week 5
DESCRIPTION
Acc101TRANSCRIPT
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Preparing worksheetsClosing entries
Reversing entries
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LEARNING OBJECTIVES
1. Describe all the steps in the complete accounting cycle2. The Use of Worksheets3. Steps in the preparation of worksheet4. Explain why temporary ledger accounts need to be closed5. Explain how to record adjusting entries from the worksheet6. Describe the closing process, enter closing entries in accounting
records and prepare a post-closing trial balance7. Account for accrual items in subsequent periods using reversing
entries
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COMPLETE ACCOUNTING CYCLE
2. Journalise transaction
3. Post to ledger accounts
4. Prepare unadjusted trial balance of general ledger
1. Recognise and record transactions
Source documents
General journal
General ledger
Trial balance (unadjusted)
Continued Next Slide
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COMPLETE ACCOUNTING CYCLE
8. Journalise closing entries
6. Post adjusting entries to general ledger
7. Prepare adjusted trial balance
5. Determine adjusting entries and journalise
General journal
General ledger (accounts adjusted)
Trial balance(adjusted)
General journal
Continued Next Slide
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COMPLETE ACCOUNTING CYCLE
12. Journalise reversing entries
10. Prepare post closing trial balance
11. Prepare financial statements
9. Post closing entries to general ledger
General ledger(temp a/c’s closed)
Trial balance (post closing)
Financial statements
General journal
Worksheet
13. Post reversing entries to general ledger
General ledger
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THE WORKSHEET
• A useful “One Stop Shop”• Assembles all information needed to adjust the
accounts and prepare financial statements• Aids in the preparation of interim financial
statements when adjusting and closing entries are not required
• Contains information needed to close off profit and loss accounts for the period if required
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PREPARATION OF THE WORKSHEET
1. Enter ledger account titles and balances in the account title and unadjusted trial balance columns
2. Enter the adjustments in the adjustment column (note: same principal as a journal – DR and CR appropriate accounts)
3. Calculate adjusted trial balances4. Extend adjusted balances to the financial
statements columns7
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PREPARATION OF THE WORKSHEET
5. Difference between the two income columns represents the profit or loss for the period. This balance is transferred to the balance sheet column to balance totals.
Financial statements can then be prepared
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Unadjusted Adjusted Income Balance trial balance Adjustments trial balance statement sheetAccount Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
CRESCENT REAL ESTATEWorksheet for the year ended 30 June 2016
Cash at bank 10500Accounts receivable 5400Prepaid insurance 960 Office supplies 540Equipment 55000Acc Dep-Equipment 10000Land 50000Accounts payable 4600M Mooney-Capital 100000 Commission revenue 9600Salary expense 1800
. Sub-Total 124200 124200Net profit for the year Total
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Work sheet exercise
• Using the worksheet provided in the lecture, prepare the following adjusting entries.
• 1. The 24 month insurance policy was purchased on the 31st March 2016.
• 2. The Equipment when purchased, on 1 July 2014,was expected to last 5 years after which time it will be sold for $5,000. The firm uses the straight line method for depreciation.
• 3. Commission earned but not recorded amounts to $200.
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Worksheet completion
• Now complete the worksheet across the columns.
• Make sure you total the columns.
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Unadjusted Adjusted Income Balance trial balance Adjustments trial balance statement sheetAccount Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
CRESCENT REAL ESTATEWorksheet for the year ended 30 June 2016
Cash at bank 10500 10500 10500Accounts receivable 5400 200 5600 5600Prepaid insurance 960 120 840 840Office supplies 540 540 540Equipment 55000 55000 55000Acc Dep-Equipment 10000 10000 20000 20000Land 50000 50000 50000Accounts payable 4600 4600 4600M Mooney-Capital 100000 100000 100000 Commission revenue 9600 200 9800 9800Salary expense 1800 1800 1800Insurance expense 120 120 120Depreciation expense 10000 10000 10000 . Sub-Total 124200 124200 10320 10320 134400 134400 11920 9800 122480 124600Net loss for the period 2120 2120
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Extending the Accounting Cycle
1. Analyse Transactions 2. Record in Journals (ie journalise)3. Post to Ledger4. Prepare Trial Balance5. Prepare end-of-period adjustments 6. Prepare an Adjusted Trial Balance7. Prepare Financial Statements
8. Close the Temporary Accounts9. Post Closing Trial Balance10.Reversing Entries
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RECORDING ADJUSTING ENTRIES
• From worksheet formal adjusting entries may be entered in general journal
• Entries are dated the last day of the accounting period
• Data for determining the entity’s closing entries for the period are found in income statement columns of worksheet which contain temporary income and expense accounts
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CLOSING TEMPORARY ACCOUNTS
