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1、Dont forget yourPASS Session!,In Autumn 2011,students who regularly*attended PASS scored 11 marks higher on average than non-attending students.Students who did not attend PASS were also 5 times as likely to fail.,Chapter 3:Adjusting the accounts,Week 3,2,BEFORE WE START.,C=CREDIT,D=DEBIT,Normal bal
2、ance of these accounts is a debit.To increase balance debit again,to decrease credit out of the account.,Normal balance of these accounts is a credit.To increase balance credit again,to decrease debit out of the account.,Before we start,4,DRD+A+X=C+I+LCRWhat is the normal balance ofAccounts receivab
3、le?Accounts payable?Machinery?Tax expense?Dividends/Drawings?Share capital?Retained earnings?Sales revenue?,Before we start,Last week we looked at transactions analysis,journal entries and general ledger accountsElena Lee example,5,1 October,office rent for October is paid in cash,$1800,The expense
4、Rent is increased$1800 because the payment pertains only to the current month;the asset Cash is decreased$1800,Debits increase expenses:debit Rent Expense$1800Credits decrease assets:credit Cash$1800,Before we start,6,Debits increase expenses:debit Rent Expense$1800Credits decrease assets:credit Cas
5、h$1800,This week,7,Accrual versus cash basis of accountingRevenue recognition criteriaExpense recognition criteriaTypes of adjusting entriesPrepaymentsAccrualsAdjusted trial balanceWorksheetsFinancial statements from worksheets,Accrual versus cash basis of accounting,Cash-based accounting,Accrual-ba
6、sed accounting,8,Revenue recognised when the cash is received or paid.Expenses recognised when the cash is received or paid,Revenue recognised when goods and services are providedExpenses recognised when assets are consumed or liabilities incurred,Cash versus accrual basis,9,Accrual basis Income exa
7、mple:assume Penny received$20,000 in cash for sales during 2011 and charged clients$2,400 which was to be paid in the following year.How much revenue should Penny record for 2011?Revenue for 2010 would be$22,400Why?Sales Cash$20,000Sales Accounts receivable$2,400Total sales for 2011$22,400,Cash vers
8、us accrual basis,10,Accrual basis Expenses example:Pennys phone bill for March was$400 but she doesnt receive the bill until April.When should Penny record the telephone expense?The$400 is still a March expense because this is the period in which the expense was incurred.The actual cash wont go out
9、until April,but the expense is still a March expense.,Why do we need adjusting entries?,11,Its a timing issue and related to the period assumption.Because sometimes transactions effect two or more accounting periods we need to make sure income and expenses are recorded in the correct period We need
10、to make sure that asset and liability balances are accurately reflected at the end of the accounting periodAdjusting entries occur after the transactions have been recorded and posted,but before the financial statements are prepared,Types of adjusting entries,12,Types of adjusting entries,13,Adjusti
11、ng entries,14,One side of the adjusting journal entry affects an account reported in the income statement(ie revenue or expense)and the other side of the entry affects an account recorded in the balance sheet(asset or liability)The cash account is never adjusted because the cash flow occurs before o
12、r after the reporting date,An example:Bazinga Inc,15,Bazinga Inc is a comic book store in Pasadena,California.It is owned and managed by four friends:Sheldon,Leonard,Howard,and Raj.The Trial Balance as at June 2010 for the company,before adjusting entries are made,is shown on the following slide,16,
13、An example:Bazinga Inc,year end info,When doing adjusting entries,you will need to determine what information is available at the end of the accounting period so that you can calculate the correct balances for assets and liability accounts and determine the amounts to be included as revenue and expe
14、nses.In ACCY901,this type of information will be given to you.(a)Supplies on hand at the end of the period were$8,000(b)The useful life of shop fittings was 5 years and the residual value is$5,000.(c)A three year insurance policy was purchased on 1 July 2009.(d)The business employs one sales assista
15、nt who is paid$1,000 for a five day working week and is paid every Friday.Balance day is a Wednesday.(e)Comic books worth$3,500 were sent to a collector with an invoice on 29 June 2010.(f)The subscription revenue recorded in the unearned revenue account were for a two-year period,therefore half of t
16、his money was earned at year end,17,(a)Supplies on hand at the end of the period were$8,000,Type of adjusting entry prepayment cost paid for before consumedIn the unadjusted trial balance,supplies at the beginning of the period were$12,500Therefore,an adjusting entry is required to reduce the balanc
17、e to$8,000,(b)The useful life of shop fittings was 5 years and the residual value is$5,000.,Type of adjusting entry prepayment depreciationAdjusting entry for depreciation expenseAnnual depreciation expense=(cost residual value)/estimated useful lifeAnnual depreciation expense=($15,000-$5,000)/5 yea
18、rs,(c)A three year insurance policy was purchased on 1 July 2009.,Type of adjusting entry prepayment prepaid expenseInsurance policy purchased at the beginning of the current year.Valid for three years.Adjusting entry records expiration of policy over this period.,(d)The business employs one sales a
