1. BAF3M1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9.1

2. The Adjustment Process  In Chapter 8, we learned that financial statements are used to assist in making important decisions  Therefore, it is important that financial statements are accurate, up-to-date, and consistent from year to year – the purpose of the adjustment process  Bringing the account data up-to-date at statement time is known as “making the adjustments”. The accounting entries produced in this process are known as ___________________ ____________

3. Recall: GAAP - The Matching Principle  One of the main GAAPs governing adjusting entries is the Matching principle, which states that expenses are to be recognized in the same period as the revenue that they helped to earn  In most cases, an adjusting entry assigns amounts of revenue or expense to the appropriate accounting period before finalizing the books for the fiscal period

4. Adjusting Entries for Supplies  The Supplies account is an example of an account that requires an _________________ at the ______ ____ ________ _______________ ____________  WHY? When supplies are purchased, their cost is debited correctly to the Supplies account. BUT, as supplies are used, which usually happens daily, no accounting entries are made to record the usage at the time.

5. Example:  During the accounting period, the balance of the Supplies account represents the balance at the beginning of the period, plus any new supplies purchased.  The Supplies account has a balance of $7900 on December 31, 2008. An inventory (or count of the remaining supplies on hand) is taken, and the value of the actual supplies on hand at December 31, 2008 is $1386.  The difference between $7900 and $1386 represents the cost of the supplies used. (7900 – 1386 = 6514)  The journal (adjusting) entry to account for this difference: DateParticularsPR DRCR 2008 Dec31Supplies Expense 6514 Supplies 6514 Adjusting entry

6. Adjusting Entries for Prepaid Expenses  There are times in business when expense items are paid for in advance. Some expense items, like insurance, may cover a length of time that affects the current fiscal period AND the following fiscal period as well. These expenses require adjusting entries.  A prepaid expense is an item _________ ______ ____ ____________, but one where the benefits extend into the future.  When prepaid expenses are purchased, they are usually debited to a prepaid expense account.  Prepaid expense accounts are classified as assets. They are usually listed in the Current Assets section of the balance sheet because their value expires in a short time (usually within one year)

7. Example:  Suppose that D’Cruz Company purchased a one-year automobile insurance policy on September 1, 2008 at a cost of $1800. At the time of purchase, the accounting clerk would make the following entry: DateParticularsPR DRCR 2008 Sept1Prepaid Insurance 1800 Bank 1800 Purchased a one-year insurance policy

8.  Since the one-year insurance policy was purchased on September 1, and the fiscal period ends on December 31, only four (4) months of insurance have been used. Eight (8) months of insurance coverage remain.  The journal (adjusting) entry to account for the portion of insurance used: DateParticularsPR DRCR 2008 Dec31Insurance Expense 600 Prepaid Insurance 600 Adjusting entry for 4 months of insurance coverage used Calculation: $1800/12 months = $150 per month $150 x 4 months = $600

9. Adjusting Entries for Late-Arriving Purchase Invoices  Goods and services are often bought and received toward the end of an accounting period. The bills for these items may not arrive until the next fiscal period.  Financial statements are ______ ___________ _______________ until ______ to ___________ weeks ___________ the _____________ ________ ______. This gives the accounting department time to wait for late-arriving invoices.  During the waiting period, the accounting department examines all purchase invoices to find those that affect the current fiscal period.

10. Example:  Suppose that on January 15, 2009, two late-arriving invoices were received: Telephone $212, Utilities $315. These invoices represent expenses that helped the business earn revenue in the year 2008.  The journal (adjusting entry) for these late-arriving invoices: DateParticularsPR DRCR 2008 Dec31Telephone Expense212 Utilities Expense315 Accounts payable527 Adjusting entry for late-arriving purchase invoices

11. BAF3M1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9.2

12. Adjusting entries and the Work Sheet Refer to page 310 for a revised work sheet  The first place that adjusting entries are recorded is on the work sheet  As the work sheet is prepared, the adjusting entries are calculated and recorded in a section headed Adjustments

13. Supplies and the work sheet Refer to page 312 in the textbook DateParticularsPR DRCR 2004 Dec31Supplies Expense 95490 Supplies 95490 Adjusting entry  This adjusting entry is not journalized at this time. It is entered in the Adjustments section of the work sheet first, then journalized and posted.  In the work sheet, we will see that the Debit to Supplies Expense is written at the bottom. WHY? The Supplies Expense account does not appear in the Accounts column, so we have to write its title on the next available line on the work sheet.  Notice that the adjusting entry is referenced with a circled numeral 1

14. Insurance and the Work Sheet Refer to page 314 in the textbook DateParticularsPR DRCR 2004 Dec31Insurance Expense 2494 Prepaid Insurance 2494 Adjusting entry  This adjusting entry is not journalized at this time. It is entered in the Adjustments section of the work sheet first, then journalized and posted.  In the work sheet, we will see that the Debit to Insurance Expense is written at the bottom. WHY? The Insurance Expense account does not appear in the Accounts column, so we have to write its title on the next available line on the work sheet.  Notice that the adjusting entry is referenced with a circled numeral 2

15. Late purchase invoices and the Work sheet Refer to page 315 in the textbook DateParticularsPR DRCR 2004 Dec31Telephone Expense45 Truck Expense496 Miscellaneous Expense85 Accounts payable626  This adjusting entry is not journalized at this time. It is entered in the Adjustments section of the work sheet first, then journalized and posted.  In the work sheet, we will see the adjusting entry made with a debit to Telephone Expense, Truck Expense, and Miscellaneous Expense  Notice that the adjusting entry is referenced with a circled numeral 3

16. Total adjusting entries Refer to page 315  After the last adjusting entries are made, the adjustments columns are totalled and ruled.

17. Updating the Balance sheet and Income Statement columns Step 1: Evaluate each item in the first columns of the work sheet (Trial Balance, DR & CR, Adjustments, DR & CR). For each adjusting entry, take the beginning value (under the Trial balance column) and add or subtract the adjustment (Adjustments column). Step 2: Transfer the value from step 1 to one of the last four columns on the work sheet (Income statement, DR or CR; Balance sheet, DR or CR) Step 3: Balancing the worksheet involves the same steps learned in Chapter 8. Total the last four columns, calculate the difference between the two income statement columns, and two balance sheet columns. Both differences have to be the same. If they are not, the work sheet does not balance and contains one or more errors.

18. BAF3M1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9.3

19. Closing Entries  The final stage of the accounting cycle is ___ _____________ ______ ____________ _____ ______ ________ ____________ ____________  To do this, we must understand which accounts have balances that continue from one period to the next

20. Real Accounts and Nominal Accounts  All asset and liability accounts, as well as the capital account, are called real accounts. ________ _____________ have balances that continue into the next fiscal period.  On the other hand, revenue, expense, and drawings accounts are known as nominal accounts. _______________ ____________ have balances that do not continue into the next fiscal period. All nominal accounts begin each fiscal period with a nil (0) balance.

21. Income Summary account  A special account called Income Summary account, is used only during the closing entry process. The Income Summary account ________________ the _______________ and _____________of the period.  The ______________ _______________ in this account represent either the amount of net income or the amount of net loss.