TOPIC COMPLETING THE ACCOUNTING CYCLE (ADJUSTING & CLOSING THE ACCOUNTS) PART 1- ADJUSTING ENTRIES TOPIC PART LEARNING OBJECTIVES On completion of this topic, you should be able to: Differentiate between the cash basis and the accrual basis of accounting Explain the criteria for revenue recognition and expense recognition Explain why adjusting entries are needed and identify the major types of adjusting entries Prepare adjusting entries for prepayments and accruals Describe the nature and purpose of the adjusted trial balance ACCRUAL vs CASH ACCOUNTING • Transactions are recorded when income is earned or expenses are incurred • Revenue & expense recognition criteria • Transactions are recorded when cash is paid or cash is received (Conceptual Framework) ACCRUAL CASH Most businesses use ACCRUAL accounting ACCRUAL accounting is one of the key underlying assumptions that contributes to providing useful accounting information to decision makers Because of ACCRUAL accounting we need to make end of period adjustments to the accounts Closing entries Adjusting entries | 20/6/17 3,500 3,300 1/6/17 1,200 21/6/17 21/6/17 Bal 30/6 2,000 21/6/17 2,000 21,900 GENERAL JOURNAL Date 1/6/17 Particulars Post Ref Prepaid Rent Cash at Bank DEBIT 120 100 3,300 Cash at Bank Services Revenue 100 400 3,500 Salaries and Wages Expense Cash at Bank 590 100 1,200 100 210 2,000 CREDIT 3,300 (Prepay mths rent) 20/6/17 3,300 3,500 (Cash Revenue) 21/6/17 1/6/17 3,500 20/6/17 1,200 12,000 Bal 30/6 (Salaries Expense) 21/6/17 Cash at Bank Unearned Revenue 2,000 (Deposit taken) Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Trial Balance DEBIT CREDIT 21,900 2,000 3,300 10,000 200 2,000 30,000 2,000 12,000 500 400 600 1,100 2,400 44,200 44,200 21/6/17 1,200 Bal 30/6 2,400 THE END-OFPERIOD PROCESS TWO TYPES OF ADJUSTING ENTRIES Prepaid expenses PREPAYMENTS ACCRUALS (Unrecorded) Costs/expenses paid before they are consumed e.g prepaid insurances and rent, DEPRECIATION Revenue received in advance Revenues that are collected or received but not yet earned e.g unearned services or subscriptions revenue Accrued expenses Accrued revenues Expenses incurred but not yet paid e.g accrued wages Revenue earned but not yet received e.g accrued interest on a term deposit | DEPRECIATIONis the Allocation of the historic cost of an asset (less any residual) over the useful life of that asset • Recall on May 2017 Kelly Cook eTravel P/L purchases Office Furniture & Equipment paying $10,000 in cash • The furniture is expected to last for years and be worthless at the end of this period (zero residual) • The cost of the furniture must be matched with the accounting periods in which it was used to earn revenue Depreciation Preview STEP 1: Divide the cost of the asset by the number of accounting periods in the asset’s useful life (10,000 / 5) = 2,000 per year STEP 2: Calculate the depreciation expense amount for the part year e.g month out of 12 (2,000 / 12 *2 = 333) STEP 3: Do the adjusting entry by crediting the asset’s contra-account and crediting depreciation expense CONTRA ACCOUNTS A contra account is a “companion account” Accumulated depreciation is a contra account to PPE asset account A contra account’s normal balance is opposite to that of the companion account Users of financial statements use this information in decision making | ADJUSTING ENTRIES 30-June-2017 Account for expiry of one