Transcript BAF3M Accounting

BAF3M Accounting
Chapter 8 – Completing the
Accounting Cycle
8.1 The Adjustment Process
• Accountants need to ensure that the statements
they produce are:
• Up to Date, Accurate, Consistent
Adjustments are necessary to ensure
• Accounts are brought up to date
• All late transactions are taken into account
• All calculations are correct
• All accounting standards have been complied
with
8.1 The Adjustment Process
• During the course of the fiscal period,
things are allowed to get out of date
• Adjusting entries get everything up-to-date
and accurate again
• Why allowed to go inaccurate?
– Saves time, money, effort
8.1 The Adjustment Process
• We will look at the adjusting entries for
four main areas
– Supplies
– Prepaid Expenses
– Late Arriving Invoices
– Unearned Revenue
Adjustment #1: Supplies
The Supplies balance shows
the total supplies
purchased in the year
Adjusting Entries
What is the Balance?
What the
balance is
What Should The Balance Be?
What the balance
should be?
What the balance “should be” is determined from
someone counting the supplies that remain in the
business at the end of the year
The Adjustment
The required
adjustment
Introducing a New Account
What the
balance is
The income statement account related to Supplies is
shown above
The accounting clerk has not used this account
during the year
Expense: What Should the
Balance Be?
What the balance
should be
What the balance “should be” is equal to the amount
of supplies “used up” during the year
What the Adjustment Would Be
The required
adjustment
What that Looks Like in the Journal
The adjusting entry as it would appear in the general
journal
Adjustment #2:
Prepaid Expenses
The Prepaid Insurance
balance shows the total
cost of insurance bought in
the year
Adjusting Entries
What is the Balance?
What the balance
is
What Should the Balance Be?
What the balance
should be
What the balance “should be” is determined from someone
calculating the portion of the insurance policy that is
“unexpired” or “not used up yet, but paid for”
How did you Get $1200?
• An Insurance policy was purchased on
September 1st for one year. The fiscal
period expires Dec. 31.
As of Dec. 31, how many months of
insurance have been used ?
- 4 months have been used
Each month costs:
4 months have been used:
$1800 / 12mo. = $150
$150*4 = $600
The Adjustment
The required adjustment
Introducing Your 2nd New
Account
What the balance
is
The income statement account related to Prepaid Insurance is
shown above
The accounting clerk has not used this account during the year
Expense: What Should the
Balance Be?
What the balance
should be
What the balance “should be” is the amount of the insurance
policy that has expired at year’s end
What the Adjustment Should Be?
The required
adjustment
What it Looks Like in the Journal
The adjusting entry for insurance as it would appear in the
general journal
Adjustment #3:
Late Arriving Invoices
Adjusting Entries
The Accounts Payable balance
does not include two invoices
that arrived late
• Two late invoices have arrived
–$212 for the Telephone Bill
–$315 for the Utilities Bill
What is the Balance?
Little analysis is needed for this adjustment
The Adjustment
Simply enter the late invoices
The Adjustment contd.
Simply enter the late invoices
What Should the Balance Be?
And calculate the adjusted balance
Expense: What is the Balance?
The Adjustments
The What Should the Balance Be?
What that Looks Like in the Journal
The adjusting entry for late invoices as it would
appear in the general journal
Adjusting Entries—Summary
Summary 1
Balance Sheet
The adjusting entries have brought
balance sheet accounts up to date
Adjusting Entries—Summary
Summary 2
Balance Sheet
Income Statement
And have recorded expenses in related accounts on the
income statement
Adjusting for Unearned Revenue
• Unearned Revenue is a liability – it occurs
when you are paid in advance of providing
a service.
• If the accounting department puts advance
payments into Revenue, this is an error
that needs to be corrected:
• DR Revenue (to reduce it); CR Unearned
Revenue (to increase it)
Check your Understanding
• See Textbook Tracker Sheet for the
required Questions and Exercises for
section 8.1
8.2 Adjusting Entries and
the Work Sheet
• The work sheet is an informal accounting
form used to help organize all of the
financial data
• There are 8 columns
– Trial Balance DR/CR
– Adjustments DR/CR
– Income Statement DR/CR
– Balance Sheet DR/CR
8.2 Adjusting Entries and
the Work Sheet
ADJUSTING FOR SUPPLIES
• According to Global Logistics’ trial balance
they have $1480.90 worth of supplies
• However, once a physical inventory was
completed on December 31, 2008 they
discovered that they only had $526.00
worth of supplies on hand
Global Logistics
Work Sheet
Trial Balance
Account Titles
Dr.
