Chapter 3 Completing the Accounting Cycle Accounting Cycle

Chapter 3 Completing the Accounting Cycle

Accounting Cycle Analyze and record the transactions Prepare the financial statements Chapter 3 Post the transactions and prepare trial balance Close the accounts and prepare trial Mugan-Akman balance 2005 Adjust the accounts and prepare trial balance 2

Matching Principle All revenues must be recorded in the accounting period in which the goods are sold or services are rendered and all expenses must be recorded in the accounting period in which they are incurred to produce such revenues Chapter 3 Mugan-Akman 2005 3

Adjusting Entries • Some journal entries are made at the end of the accounting period just to separate the effect of an event into its proper periods. • Each adjusting entry affects: 1) a revenue or expense account 2) an asset or liability account (except cash) • Examples include: 1. Recognition of accrued revenues and receivables, 2. Interest calculations, 3. Recognition of accrued expenses and payables, 4. Allocation of prepaid operating costs, and 5. Recognition of depreciation. Chapter 3 Mugan-Akman 2005 4

When do we need adjusting entries? Prepayments Chapter 3 Accruals 1. Allocation of costs between accounting periods 3. Expenses incurred but not recorded 2. Allocation of unearned revenues between accounting periods 4. Revenues earned but not recorded Mugan-Akman 2005 5

TRIAL BALANCE Chapter 3 Mugan-Akman 2005 6

Adjusting Entries Chapter 3 1. Allocation of costs between accounting periods 3. Expenses incurred but not recorded 2. Allocation of unearned revenues between accounting periods 4. Revenues earned but not recorded Mugan-Akman 2005 7

Adjustment (1) Prepaid Rent Chapter 3 Mugan-Akman 2005 8

Adjustment (2) Prepaid Insurance Chapter 3 Mugan-Akman 2005 9

Adjustment (3) Office Supplies Chapter 3 Mugan-Akman 2005 10

Adjustment (4) Depreciation of Property Plant & Equipment Chapter 3 Mugan-Akman 2005 11

Express Travel Agency Partial Balance Sheet 31 January 2004 In TL Plant and Equipment Office Equipment and Furniture Less: Accumulated Depreciation Plant and Equipment, net Chapter 3 Mugan-Akman 2005 15. 000 (250) 14. 750 12

Adjusting Entries Chapter 3 1. Allocation of costs between accounting periods 3. 2. Allocation of 4. unearned revenues between accounting periods Expenses incurred but not recorded Revenues earned but not recorded Mugan-Akman 2005 13

Adjustment (5) Unearned Revenues Chapter 3 Mugan-Akman 2005 14

Adjusting Entries Chapter 3 1. Allocation of costs between accounting periods 3. 2. Allocation of 4. unearned revenues between accounting periods Expenses incurred but not recorded Revenues earned but not recorded Mugan-Akman 2005 15

January 2004 Chapter 3 Mo Tu We Th Fr Sa Su 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Mugan-Akman 2005 16

Adjustment (6) Accrued Salary Expense Chapter 3 Mugan-Akman 2005 17

Adjustment (7) Accrued Interest Expense Chapter 3 Mugan-Akman 2005 18

Adjusting Entries Chapter 3 1. Allocation of costs between accounting periods 3. Expenses incurred but not recorded 2. Allocation of unearned revenues between accounting periods 4. Revenues earned but not recorded Mugan-Akman 2005 19

Adjustment (8) Accrued Revenues Chapter 3 Mugan-Akman 2005 20

Effects of Adjusting Entries Chapter 3 Mugan-Akman 2005 21

Chapter 3 Mugan-Akman 2005 22

Accounting Cycle Analyze and record the transactions Prepare the financial statements Chapter 3 Post the transactions and prepare trial balance Adjust the accounts and prepare trial balance Close the accounts and prepare trial balance Mugan-Akman 2005 23

Steps to Close Accounts • • Chapter 3 Close temporary accounts with credit balances to income summary Close temporary accounts with debit balances to income summary Close dividends or owners’ withdrawals Mugan-Akman 2005 24

Chapter 3 Mugan-Akman 2005 25

Closing Credit Balances Chapter 3 Mugan-Akman 2005 26

Chapter 3 Mugan-Akman 2005 27

Closing Debit Balances Chapter 3 Mugan-Akman 2005 28

Closing Income Summary Chapter 3 Mugan-Akman 2005 29

Closing Withdrawals Chapter 3 Mugan-Akman 2005 30

Chapter 3 Mugan-Akman 2005 31

Accounting Cycle Analyze and record the transactions Prepare the financial statements Chapter 3 Post the transactions and prepare trial balance Close the accounts and prepare trial Mugan-Akman balance 2005 Adjust the accounts and prepare trial balance 32

Chapter 3 Mugan-Akman 2005 33

Chapter 3 Mugan-Akman 2005 34

Chapter 3 Mugan-Akman 2005 35

Closing Credit Balances Chapter 3 Mugan-Akman 2005 36

Closing Debit Balances Chapter 3 Mugan-Akman 2005 37

Closing Income Summary Chapter 3 Mugan-Akman 2005 38