Topic 4 adjusting and closing the accounts PDF

TOPIC 4
COMPLETING THE
ACCOUNTING CYCLE
(ADJUSTING & CLOSING THE
ACCOUNTS)

PART 1- ADJUSTING
ENTRIES


TOPIC 4
PART 1 LEARNING
OBJECTIVES
On completion of this topic, you should be able to:
1. Differentiate between the cash basis and the accrual basis of
accounting.
2. Explain the criteria for revenue recognition and expense
recognition.
3. Explain why adjusting entries are needed and identify the major
types of adjusting entries.
4. Prepare adjusting entries for prepayments and accruals.
5. Describe the nature and purpose of the adjusted trial balance.


ACCRUAL vs CASH ACCOUNTING
• Transactions are
recorded when income
is earned or expenses
are incurred.
• Revenue & expense
recognition criteria

• Transactions are
recorded when cash is
paid or cash is
received.

(Conceptual Framework)

ACCRUAL

CASH

 Most businesses use ACCRUAL accounting
 ACCRUAL accounting is one of the key underlying assumptions that
contributes to providing useful accounting information to decision makers
 Because of ACCRUAL accounting we need to make end of period adjustments
to the accounts
Closing
entries

Adjusting
entries
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3


20/6/17

3,500

3,300

1/6/17

1,200 21/6/17
21/6/17
Bal 30/6

2,000 21/6/17

2,000
21,900

GENERAL JOURNAL
Date
1/6/17

Particulars

Post Ref

Prepaid Rent
Cash at Bank

DEBIT

120
100

3,300

Cash at Bank
Services Revenue

100
400

3,500

Salaries and Wages Expense
Cash at Bank

590
100

1,200

100
210

2,000

CREDIT
3,300

(Prepay 3 mths rent)
20/6/17

3,300

3,500

(Cash Revenue)

21/6/17

1/6/17

3,500 20/6/17
1,200

12,000 Bal 30/6

(Salaries Expense)
21/6/17

Cash at Bank
Unearned Revenue

2,000

(Deposit taken)
Kelly Cook e-Travel Pty Ltd
WORKSHEET
for period ending 30 June 2017

100
110
120

170
175
200
210
220
300
320
400
500
530
540
570
580
590

Account
Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip
Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense

Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense

Trial Balance
DEBIT
CREDIT
21,900
2,000
3,300
10,000

200
2,000
30,000

2,000
12,000
500
400
600
1,100
2,400
44,200

44,200

21/6/17

1,200

Bal 30/6

2,400


THE END-OFPERIOD PROCESS
TWO TYPES OF
ADJUSTING ENTRIES

Prepaid expenses

PREPAYMENTS

ACCRUALS
(Unrecorded)

Costs/expenses paid
before they are consumed
e.g. prepaid insurances
and rent, DEPRECIATION

Revenue received in
advance
Revenues that are collected
or received but not yet
earned
e.g. unearned services or
subscriptions revenue

Accrued expenses

Accrued revenues

Expenses incurred but not
yet paid
e.g. accrued wages

Revenue earned but not yet
received
e.g. accrued interest on a
term deposit
|
5


DEPRECIATIONis the Allocation of the
historic cost of an asset (less any residual)
over the useful life of that asset
• Recall on 2 May 2017 Kelly Cook eTravel P/L purchases
Office Furniture & Equipment paying $10,000 in cash.
• The furniture is expected to last for 5 years and be
worthless at the end of this period (zero residual).
• The cost of the furniture must be matched with the
accounting periods in which it was used to earn
revenue.

Depreciation Preview
STEP 1: Divide the cost of the asset by the number of
accounting periods in the asset’s useful life (10,000 / 5) =

2,000 per year
STEP 2: Calculate the depreciation expense amount for the
part year e.g. 2 month out of 12 (2,000 / 12 *2 = 333)
STEP 3: Do the adjusting entry by crediting the asset’s
contra-account and crediting depreciation expense.