Cr.
Bank
520.51
Accounts Receivable
18475.00
Supplies
1480.90
Prepaid Inusrance
6564.00
Furniture & Equipment
4196.00
Automotive Equipment
54600.00
Account Payable
52510.00
GST Payable
1240.00
GST Recoverable
720.00
Bank Loan
25000.00
Capital
28895.42
Drawings
42000.00
Shipping Revenue
213821.00
Bank Charges Expense
3500.00
Miscellaneious Expense
1951.65
Rent Expense
24000.00
Telephone Expense
1800.00
Truck Expense
41951.16
Utitlies Expense
3750.00
Wages Espense
65957.20
296466.42 296466.42
Year ended: Dec. 31, 20-Adjustments
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
8.2 Adjusting Entries and
the Work Sheet
ADJUSTING FOR SUPPLIES
20-Dec. 31
Supplies Expense
Supplies
964.90
964.90
Account Titles
Bank
Account Receivable
Supplies
Prepaid Insurance
Furniture & Equipment
Automotive Equipment
Account Payable
GST Payable
GST Recoverable
Bank Loan
Capital
Drawings
Shipping Revenue
Bank Charges Expense
Miscellaneous Expense
Rent Expense
Telephone Expense
Truck Expense
Utitlies Expense
Wages Expense
Supplies Expense
Trial Balance
Dr.
Cr.
520.51
18475.00
1480.90
6564.00
4196.00
54600.00
2510.00
1240.00
720.00
25000.00
28895.42
42000.00
213821.00
3500.00
1951.65
24000.00
1800.00
41951.16
3750.00
65957.20
271466.42 271466.42
Adjustments
Dr.
Cr.
954.90
954.90
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
8.2 Adjusting Entries and
the Work Sheet
ADJUSTING FOR INSURANCE USED
• According to Global Logistics’ trial balance
they have $6564 in prepaid insurance
• They have$4070 remaining in unused
insurance
8.2 Adjusting Entries and
the Work Sheet
ADJUSTING FOR INSURANCE USED
20-Dec. 31
Insurance Expense
2494
Prepaid Insurance
2494
Global Logistics
Account Titles
Bank
Account Receivable
Supplies
Prepaid Insurance
Furniture & Equipment
Automotive Equipment
Account Payable
GST Payable
GST Recoverable
Bank Loan
Capital
Drawings
Shipping Revenue
Bank Charges Expense
Miscellaneous Expense
Rent Expense
Telephone Expense
Truck Expense
Utitlies Expense
Wages Expense
Supplies Expense
Insurance Expense
Work Sheet
Trial Balance
Dr.
Cr.
520.51
18475.00
1480.90
6564.00
4196.00
54600.00
2510.00
1240.00
720.00
25000.00
28895.42
42000.00
213821.00
3500.00
1951.65
24000.00
1800.00
41951.16
3750.00
65957.20
271466.42 271466.42
Year ended: Dec. 31, 2008
Adjustments
Dr.
Cr.
954.90
2494.00
954.90
2494
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
8.2 Adjusting Entries and
the Work Sheet
ADJUSTING FOR LATE ARRIVING INVOICES
• Three late invoices in this example
Telephone
Truck Repair
Printer Repair
Total
$ 45
496
85
$626
8.2 Adjusting Entries and
the Work Sheet
20-Dec. 31
Telephone expense
Truck expense
Miscellaneous expense
Accounts Payable
45
496
85
626
Global Logistics
Account Titles
Bank
Account Receivable
Supplies
Prepaid Insurance
Furniture & Equipment
Automotive Equipment
Account Payable
GST Payable
GST Recoverable
Bank Loan
Capital
Drawings
Shipping Revenue
Bank Charges Expense
Miscellaneous Expense
Rent Expense
Telephone Expense
Truck Expense
Utitlies Expense
Wages Expense
Supplies Expense
Insurance Expense
Work Sheet
Trial Balance
Dr.
