Recording Adjusting and Closing Entries for a Service Business Chapter 8 Recording Adjusting and Closing Entries for a Service Business Accounting January 2016

Warm Up The Walt Disney Company What do you think of when you hear the word DISNEY? How many of you think of the environment when you hear the word Disney?

Warm Up In 1990, the WDC introduced an The Walt Disney Company In 1990, the WDC introduced an Initiative called “Environmentality.” Definition-A fundamental ethic that blends business growth with the conservation of natural resources.

Warm Up The Walt Disney Company Environmentality goes beyond just complying with laws. It includes purchasing recycled products, waste minimization , resource conservation, research and development, community involvement and education.

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Warm Up The Walt Disney Company List at least two reasons why you think the WDC would be interested in such environmental measures? If the WDC purchased equipment to help measure water usage, would that equipment be classified as an asset, liability, or owner’s equity on the balance sheet? Why?

Warm Up The Walt Disney Company List at least two reasons why you think the WDC would be interested in such environmental measures? WDC could generally be concerned about the environment and believe that business has a responsibility to do what it can to conserve natural resources.

Warm Up The Walt Disney Company List at least two reasons why you think the WDC would be interested in such environmental measures? Could be that good use of natural resources can result in cost savings for the company. A company also might think that its customers expect the company to protect the environment.

Warm Up The Walt Disney Company If the WDC purchased equipment to help measure water usage, would that equipment be classified as an asset, liability, or owner’s equity on the balance sheet? Why? Equipment to help measure water usage would be classified as an asset because it is something of value owned by the company

Internet Research Activity Go to the homepage for a company or corporation of your choice. Search the site for the most recent annual report. Go to the income statement. Looking at the categories of Revenues on the income statement, List the accounts that may be Included in the company’s entry to close the revenue accounts.

Internet Research Activity Answers should vary here, but all answers should include the Income Summary account along with a variety of appropriate revenue accounts.

Chapter 8 presents journalizing adjusting entries for a service business organized as a proprietorship. Adjusting entries play an important role in the accounting cycle. Journalizing closing entries is also covered in this chapter.

Preview Chapter 8.1 Objectives

Objectives for Chapter 8.1 Define Accounting Terms related to adjusting entries for a service business organized as a proprietorship. Identify accounting concepts and practices related to adjusting entries for a service business organized as a proprietorship. Record adjusting entries for a service business organized as a proprietorship.

REMEMBER… The balance in an account is changed by journalizing a transaction and posting the entry to the account. When we prepared the worksheet, we only planned the adjusting entries. NO account balances have been changed.

Terminology 8.1 Adjusting Entries- journal entries recorded to update general ledger accounts at the end of a fiscal period. (p. 202)

Let me Explain… You do not have to decide the debit and credit parts of the entry. The analysis was done when the worksheet was completed. All that needs to be done at this point is to record the entry in the journal. T accounts are given so that you can visualize the effect of the entry on accounts.

Let me Explain… There are no documents associated with adjusting entries, therefore the doc No. column is left blank. The entry must be posted to the general Ledger accounts before the account balance changes. Once the entry is posted, the supplies account balance will reflect the amount of supplies on hand at the end of the period.

ADJUSTING ENTRY FOR SUPPLIES page 202 1. Write the heading. 2. Write the date. 3. Write the title of the account debited. Record the debit amount. 1 4. Write the title of the account credited. Record the credit amount. 3 2 4 LESSON 8-1

Adjusting Entry for Prepaid Insurance page 204 1. Write the date. 2. Write the title of the account debited. Record the debit amount. 3. Write the title of the account credited. Record the credit amount. 2 1 3 LESSON 8-1

page 205 TERM REVIEW Adjusting entries- journal entries recorded to update general ledger accounts at the end of a fiscal period. (p. 202) Try Aplia 8-1:Work Together & On Your Own Application Problem 8-1 LESSON 8-1

Exit Ticket Why are Adjusting Entries Journalized? Where is the information obtained to journalize adjusting entries? What account are increased from zero balances after adjusting entries for supplies and prepaid insurance are journalized and posted?

Recording Closing Entries Accounting

Today in Accounting We will learn about Closing Entries Complete in Aplia 8-2 Work together, On Your Own and Application Next Class (Snow?) 8-3!

Objectives Define Accounting Terms related to adjusting entries for a service business organized as a proprietorship. Identify accounting concepts and practices related to adjusting entries for a service business organized as a proprietorship. Record adjusting entries for a service business organized as a proprietorship.

Terminology Permanent accounts (real accounts)-accounts used to accumulate information from one fiscal period to the next. (p. 206)ex-asset and liability & owner’s equity accounts. The Ending Account Balances are carried over to the next fiscal period.

Terminology Temporary accounts-accounts used to accumulate information until it is transferred to the owner’s capital account. (p. 206) EX-revenue, expense, income summary and Owner’s drawing account. These accounts show changes in the owner’s capital for a single fiscal period At the end of a fiscal period the balances are Summarized and transferred to the owner’s Capital account. Begin a new fiscal period at a zero balance.

Need for Closing Temporary Accounts Closing entries-journal entries used to prepare temporary accounts for a new fiscal period. Example- If an account has a credit balance of $3,565, a debit of $3,565 is recorded to close the account.

