(2) adjusting the accounts & completing the accounting cycle 2012 (1)
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ADJUSTING THE ACCOUNTS
Mahfuzul Hoque Ph.D
Monday, May 1, 2023 1DMH - DU
After studying this chapter, you should be able to:
ADJUSTING THE ACCOUNTS
1 Explain the time period assumption.2 Explain the accrual basis of accounting.3 Explain why adjusting entries are needed.4 Identify the major types of adjusting entries.5 Prepare adjusting entries for prepayments.6 Prepare adjusting entries for accruals.7 Describe the nature and purpose of an adjusted
trial balance.
Monday, May 1, 2023 2DMH - DU
TIME-PERIOD ASSUMPTION
• The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods.
• Accounting time periods are generally a month, a quarter, or a year.
• The accounting time period of one year in length is referred to as a fiscal year.
Monday, May 1, 2023 3DMH - DU
ACCRUAL BASIS OF ACCOUNTING
• The revenue recognition and matching principles are used under the accrual basis of accounting.
• Under cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when cash is paid.
• Generally accepted accounting principles require accrual basis accounting because the cash basis often causes misleading financial statements.
Monday, May 1, 2023 4DMH - DU
REVENUE RECOGNITION PRINCIPLE
• The revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned.
• In a service business, revenue is considered to be earned at the time the service is performed.
Monday, May 1, 2023 5DMH - DU
THE MATCHING PRINCIPLE
• The practice of expense recognition is referred to as the matching principle.
• The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues).
Revenues earned
this monthare offset against....
expensesincurred inearning the
revenue
Monday, May 1, 2023 6DMH - DU
ADJUSTING ENTRIES
Adjusting entries are made in order for:1. Revenues to be recorded in the period in which
they are earned, and for...... 2. Expenses to be recognized in the period in
which they are incurred.
Monday, May 1, 2023 7DMH - DU
• Adjusting entries are required each time financial statements are prepared.
• Adjusting entries can be classified as1. prepayments (prepaid expenses or unearned
revenues) OR2. accruals (accrued revenues or accrued expenses)
ADJUSTING ENTRIES
Monday, May 1, 2023 8DMH - DU
TYPES OF ADJUSTING ENTRIES
Prepayments1. Prepaid Expenses — Expenses paid in cash and
recorded as assets before they are used or consumed2. Unearned Revenues — cash received and recorded as
liabilities before revenue is earnedAccruals1. Accrued Revenues — Revenues earned but not yet
received in cash or recorded2. Accrued Expenses — Expenses incurred but not yet paid
in cash or recorded
Monday, May 1, 2023 9DMH - DU
TRIAL BALANCE PIONEER ADVERTISING AGENCY Trial Balance October 31, 2002 Debit Credit Cash $ 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable $ 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 C. R. Byrd, Capital 10,000 C. R. Byrd, Drawing 500 Service Revenue 10,000 Salaries Expense 4,000 Rent Expense 900 $ 28,700 $ 28,700
The Trial Balance is the starting place for adjusting
entries.
Monday, May 1, 2023 10DMH - DU
Advertising Supplies ExpenseOct. 31 1,500
Advertising Supplies Oct. 5 2,500 Oct. 31 1,500 31 1,000
Date Account Titles and Explanation Debit Credit Oct. 31 Advertising Supplies Expense 1,500
Advertising Supplies 1,500 (To record supplies used)
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, an inventory count reveals that $1,000 of $2,500 of supplies are still on hand.
ADJUSTING ENTRIES FOR PREPAYMENTS SUPPLIES
Monday, May 1, 2023 11DMH - DU
ADJUSTING ENTRIES FOR PREPAYMENTS INSURANCE
Insurance Expense 63Oct. 31 50
Prepaid Insurance 10 Oct. 4 600 Oct. 31 50 31 550
Date Account Titles and Explanation Debit Credit Oct. 31 Insurance Expense 50
Prepaid Insurance 50 (To record insurance expired)
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, an analysis of the policy reveals that $50 of insurance expires each month.