Cr.
520.51
18475.00
1480.90
6564.00
4196.00
54600.00
2510.00
1240.00
720.00
25000.00
28895.42
42000.00
213821.00
3500.00
1951.65
24000.00
1800.00
41951.16
3750.00
65957.20
271466.42 271466.42
Year ended: Dec. 31, 2008
Adjustments
Dr.
Cr.
954.90
2494.00
626.00
85.00
45.00
496.00
954.90
2494
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
COMPLETING THE SHEET
• From this point you complete the 8-column
worksheet just as you completed the 6-column
worksheet
– Except as you transfer numbers to the correct column
you may need to add or subtract the adjustments into
the totals as necessary
• Balance the columns using the “magical”
number
• Underline where necessary
Global Logistics
Account Titles
Bank
Account Receivable
Supplies
Prepaid Insurance
Furniture & Equipment
Automotive Equipment
Account Payable
GST Payable
GST Recoverable
Bank Loan
Capital
Drawings
Shipping Revenue
Bank Charges Expense
Miscellaneous Expense
Rent Expense
Telephone Expense
Truck Expense
Utitlies Expense
Wages Expense
Supplies Expense
Insurance Expense
Work Sheet
Trial Balance
Dr.
Cr.
520.51
18475.00
1480.90
6564.00
4196.00
54600.00
2510.00
1240.00
720.00
25000.00
28895.42
42000.00
213821.00
3500.00
1951.65
24000.00
1800.00
41951.16
3750.00
65957.20
271466.42 271466.42
Year ended: Dec. 31, 2008
Adjustments
Dr.
Cr.
Income
Statement
Dr.
Cr.
954.90
2494.00
Balance Sheet
Dr.
520.51
18475.00
526.00
4070.00
4196.00
54600.00
626.00
Cr.
3136.00
1240.00
720.00
25000.00
28895.42
42000.00
213821.00
85.00
45.00
496.00
954.90
2494
4074.90
3500.00
2036.65
24000.00
1845.00
42447.16
3750.00
65957.20
954.90
2494
4074.90 146984.91 213821.00
66836.09
213821.00 213821.00
125107.51
58271.42
66836.09
125107.51 125107.51
8.2 Adjusting Entries and
the Work Sheet
• Journalizing and Posting the Adjusting
Entries
– All the adjusting entries need to be properly
journalized and posted to the ledger
8.3 Preparing for New Fiscal Years
• REAL ACCOUNTS – balances that
continue into the next fiscal period
ex. Bank, trucks, accounts payable etc.
• NOMINAL ACCOUNTS – have balances
that do not continue into the next fiscal
period
ONLY Expenses, drawing and revenue
8.3 Preparing for New Fiscal Years
• CLOSING OUT AN ACCOUNT – means to
make it have no balance. Nominal accounts are
closed out at the end of the fiscal period.
• INCOME SUMMARY ACCOUNT –
summarizes the revenues and expenses
of the period. Represents either the net
income or net loss for the fiscal period
8.3 Preparing for New Fiscal Years
WHY DO WE CLOSE OUT ACCOUNTS?
Closing these accounts allows us to plainly
observe the previous year's effect on our
revenue, expense, and drawings
accounts. You can well imagine that if we
did not close these accounts, their
balances would build to outrageous
amounts.
8.3 Preparing for New Fiscal Years
HOW DO WE DO THIS?
