THE COMPLETE ACCOUNTING CYCLE

THE COMPLETE ACCOUNTING CYCLE
A DAC 101 PRESENTATION BY H ONDIGO SCHOOL OF BUSINESS UNIVERSITY OF NAIROBI

Presentation Objectives
Understand basic accounting terminology. Explain double-entry rules. Identify steps in the accounting cycle. Record transactions in journals, post to ledger accounts, and prepare a trial balance. Explain the reasons for preparing adjusting entries. Prepare financial statement from the adjusted trial balance. Prepare closing entries. Preparing reversing entries Using a worksheet 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

The Accounting Information System Accounting Information System
The Accounting Cycle Basic terminology Debits and credits Accounting equation Financial statements and ownership structure Identifying and recording Journalizing Posting Trial balance Adjusting entries Adjusted trial balance Preparing financial statements Closing Post-closing trial balance Reversing entries Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

Accounting Information System
Accounting Information System (AIS) Collects and processes transaction data. Disseminates the information to interested parties.

Accounting Information System
Helps management answer such questions as: How much and what kind of debt is outstanding? Were sales higher this period than last? What assets do we have? What were our cash inflows and outflows? Did we make a profit last period? Are any of our product lines or divisions operating at a loss? Can we safely increase our dividends to stockholders? Is our rate of return on net assets increasing?

Basic Terminology Accounts & General ledger Journal Posting
Event & Transaction Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries

Accounts Business people need to be able to retrieve transaction data quickly and in usable form. A filing system consisting of accounts is used to sort out or classify all the transactions that occur in a business. Accounts are the basic storage unit for accounting data and are used to accumulate amounts from similar transactions.

Accounts An account is the means by which management accumulates the effects of transactions; it is the basic storage unit for accounting data. The title should describe what is recorded in the account The general ledger is the file or book in which the company’s accounts are kept.

The general ledger may be manual or computer-based.
Accounts cont… An accounting system has a separate account for each asset, liability, and each component of stockholders’ equity, including revenues and expenses. A small organization may have only a few dozen accounts; a multinational corporation may require thousands of accounts. The group of company accounts is known as the general ledger or simply ledger. The general ledger may be manual or computer-based.

Accounts are numbered to make them easy to find.
Chart of Accounts Accounts are numbered to make them easy to find. The list of all account numbers and names is known as the chart of accounts. Accounts are numbered for processing and reference purposes. The account number may be coded to provide information about the account. An asset account typically starts with 1. A liability account typically starts with 2.

Equity Accounts Revenue and expense accounts are separated from other owner’s equity accounts.

Equity Accounts cont… The company’s act requires that capital investments and withdrawals be separated from revenues and expenses for income tax reporting, financial reporting, and other purposes. Management needs a detailed breakdown of revenues and expenses for budgeting and operating purposes Accounting gives management information about whether it has achieved its primary goal of earning a net income.

Relationship of Equity Accounts

The Double Entry System
Described by Fra Luca Pacioli, Italy, 1494 Principle of duality. Each transaction must be recorded with at least one debit and one credit so that monetary value of debits and credits are equal. The whole system is always in balance. All accounting systems are based on the principle of duality.

Analyzing and Processing Transactions
Every transaction affects at least two accounts. Total debits must equal total credits. Assets = Liabilities + Owner’s Equity. Assets = Liabilities OE Debit for increases (+) Credit decreases (-)

Application of Debit/Credit Rules to OE
Assets = Liabilities + Capital - Withdrawals + Revenues - Expenses Debit is commonly abbreviated Dr. Credit is commonly abbreviated Cr.

Arrangement of the Accounting Equation
The accounting equation can be rearranged to shift withdrawals and expenses to the left side. Assets + Withdrawals + Expenses = Liabilities + Capital + Revenues

Analyzing and Processing Transactions

Steps in Analyzing and Processing Transactions
Analyze the transaction to determine its effect on assets, liabilities, and OE. Supported by a source document. Apply the rules of double entry. Dr. increases an asset. Cr. increases a liability. Etc.

Steps in Analyzing and Processing Transactions (continued)
Record the entry. Enter in chronological order in a journal. Enter the date/debit account/debit amount on one line. Enter the credit account/credit amount indented on the next line. Dr. Cr. June Cash ,000 Notes Payable ,000 This form is called journal form and is followed by an explanation.