Monday, May 1, 2023 12DMH - DU
• Depreciation is the allocation of the cost of an asset to expense over its useful life in a rational and systematic manner.
• The purchase of equipment or a building is viewed as a long-term prepayment of services and, therefore, is allocated in the same manner as other prepaid expenses.
DEPRECIATION
Monday, May 1, 2023 13DMH - DU
DEPRECIATION
• Depreciation is an estimate rather than a factual measurement of the cost that has expired.
• In recording depreciation, Depreciation Expense is debited and a contra asset account, Accumulated Depreciation, is credited
Depreciation Expense
XXX
Accumulated Depreciation
XXX
Monday, May 1, 2023 14DMH - DU
• In the balance sheet, Accumulated Depreciation is offset against the asset account.
• The difference between the cost of any depreciable asset and its related accumulated depreciation is referred to as the book value of the asset.
DEPRECIATION
Monday, May 1, 2023 15DMH - DU
ADJUSTING ENTRIES FOR PREPAYMENTS - DEPRECIATION
Accumulated Depreciation -Office Equipment
Oct. 31 40
Date Account Titles and Explanation Debit Credit Oct. 31 Depreciation Expense 40
Accumulated Depreciation - Office Equipment 40 (To record monthly depreciation)
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, depreciation on the office equipment is estimated to be $480 a year, or $40 per month.
Depreciation ExpenseOct. 31 40
Monday, May 1, 2023 16DMH - DU
ADJUSTING ENTRIES FOR PREPAYMENTS - UNEARNED REVENUES
Service RevenueOct. 31 10,000 31 400
Unearned RevenueOct. 31 400 Oct. 2 1,200
31 800
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, analysis reveals that, of $1,200 in fees, $400 has been earned in October.
Date Account Titles and Explanation Debit Credit Oct. 31 Unearned Revenue 400
Service Revenue 400 (To record revenue for services provided)
Monday, May 1, 2023 17DMH - DU
ADJUSTING ENTRIES FOR ACCRUALS - ACCRUED REVENUES
Service RevenueOct. 31 10,000 31 400 31 200 31 10,600
Accounts ReceivableOct. 31 200
Date Account Titles and Explanation Debit Credit Oct. 31 Accounts Receivable 200
Service Revenue 200 (To accrue revenue for services provided)
October 31, the agency earned $200 for advertising services that were not billed to clients before October 31.
JOURNAL ENTRY
POSTING
ADJUSTMENT
Monday, May 1, 2023 18DMH - DU
ADJUSTING ENTRIES FOR ACCRUALS - ACCRUED INTEREST
Interest PayableOct. 31 50
Interest ExpenseOct. 31 50
Date Account Titles and Explanation Debit Credit Oct. 31 Interest Expense 50
Interest Payable 50 (To accrue interest on notes payable)
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, the portion of the interest to be accrued on a 3-month note payable is calculated to be $50.
Monday, May 1, 2023 19DMH - DU
ADJUSTING ENTRIES FOR ACCRUALS - ACCRUED SALARIES
Salaries PayableOct. 31 1,200
Date Account Titles and Explanation Debit Credit Oct. 31 Salaries Expense 1,200
Salaries Payable 1,200 (To record accrued salaries)
JOURNAL ENTRY
POSTING
ADJUSTMENT October 31, accrued salaries are calculated to be $1,200.
Salaries ExpenseOct. 26 4,000 31 1,200 31 5,200
Monday, May 1, 2023 20DMH - DU
ADJUSTED TRIAL BALANCE• An Adjusted Trial Balance is prepared after all
adjusting entries have been journalized and posted.• Its purpose is to prove the equality of the total debit
and credit balances in the ledger after all adjustments have been made.
• Financial statements can be prepared directly from the adjusted trial balance.