CONTRA ACCOUNTS





A contra account is a
“companion account”.
Accumulated depreciation is
a contra account to PPE asset
account
A contra account’s normal
balance is opposite to that of
the companion account.
Users of financial statements
use this information in
decision making

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6


ADJUSTING ENTRIES

30-June-2017
Account for expiry of one month's rent
30-June-2017

Account for 2 months' depreciation of office furniture - straight line over 5 years

30-June-2017

Account for $500 service revenue from legal firm previously unearned, now earned

30-June-2017

Account for accrued salaries & wages for one week - $300

30-June-2017

Account for accrued service revenue of $400 from a customer, that is earned but not recorded

30/6/17

500

1,500 Bal 30/6

30/6/17 400
Bal 30/6 2,400

Date
30/6/17

Particulars

GENERAL JOURNAL
Post Ref
ADJUSTING ENTRIES

Rent Expense
Prepaid Rent

580
120

DEBIT

CREDIT

Depreciation Expense
Accumulated Depreciation PPE

1,100 30/6/17
2,200

1,100
1,100

(Adjust for one month’s rent)

30/6/17

Bal

30/6

300 30/6/17

333
530

30/6/17

500 30/6/17
400 30/6/17
12,900 Bal 30/6

333
333

175

(Adjust for 1 month’s depreciation)
30/6/17

Unearned Revenue

210

Service Revenue

400

500

500

(Record earned revenue)
30/6/17

Salaries and Wages Expense
Salaries and Wages Payable

30/6/17
590
220

333

300
300

(Record accrued wages)
30/6/17

Accounts Receivable

Revenue

110

30/6/17 1,100
Bal 30/6 2,200

400

400

400

(Record revenue receivable)
2,633

2,633

30/6/17

300

Bal 30/6 2,700


100
110
120
170
175
200
210
220
300
320
400
500
530

540
570
580
590

Account
Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip
Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense

Kelly Cook e-Travel Pty Ltd
WORKSHEET
for period ending 30 June 2017
Trial Balance
Adjustments
Adjusted Trial Balance

DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
21,900
21,900
2,400
400
2,000
1,100
2,200
3,300
10,000
10,000
333

333

200
2,000

200
1,500
300
30,000

500
300

30,000
2,000

2,000

12,000
500
400
600
1,100
2,400
44,200

333

500
333
400

1,100

600
2,200
2,700

300

44,200

12,900

900

2,633

2,633

45,233

45,233

Profit & Loss
DEBIT
CREDIT

Balance Sheet
DEBIT
CRED


Complete Worksheet ready
for next stage – Preparing

the Financial Statements

100
110
120
170

175
200
210
220
300
320
400
500
530
540
570
580
590

Account
Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip
Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense

Rent Expense
Salaries & Wages Expense

Kelly Cook e-Travel Pty Ltd
WORKSHEET
for period ending 30 June 2017
Trial Balance
Adjustments
Adjusted Trial Balance
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
21,900
21,900
2,000
400
2,400
3,300
1,100
2,200
10,000
10,000
333
333
200
200
2,000

500
1,500
300
300
30,000
30,000
2,000
2,000
12,000
900
12,900
500
500
333
333
400
400
600
600
1,100
1,100
2,200
2,400
300
2,700
44,200
44,200
2,633
2,633
45,233

45,233

Profit & Loss
DEBIT
CREDIT

Balance Sheet
DEBIT
CREDIT
21,900
2,400
2,200
10,000
333
200
1,500
300
30,000
2,000

12,900
500
333
400
600
2,200
2,700
6,733
6,167
12,900

12,900

38,500

12,900

38,500

32,333
6,167
38,500


TOPIC 4
COMPLETING THE
ACCOUNTING CYCLE
(ADJUSTING & CLOSING THE
ACCOUNTS)

PART 2- PREPARING
THE FINANCIAL
STATEMENTS &
CLOSING ENTRIES


TOPIC 4
PART 2 LEARNING
OBJECTIVES
On completion of this topic, you should be able to:

1. Prepare the financial statement's from the
completed worksheet
2. Explain the purpose of closing entries.
3. Prepare the closing entries.
4. Describe the required steps in the accounting cycle.


100
110
120
170
175
200
210
220
300
320
400
500
530
540
570
580
590

Account
Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip

Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense

Kelly Cook e-Travel Pty Ltd
WORKSHEET
for month ending 30 June 2017
Trial Balance
Adjustments
Adjusted Trial Balance
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
21,900
21,900
2,000
400

2,400
3,300
1,100
2,200
10,000
10,000
333
333
200
200
2,000
500
1,500
300
300
30,000
30,000
2,000
2,000
12,000
900
12,900
500
500
333
333
400
400
600
600

1,100
1,100
2,200
2,400
300
2,700
44,200
44,200
2,633
2,633
45,233
45,233

Profit & Loss
DEBIT
CREDIT

Balance Sheet
DEBIT
CREDIT
21,900
2,400
2,200
10,000
333
200
1,500
300
30,000
2,000