Steps in Analyzing and Processing Transactions (continued)
Post the entry. Post the entry to the general ledger by transferring the date and amount to the proper account. Prepare the trial balance to confirm the balance of the accounts. Confirm that the accounts are still in balance after recording and posting transactions.

Recording and Posting Transactions
Transactions are recorded in the General Journal and posted to the General Ledger.

Procedure for Recording a Journal Entry
Record the date For subsequent entries, only show date changes. Write the accounts to be debited and credited, followed by an explanation. Use exact account names. Start debit accounts on the left. Indent credit accounts. Explanation should be brief, but sufficient. Note: a transaction can have more than one debit or credit entry (a compound entry).

Procedure for Recording a Journal Entry (continued)
Write the debit amounts in the debit column and the credit amounts in the credit column. Nothing in the Post. Ref. Column (until you post to the general ledger). Skip a line after each entry.

Also called “the book of original entry.”
The General Journal Also called “the book of original entry.” Journal entries are made in chronological order. A separate journal entry is made for each transaction (journalizing). Later, the debit and credit portions of the entry are transferred to the general ledger.

Posting – transferring information from the journal to the ledger.
Posting to the Ledger Posting – transferring information from the journal to the ledger. Performed on a daily basis, or less frequently if there are few transactions. Locate the debit account named in journal transaction. Enter date, Enter debit amount in Debit column. Repeat 1-3 for credit side of journal entry.

Illustration Now let us Apply the steps for transaction analysis and processing to simple transactions

Jan1. Joan Miller begins business and deposits $ 10,000 in the business account JM & Associates .
Dr Cr. Jan. 1 Cash ,000 Joan Miller, Capital ,000 Cash Jan. 1 JM Capital l0,000 Joan Miller, Capital Jan. 1 Cash ,000

Jan 2. The business Rents an office, pays $800 rent in advance.
Dr Cr. Jan. 2 Prepaid Rent Cash Cash Jan. 1 Capital 10,000 Jan Prepaid rent Prepaid Rent Jan. 2 Cash

Jan 4 .Purchases art equipment, $4,200, with cash.
Dr Cr. Jan. 4 Art Equipment ,200 Cash ,200 Cash Jan. 1 Capital ,000 Jan. 2 Prepaid Rent Jan 4 Art Equipment ,200 Art Equipment Jan. 4 Cash ,200

Jan 5. Purchases office equipment, $3,000, pays $1,500 in cash and agrees to pay the rest next month. Dr Cr. Jan. 5 Office Equipment ,000 Cash ,500 Accounts Payable ,500 Cash Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment ,500 Jan. 1 Capital ,000 Office Equipment Jan. 5 Cash &Ac Payable 3,000 Accounts Payable Jan. 5 Office Equipment ,500

Jan 6. Purchases art supplies, $1,800, and office supplies, $800, on credit.
Dr Cr. Jan. 6 Art Supplies ,800 Office Supplies Accounts Payable ,600 Art Supplies Jan Ac Payable ,800 Office Supplies Jan. 6 Acc Payable Accounts Payable Jan. 5 Off. Equipment ,500 6 Art & Off. Supplies ,600

Jan 8. Pays for a one-year insurance policy with cash of $480.
Dr Cr. Jan. 8 Prepaid Insurance Cash Cash Jan. 1 JM Capital ,000 Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment 1,500 8 Prepaid Insurance Prepaid Insurance Jan. 8 Cash

Jan 9. Pays $1,000 of amount owed to Taylor Supply Co.
Dr Cr. Jan. 9 Accounts Payable ,000 Cash ,000 Cash Jan. 1 JM Capital 10,000 Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment 1,500 8 Prepaid Insurance 9 Accounts Payable 1,000 Accounts Payable Jan. 9 Cash ,000 Jan. 5 Off. Equipment ,500 6 Art & Off. Supplies 2,600

Jan 10. Collects a fee of $1,400 for placing advertisements.
Dr Cr. Jan Cash ,400 Advertising Fees Earned ,400 Cash Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment 1,500 8 Prepaid Insurance 9 Accounts Payable 1,000 Jan. 1 Capital , Ad Fee Earned 1,400 Advertising Fees Earned Jan. 10 Cash ,400