• Income and expense accounts must be reduced to zero at the end of each period in order to determine the profit or loss for the period
• These are called closing entries• Income and expense accounts then begin the
next accounting period with a zero balance• The Profit or Loss Summary account is used to
summarise balances and calculate profit• Note: Balance sheet accounts are NOT closed
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The Closing Process
• Accounts in the general ledger include both “permanent” and “temporary” accounts.– All Asset accounts are permanent– All Liability accounts are permanent– Owners equity accounts such as Capital, Retained
Earnings and Reserves are permanent but…
– Dividends and Drawings are temporary– Revenue accounts are temporary– Expense accounts are temporary
• At the end of the accounting period all temporary accounts must be “closed” (ie reset to zero)
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THE CLOSING PROCESS
1. Income accounts closed to P or L summary– Debit income– Credit P or L Summary
2. Expense accounts closed to P or L summary– Debit P or L summary– Credit expense
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3. Profit or Loss Summary balances to determine profit/loss then closed to capital
– Debit P or L summary (assuming a profit)– Credit capital account
4. Drawings closed to capital– Debit capital account– Credit drawings account
THE CLOSING PROCESS
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FLOWCHART of CLOSING PROCESS
P & L SUMMARY
CAPITAL ACCOUNT
INCOME
12,000 7,500 9,000
SALARY EXP
1,500 1,800
RENT EXP
800
SUPPLIES EXP
350
28,500 28,500
(CLOSE INCOME ACCOUNT)
24,050
24,050
(CLOSE P & L SUMMARY)
DRAWINGS
2,500
3,300
4,450
(CLOSE EXPENSE ACCOUNTS)
350
800
24,050
2,500
(CLOSE DRAWINGS ACCOUNT)
2,500
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ACCOUNT BALANCES AFTER THE CLOSING PROCESS
• All income accounts have nil balances• All expense accounts have nil balances• The drawings account has a nil balance• The capital account has either been
– increased by the profit, or – decreased by the loss
• and decreased by the drawings• The Capital balance is now updated
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Remember for closing entries...
• Create an account Profit & Loss Summary• Close all revenue (income) accounts against
the P & L Summary• Close all expense accounts against the P & L
Summary• Close P & L Summary against Capital account• Close Drawings against capital account
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S. Lang Capital $91 200 Interest expense $4 400Service Revenue 181 000 Accts receivable 52 000
Unearned revenue 2 700 Salary payable 1 700Salary expense 31 000 Deprec. Expense 20 400
Accum depreciation 70 000 Rent expense 11 800Supplies expense 2 800 S. Lang Drawings 80 000Interest revenue 1 400 Supplies 2 200
The following account balances are taken from the annual financial statements of Stuart Lang Home Cleaning services with a reporting date of 30 June 2012. Prepare the closing entries:
Now try this exercise
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THE POST-CLOSING TRIAL BALANCE
• Prepared to verify the equality of debits and credits– i.e. ledger is “in balance”
• Confirms that only permanent accounts have balances
• Starting point for next accounting period
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ACCRUAL ENTRIES IN SUBSEQUENT PERIODS
• Adjusting entries are made at the end of the accounting period to record accruals
• Cash received or paid in subsequent periods for accruals must be analysed to correctly apportion amount between the two periods– e.g. payment for salaries
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• Original adjusting Entry
• Subsequent Entry
General Journal
Jun 30 Salaries Expense 3 980
Salaries Payable 3 980
(Adjusting entry for salaries payable)
Jul 6 Salaries Payable 3 980
Salaries Expense 3 420
Cash at Bank 7 400
(Payment of salaries earned 23 June to 6 July)
Balance is cleared by payment
ACCRUAL ENTRIES IN SUBSEQUENT PERIODS
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REVERSING ENTRIES
• Alternative to previous treatment• Dated the first day of the subsequent accounting
period• Exactly reverse certain adjusting entries• An accounting technique used to simplify the
recording of regular transactions in the next period
• They are optional in an accounting system (however very useful)
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• Adjusting Entry
• Reversing Entry
General Journal
Jun 30 Salaries Expense 3 980
Salaries Payable 3 980
(Adjusting entry for salaries payable)
Jul 1 Salaries Payable 3 980
Salaries Expense 3 980
(Reversing entry for salaries payable)
REVERSING ENTRIES
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• Subsequent EntryJul 6 Salaries Expense 7 400
Cash at Bank 7 400
(Payment of salaries earned 23 June to 6 July)
Salaries ExpenseAdjusting Entry 3 980
0Closing Entry 3 980
Subsequent Entry 7 4003 420
Reversing Entry 3 980
Correct expense recorded in prior period, and closed
Correct expense recorded in current period, without needing to know what had been accrued previously
REVERSING ENTRIES
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REVERSING ENTRIES
• Not required for all adjusting entries• Used to simplify recording of transactions in
future periods• Only used where adjustment is temporary
– Accrued expenses– Accrued income– Prepayments originally recorded as expenses– Unearned income originally recorded as income