month's rent 30-June-2017 Account for months' depreciation of office furniture - straight line over years 30-June-2017 Account for $500 service revenue from legal firm previously unearned, now earned 30-June-2017 Account for accrued salaries & wages for one week - $300 30-June-2017 Account for accrued service revenue of $400 from a customer, that is earned but not recorded 30/6/17 500 1,500 Bal 30/6 30/6/17 400 Bal 30/6 2,400 Date 30/6/17 Particulars GENERAL JOURNAL Post Ref ADJUSTING ENTRIES Rent Expense Prepaid Rent 580 120 DEBIT CREDIT Depreciation Expense Accumulated Depreciation PPE 1,100 30/6/17 2,200 1,100 1,100 (Adjust for one month’s rent) 30/6/17 Bal 30/6 300 30/6/17 333 530 30/6/17 500 30/6/17 400 30/6/17 12,900 Bal 30/6 333 333 175 (Adjust for month’s depreciation) 30/6/17 Unearned Revenue 210 Service Revenue 400 500 500 (Record earned revenue) 30/6/17 Salaries and Wages Expense Salaries and Wages Payable 30/6/17 590 220 333 300 300 (Record accrued wages) 30/6/17 Accounts Receivable Revenue 110 30/6/17 1,100 Bal 30/6 2,200 400 400 400 (Record revenue receivable) 2,633 2,633 30/6/17 300 Bal 30/6 2,700 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017 Trial Balance Adjustments Adjusted Trial Balance DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 21,900 21,900 2,400 400 2,000 1,100 2,200 3,300 10,000 10,000 333 333 200 2,000 200 1,500 300 30,000 500 300 30,000 2,000 2,000 12,000 500 400 600 1,100 2,400 44,200 333 500 333 400 1,100 600 2,200 2,700 300 44,200 12,900 900 2,633 2,633 45,233 45,233 Profit & Loss DEBIT CREDIT Balance Sheet DEBIT CRED Complete Worksheet ready for next stage – Preparing the Financial Statements 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017 Trial Balance Adjustments Adjusted Trial Balance DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 21,900 21,900 2,000 400 2,400 3,300 1,100 2,200 10,000 10,000 333 333 200 200 2,000 500 1,500 300 300 30,000 30,000 2,000 2,000 12,000 900 12,900 500 500 333 333 400 400 600 600 1,100 1,100 2,200 2,400 300 2,700 44,200 44,200 2,633 2,633 45,233 45,233 Profit & Loss DEBIT CREDIT Balance Sheet DEBIT CREDIT 21,900 2,400 2,200 10,000 333 200 1,500 300 30,000 2,000 12,900 500 333 400 600 2,200 2,700 6,733 6,167 12,900 12,900 38,500 12,900 38,500 32,333 6,167 38,500 TOPIC COMPLETING THE ACCOUNTING CYCLE (ADJUSTING & CLOSING THE ACCOUNTS) PART 2- PREPARING THE FINANCIAL STATEMENTS & CLOSING ENTRIES TOPIC PART LEARNING OBJECTIVES On completion of this topic, you should be able to: Prepare the financial statement's from the completed worksheet Explain the purpose of closing entries Prepare the closing entries Describe the required steps in the accounting cycle 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Kelly Cook e-Travel Pty Ltd WORKSHEET for month ending 30 June 2017 Trial Balance Adjustments Adjusted Trial Balance DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 21,900 21,900 2,000 400 2,400 3,300 1,100 2,200 10,000 10,000 333 333 200 200 2,000 500 1,500 300 300 30,000 30,000 2,000 2,000 12,000 900 12,900 500 500 333 333 400 400 600 600 1,100 1,100 2,200 2,400 300 2,700 44,200 44,200 2,633 2,633 45,233 45,233 Profit & Loss DEBIT CREDIT Balance Sheet DEBIT CREDIT 21,900 2,400 2,200 10,000 333 200 1,500 300 30,000 2,000 12,900 500 333 400 600 2,200 2,700 6,733 6,167 12,900 12,900 38,500 12,900 38,500 32,333 6,167 38,500 | 12 