycle

Chapter 9 – Completing the Accounting Cycle
BAF3M Accounting Chapter 9 – Completing the Accounting Cycle

9.1 The Adjustment Process
Accountants need to ensure that the statements they produce are: Up to Date, Accurate, Consistent Adjustments are necessary to ensure Accounts are brought up to date All late transactions are taken into account All calculations are correct All GAAPs have been complied with

During the course of the fiscal period, things are allowed to get out of date Adjusting entries get everything up-to-date and accurate again Why allowed to go inaccurate? Saves time, money, effort

We will look at the adjusting entries for three main areas Supplies Prepaid Expenses Late Arriving Invoices

Adjustment #1: Supplies
The Supplies balance shows the total supplies purchased in the year Adjusting Entries

What is the Balance? What the balance is

What Should The Balance Be?
What the balance should be? What the balance “should be” is determined from someone counting the supplies that remain in the business at the end of the year

The Adjustment The required adjustment

Introducing a New Account
What the balance is - they haven’t used it yet because no one was went and physically taken an inventory of the expenses to see what has been used The income statement account related to Supplies is shown above The accounting clerk has not used this account during the year

Expense: What Should the Balance Be?
What the balance should be What the balance “should be” is equal to the amount of supplies “used up” during the year

What the Adjustment Would Be
The required adjustment

What that Looks Like in the Journal
The adjusting entry as it would appear in the general journal

Adjustment #2: Prepaid Expenses
The Prepaid Insurance balance shows the total cost of insurance bought in the year Adjusting Entries

What is the Balance? What the balance is

What Should the Balance Be?
What the balance should be What the balance “should be” is determined from someone calculating the portion of the insurance policy that is “unexpired” or “not used up yet, but paid for”

How did you Get $1200? An Insurance policy was purchased on September 1st for one year. The fiscal period expires Dec. 31. As of Dec. 31, how many months of insurance have been used ? - 4 months have been used Each month costs: $1800 / 12mo. = $150 4 months have been used: $150*4 = $600

The Adjustment The required adjustment

Introducing Your 2nd New Account
What the balance is The income statement account related to Prepaid Insurance is shown above The accounting clerk has not used this account during the year

Expense: What Should the Balance Be?
What the balance should be What the balance “should be” is the amount of the insurance policy that has expired at year’s end

What the Adjustment Should Be?
The required adjustment

What it Looks Like in the Journal
The adjusting entry for insurance as it would appear in the general journal

Adjustment #3: Late Arriving Invoices
The Accounts Payable balance does not include two invoices that arrived late Adjusting Entries

Two late invoices have arrived
$212 for the Telephone Bill $315 for the Utilities Bill

What is the Balance? Little analysis is needed for this adjustment

The Adjustment Simply enter the late invoices

The Adjustment contd. Simply enter the late invoices

What Should the Balance Be?
And calculate the adjusted balance

Expense: What is the Balance?

The Adjustments

The What Should the Balance Be?

What that Looks Like in the Journal
The adjusting entry for late invoices as it would appear in the general journal

Summary 1 Adjusting Entries—Summary Balance Sheet
The adjusting entries have brought balance sheet accounts up to date

Summary 2 Adjusting Entries—Summary Balance Sheet Income Statement
And have recorded expenses in related accounts on the income statement

Check your Understanding
Pg 308 # 1-6

9.2 Adjusting Entries and the Work Sheet
The 6 column work sheet from last chapter has 2 columns added to it for Adjustments So you now have 8 columns Trial Balance DR/CR Adjustments DR/CR Income Statement DR/CR Balance Sheet DR/CR

ADJUSTING FOR SUPPLIES According to Global Logistics’ trial balance they have $ worth of supplies However, once a physical inventory was completed on December 31, 2008 they discovered that they only had $ worth of supplies on hand

ADJUSTING FOR SUPPLIES 20-- Dec. 31 Supplies Expense Supplies

ADJUSTING FOR INSURANCE USED According to Global Logistics’ trial balance they have $6564 in prepaid insurance They have$4070 remaining in unused insurance

ADJUSTING FOR INSURANCE USED 20-- Dec. 31 Insurance Expense 2494 Prepaid Insurance 2494

ADJUSTING FOR LATE ARRIVING INVOICES Three late invoices in this example Telephone $ 45 Truck Repair Printer Repair Total $626

20-- Dec. 31 Telephone expense Truck expense 496 Miscellaneous expense 85 Accounts Payable

COMPLETING THE SHEET From this point you complete the 8-column worksheet just as you completed the 6-column worksheet Except as you transfer numbers to the correct column you may need to add or subtract the adjustments into the totals as necessary Balance the columns using the “magical” number Underline where necessary