The Order in Which we Close Out Accounts (p293)
1. Close out the revenue account(s) to the
Income Summary account
2. Close out the expense account(s) to the
Income Summary account
3. Close out the Income Summary account to the
Capital account
4. Close out the Drawing account to the Capital
account
8.3 Preparing for New Fiscal Years
•
Closing Entry #1: Close out the revenue
account(s) to the Income Summary
account
Journal
Dec 31 Shipping Revenue
213821
Income Summary
213821
Because revenue is a CR balance account, a DR entry
is needed to close it off
8.3 Preparing for New Fiscal Years
•
Closing Entry #2: Close out the expense
account(s) to the Income Summary account
Journal
Dec 31
Income Summary 146984.91
Bank Charges Exp
…(all exp listed here)
Insurance Exp
3500
2494
Because expenses are a DR balance account, a CR entry
is needed to close them off
8.3 Preparing for New Fiscal Years
•
Closing Entry #3: Close out the Income
Summary account to the Capital account
Journal
Dec 31 Income Summary
66836.09
P. Marshall, Capital
66836.09
If the Income Summary account has a CR balance, then a
DR entry is needed to close it. (profit  capital increases)
If the Income Summary account has a DR balance, then a
CR entry is needed to close it. (loss  capital decreases)
8.3 Preparing for New Fiscal Years
•
Closing Entry #4: Close out the Drawing
account to the Capital account
Journal
Dec 31 P. Marshall, Capital 42000
P. Marshall, Drawings 42000
Because Drawings is a DR balance account, a CR entry is
needed to close it
8.3 Preparing for New Fiscal Years
• Post-Closing Trial Balance
– Checks the accuracy of the ledger after the
adjusting and closing entries have been done
– Example shown in Fig 8-10, Page 290
8.4 Adjusting for Depreciation
• What is it?
• First let’s remember our definition for an
expense
– Something that we spend money on to make
money
• Based on this definition shouldn’t things like
equipment or cars be expenses? We use these
things to make money do we not?
8.4 Adjusting for Depreciation
• However, items such as a car don’t
suddenly become worthless – it loses
some of it’s value each year
• So a portion of the cost of the equipment
should be allocated as an expense in each
year of the item’s life
• This process meets the matching principle
8.4 Adjusting for Depreciation
Depreciation  an allowance made for the
decrease in value of an asset over time
Depreciation is an expense so it appears on
the INCOME STATEMENT
8.4 Adjusting for Depreciation
• An anecdotal example
– Read p. 301-302 about the depreciation of a
company’s delivery van
8.4 Adjusting for Depreciation
• Methods
– 2 most common are:
– Straight Line
– Declining Balance
8.4 Adjusting for Depreciation
• Straight Line Method
– Divides up the net cost of the asset equally
over the years of the assets life
Straight Line for 1 yr =
(orig cost - estimated salvage value)
Estimated # of periods in the asset’s life
8.4 Adjusting for Depreciation
• Straight line Example
• Tip Top Trucking purchased a truck for
$78000 on Jan 1. 20--. Truck could be
used for 6 years, and be sold at that time
for $7800.
• Therefore:
Estimated Annual Depreciation is
($78000 – $7800) / 6 = $11700
The truck will depreciate $11700 each year.
8.4 Adjusting for Depreciation
• Recording Depreciation
Journal
Depreciation Expense – Truck
Truck
11700
11700
The above work is correct, but not used by larger,
computerized businesses…they use a new account called
“Accumulated Depreciation”
8.4 Adjusting for Depreciation
• So the entry will look like this:
Journal
Depreciation Expense – Truck
Accumulated Depreciation - Truck
11700
11700
The use of the accumulated depreciation account
provides 2 types of information:
1) By not taking the depreciation right off of the asset
account we can still find the original cost of the asset
2) We can quickly calculate the total amount of
depreciation recorded over the years
8.4 Adjusting for Depreciation
• Accumulated Depreciation is a CONTRA
account
– A contra account is one that is displayed
alongside an associated account and has a
balance that is opposite to that account
8.4 Adjusting for Depreciation
• Accumulated Depreciation is also a
VALUATION account
– One that is used together with an asset
account to show the true net value of an asset
8.4 Adjusting for Depreciation
• Adjusting Entry for Depreciation
1) records the depreciation for the period in
the depreciation expense account
2)Increases the appropriate accumulated
depreciation account for the asset, which
reduces the asset’s net book value
Journalized as…
Depreciation Exp
$$$$
Acc. Dep. (Asset)
$$$$
8.4 Adjusting for Depreciation
Declining-balance Method
• Allocates a greater amount of depreciation to the first
years of an asset’s life
• This is the method the government requires for income
tax purposes
• To find the depreciated amount you take the
undepreciated cost of the asset and multiply it by a fixed
%
– This % is set by the gov’t
– See schedule on p. 308