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017 Trial Balance Adjustments Adjusted Trial Balance DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 21,900 21,900 2,000 400 2,400 3,300 1,100 2,200 10,000 10,000 333 333 200 200 2,000 500 1,500 300 300 30,000 30,000 2,000 2,000 12,000 900 12,900 500 500 333 333 400 400 600 600 1,100 1,100 2,200 2,400 300 2,700 44,200 44,200 2,633 2,633 45,233 45,233 Profit & Loss DEBIT CREDIT 12,900 500 333 400 600 2,200 2,700 6,733 6,167 12,900 Profit & Loss DEBIT CREDIT Balance Sheet DEBIT CREDIT 21,900 2,400 2,200 10,000 333 200 1,500 300 30,000 2,000 12,900 500 333 400 600 2,200 2,700 6,733 6,167 12,900 12,900 38,500 12,900 38,500 32,333 6,167 38,500 Kelly Cook eTravel Pty Ltd Statement of Profit or Loss for period May - June 2017 Revenue Service Revenue Expenses Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Total Expenses Profit 12,900 500 333 400 600 2,200 2,700 6,733 $ 6,167 12,900 12,900 | 13 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense 100 110 120 170 175 200 210 220 300 320 400 500 530 540 570 580 590 Kelly Cook e-Travel Pty Ltd WORKSHEET for period ending 30 June 2017 Trial Balance Adjustments Adjusted Trial Balance DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 21,900 21,900 2,000 400 2,400 3,300 1,100 2,200 10,000 10,000 333 333 200 200 2,000 500 1,500 300 300 30,000 30,000 2,000 2,000 12,000 900 12,900 500 500 333 333 400 400 600 600 1,100 1,100 2,200 2,400 300 2,700 44,200 44,200 2,633 2,633 45,233 45,233 Account Cash at Bank Accounts Receivable Prepaid Rent Property, Plant & Equip Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Dividends Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense Profit & Loss DEBIT CREDIT Balance Sheet DEBIT CREDIT 21,900 2,400 2,200 10,000 333 200 1,500 300 30,000 2,000 12,900 500 333 400 600 2,200 2,700 6,733 6,167 12,900 12,900 38,500 12,900 38,500 32,333 6,167 38,500 Balance Sheet DEBIT CREDIT 21,900 2,400 2,200 10,000 333 200 1,500 300 30,000 2,000 Kelly Cook eTravel Pty Ltd Statement of Financial Position as at 30 June 2017 Current Assets Cash 21,900 Accounts Receivable 2,400 Prepaid rent 2,200 Total Current Assets 26,500 Non-current Assets PPE Less Acc Dep Totsl Non-current Assets TOTAL ASSETS Liabilites Accounts Payable Unearned Revenue Salaries Payable Total Current Liabilites NET ASSETS Equity Capital Retained Earnings EQUITY 10,000 333 9,667 36,167 200 1,500 300 2,000 A=L+E A–L=E Net Assets = Equity 34,167 30,000 4,167 34,167 Kelly Cook eTravel Pty Ltd Calculation of Retained Earnings 38,500 38,500 32,333 6,167 38,500 Beginning Retained Earnings Add Profit Less Dividends Ending Retained Earnings | 6,167 2,000 14 4,167 CLOSING THE (TEMPORARY) ACCOUNTS Close all income accounts (debit entry as have credit balances), and credit the total to the Profit & Loss (Income) Summary account Close all expense accounts (credit entry as have debit balances), and debit the total to the Profit & Loss Summary account Close the Profit & Loss summary account (also called Income Summary) by transferring the balance to the retained earnings account Close the dividends account to the retained earnings account | 15 DEBIT Bal 31/5 20/6/17 21/6/17 Bal 30/6 GENERAL LEDGER T-ACCOUNTS CREDIT DEBIT Cash @ Bank #100 20,900 3,300 3,500 1,200 2,000 21,900 CREDIT Accts Pay #200 200 Bal 1/6/17 Unearned Revenue #210 21/6/17 30/6/17 500 2,000 1,500 21/6/17 Salaries