BAF 3 M 1 COMPLETING THE ACCOUNTING CYCLE

BAF 3 M 1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9. 1

The Adjustment Process In Chapter 8, we learned that financial statements are used to assist in making important decisions Therefore, it is important that financial statements are accurate, up-to-date, and consistent from year to year – the purpose of the adjustment process Bringing the account data up-to-date at statement time is known as “making the adjustments”. The accounting entries produced in this process are known as

Recall: GAAP - The Matching Principle One of the main GAAPs governing adjusting entries is the Matching principle, which states that expenses are to be recognized in the same period as the revenue that they helped to earn In most cases, an adjusting entry assigns amounts of revenue or expense to the appropriate accounting period before finalizing the books for the fiscal period

Adjusting Entries for Supplies The Supplies account is an example of an account that requires an _________ at the ________ ____________ WHY? When supplies are purchased, their cost is debited correctly to the Supplies account. BUT, as supplies are used, which usually happens daily, no accounting entries are made to record the usage at the time.

Example: During the accounting period, the balance of the Supplies account represents the balance at the beginning of the period, plus any new supplies purchased. � � � The Supplies account has a balance of $7900 on December 31, 2008. An inventory (or count of the remaining supplies on hand) is taken, and the value of the actual supplies on hand at December 31, 2008 is $1386. The difference between $7900 and $1386 represents the cost of the supplies used. (7900 – 1386 = 6514) The journal (adjusting) entry to account for this difference: Date Particulars PR DR CR 2008 Dec 31 Supplies Expense Supplies Adjusting entry 6 5 1 4

Adjusting Entries for Prepaid Expenses There are times in business when expense items are paid for in advance. Some expense items, like insurance, may cover a length of time that affects the current fiscal period AND the following fiscal period as well. These expenses require adjusting entries. A prepaid expense is an item ______ ______, but one where the benefits extend into the future. When prepaid expenses are purchased, they are usually debited to a prepaid expense account. Prepaid expense accounts are classified as assets. They are usually listed in the Current Assets section of the balance sheet because their value expires in a short time (usually within one

Example: Suppose that D’Cruz Company purchased a oneyear automobile insurance policy on September 1, 2008 at a cost of $1800. At the time of purchase, the accounting clerk would make the following entry: Date Particulars PR DR CR 2008 Sept 1 Prepaid Insurance Bank Purchased a one-year insurance policy 1 8 0 0

Since Date the one-year insurance policy was purchased on September 1, and the fiscal period ends on December 31, only four (4) months of insurance have been used. Eight (8) months of insurance coverage remain. The journal (adjusting) entry to account for the portion of insurance Particulars used: PR DR CR 2008 Dec 31 Insurance Expense Prepaid Insurance 6 0 0 Adjusting entry for 4 months of insurance coverage used Calculation: $1800/12 months = $150 per month

Adjusting Entries for Late-Arriving Purchase Invoices Goods and services are often bought and received toward the end of an accounting period. The bills for these items may not arrive until the next fiscal period. Financial statements are ___________ until ______ to ______ weeks ______ the _______ ______. This gives the accounting department time to wait for late-arriving invoices. During the waiting period, the accounting department examines all purchase invoices to find those that affect the current fiscal period.

Example: Suppose Date that on January 15, 2009, two latearriving invoices were received: Telephone $212, Utilities $315. These invoices represent expenses that helped the business earn revenue in the year 2008. The journal (adjusting entry) for these late-arriving invoices: Particulars PR DR CR 2008 Dec 31 Telephone Expense Utilities Expense Accounts payable Adjusting entry for late-arriving purchase invoices 2 1 2 3 1 5 5 2 7

BAF 3 M 1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9. 2

Adjusting entries and the Work Sheet Refer to page 310 for a revised work sheet The first place that adjusting entries are recorded is on the work sheet As the work sheet is prepared, the adjusting entries are calculated and recorded in a section headed Adjustments

Supplies and the work sheet Refer to page 312 in the textbook Date Particulars PR DR CR 2004 Dec 31 Supplies Expense Supplies 9 5 4 90 Adjusting entry Ø This adjusting entry is not journalized at this time. It is entered in the Adjustments section of the work sheet first, then journalized and posted. Ø In the work sheet, we will see that the Debit to Supplies Expense is written at the bottom. WHY? The Supplies Expense account does not appear in the Accounts column, so we have to write its title on the next available line on the work sheet.

Insurance and the Work Sheet Refer to page 314 in the textbook Date Particulars PR DR CR 2004 Dec 31 Insurance Expense Prepaid Insurance 2 4 9 4 Adjusting entry Ø This adjusting entry is not journalized at this time. It is entered in the Adjustments section of the work sheet first, then journalized and posted. Ø In the work sheet, we will see that the Debit to Insurance Expense is written at the bottom. WHY? The Insurance Expense account does not appear in the Accounts column, so we have to write its title on the next available line on the work sheet.

Late purchase invoices and the Work sheet Refer to page 315 in the textbook Date Particulars PR DR CR 2004 Dec 31 Telephone Expense Truck Expense Miscellaneous Expense 4 5 4 9 6 8 5 Accounts payable 6 2 6 Ø This adjusting entry is not journalized at this time. It is entered in the Adjustments section of the work sheet first, then journalized and posted. Ø In the work sheet, we will see the adjusting entry made with a debit to Telephone Expense, Truck Expense, and Miscellaneous Expense Ø Notice that the adjusting entry is referenced with a circled

Total adjusting entries Refer to page 315 After the last adjusting entries are made, the adjustments columns are totalled and ruled.

Updating the Balance sheet and Income Statement columns Step 1: Evaluate each item in the first columns of the work sheet (Trial Balance, DR & CR, Adjustments, DR & CR). For each adjusting entry, take the beginning value (under the Trial balance column) and add or subtract the adjustment (Adjustments column). Step 2: Transfer the value from step 1 to one of the last four columns on the work sheet (Income statement, DR or CR; Balance sheet, DR or CR) Step 3: Balancing the worksheet involves the same steps learned in Chapter 8. Total the last four columns, calculate the difference between the two income statement columns, and two balance sheet columns. Both differences have to be the same. If they are not, the work sheet does not balance and contains one or more errors.

BAF 3 M 1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9. 3

Closing Entries The final stage of the accounting cycle is ______________ _______ To do this, we must understand which accounts have balances that continue from one period to the next

Real Accounts and Nominal Accounts All asset and liability accounts, as well as the capital account, are called real accounts. _____________ have balances that continue into the next fiscal period. On the other hand, revenue, expense, and drawings accounts are known as nominal accounts. ________ have balances that do not continue into the next fiscal period. All nominal accounts begin each fiscal period with a nil (0) balance.

Income Summary account A special account called Income Summary account, is used only during the closing entry process. The Income Summary account ________ the ________ and _______of the period. The _______________ in this account represent either the amount of net income or the amount of net loss.