1. Chapter 8 – Completing the Accounting Cycle
BAF3M Accounting
Chapter 8 – Completing the Accounting Cycle

2. 8.1 The Adjustment Process
Accountants need to ensure that the statements they produce are:
Up to Date, Accurate, Consistent
Adjustments are necessary to ensure
Accounts are brought up to date
All late transactions are taken into account
All calculations are correct
All accounting standards have been complied with

3. 8.1 The Adjustment Process
During the course of the fiscal period, things are allowed to get out of date
Adjusting entries get everything up-to-date and accurate again
Why allowed to go inaccurate?
Saves time, money, effort

4. 8.1 The Adjustment Process
We will look at the adjusting entries for four main areas
Supplies
Prepaid Expenses
Late Arriving Invoices
Unearned Revenue

5. Adjustment #1: Supplies
The Supplies balance shows the total supplies purchased in the year
Adjusting Entries

6. What is the Balance?
What the balance is

7. What Should The Balance Be?
What the balance should be?
What the balance “should be” is determined from someone counting the supplies that remain in the business at the end of the year

8. The Adjustment
The required adjustment

9. Introducing a New Account
What the balance is
- they haven’t used it yet because no one was went and physically taken an inventory of the expenses to see what has been used
The income statement account related to Supplies is shown above
The accounting clerk has not used this account during the year

10. Expense: What Should the Balance Be?
What the balance should be
What the balance “should be” is equal to the amount of supplies “used up” during the year

11. What the Adjustment Would Be
The required adjustment

12. What that Looks Like in the Journal
The adjusting entry as it would appear in the general journal

13. Adjustment #2: Prepaid Expenses
The Prepaid Insurance balance shows the total cost of insurance bought in the year
Adjusting Entries

14. What is the Balance?
What the balance is

15. What Should the Balance Be?
What the balance should be
What the balance “should be” is determined from someone calculating the portion of the insurance policy that is “unexpired” or “not used up yet, but paid for”

16. How did you Get $1200?
An Insurance policy was purchased on September 1st for one year. The fiscal period expires Dec. 31.
As of Dec. 31, how many months of insurance have been used ?
- 4 months have been used
Each month costs:
$1800 / 12mo. = $150
4 months have been used:
$150*4 = $600

17. The Adjustment
The required adjustment

18. Introducing Your 2nd New Account
What the balance is
The income statement account related to Prepaid Insurance is shown above
The accounting clerk has not used this account during the year

19. Expense: What Should the Balance Be?
What the balance should be
What the balance “should be” is the amount of the insurance policy that has expired at year’s end

20. What the Adjustment Should Be?
The required adjustment

21. What it Looks Like in the Journal
The adjusting entry for insurance as it would appear in the general journal

22. Adjustment #3: Late Arriving Invoices
The Accounts Payable balance does not include two invoices that arrived late
Adjusting Entries

23. Two late invoices have arrived
$212 for the Telephone Bill
$315 for the Utilities Bill

24. What is the Balance?
Little analysis is needed for this adjustment

25. The Adjustment
Simply enter the late invoices

26. The Adjustment contd.
Simply enter the late invoices

27. What Should the Balance Be?
And calculate the adjusted balance

28. Expense: What is the Balance?

29. The Adjustments

30. The What Should the Balance Be?

31. What that Looks Like in the Journal
The adjusting entry for late invoices as it would appear in the general journal

32. Summary 1 Adjusting Entries—Summary Balance Sheet
The adjusting entries have brought balance sheet accounts up to date

33. Summary 2 Adjusting Entries—Summary Balance Sheet Income Statement
And have recorded expenses in related accounts on the income statement

34. Adjusting for Unearned Revenue
Unearned Revenue is a liability – it occurs when you are paid in advance of providing a service.
If the accounting department puts advance payments into Revenue, this is an error that needs to be corrected:
DR Revenue (to reduce it); CR Unearned Revenue (to increase it)

35. Check your Understanding
See Textbook Tracker Sheet for the required Questions and Exercises for section 8.1

36. 8.2 Adjusting Entries and the Work Sheet
The work sheet is an informal accounting form used to help organize all of the financial data
There are 8 columns
Trial Balance DR/CR
Adjustments DR/CR
Income Statement DR/CR
Balance Sheet DR/CR

37. 8.2 Adjusting Entries and the Work Sheet
ADJUSTING FOR SUPPLIES
According to Global Logistics’ trial balance they have $ worth of supplies
However, once a physical inventory was completed on December 31, 2008 they discovered that they only had $ worth of supplies on hand

39. 8.2 Adjusting Entries and the Work Sheet
ADJUSTING FOR SUPPLIES
20--
Dec. 31 Supplies Expense
Supplies

41. 8.2 Adjusting Entries and the Work Sheet
ADJUSTING FOR INSURANCE USED
According to Global Logistics’ trial balance they have $6564 in prepaid insurance
They have$4070 remaining in unused insurance

42. 8.2 Adjusting Entries and the Work Sheet
ADJUSTING FOR INSURANCE USED
20--
Dec. 31 Insurance Expense 2494
Prepaid Insurance 2494

44. 8.2 Adjusting Entries and the Work Sheet
ADJUSTING FOR LATE ARRIVING INVOICES
Three late invoices in this example
Telephone $ 45
Truck Repair
Printer Repair
Total $626

45. 8.2 Adjusting Entries and the Work Sheet
20--
Dec. 31 Telephone expense
Truck expense 496
Miscellaneous expense 85
Accounts Payable

47. COMPLETING THE SHEET
From this point you complete the 8-column worksheet just as you completed the 6-column worksheet
Except as you transfer numbers to the correct column you may need to add or subtract the adjustments into the totals as necessary
Balance the columns using the “magical” number
Underline where necessary