Monday, May 1, 2023 21DMH - DU
PIONEER ADVERTISING AGENCYAdjusted Trial Balance
October 31, 2002Before After
Adjustment AdjustmentDebit Credit Debit Credit
Cash $ 15,200 $ 15,200Accounts Receivable 200Advertising Supplies 2,500 1,000Prepaid Insurance 600 550Office Equipment 5,000 5,000Accumulated Depreciation - Office Equipment $ 40Notes Payable $ 5,000 5,000Accounts Payable 2,500 2,500Interest Payable 50Unearned Revenue 1,200 800Salaries Payable 1,200C. R. Byrd, Capital 10,000 10,000C. R. Byrd, Drawing 500 500Service Revenue 10,000 10,600Salaries Expense 4,000 5,200Advertising Supplies Expense 1,500Rent Expense 900 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 28,700 $ 28,700 $ 30,190 $ 30,190
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Monday, May 1, 2023 22DMH - DU
PREPARING FINANCIAL STATEMENTS
Financial statements can be prepared directly from the adjusted trial balance.1. The income statement is prepared from the revenue
and expense accounts.2. The owner’s equity statement is derived from the
owner’s capital and drawing accounts and the net income (or net loss) from the income statement.
3. The balance sheet is then prepared from the asset and liability accounts and the ending owner’s capital balance as reported in the owner’s equity statement.
Monday, May 1, 2023 23DMH - DU
PIONEER ADVERTISING AGENCYAdjusted Trial Balance
October 31, 2002
Debit CreditCash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550Office Equipment 5,000Accumulated Depreciation - Office Equipment $ 40Notes Payable 5,000Accounts Payable 2,500Interest Payable 50Unearned Revenue 800Salaries Payable 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PREPARATION OF THE INCOME STATEMENT AND THE OWNER’S EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCE
Monday, May 1, 2023 24DMH - DU
PREPARATION OF THE INCOME STATEMENT AND THE OWNER’S EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCE
PIONEER ADVERTISING AGENCYIncome Statement
For the Month Ended October 31, 2002
Revenues Fees earned $ 10,600
Expenses Salaries expense $ 5,200 Advertising supplies expense 1,500 Rent expense 900 Insurance expense 50 Interest expense 50 Depreciation expense 40 Total expenses 7,740Net income $ 2,860
The income statement is prepared from the revenue and expense accounts.
Monday, May 1, 2023 25DMH - DU
PIONEER ADVERTISING AGENCYAdjusted Trial Balance
October 31, 2002
Debit CreditCash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550Office Equipment 5,000Accumulated Depreciation - Office Equipment $ 40Notes Payable 5,000Accounts Payable 2,500Interest Payable 50Unearned Revenue 800Salaries Payable 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PREPARATION OF THE INCOME STATEMENT AND THE OWNER’S EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCE
Monday, May 1, 2023 26DMH - DU
PREPARATION OF THE INCOME STATEMENT AND THE OWNER’S EQUITY STATEMENT FROM THE ADJUSTED TRIAL BALANCE
PIONEER ADVERTISING AGENCYOwner’s Equity Statement
For the Month Ended October 31, 2002
C.R. Byrd, Capital, October 1 $ -0-Add: Investments $ 10,000 Net income 2,860 12,860
12,860Less: Drawings 500C.R. Byrd, Capital, October 31 $ 12,360
The owner’s equity statement is prepared from the owner’s capital and drawing accounts and the net income (or net loss) shown in the income statement.