12,900
500
333
400
600
2,200
2,700
6,733
6,167
12,900

12,900

38,500

12,900

38,500

32,333
6,167
38,500

|

12


100

110
120
170
175
200
210
220
300
320
400
500
530
540
570
580
590

100
110
120
170
175
200
210
220
300
320
400
500
530

540
570
580
590

Account
Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip
Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense

Account
Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip
Accum Depn - PPE

Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense

Kelly Cook e-Travel Pty Ltd
WORKSHEET
for period ending 30 June 2017
Trial Balance
Adjustments
Adjusted Trial Balance
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
21,900
21,900
2,000
400
2,400

3,300
1,100
2,200
10,000
10,000
333
333
200
200
2,000
500
1,500
300
300
30,000
30,000
2,000
2,000
12,000
900
12,900
500
500
333
333
400
400
600
600
1,100

1,100
2,200
2,400
300
2,700
44,200
44,200
2,633
2,633
45,233
45,233

Profit & Loss
DEBIT
CREDIT

12,900
500
333
400
600
2,200
2,700
6,733
6,167
12,900

Profit & Loss
DEBIT
CREDIT

Balance Sheet
DEBIT
CREDIT
21,900
2,400
2,200
10,000
333
200
1,500
300
30,000
2,000

12,900
500
333
400
600
2,200
2,700
6,733
6,167
12,900

12,900

38,500

12,900

38,500

32,333
6,167
38,500

Kelly Cook eTravel Pty Ltd
Statement of Profit or Loss
for period May - June 2017
Revenue
Service Revenue
Expenses
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense
Total Expenses
Profit

12,900
500
333
400
600
2,200
2,700

6,733
$ 6,167

12,900
12,900

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13


100
110
120
170
175
200
210
220
300
320
400
500
530
540
570
580
590

Account

Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip
Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense

100
110
120
170
175
200
210
220
300
320
400
500

530
540
570
580
590

Kelly Cook e-Travel Pty Ltd
WORKSHEET
for period ending 30 June 2017
Trial Balance
Adjustments
Adjusted Trial Balance
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
21,900
21,900
2,000
400
2,400
3,300
1,100
2,200
10,000
10,000
333
333

200
200
2,000
500
1,500
300
300
30,000
30,000
2,000
2,000
12,000
900
12,900
500
500
333
333
400
400
600
600
1,100
1,100
2,200
2,400
300
2,700
44,200
44,200

2,633
2,633
45,233
45,233

Account
Cash at Bank
Accounts Receivable
Prepaid Rent
Property, Plant & Equip
Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Dividends
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense

Profit & Loss
DEBIT
CREDIT

Balance Sheet
DEBIT

CREDIT
21,900
2,400
2,200
10,000
333
200
1,500
300
30,000
2,000

12,900
500
333
400
600
2,200
2,700
6,733
6,167
12,900

12,900

38,500

12,900

38,500

32,333
6,167
38,500

Balance Sheet
DEBIT
CREDIT
21,900
2,400
2,200
10,000
333
200
1,500
300
30,000
2,000

Kelly Cook eTravel Pty Ltd
Statement of Financial Position
as at 30 June 2017
Current Assets
Cash
21,900
Accounts Receivable
2,400
Prepaid rent
2,200
Total Current Assets

26,500
Non-current Assets
PPE
Less Acc. Dep
Totsl Non-current Assets

TOTAL ASSETS
Liabilites
Accounts Payable
Unearned Revenue
Salaries Payable
Total Current Liabilites

NET ASSETS
Equity
Capital
Retained Earnings

EQUITY

10,000
333
9,667

36,167
200
1,500
300
2,000

A=L+E
A–L=E
Net Assets = Equity

34,167

30,000
4,167
34,167

Kelly Cook eTravel Pty Ltd
Calculation of Retained Earnings

38,500
38,500

32,333
6,167
38,500

Beginning Retained Earnings
Add Profit
Less Dividends
Ending Retained Earnings

|

0
6,167
2,000

14
4,167


CLOSING THE (TEMPORARY) ACCOUNTS

1. Close all income accounts (debit entry
as have credit balances), and credit the
total to the Profit & Loss (Income)
Summary account.
2. Close all expense accounts (credit
entry as have debit balances), and
debit the total to the Profit & Loss
Summary account.
3. Close the Profit & Loss summary
account (also called Income Summary)
by transferring the balance to the
retained earnings account
4. Close the dividends account to the
retained earnings account.
|