Jan 12. Pays the secretary two weeks’ wages, $600.
Dr Cr. Jan Wages Expense Cash Cash Jan. 1 Capital 10,000 Ad Fee Earned 1,400 Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment 1,500 8 Prepaid Insurance 9 Accounts Payable ,000 12 Wages Expense Wages Expense Jan Cash

Jan 15. Accepts $1,000 for art work to be done for another agency.
Dr Cr. Jan Cash ,000 Unearned Art Fees ,000 Cash Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment 1,500 8 Prepaid Insurance 9 Accounts Payable ,000 12 Wages Expense Jan. 1 Capital , Ad Fee Earned 1,400 15 Unearned ArtFee1,000 Unearned Art Fees Jan. 15 Cash ,000

Jan 19. Performs a service for $2,800. Fee to be collected next month.
Dr Cr. Jan Accounts Receivable ,800 Advertising Fees Earned ,800 Accounts Receivable Jan. 19 Adv Fee Earned 2,800 Advertising Fees Earned Jan. 10 Cash ,400 19 Accounts Receivable 2,800

Jan 26 . Pays the secretary two more weeks’ wages, $600.
Dr Cr. Jan. 26 Wages Expense Cash Cash Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment ,500 8 Prepaid Insurance 9 Accounts Payable ,000 12 Wages Expense 26 Wages Expense Jan. 1 Capital , Ad Fee Earned 1,400 15 Unearned ArtFee1,000 Wages Expense Jan Cash 26 Cash

Jan 29. Receives and pays the utility bill, $100.
Dr Cr. Jan. 29 Utilities Expense Cash Cash Jan. 1 Capital , Ad Fee Earned 1,400 15 Unearned ArtFee1,000 Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment ,500 8 Prepaid Insurance 9 Accounts Payable ,000 12 Wages Expense 26 Wages Expense 29 Utilities Expense Utilities Expense Jan. 29 Cash

Jan 30. Receives (but does not pay) telephone bill, $70.
Dr Cr. Jan. 30 Telephone Expense Accounts Payable Telephone Expense Jan. 30 Acc Payable Accounts Payable Jan. 9 Cash ,000 Jan. 5 Off. Equipment ,500 6 Off. Supplies ,600 30 Telephone Expense

Jan 31. Withdraws $1,400 for personal expenses.
Dr Cr. Jan J.M Withdrawals ,400 Cash ,400 Cash Jan. 1 Capital , Ad Fee Earned 1,400 15 Unearned ArtFee1,000 Jan. 2 Prepaid Rent 4 Art Equipment ,200 5 Office Equipment ,500 8 Prepaid Insurance 9 Accounts Payable ,000 12 Wages Expense 26 Wages Expense 29 Utilities Expense 31 J.M Withdrawals ,400 J.M Withdrawals Jan Cash ,400

Footing/Casting of the accounts
Before a Trial Balance is prepared accounts are footed/ balanced, If Debit entries are greater than Credit entries, the account will have a debit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 Transaction #2 Transaction #3 8,000 $15,000 Balance c/d $18,000 $18,000 Balance b/d $15,000

Footing/Casting of the accounts cont…
If Credit entries are greater than Debit entries, the account will have a credit balance. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance c/d 1,000 $11,000 $11,000 1,000 Balance b/d

Cash Account Jan. 2 Prepaid Rent 800 Jan. 1 Capital 10,000
4 Art Equipment ,200 5 Office Equipment ,500 8 Prepaid Insurance 9 Accounts Payable ,000 12 Wages Expense 26 Wages Expense 29 Utilities Expense 31 J M Withdrawals ,400 Balance c/d ,720 12,400 Jan. 1 Capital ,000 10 Ad Fee Earned ,400 15 Unearned Art Fee ,000 12,400 Bal b/d 1,720

The total of debits and credits in the accounts must be equal.
The Trial Balance The total of debits and credits in the accounts must be equal. A trial balance is prepared periodically (usually on the last day of the month) to test this equality. Steps in preparing a trial balance: List each ledger account that has a balance, debit balances in the left column, credit balances in the right column. Add (foot) each column. Compare the totals of the two columns.