Monday, May 1, 2023 27DMH - DU
PIONEER ADVERTISING AGENCYAdjusted Trial Balance
October 31, 2002
Debit CreditCash $ 15,200Accounts Receivable 200Advertising Supplies 1,000Prepaid Insurance 550Office Equipment 5,000Accumulated Depreciation - Office Equipment $ 40Notes Payable 5,000Accounts Payable 2,500Interest Payable 50Unearned Revenue 800Salaries Payable 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500Service Revenue 10,600Salaries Expense 5,200Advertising Supplies Expense 1,500Rent Expense 900Insurance Expense 50Interest Expense 50Depreciation Expense 40
$ 30,190 $ 30,190
PREPARATION OF THE BALANCE SHEET FROM THE ADJUSTED TRIAL BALANCE
Monday, May 1, 2023 28DMH - DU
PREPARATION OF THE BALANCE SHEET FROM THE ADJUSTED TRIAL BALANCE
PIONEER ADVERTISING AGENCYBalance Sheet
October 31, 2002
Assets Liabilities and Owner’s Equity
Cash $ 15,200 LiabilitiesAccounts receivable 200 Notes payable $ 5,000Advertising supplies 1,000 Accounts payable 2,500Prepaid insurance 550 Interest payable 50Office equipment $ 5,000 Unearned fees 800Less: Accumulated Salaries payable 1,200
depreciation 40 4,960 Total liabilities 9,550Owner’s equity C.R. Byrd, Capital 12,360
Total liabilities and owner’sTotal assets $ 21,910 equity $ 21,910
The balance sheet is then prepared from the asset and liability accounts and the ending owner’s capital balance as reported in the owner’s equity statement.
Monday, May 1, 2023 29DMH - DU
Completing the Accounting Cycle
Monday, May 1, 2023 30DMH - DU
Study Objectives1. Prepare a worksheet.2. Explain the process of closing the books.3. Describe the content and purpose of a post-closing trial balance.4. State the required steps in the accounting cycle.5. Explain the approaches to preparing correcting entries.6. Identify the sections of a classified balance sheet.
Monday, May 1, 2023 31DMH - DU
Using a Worksheet
Steps in preparationPreparing financial statementsPreparing adjusting entries
Current assetsLong-term investmentsProperty, plant, and equipmentIntangible assetsCurrent liabilitiesLong-term liabilitiesOwner’s equity
Reversing entries—An optional stepCorrecting entries—An avoidable step
Preparing closing entriesPosting closing entriesPreparing a post-closing trial balance
Closing the Books Summary of Accounting Cycle
Classified Balance Sheet
Completing the Accounting Cycle
Monday, May 1, 2023 32DMH - DU
A multiple-column form used in preparing financial statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.
Using A Worksheet
Worksheet
Monday, May 1, 2023 33DMH - DU
Steps in Preparing a WorksheetIllustration 1
Monday, May 1, 2023 34DMH - DU
Illustration:
Steps in Preparing a WorksheetIllustration -2Preparing a trial balance
Monday, May 1, 2023 35DMH - DU
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 C. R. Byrd, Capital 10,000 C. R. Byrd, Drawing 500 Service Revenue 10,000
Salaries Expense 4,000 Rent 900
Totals 28,700 28,700
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
Steps in Preparing a Worksheet1. Prepare a Trial Balance on the Worksheet
Trial balance amounts come directly from ledger accounts.
Include all accounts with balances.
Monday, May 1, 2023 36DMH - DU
Steps in Preparing a WorksheetGeneral journal showing adjusting entries
Adjusting Journal Entries
Monday, May 1, 2023 37DMH - DU
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 1,500 Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 400 C. R. Byrd, Capital 10,000 C. R. Byrd, Drawing 500 Service Revenue 10,000 400
200 Salaries Expense 4,000 1,200 Rent 900
Totals 28,700 28,700 Advertising Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries Payable 1,200
Totals 3,440 3,440
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
Steps in Preparing a Worksheet2. Enter the Adjustments in the Adjustments Columns
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Enter adjustment amounts, total adjustments columns,and check for equality.
Add additional accounts as needed.
Adjustments Key:(a) Supplies Used.(b) Insurance Expired.(c) Depreciation Expensed.(d) Service Revenue Earned.(e) Service Revenue Accrued.(f) Interest Accrued.(g) Salaries Accrued.