15


DEBIT

Bal 31/5
20/6/17
21/6/17

Bal 30/6

GENERAL LEDGER T-ACCOUNTS
CREDIT
DEBIT

Cash @ Bank #100
20,900
3,300
3,500
1,200
2,000
21,900

CREDIT

Accts Pay #200
200 Bal
1/6/17
Unearned Revenue #210

21/6/17

30/6/17

500

2,000
1,500

21/6/17

Salaries payable #220

300

Date
30/6/17

30/6/17

30/6/17

Particulars

GENERAL JOURNAL
Post Ref
CLOSING ENTRIES

Service Revenue
P/L Summary A/C

CREDIT

12,900
12,900

600
600

Advertising

500

500

Depreciation

530

333

Electricity

540

400

Printing & Stationery

570

600

Rent

580

2,200

Salaries & Wages

590

2,700

P/L Summary A/C

Retained Earnings

Dividends

1/6/17
Bal 30/6

Prepaid Rent #120
3,300
1,100
2200

Bal

P/L Summary A/C

Retained Earnings
30/6/17

400

DEBIT

Bal
30/6/17
Bal 30/6

Accts Rec #110
2,000
400
2,400

6,733

6,167
6,167

310
310

2,000
27,800

Dividends #320
2,000
2,000 30/6/17

30/6/17

Revenue #400
8,500 Bal 31/5
3,500

20/6/17
500
30/6/17
400
30/6/17
12,900
12,900

Bal

Advertising #500
500
500 30/6/17

Bal

Electricity #540
400
400 30/6/17

30/6/17

30/6/17

6,733

30/6/17

6,167

12,900

30/6/17

Retained Earnings #310

2,000

6,167 30/6/17
4,167 Bal 30/6

Depreciation #530

30/6/17

333

333 30/6/17

Print & Stationery #570

Bal

2,000

320

Bal
30/6/17

P & L Summary #600

30/6/17
600

Capital #300
30,000 Bal

PPE #150
10,000
Accum Dep PPE #175
333

30/6/17

Bal
30/6/17

27,800

600

600 30/6/17

Rent #580
1,100
1,100
2,200 30/6/17
2,200
Salaries & Wages # 590

Bal
21/6/17
30/6/17

1,200
1,200
300


DEBIT

Bal 31/5
20/6/17
21/6/17
Bal 30/6

GENERAL LEDGER T-ACCOUNTS
CREDIT
DEBIT

Cash @ Bank #100
20,900
3,300
3,500
1,200
2,000
21,900

CREDIT

Accts Pay #200
200 Bal
1/6/17
Unearned Revenue #210

21/6/17

30/6/17

500

2,000
1,500

21/6/17
Bal 30/6

Salaries payable #220

30/6/17
Bal 30/6

Accts Rec #110
2,000
400
2,400

1/6/17
Bal 30/6

Prepaid Rent #120
3,300
1,100
2,200

Bal

Bal 30/6

Bal

P & L Summary #600
30/6/17
6,733
12,900
30/6/17
6,167

30/6/17

Capital #300
30,000

Bal 30/6

Dividends #320
2,000
2,000

30/6/17

30/6/17

PPE #150
10,000
Accum Dep PPE #175
333

300

30/6/17

Revenue #400
8,500 Bal 31/5
3,500
20/6/17
500 30/6/17
400 30/6/17
12,900
12,900

30/6/17
Bal

Advertising #500
500
500

30/6/17

Bal

Electricity #540
400
400

30/6/17

30/6/17

Retained Earnings #310

30/6/17

2,000

6,167
4,167

30/6/17
Bal 30/6

Depreciation #530

30/6/17

333

333

30/6/17

Print & Stationery #570

Bal

Bal
30/6/17

600

600

30/6/17

Rent #580
1,100
1,100
2,200
2,200

30/6/17

Salaries & Wages # 590

Bal
21/6/17
30/6/17

1,200
1,200
300
2,700

2,700

30/6/17

100
110
120
170
175
200
210
220
300
310
400
500
530
540
570
580
590

Kelly Cook e-Travel Pty Ltd
Post Closing Trial Balance
for period ending 30 June 2017

Account
DEBIT
Cash at Bank
21,900
Accounts Receivable
2,400
Prepaid Rent
2,200
Property, Plant & Equip
10,000
Accum Depn - PPE
Accounts Payable
Unearned Revenue
Salaries & Wages Payable
Share Capital
Retained Earnings
Service Revenue
Advertising Expense
Depreciation Expense
Electricty Expense
Printing & Stationery Expense
Rent Expense
Salaries & Wages Expense
36,500

CREDIT

333
200
1,500

300
30,000
4,167

36,500


Closing
entries

Adjusting
entries

|

18