19、ssistant who is paid$1,000 for a five day working week and is paid every Friday.Balance day is a Wednesday.,Type of adjusting entry accrual unrecorded expensesWork out:how much is paid per day AND how many days fall between date of last pay and balance date.,(e)Comic books worth$3,500 were sent to a
20、 collector with an invoice on 29 June 2010.,Type of adjusting entry accrual unrecorded revenueAdjusting entry for unrecorded revenue,(f)The subscription revenue recorded in the unearned revenue account were for a two-year period,therefore half of this money was earned at year end,Type of adjusting e
21、ntry deferral unearned revenueAdjusting entry for unearned revenue now earned,An example:Bazinga Inc,24,Once adjusting entries are posted to ledger accounts,new totals are calculated and an adjusted trial balance is takenAfter the adjusting process is completed,the adjusted trial balance is used to
22、prepare the financial statementsWe will use worksheets to help us with this process,Using a worksheet,25,Why use a worksheet?It helps to compile the information necessary for the preparation of the financial statementsThe balances of ledger accounts appear in one locationThe affect of adjustments ca
23、n be viewed easily and corrected if necessaryBecause the adjusted trial balance is easily visible,the worksheet can simplify the preparation of financial statements,What does a worksheet look like?,26,An example:Bazinga Inc,27,Once the adjustments are entered,the adjusted balances are extended to th
24、e appropriate columns in the adjusted trial balance.Expenses debit columnRevenue credit columnAssets and dividends/drawings debit columnsLiabilities,equity,contra assets credit columns,28,An example:Bazinga Inc,29,Finally,the amounts in the adjusted trial balance are entered in the income statement
25、and balance sheet columns.Expenses=debit column of income statementRevenue=credit column of income statementAssets and dividends/drawings=debit column of balance sheetLiabilities,equity,contra assets=credit column of balance sheetThese columns are then used to prepare the financial statements,30,Inc
26、ome statement from worksheet,31,Statement of changes in equity,32,Balance sheet from worksheet,33,Chapter 4:Completion of the accounting cycle,Week 3,34,Closing entries,To make the accounts ready for the next accounting period,the books must be closed.Understand the difference betweenTemporary(or no
27、minal)accountsPermanent(or real)accountsTemporary accounts include all the income statement accounts and dividend/drawing accounts that are useful for one period only(to determine profit for the year).These accounts are closed at the end of the year.Permanent accounts include all balance sheet accou
28、nts and relate to one or more accounting periods.These accounts are not closed.,35,Preparing closing entries,Closing entries Formally transfer profit or loss and owners drawings or dividends to owners capitalProduce a zero balance in each temporary accountProfit and Loss SummaryThis is another tempo
29、rary account which is used to help with the closing processThis account is also closed(example coming!),36,The closing process,1 Close revenue accounts to Profit and Loss Summary2 Close expenses accounts to Profit and Loss Summary,37,1,2,The closing process continued,3 Close Profit&Loss Summary to R
30、etained earnings,38,3,The closing process continued,4 Close Dividends to Retained earnings,39,4,Closing Entries Illustrated:Bazinga Inc,40,GENERAL JOURNAL J3Date Account titles and explanations Ref.Debit Credit2010June 30 Sales Revenue 32 250 Profit&Loss Summary 32 250(To close income account)30 Pro
31、fit&Loss Summary 8 100 Supplies Expense 4 500 Depreciation Expense-fittings 2 000 Insurance Expense 1 000 Salaries Expense 600(To close expense accounts)30 Profit&Loss Summary 24 150 Retained earnings 24 150(To close Profit and Loss Summary account and transfer profit to Retained Earnings)IF THERE H
32、AD BEEN A DIVIDEND PAID 30 Retained earnings 500 Dividends 500(To close dividends and recognise decrease in retained earnings),1,2,3,4,Post closing entries,Temporary accountsAll will have zero balances after posting the closing entriesAll revenue and expense accounts are totalled,balanced and double
33、-ruledRetained earnings Balance represents total retained earnings at end of accounting periodNo entries are journalised and posted to retained earnings during the yearPermanent accounts Not closed(assets,liabilities,equity),41,Preparing a post-closing trial balance,A post-closing trial balance is a
34、 list of all permanent accounts and their balances after closing entries are journalised and postedThe purpose of the post-closing trial balance is to prove the equality of the permanent accounts that are carried forward to the next accounting period,42,Preparing a post-closing trial balance continu
35、ed,43,SUMMARY OF THE ACCOUNTING CYCLE,Analyse business transactionsJournalise the transactionsPost to ledger accountsPrepare a trial balanceJournalise and post adjusting entries:prepayments/accrualsPrepare an adjusted trial balancePrepare financial statementsIncome statementStatement of changes in equityStatement of financial positionJournalise and post closing entriesPrepare a post-closing trial balance,44,