Monday, May 1, 2023 38DMH - DU
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 C. R. Byrd, Capital 10,000 10,000 C. R. Byrd, Drawing 500 500 Service Revenue 10,000 400 10,600
200 Salaries Expense 4,000 1,200 5,200 Rent 900 900
Totals 28,700 28,700 Advertising Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
Steps in Preparing a Worksheet3. Complete the Adjusted Trial Balance Columns
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Total the adjusted trial balance columns and check for equality.Monday, May 1, 2023 39DMH - DU
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 C. R. Byrd, Capital 10,000 10,000 C. R. Byrd, Drawing 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900
Totals 28,700 28,700 Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 Interest Expense 50 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
Steps in Preparing a Worksheet4. Extend Amounts to Financial Statement Columns
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Extend all revenue and expense account balances to the income statement columns.Monday, May 1, 2023 40DMH - DU
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 C. R. Byrd, Capital 10,000 10,000 10,000 C. R. Byrd, Drawing 500 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900
Totals 28,700 28,700 Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
Steps in Preparing a Worksheet4. Extend Amounts to Financial Statement Columns
Extend all asset, liability, and equity account balances to the balance sheet columns.
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Monday, May 1, 2023 41DMH - DU
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 C. R. Byrd, Capital 10,000 10,000 10,000 C. R. Byrd, Drawing 500 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900
Totals 28,700 28,700 Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net income 2,860 2,860
Totals 10,600 10,600 22,450 22,450
Balance SheetAdjusted Income
Trial Balance Adjustments Trial Balance Statement
Steps in Preparing a Worksheet5. Total Columns, Compute Net Income (Loss)
(a)(b)
(a)
(g)
(c)
(d)
(d)
(e)
(b)
(e)(f)
(f)(g)
(c)
Compute Net Income or Net Loss.Monday, May 1, 2023 42DMH - DU
Net income is shown on a worksheet in the:a. income statement debit column only.b. balance sheet debit column only.c. income statement credit column and balance sheet debit
column.d. income statement debit column and balance sheet credit
column.
Review Question
Steps in Preparing a Worksheet
Monday, May 1, 2023 43DMH - DU
Income statement is prepared from the income statement columns.
Balance sheet and owner’s equity statement are prepared from the balance sheet columns.
Companies journalize and post adjusting entries.
Preparing Financial Statements from a Worksheet
Worksheet
Monday, May 1, 2023 44DMH - DU
Preparing Financial Statements from a Worksheet
Monday, May 1, 2023 45DMH - DU
Preparing Financial Statements from a Worksheet
Monday, May 1, 2023 46DMH - DU
Preparing Financial Statements from a Worksheet
Monday, May 1, 2023 47DMH - DU
The adjusting entries are prepared from the adjustments columns of the worksheet.
Journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used.
Preparing Adjusting Entries from a Worksheet
Adjusting Entries
Monday, May 1, 2023 48DMH - DU
Preparing Adjusting Entries from a Worksheet
General journal showing adjusting entries
Adjusting Journal Entries
Monday, May 1, 2023 49DMH - DU
Q4-2. Explain the purpose of the worksheet.
Discussion Question
See notes page for discussion
Preparing Adjusting Entries from a Worksheet
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At the end of the accounting period, the company makes the accounts ready for the next period.
Closing the Books
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Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss) and owner’s drawing to owner’s capital.
Closing the Books
Closing entries are only at the end of the annual accounting period.
Monday, May 1, 2023 52DMH - DU
Closing the Books
Illustration 4-6
Owner’s Capital is a permanent account; all other
accounts are temporary accounts.
Owner’s Drawing is closed directly to Capital and not to
Income Summary because Owner’s Drawing is not an
expense.
Note:
Monday, May 1, 2023 53DMH - DU
Closing the Books
Closing Entries need to
be Posted
Closing entries journalized
Monday, May 1, 2023 54DMH - DU
Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.
Preparing a Post-Closing Trial Balance
Temporary accounts will have zero balances.
