Completing the
accounting cycle
• Financial statements are the main product of
an accounting system.
• We move from our:
–
–
–
–
opening balance sheet
through transactions (in our general journal)
posting their amounts to our ledger
and using those amounts to prepare a trial balance,
income statement, and final balance sheet.
The Adjustment Process
• It is important for financial statements to
be up to date, so they can be comparable
from year to year.
• Bringing accounts up to date is also called
‘making the adjustments.’
Adjusting Entries
• The journal entries needed to bring
accounts up to date are called ‘Adjusting
Entries.’
• It is necessary to make these adjustments
so the correct net income or loss can be
determined.
Adjusting for Supplies
• The ‘Supplies’ account is allowed to
become inaccurate from day to day (as
supplies are used up).
• When supplies are purchased, their cost is
debited directly to the Supplies account.
Supplies
Cash
200
200
Journal Entry
• The journal entry would have been:
Supplies
200
Bank
200
Purchased supplies for cash
• As supplies are used (usually daily) no
accounting entry is made.
• Thus, when we get to the end of our fiscal
period, we must make an ‘adjustment’ to
the supplies account.
• How do we figure out how much we’ve
used?
– We do a physical count:
Let’s say there’s $125 worth of supplies left.
(so we must have used $75)
We make the adjustment by….
• deducting the amount from
the supplies account (CR)
and turning it into an expense (DR)
Supplies Expense
75
Supplies
Adjusting entry for supplies
75
Adjustment 2: Prepaid Expenses
• Let’s say, on July 1, we paid an entire
year’s worth of rent. ($12,000)
We would not want to make an expense of
the whole thing, because we technically
haven’t used it yet.
(But we need to keep track of the $12,000)
‘Prepaid Rent’
Prepaid Rent
Bank
$12,000
$12,000
Adjusting entry…
• At the end of each month we would make
an adjusting entry:
Rent Expense
Prepaid Rent
$1000
$1000
reduces this
account
• This way, we would be expensing our rent
each month, and decreasing the amount in
the ‘prepaid rent’ account!
Prepaid expenses
• Prepaid expenses might also be in the
form of insurance:
• Let’s say we bought an insurance policy
for $600 on August 1, 2012.
• If we only made an adjustment at yearend, what would the journal entries be on
August 1 and Dec 31?
Aug 1 Prepaid Insurance
Bank
$600
Dec 31 Insurance Expense $250
Prepaid Insurance
Why? $600 / 12 months = $50 / month
(August – Dec = 5 months)
$600
$250
Homework
• Page 308
– Exercise 1 (Do the adjusting entries for each
on a separate piece of journal paper.)
– Exercise 3
– Exercise 5