Financial Accounting Lesson 4 Completing the Accounting Cycle

Financial Accounting Lesson 4: Completing the Accounting Cycle Ben Trnka/Boz Bostrom www. benandboz. com

Let’s start with an example! Here we have Salesforce’s Income Statement and Balance sheet. What accounts require adjusting at period end?

Overview: 1. Learn how to create an unadjusted trial balance from TAccounts 2. Understand apply the four types of adjusting journal entries 3. Understand how to create an adjusted trial balance and financial statements 4. Understand how and why a company completes closing entries

T-Accounts Unadjusted Trial Balance

Adjusting Entries Cash Before - Deferral Cash After - Accruals and Deferrals Revenues Expenses Summary of the 4 types: 1. Accrued Revenue 2. Deferred Revenue 3. Accrued Expense 4. Deferred Expense

Accrued Revenue Example: Salesforce provides $1, 000 worth of support services to a client during the month, but doesn’t receive payment until after the end of the year. What is the journal entry on December 31? Entry at the end of the month: Entry when payment is received: Accounts Receivable Revenue Cash Accounts Receivable $1, 000

Deferred Revenue Example: On the 1 st of the month Salesforce received payment from a client for $1, 000 for cloud services starting on the 15 th of the month. What is the journal entry on the 1 st and at the end of the month (after services have been provided)? Entry on the 1 st of the month: Entry at the end of the month: Cash Unearned Revenue $1, 000

Accrued Expense Example: Salesforce pays employees after every 10 business days. At the end of the month, employees were owed for 7 days of work, or $7, 000. What is the journal entry at the end of the year, and what is the journal entry when employees are paid? Entry at the end of the year: Entry when employees are paid: Wages Expense Wages Payable Wages Expense Cash $7, 000 $3, 000 $10, 000

Deferred Expense Example: Salesforce pays rent for 6 months in advance. The total rent paid for the 6 months is $6, 000. What is the entry when payment is made, and what is the entry after the end of one month? Entry on the 1 st of the month: Entry at the end of one month: Prepaid Rent Cash Rent Expense Prepaid Rent $6, 000 $1, 000

Bonus Accrued Expense!!! Example: Salesforce takes out a one year, $1, 000 loan on 7/1. The loan has an 8% interest rate, and interest payments are due each year on 6/30. What is the journal entry related to interest on 12/31, and what is the journal entry on 6/30 of year 2? Entry on 7/1: Cash Notes Payable $1, 000, 000 Entry on 12/31: Interest Expense Interest Payable $40, 000 Entry on 6/30 of year 2: Notes Payable Interest Expense Interest Payable Cash $1, 000 $40, 000 $1, 080, 000

Unadjusted Trial Balance Adjusted Trial Balance

Adjusted Trial Balance Financial Statements

Closing Entries Retained Earnings Debit Credit Dividends and Losses + Income Expenses Revenues Debit Credit + - Debit Credit +

Closing Entries - Examples Total revenue for our company was $38, 000, and we have two expenses: wages expense for $24, 000 and rent expense for $12, 000. What are the closing entries? 1. Close out revenue: Revenue $38, 000 Retained Earnings $38, 000 2. Close out Expenses: Retained Earnings Wages Expense Rent Expense $12, 000 $36, 000 $24, 000

Post-Closing Trial Balance

Key Takeaways Unadjusted Trial Balance Adjusted Trial Balance Financial Statements Post-closing trial balance 4 Types of Adjusting Entries Accrued Revenues Deferred Revenues Accrued Expenses Deferred Expenses Closing Entries are completed at the end of each period Revenues are debited while Retained Earnings is credited Expenses are credited while Retained Earnings is debited Thanks for tuning in!