Illustration 4-9
Monday, May 1, 2023 55DMH - DU
Summary of the Accounting Cycle
1. Analyze business transactions
2. Journalize the transactions
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
4. Prepare a trial balance
3. Post to ledger accounts
5. Journalize and post adjusting entries
Illustration 4-12
Monday, May 1, 2023 56DMH - DU
Correcting entries
are unnecessary if the records are error-free.
are made whenever an error is discovered.
must be posted before closing entries.
Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry.
Correcting Entries—An Avoidable Step
Monday, May 1, 2023 57DMH - DU
Illustration (Case 1): On May 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full.
Correcting Entries—An Avoidable Step
Cash 50Incorrect entry Service revenue 50
Cash 50Correct entry
Accounts receivable 50
Service revenue 50Correcting entry Accounts receivable 50
Monday, May 1, 2023 58DMH - DU
Illustration (Case 2): On May 18, Mercato purchased on account office equipment costing $450. The transaction was journalized and posted as a debit to Delivery Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3.
Correcting Entries—An Avoidable Step
Delivery equipment 45Incorrect entry
Accounts payable 45
Office equipment 450Correct entryAccounts payable 450
Office equipment 450Correcting entry Delivery equipment 45
Accounts receivable 405
Monday, May 1, 2023 59DMH - DU
The Classified Balance Sheet
Presents a snapshot at a point in time.
To improve understanding, companies group similar assets and similar liabilities together.
Assets Liabilities and Owner’s EquityCurrent assets Current liabilitiesLong-term investments Long-term liabilitiesProperty, plant, and equipment Owner’s (Stockholders’) equityIntangible assets
Standard Classifications
Monday, May 1, 2023 60DMH - DU
The Classified Balance Sheet
Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer.
Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers.
Current Assets
Monday, May 1, 2023 61DMH - DU
The Classified Balance Sheet
Companies usually list current asset accounts in the order they expect to convert them into cash.
Current Assets
Monday, May 1, 2023 62DMH - DU
Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called:
a. Current assets.b. Intangible assets.c. Long-term investments.d. Property, plant, and equipment.
Review Question
The Classified Balance Sheet
Monday, May 1, 2023 63DMH - DU
The Classified Balance Sheet
Investments in stocks and bonds of other companies.
Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities.
Long-Term Investments
Monday, May 1, 2023 64DMH - DU
The Classified Balance Sheet
Long useful lives.
Currently used in operations.
Depreciation - allocating the cost of assets to a number of years.
Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life.
Property, Plant, and Equipment
Monday, May 1, 2023 65DMH - DU
The Classified Balance Sheet
Property, Plant, and Equipment
Monday, May 1, 2023 66DMH - DU
The Classified Balance Sheet
Assets that do not have physical substance.
Intangible Assets
Monday, May 1, 2023 67DMH - DU
Patents and copyrights area. Current assets.b. Intangible assets.c. Long-term investments.d. Property, plant, and equipment.
Review Question
The Classified Balance Sheet
Monday, May 1, 2023 68DMH - DU
The Classified Balance Sheet
Obligations the company is to pay within the coming year.
Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude.
Liquidity - ability to pay obligations expected to be due within the next year.
Current Liabilities
Monday, May 1, 2023 69DMH - DU
The Classified Balance Sheet
Current Liabilities
Monday, May 1, 2023 70DMH - DU
The Classified Balance Sheet
Obligations a company expects to pay after one year.
Long-Term Liabilities
Monday, May 1, 2023 71DMH - DU
Which of the following is not a long-term liability?a. Bonds payableb. Current maturities of long-term obligationsc. Long-term notes payabled. Mortgages payable
Review Question
The Classified Balance Sheet
Monday, May 1, 2023 72DMH - DU
The Classified Balance Sheet
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.
Owner’s Equity
Monday, May 1, 2023 73DMH - DU
(a) What is the term used to describe the owner’s equity section of a corporation?
(b) Identify the two owner’s equity accounts in a corporation and indicate the purpose of each.
The Classified Balance Sheet
Discussion Question
Monday, May 1, 2023 74DMH - DU
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