Chapter 8 Completing the Accounting Cycle

8.1 WHY? Adjustment Process At the End of the Year: Need to finalize the accounts/ numbers for tax purposes, internal management, complete yearly financial statements for investors

Adjustment Process Accounts are brought up to date Late transactions are added Check for errors Insure accounting standards have been followed

Accrual Accounting Reminder Revenue and Expenses must be matched, even if cash has not been paid to get an accurate reflection of Profit Time period concept: accountants must regularly measure financial performance Revenue-Expenses=Profit

What is the purpose of doing monthly, quarterly, or bi-yearly financial statements? Comparability We are then able to compare the months, quarters or years to make management decisions

Late Arriving Invoices Adjusting Entries Used to update accounts to ensure their balances are correct and at their true value Adjustments: Supplies, Prepaid Expenses, Late Arriving Invoices

Supplies Inventory (count) is taken of all the supplies in the business This is very time consuming ($) , so it should be done only once a year. If inventory is $3000 and supplies is at $15000 Supplies Supplies Expense 15000 12000 12000 3000

Prepaid Expenses Calculate how many months have been used Eg. Original value $1200 for 1 year insurance 5 Months used @ Dec 31 1200/ 12 months= $100/ mth x 5 months= $500 used Prepaid Insurance Insurance Expense 1200 500 500 700

Late Arriving Invoices Rule: If they were expenses on or before the end of year (typically Dec 31) then they should be included in the Income Statement. Debit the Expense, Credit the A/P account Pg. 274

Unearned Revenue It is possible that we have received money for a sale or service that we have not earned yet. A gift card is a perfect example of this. Because we OWE our client the product or service Unearned Revenue is a Liability. Transaction: Debit Fees Earned Credit Unearned Revenue

Adjusting the General Journal Entries must also be done in the GJ Eg. To adjust for the inventory count of $4500 To adjust for four months of expired insurance To record the 2016 invoices that arrived in 2017 To adjust for the cash advance received

8.2 The Worksheet The worksheet is an INFORMAL paper used to organize and plan the data for the financial statements. Done in pencil or In a spreadsheet

Worksheet Steps Enter all the account names in order Enter in trial balance balances (balanced?) Make Adjusting Entries (may need to add new accounts below) Total New Adjusted Balances Move over Revenue and Expense Balances into the Income Statement Column Calculate Net Income and Total Move over A, L and OE into Balance Sheet column and total Add Net income below credit total Final Total is taken for the Balance Sheet Make sure single and double underlines are put in Pg279-287

8.3 Closing Entries In order to start fresh in the new fiscal year we need to zero out some of our accounts. These are called closing entries and are done in the general journal. What accounts do you think we need to zero out?

Income Summary A temporary account used for closing entries All revenues and expenses are put in this account to see the true value of the net income or loss. Debit Revenue Credit Income Summary To close the 2016 balance of revenue Debit Income Summary Credit All Expenses To close the 2016 expense accounts

Income Summary Net Income/ Loss value will then be deposited into the Capital account * IF Net Income Debit Income Summary Credit Capital * IF Net Loss Debit Capital Credit Income Summary To close the Income Summary account and transfer the net income (loss) to capital.

Close Drawings Debit Capital Credit Drawings To close the Drawings account and transfer its balance to capital.

FINAL STEP! Post Closing Trial Balance  Dated Jan 1, 2017 (begin of year) Has updated Capital balance No Revenue, Drawings or Expense accounts exist At this point we are all ready for another year of accounting. The accounting cycle is complete.