Journalizing and Posting the Adjusting Entries All the adjusting entries need to be properly journalized and posted to the ledger See Figs 9.9 and 9.10

9.3 Closing Entries Concepts
REAL ACCOUNTS – balances that continue into the next fiscal period ex. Bank, trucks, accounts payable etc. NOMINAL ACCOUNTS – have balances that do not continue into the next fiscal period ONLY Expenses, drawing and revenue

CLOSING OUT AN ACCOUNT – means to make it have no balance. Nominal accounts are closed out at the end of the fiscal period. INCOME SUMMARY ACCOUNT – summarizes the revenues and expenses of the period. Represents either the net income or net loss for the fiscal period

WHY DO WE CLOSE OUT ACCOUNTS? Closing these accounts allows us to plainly observe the previous year's effect on our revenue, expense, and drawings accounts. You can well imagine that if we did not close these accounts, their balances would build to outrageous amounts.

HOW DO WE DO THIS? The Order in Which we Close Out Accounts (p333) Close out the revenue account(s) to the Income Summary account Close out the expense account(s) to the Income Summary account Close out the Income Summary account to the Capital account Close out the Drawing account to the Capital account

Try it Page 325 #2

9.4 Journalizing and Posting the Closing Entries
Closing Entry #1: Close out the revenue account(s) to the Income Summary account Journal Dec 31 Shipping Revenue Income Summary Because revenue is a CR balance account, a DR entry is needed to close it off

Closing Entry #2: Close out the expense account(s) to the Income Summary account Journal Dec 31 Income Summary Bank Charges Exp 3500 …(all exp listed here) Insurance Exp 2494 Because expenses are a DR balance account, a CR entry is needed to close them off

Closing Entry #3: Close out the Income Summary account to the Capital account Journal Dec 31 Income Summary P. Marshall, Capital If the Income Summary account has a CR balance, then a DR entry is needed to close it. (profit  capital increases) If the Income Summary account has a DR balance, then a CR entry is needed to close it. (loss  capital decreases)

Closing Entry #4: Close out the Drawing account to the Capital account Journal Dec 31 P. Marshall, Capital P. Marshall, Drawings 42000 Because Drawings is a DR balance account, a CR entry is needed to close it

Post-Closing Trial Balance Checks the accuracy of the ledger after the adjusting and closing entries have been done Example shown in Fig 9-20

9.5 Adjusting for Depreciation
What is it? First let’s remember our definition for an expense Something that we spend money on to make money Based on this definition shouldn’t things like equipment or cars be expenses? We use these things to make money do we not?

However, items such as a car don’t suddenly become worthless – it loses some of it’s value each year So a portion of the cost of the equipment should be allocated as an expense in each year of the item’s life This process meets the matching principle

Depreciation  an allowance made for the decrease in value of an asset over time Depreciation is an expense so it appears on the INCOME STATEMENT

An anecdotal example Read p about the depreciation of a company’s delivery van

Methods 2 most common are: Straight Line Declining Balance

Straight Line Method Divides up the net cost of the asset equally over the years of the assets life Straight Line for 1 yr = (orig cost - estimated salvage value) Estimated # of periods in the asset’s life

Straight line Example Tip Top Trucking purchased a truck for $78000 on Jan Truck could be used for 6 years, and be sold at that time for $7800. Therefore: Estimated Annual Depreciation is ($78000 – $7800) / 6 = $11700 The truck will depreciate $11700 each year.

Recording Depreciation Journal Depreciation Expense – Truck 11700 Truck The above work is correct, but not used by larger, computerized businesses…they use a new account called “Accumulated Depreciation”

So the entry will look like this: Journal Depreciation Expense – Truck Accumulated Depreciation - Truck The use of the accumulated depreciation account provides 2 types of information: 1) By not taking the depreciation right off of the asset account we can still find the original cost of the asset 2) We can quickly calculate the total amount of depreciation recorded over the years

Accumulated Depreciation is a CONTRA account A contra account is one that is displayed alongside an associated account and has a balance that is opposite to that account

Accumulated Depreciation is also a VALUATION account One that is used together with an asset account to show the true net value of an asset

Insert scan of image on p340

Adjusting Entry for Depreciation 1) records the depreciation for the period in the depreciation expense account 2)Increases the appropriate accumulated depreciation account for the asset, which reduces the asset’s net book value Journalized as… Depreciation Exp $$$$ Acc. Dep. (Asset) $$$$

Declining-balance Method Allocates a greater amount of depreciation to the first years of an asset’s life This is the method the government requires for income tax purposes To find the depreciated amount you take the undepreciated cost of the asset and multiply it by a fixed % This % is set by the gov’t See schedule on p. 345

Chapter 9 – Completing the Accounting Cycle

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