Now prepare the trial balance of JM & Associates as at 31 January 2012
Task Now prepare the trial balance of JM & Associates as at 31 January 2012

The Trial Balance cont…
An account may have a balance other than its normal balance. An asset account may have a credit balance. A liability account may have a debit balance. The trial balance proves whether or not the total of all debits recorded equals the total of all credits recorded. It does not prove that the transactions were analyzed correctly or recorded for the correct amounts or in the proper accounts. It cannot identify transactions that were completely omitted.

If the Trial Balance does not Balance
Possible Reasons A debit was entered as a credit, or vice versa. The balance of an account was computed incorrectly. An error was made in carrying the account balance to the trial balance. The trial balance was footed incorrectly.

Discussion Question a. Analysis of the transaction Answer.
Arrange the following six items in sequence to show the flow of events through the accounting system: a. Analysis of the transaction b. Debits and credits posted from the journal to the ledger c. Occurrence of a business transaction d. Preparation of the financial statements e. Entry made in the journal f. Preparation of the trial balance Answer. c a e b f d

The Accounting Cycle Transactions 9. Reversing entries
1. Journalization 8. Post-closing trail balance 2. Posting 7. Closing entries 3. Trial balance 6. Financial Statements Work Sheet 4. Adjustments 5. Adjusted trial balance

Comprehensive Illustration
Now let us Apply the steps for transaction analysis and processing to a comprehensive class illustration from journalizing up to the reversing entries

Journalizing & Posting
1. October 1: Stockholders invest $100,000 cash in an advertising venture to be known as Pioneer Advertising Agency Inc. Oct. 1 Cash 100,000 Common stock 100,000 Cash Common Stock Debit Credit Debit Credit 100,000 100,000

2. October 1: Pioneer Advertising purchases office equipment costing $50,000 by signing a 3-month, 12%, $50,000 note payable. Oct. 1 Office equipment 50,000 Notes payable 50,000 Office Equipment Notes Payable Debit Credit Debit Credit 50,000 50,000

3. October 2: Pioneer Advertising receives a $12,000 cash advance from KC, a client, for advertising services that are expected to be completed by December 31. Oct. 2 Cash 12,000 Unearned service revenue 12,000 Cash Unearned Service Revenue Debit Credit Debit Credit 100,000 12,000 12,000

4. October 3: Pioneer Advertising pays $9,000 office rent, in cash, for October. Oct. 3 Rent expense 9,000 Cash 9,000 Cash Rent Expense Debit Credit Debit Credit 100,000 9,000 9,000 12,000

5. October 4: Pioneer Advertising pays $6,000 for a one-year insurance policy that will expire next year on September 30. Oct. 4 Prepaid insurance 6,000 Cash 6,000 Cash Prepaid Insurance Debit Credit Debit Credit 100,000 9,000 6,000 12,000 6,000

6. October 5: Pioneer Advertising purchases, for $25,000 on account, an estimated 3-month supply of advertising materials from Aero Supply. Oct. 5 Advertising supplies 25,000 Accounts payable 25,000 Advertising Supplies Accounts Payable Debit Credit Debit Credit 25,000 25,000

7. October 9: Pioneer Advertising signs a contract with a local newspaper for advertising inserts (flyers) to be distributed starting the last Sunday in November. Pioneer will start work on the content of the flyers in November. Payment of $7,000 is due following delivery of the Sunday papers containing the flyers.

8. October 20: Pioneer Advertising’s board of directors declares and pays a $5,000 cash dividend to stockholders. Oct. 20 Dividends 5,000 Cash 5,000 Cash Dividends Debit Credit Debit Credit 100,000 9,000 5,000 12,000 6,000 5,000

9. October 26: Employees are paid every four weeks. The total payroll is $2,000 per day. The pay period ended on Friday, October 26, with salaries of $40,000 being paid. Oct. 26 Salaries expense 40,000 Cash 40,000 Cash Salaries Expense Debit Credit Debit Credit 100,000 9,000 40,000 12,000 6,000 5,000 40,000

10. October 31: Pioneer Advertising receives $28,000 in cash and bills Copa Company $72,000 for advertising services of $100,000 provided in October. Oct. 31 Cash 28,000 Accounts receivable 72,000 Service revenue 100,000 Cash Accounts Receivable Service Revenue Debit Credit Debit Credit Debit Credit 100,000 9,000 72,000 100,000 12,000 6,000 28,000 5,000 40,000 8,000

TheTrial Balance Trial Balance – A list of each account and its balance; used to prove equality of debit and credit balances.