49. 8.2 Adjusting Entries and the Work Sheet
Journalizing and Posting the Adjusting Entries
All the adjusting entries need to be properly journalized and posted to the ledger

50. 8.3 Preparing for New Fiscal Years
REAL ACCOUNTS – balances that continue into the next fiscal period ex. Bank, trucks, accounts payable etc.
NOMINAL ACCOUNTS – have balances that do not continue into the next fiscal period ONLY Expenses, drawing and revenue

51. 8.3 Preparing for New Fiscal Years
CLOSING OUT AN ACCOUNT – means to make it have no balance. Nominal accounts are closed out at the end of the fiscal period.
INCOME SUMMARY ACCOUNT – summarizes the revenues and expenses of the period. Represents either the net income or net loss for the fiscal period

52. 8.3 Preparing for New Fiscal Years
WHY DO WE CLOSE OUT ACCOUNTS? Closing these accounts allows us to plainly observe the previous year's effect on our revenue, expense, and drawings accounts. You can well imagine that if we did not close these accounts, their balances would build to outrageous amounts.

53. 8.3 Preparing for New Fiscal Years
HOW DO WE DO THIS?
The Order in Which we Close Out Accounts (p293)
Close out the revenue account(s) to the Income Summary account
Close out the expense account(s) to the Income Summary account
Close out the Income Summary account to the Capital account
Close out the Drawing account to the Capital account

54. 8.3 Preparing for New Fiscal Years
Closing Entry #1: Close out the revenue account(s) to the Income Summary account
Journal
Dec 31 Shipping Revenue
Income Summary
Because revenue is a CR balance account, a DR entry is needed to close it off

55. 8.3 Preparing for New Fiscal Years
Closing Entry #2: Close out the expense account(s) to the Income Summary account
Journal
Dec 31 Income Summary
Bank Charges Exp 3500
…(all exp listed here)
Insurance Exp 2494
Because expenses are a DR balance account, a CR entry is needed to close them off

56. 8.3 Preparing for New Fiscal Years
Closing Entry #3: Close out the Income Summary account to the Capital account
Journal
Dec 31 Income Summary
P. Marshall, Capital
If the Income Summary account has a CR balance, then a DR entry is needed to close it. (profit  capital increases)
If the Income Summary account has a DR balance, then a CR entry is needed to close it. (loss  capital decreases)

57. 8.3 Preparing for New Fiscal Years
Closing Entry #4: Close out the Drawing account to the Capital account
Journal
Dec 31 P. Marshall, Capital
P. Marshall, Drawings 42000
Because Drawings is a DR balance account, a CR entry is needed to close it

58. 8.3 Preparing for New Fiscal Years
Post-Closing Trial Balance
Checks the accuracy of the ledger after the adjusting and closing entries have been done
Example shown in Fig 8-10, Page 290

59. 8.4 Adjusting for Depreciation
What is it?
First let’s remember our definition for an expense
Something that we spend money on to make money
Based on this definition shouldn’t things like equipment or cars be expenses? We use these things to make money do we not?

60. 8.4 Adjusting for Depreciation
However, items such as a car don’t suddenly become worthless – it loses some of it’s value each year
So a portion of the cost of the equipment should be allocated as an expense in each year of the item’s life
This process meets the matching principle

61. 8.4 Adjusting for Depreciation
Depreciation  an allowance made for the decrease in value of an asset over time
Depreciation is an expense so it appears on the INCOME STATEMENT

62. 8.4 Adjusting for Depreciation
An anecdotal example
Read p about the depreciation of a company’s delivery van

63. 8.4 Adjusting for Depreciation
Methods
2 most common are:
Straight Line
Declining Balance

64. 8.4 Adjusting for Depreciation
Straight Line Method
Divides up the net cost of the asset equally over the years of the assets life
Straight Line for 1 yr =
(orig cost - estimated salvage value)
Estimated # of periods in the asset’s life

65. 8.4 Adjusting for Depreciation
Straight line Example
Tip Top Trucking purchased a truck for $78000 on Jan Truck could be used for 6 years, and be sold at that time for $7800.
Therefore:
Estimated Annual Depreciation is
($78000 – $7800) / 6 = $11700
The truck will depreciate $11700 each year.

66. 8.4 Adjusting for Depreciation
Recording Depreciation
Journal
Depreciation Expense – Truck 11700
Truck
The above work is correct, but not used by larger, computerized businesses…they use a new account called “Accumulated Depreciation”

67. 8.4 Adjusting for Depreciation
So the entry will look like this:
Journal
Depreciation Expense – Truck
Accumulated Depreciation - Truck
The use of the accumulated depreciation account provides 2 types of information:
1) By not taking the depreciation right off of the asset account we can still find the original cost of the asset
2) We can quickly calculate the total amount of depreciation recorded over the years

68. 8.4 Adjusting for Depreciation
Accumulated Depreciation is a CONTRA account
A contra account is one that is displayed alongside an associated account and has a balance that is opposite to that account

69. 8.4 Adjusting for Depreciation
Accumulated Depreciation is also a VALUATION account
One that is used together with an asset account to show the true net value of an asset

70. 8.4 Adjusting for Depreciation
Adjusting Entry for Depreciation
1) records the depreciation for the period in the depreciation expense account
2)Increases the appropriate accumulated depreciation account for the asset, which reduces the asset’s net book value
Journalized as…
Depreciation Exp $$$$
Acc. Dep. (Asset) $$$$

71. 8.4 Adjusting for Depreciation
Declining-balance Method
Allocates a greater amount of depreciation to the first years of an asset’s life
This is the method the government requires for income tax purposes
To find the depreciated amount you take the undepreciated cost of the asset and multiply it by a fixed %
This % is set by the gov’t
See schedule on p. 308