payable #220 300 Date 30/6/17 30/6/17 30/6/17 Particulars GENERAL JOURNAL Post Ref CLOSING ENTRIES Service Revenue P/L Summary A/C CREDIT 12,900 12,900 600 600 Advertising 500 500 Depreciation 530 333 Electricity 540 400 Printing & Stationery 570 600 Rent 580 2,200 Salaries & Wages 590 2,700 P/L Summary A/C Retained Earnings Dividends 1/6/17 Bal 30/6 Prepaid Rent #120 3,300 1,100 2200 Bal P/L Summary A/C Retained Earnings 30/6/17 400 DEBIT Bal 30/6/17 Bal 30/6 Accts Rec #110 2,000 400 2,400 6,733 6,167 6,167 310 310 2,000 27,800 Dividends #320 2,000 2,000 30/6/17 30/6/17 Revenue #400 8,500 Bal 31/5 3,500 20/6/17 500 30/6/17 400 30/6/17 12,900 12,900 Bal Advertising #500 500 500 30/6/17 Bal Electricity #540 400 400 30/6/17 30/6/17 30/6/17 6,733 30/6/17 6,167 12,900 30/6/17 Retained Earnings #310 2,000 6,167 30/6/17 4,167 Bal 30/6 Depreciation #530 30/6/17 333 333 30/6/17 Print & Stationery #570 Bal 2,000 320 Bal 30/6/17 P & L Summary #600 30/6/17 600 Capital #300 30,000 Bal PPE #150 10,000 Accum Dep PPE #175 333 30/6/17 Bal 30/6/17 27,800 600 600 30/6/17 Rent #580 1,100 1,100 2,200 30/6/17 2,200 Salaries & Wages # 590 Bal 21/6/17 30/6/17 1,200 1,200 300 DEBIT Bal 31/5 20/6/17 21/6/17 Bal 30/6 GENERAL LEDGER T-ACCOUNTS CREDIT DEBIT Cash @ Bank #100 20,900 3,300 3,500 1,200 2,000 21,900 CREDIT Accts Pay #200 200 Bal 1/6/17 Unearned Revenue #210 21/6/17 30/6/17 500 2,000 1,500 21/6/17 Bal 30/6 Salaries payable #220 30/6/17 Bal 30/6 Accts Rec #110 2,000 400 2,400 1/6/17 Bal 30/6 Prepaid Rent #120 3,300 1,100 2,200 Bal Bal 30/6 Bal P & L Summary #600 30/6/17 6,733 12,900 30/6/17 6,167 30/6/17 Capital #300 30,000 Bal 30/6 Dividends #320 2,000 2,000 30/6/17 30/6/17 PPE #150 10,000 Accum Dep PPE #175 333 300 30/6/17 Revenue #400 8,500 Bal 31/5 3,500 20/6/17 500 30/6/17 400 30/6/17 12,900 12,900 30/6/17 Bal Advertising #500 500 500 30/6/17 Bal Electricity #540 400 400 30/6/17 30/6/17 Retained Earnings #310 30/6/17 2,000 6,167 4,167 30/6/17 Bal 30/6 Depreciation #530 30/6/17 333 333 30/6/17 Print & Stationery #570 Bal Bal 30/6/17 600 600 30/6/17 Rent #580 1,100 1,100 2,200 2,200 30/6/17 Salaries & Wages # 590 Bal 21/6/17 30/6/17 1,200 1,200 300 2,700 2,700 30/6/17 100 110 120 170 175 200 210 220 300 310 400 500 530 540 570 580 590 Kelly Cook e-Travel Pty Ltd Post Closing Trial Balance for period ending 30 June 2017 Account DEBIT Cash at Bank 21,900 Accounts Receivable 2,400 Prepaid Rent 2,200 Property, Plant & Equip 10,000 Accum Depn - PPE Accounts Payable Unearned Revenue Salaries & Wages Payable Share Capital Retained Earnings Service Revenue Advertising Expense Depreciation Expense Electricty Expense Printing & Stationery Expense Rent Expense Salaries & Wages Expense 36,500 CREDIT 333 200 1,500 300 30,000 4,167 36,500 Closing entries Adjusting entries | 18 ... 38,500 TOPIC COMPLETING THE ACCOUNTING CYCLE (ADJUSTING & CLOSING THE ACCOUNTS) PART 2- PREPARING THE FINANCIAL STATEMENTS & CLOSING ENTRIES TOPIC PART LEARNING OBJECTIVES On completion of this topic, ... 3,300 10,000 200 2,000 30,000 2,000 12,000 500 40 0 600 1,100 2 ,40 0 44 ,200 44 ,200 21/6/17 1,200 Bal 30/6 2 ,40 0 THE END-OFPERIOD PROCESS TWO TYPES OF ADJUSTING ENTRIES Prepaid expenses PREPAYMENTS... and expense recognition Explain why adjusting entries are needed and identify the major types of adjusting entries Prepare adjusting entries for prepayments and accruals Describe the nature and