Closing Entries Necessary because it transfers the balance of one account to another account. The procedure for closing an account includes entering an amount equal to the account balance on the side opposite its balance.

Analogy The reasons for recording closing entries can be compared to a trip odometer. Closing entries are recorded to prepare the temporary accounts for the next fiscal period by reducing their balances to zero. Likewise, a trip odometer must be reset to zero to begin recording the miles for the next trip.

Here we go… There are four closing entries taken from the income Statement and balance Sheet columns of the work sheet. Close Income Statement accounts with credit balances Close income statement accounts with debit balances 3. Record net income or loss in the owner’s capital account and close Income Summary 4. Close the owner’s drawing account

NEED FOR THE INCOME SUMMARY ACCOUNT

CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE page 208 1 2 3 4 1. Write the heading. 2. Write the date. 3. Write the title of the account debited. Record the debit amount. Write the title of the account credited. Record the credit amount. LESSON 8-2

CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES page 209 1. Date 2. Income Summary 3. Credit 4. Debit amount 2 4 1 3 LESSON 8-2

CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT page 210 1. DATE - 2. DEBIT- 3. Credit 2. Debit 3. Credit 1 2 3 LESSON 8-2

CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT page 211 CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT 2. Debit 3. Credit 1 2 3 1.DATE 2.DEBIT 3. CREDIT LESSON 8-2

TERM REVIEW permanent accounts temporary accounts closing entries

Case Study General Bakken forgot to journalize and post the adjusting entry for prepaid insurance at the end of the June fiscal period. What effect will this ommision have on the records of Ms. Bakken’s business as of June 30th?” Explain your answer…..

ANSWER The amount of reported net income will be overstated because Ms. Bakken did not record the amount of the insurance expense. In addition, the value of the total assets will be overstated. The prepaid insurance account balance will be larger than it should be because the insurance used has not been deducted from the account.

Exit Ticket What do the ending balances of permanent accounts for one fiscal period represent at the beginning of the next fiscal period? What do the balances of temporary accounts show? List the Four Closing entries.

LESSON 8-3 Preparing a Post-Closing Trial Balance 4/27/2017 LESSON 8-3 Preparing a Post-Closing Trial Balance Blue

page 219 TERMS post-closing trial balance-a trial balance prepared after the closing entries are posted. (p. 216) accounting cycle-the series of accounting activities included in recording financial information for a fiscal period. (p. 217) LESSON 8-3

ACCOUNTING CYCLE FOR A SERVICE BUSINESS page 217 ACCOUNTING CYCLE FOR A SERVICE BUSINESS 1. Analyzes transactions 1 2. Journalize 2 3. Post 8 4. Prepare work sheet 5. Prepare financial statements 3 6. Journalize adjusting and closing entries 7 4 7. Post adjusting and closing entries 8. Prepare post-closing trial balance 6 5 LESSON 8-3

Reminder! After closing entries are recorded and posted, the business is almost ready to start recording transactions for the new accounting period. Before this is done, it is important to check if debits still equal credits

Take a look at Page 213 The illustration which continues through page 215, shows all the general ledger accounts and the entries posted to them. When posting, if an account has a zero balance, lines are drawn in both the Balance Debit and Balance Credit columns to assure the reader that a balance has not been omitted.

Take a look at Page 213 It is important to check for the equality of debits and credits before beginning a new accounting period.

Analyzing the Ledger Accounts Refer to the illustrations of the ledger accounts after adjusting and closing entries are posted……Look at each account to determine if it has a balance or not.

GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND CLOSING ENTRIES ARE POSTED LESSON 8-3 4/27/2017 GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND CLOSING ENTRIES ARE POSTED page 213 LESSON 8-3 Blue

Quick Review PAGE 214 PAGE 215

Post Closing Trial Balance The word “post” means “after”. Therefore, a post-closing trial balance is prepared after the closing entries. There are eight steps for preparing a post-closing trial balance.

POST-CLOSING TRIAL BALANCE page 216 POST-CLOSING TRIAL BALANCE 1. Heading 4 1 2. Account titles 3. Account balances 2 3 4. Single rule 5. Compare totals 6. Totals 7. Record totals 6 7 8. Double rule 8 5 LESSON 8-3

Remember Only General ledger accounts with balances are included on a post-closing trial balance. Why is it important to prove that debits equal credits at the close of the fiscal period? Answer: To prove that the work is correct before starting a new fiscal period so errors are not carried forward.

ACCOUNTING CYCLE FOR A SERVICE BUSINESS page 217 ACCOUNTING CYCLE FOR A SERVICE BUSINESS 1. Analyzes transactions 1 2. Journalize 2 3. Post 8 4. Prepare work sheet 5. Prepare financial statements 3 6. Journalize adjusting and closing entries 7 4 7. Post adjusting and closing entries 8. Prepare post-closing trial balance 6 5 LESSON 8-3

page 219 TERMS REVIEW post-closing trial balance-a trial balance prepared after the closing entries are posted. (p. 216) accounting cycle-the series of accounting activities included in recording financial information for a fiscal period. (p. 217) LESSON 8-3

To do list… Try the Aplia problems for 8.3 Aplia Chapter Study guide chapter 8 Tutorial Quiz on c21accounting web-site Xtra study tools Workplace Competency (page 224) We will go over the answers together.