Adjusting Entries Revenues - recorded in the period in which they are earned. Expenses - recognized in the period in which they are incurred. Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed.

Types of Adjusting Entries
Prepayments Accruals 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded.

Adjusting Entries for Deferrals
Deferrals are either prepaid expenses or unearned revenues.

Adjusting Entries for “Prepaid Expenses”
Payment of cash that is recorded as an asset because service or benefit will be received in the future. Cash Payment Expense Recorded BEFORE Prepayments often occur in regard to: insurance supplies advertising rent maintenance on equipment fixed assets

Supplies. Pioneer purchased advertising supplies costing $25,000 on October 5 on Account. Prepare the journal entry to record the purchase of the supplies. Oct. 5 Advertising supplies 25,000 Accounts Payable 25,000 Advertising Supplies Accounts Payable Debit Credit Debit Credit 25,000 25,000

Supplies. An inventory count at the close of business on October 31 reveals that $10,000 of the advertising supplies are still on hand. Oct. 31 Advertising supplies expense 15,000 Advertising supplies 15,000 Advertising Supplies Expense Advertising Supplies Debit Credit Debit Credit 25,000 15,000 15,000 10,000

Statement Presentation: Advertising supplies identifies that portion of the asset’s cost that will provide future economic benefit.

Statement Presentation: Advertising expense identifies that portion of the asset’s cost that expired in October.

Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire insurance policy, beginning October 1. Show the entry to record the purchase of the insurance. Oct. 4 Prepaid insurance 6,000 Cash 6,000 Prepaid Insurance Cash Debit Credit Debit Credit 6,000 6,000

Insurance. An analysis of the policy reveals that $500 ($6,000 / 12) of insurance expires each month. Thus, Pioneer makes the following adjusting entry. Oct. 31 Insurance expense 500 Prepaid insurance 500 Prepaid Insurance Insurance Expense Debit Credit Debit Credit 6,000 500 500 5,500

Statement Presentation: Prepaid insurance identifies that portion of the asset’s cost that will provide future economic benefit.

Statement Presentation: Insurance expense identifies that portion of the asset’s cost that expired in October.

Depreciation. Pioneer Advertising estimates depreciation on its office equipment to be $400 per month. Accordingly, Pioneer recognizes depreciation for October by the following adjusting entry. Oct. 31 Depreciation expense 400 Accumulated depreciation 400 Depreciation Expense Accumulated Depreciation Debit Credit Debit Credit 400 400

Statement Presentation: Accumulated Depreciation—is a contra asset account.

Statement Presentation: Depreciation expense identifies that portion of the asset’s cost that expired in October.

Adjusting Entries for “Unearned Revenues”
Receipt of cash that is recorded as a liability because the revenue has not been earned. Cash Receipt BEFORE Revenue Recorded/Earned Unearned revenues often occur in regard to: Rent Airline tickets Tuition fee received in advance Magazine subscriptions Customer deposits Mobile Airtime

Unearned Revenue. Pioneer Advertising received $12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd. Oct. 2 Cash 12,000 Unearned advertising revenue 12,000 Cash Unearned Rent Revenue Debit Credit Debit Credit 12,000 12,000

Unearned Revenues. Analysis reveals that Pioneer earned $4,000 of the advertising services in October. Thus, Pioneer makes the following adjusting entry. Oct. 31 Unearned service revenue 4,000 Service revenue 4,000 Service Revenue Unearned Service Revenue Debit Credit Debit Credit 100,000 4,000 12,000 4,000 8,000

Statement Presentation Unearned service revenue identifies that portion of the liability that has not been earned.

Adjusting Entries for Accruals
Accruals are either accrued revenues or accrued expenses.

