Accounting Chapter 8

Remember the Adjustment Column of the Work Sheet? Adjustments must be journalized and posted WHY? Accounting Period Cycle Adequate Disclosure Matching Expenses with Revenue Adjusting Entries are journal entries recorded to update general ledger accounts at the end of a fiscal period

Information for adjusting entries are found in the Adjustment columns of the Work Sheet Which accounts are impacted? Supplies, Prepaid Insurance, Supplies Exp., Insurance Expense A new journal page is started for adjusting entries The title: Adjusting Entries is written in the middle of the Account Title column of the General Journal – WHY?

Name of Company General Journal Page:n+1 DateAccount Title Doc No. Post. RefDebitCredit Adjusting Entries 831Supplies Expense715 Supplies715

All journal entries must be posted Posting to the General Ledger insures that all account balances are up to date and match the information on the company’s financial statements Remember the steps for posting? Don’t forget to record the account number on the general journal entry WT xls

Permanent Accounts collect information from one fiscal period to the next AKA Real Accounts Ending account balances for permanent accounts become the beginning account balances for the next fiscal period Balance Sheet items are permanent accounts WHY?

Temporary Accounts accumulate information that is transferred to the owner’s capital account at the end of the fiscal period AKA Nominal Accounts Income Statement items are temporary accounts WHY? Temporary accounts begin a new fiscal period with a zero balance

Temporary Accounts balances must be reduced to zero at the end of each fiscal period Closing entries prepare temporary accounts for a new fiscal period To close a temporary account, an amount equal to its balance is recorded in the amount on the opposite to its balance: If Advertising Expense has a $100 debit balance, then a $100 credit to Advertising Expense will reduce the balance to zero

The Income Summary account is a temporary account that summarizes the closing entries associated with Revenues and Expenses All expenses (debit normal balances) are debits to Income Summary All revenues (credit normal balances) are credits to Income Summary Income Summary is eventually closed to Capital What is relationship between the Income Summary account and Net Income(Loss)?

The balance of the Income Summary account is determined by whether the business earns net income or suffers a net loss There are four closing entries for a service business (sole proprietorship): An entry to close income statement accounts with credit balances An entry to close income statement accounts with debit balances An entry to record net income or loss and close Income Summary An entry to close the owner’s drawing account

Which accounts are these?

Only one closing entry is required to close all expense accounts

Income Summary is a temporary account that is closed to the Capital account – WHY? If there is net income: If there is net loss

Drawing is not a revenue or expense account and cannot be closed through the Income Summary account WT xls

Closing entries must be posted to prepare the company’s books for the next fiscal period Accounts that are closed have a zero balance at the end of the fiscal period Lines are drawn in both the Balance Debit and Balance Credit columns of closed temporary accounts to verify that the account has been closed Delivery ExpAcct No. 510Balance DateItemPost Ref DebitCreditDebitCredit 1027G Gn

A Post Closing Trial Balance is a trial balance prepared after the closing entries are posted Verifies that debits equal credits in the general ledger Only general ledger accounts with balances are included on a post-closing trial balance Only balance sheet items – WHY? A Post-Closing Trial Balance is included on page 216 It follows a similar format to the Trial Balance prepared on the Work Sheet

The series of accounting activities included in recording financial information for a fiscal period Since it is a cycle, step 1 begins again after step 8

Source documents are analyzed Transactions are recorded in the General Journal Journal Entries are posted to the General Ledger A Work Sheet is prepared from the General Ledger Financial statements are prepared from the Work Sheet Adjusting and closing entries are journalized from the Work Sheet Adjusting an closing entries are posted to the General Ledger A Post-Closing Trial Balance of the General Ledger is preparedWT xlsWT xls