Adjusting Entries for “Accrued Revenues”
Revenues earned but not yet received in cash or recorded. Adjusting entry results in: Revenue Recorded Cash Receipt BEFORE Accrued revenues often occur in regard to: rent interest services performed

Adjusting Entries for “Accrued Revenues”
Accrued Revenues. In October Pioneer earned $2,000 for advertising services that it did not bill to clients before October 31. Thus, Pioneer makes the following adjusting entry. Oct. 31 Accounts receivable 2,000 Service revenue 2,000 Accounts Receivable Service Revenue Debit Credit Debit Credit 72,000 100,000 2,000 4,000 2,000 74,000 106,000

Statement Presentation

Adjusting Entries for “Accrued Expenses”
Expenses incurred but not yet paid in cash or recorded. Adjusting entry results in: Expense Recorded Cash Payment, if any* BEFORE Accrued expenses often occur in regard to: rent interest taxes salaries bad debts*

Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1. The note requires interest at an annual rate of 12 percent. Three factors determine the amount of the interest accumulation: 1 2 3

Accrued Interest. Pioneer signed a three-month, 12%, note payable in the amount of $50,000 on October 1. Prepare the adjusting entry on Oct. 31 to record the accrual of interest. Oct. 31 Interest expense 500 Interest payable 500 Interest Expense Interest Payable Debit Credit Debit Credit 500 500

Accrued Salaries. The employees receive total salaries of $10,000 for a five-day work week, or $2,000 per day. At October 31, the salaries for these days represent an accrued expense and a related liability to Pioneer..

Accrued Salaries. Employees receive total salaries of $10,000 for a five-day work week, or $2,000 per day. Prepare the adjusting entry on Oct. 31 to record accrual for salaries. Oct. 31 Salaries expense 6,000 Salaries payable 6,000 Salaries Expense Salaries Payable Debit Credit Debit Credit 40,000 6,000 6,000 46,000

Accrued Salaries. On November 23, Pioneer will again pay total salaries of $40, Prepare the entry to record the payment of salaries on November 23. Nov. 23 Salaries payable 6,000 Salaries expense 34,000 Cash 40,000 Salaries Expense Salaries Payable Debit Credit Debit Credit 34,000 6,000 6,000

Bad Debts. Assume Pioneer reasonably estimates a bad debt expense for the month of $1,600. It makes the adjusting entry for bad debts as follows.

Adjusted Trial Balance
Shows the balance of all accounts, after adjusting entries, at the end of the accounting period.

Preparing Financial Statements
Financial Statements are prepared directly from the Adjusted Trial Balance. Income Statement Statement of Retained Earnings Balance Sheet

Preparing Financial Statements

To transfer net income or net loss to owner’s equity.
Closing Entries To reduce the balance of the income statement (revenue and expense) accounts to zero. To transfer net income or net loss to owner’s equity. Statement of Financial Position accounts (asset, liability, and equity) are not closed. Dividends are closed directly to the Retained Earnings account.

Closing Journal Entries:
Closing Entries Closing Journal Entries: Retained earnings 5,000 Dividends 5,000 Service revenue 106,000 Income Summary 106,000 Income summary 73,000 Salaries expense 46,000 Advertising expense 15,000 Rent expense 9,000 Insurance expense 500 Interest expense 500 Depreciation expense 400 Bad debt expense 1,600

Closing Entries LO 7 Prepare closing entries.

Post-Closing Trial Balance

Accounting Cycle Summarized
Enter the transactions of the period in appropriate journals. Post from the journals to the ledger (or ledgers). Take an unadjusted trial balance (trial balance). Prepare adjusting journal entries and post to the ledger(s). Take a trial balance after adjusting (adjusted trial balance). Prepare the financial statements from the second trial balance. Prepare closing journal entries and post to the ledger(s). Take a trial balance after closing (post-closing trial balance). Prepare reversing entries (optional) and post to the ledger(s).

Reversing Entries After preparing the financial statements and closing the books, a company may reverse some of the adjusting entries before recording the regular transactions of the next period.

Reversing Entries cont…
Summary of Reversing Entries All accruals should be reversed. All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed. Adjusting entries for depreciation and bad debts are not reversed. Recognize that reversing entries do not have to be used. Therefore, some accountants avoid them entirely.

Illustration of Reversing Entries—Accruals Illustration 3B-1

Illustration of Reversing Entries—Deferrals

USING A WORKSHEET A company prepares a worksheet either on
columnar paper or within an electronic spreadsheet. A company uses the worksheet to adjust account balances and to prepare financial statements.

USING A WORKSHEET cont…
Preparing Financial Statements from a Worksheet The Worksheet: provides information needed for preparation of the financial statements. Sorts data into appropriate columns, which facilitates the preparation of the statements.

Adjusted Trial Balance

THE END THANK YOU

THE COMPLETE ACCOUNTING CYCLE

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THE COMPLETE ACCOUNTING CYCLE

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