3
Completing
the
Accounting
Cycle
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Accounting Cycle
Analyze and
record the
transactions
Prepare the
financial
statements
Chapter 3
Post the
transactions and
prepare trial
balance
Adjust the
accounts
and prepare
trial balance
Close the
accounts and
prepare trial
balance
2
Matching Principle
All revenues must be recorded in the
accounting period in which the goods are sold
or services are rendered and all expenses
must be recorded in the accounting period in
which they are incurred to produce such
revenues
Chapter 3
3
Adjusting Entries
• Some journal entries are made at the end of the accounting
period just to separate the effect of an event into its proper
periods.
• Each adjusting entry affects:
1) a revenue or expense account
2) an asset or liability account (except cash)
• Examples include:
1. Recognition of accrued revenues and receivables,
2. Interest calculations,
3. Recognition of accrued expenses and payables,
4. Allocation of prepaid operating costs, and
5. Recognition of depreciation.
Chapter 3
4
When do we need adjusting entries?
Prepayments
Accruals
1.
Allocation of costs
between accounting
periods
3.
Expenses incurred but not
recorded
2.
Allocation of unearned
revenues between
accounting periods
4.
Revenues earned but not
recorded
Chapter 3
5
Trial Balance
Chapter 3
6
Adjusting Entries
Prepayments
Accruals
1.
Allocation of costs
between accounting
periods
3.
Expenses incurred but not
recorded
2.
Allocation of unearned
revenues between
accounting periods
4.
Revenues earned but not
recorded
Chapter 3
7
Adjustment (1)
Prepaid Rent
1-Jan
Balance
31-Jan
Balance
Chapter 3
Prepaid Rent
600
31-Jan
200
400
Rent Expense
200
200
8
Adjustment (2)
Prepaid Insurance
Prepaid Insurance
3-Jan
120
31-Jan
Balance
31-Jan
Balance
Chapter 3
10
110
Insurance Expense
10
10
9
Adjustment (3)
Office Supplies
10-Jan
Balance
Office Supplies
2500
31-Jan
500
2000
Supplies Expense
31-Jan
500
Balance
Chapter 3
500
10
Adjustment (4)
Depreciation of Property Plant & Equipment
Chapter 3
11
Express Travel Agency
Partial Statement of Financial Position
31 January 2014
Plant and Equipment
Office Equipment and Furniture
Less: Accumulated Depreciation
Plant and Equipment, net
Chapter 3
TL 15.000
(250)
14.750
12
Adjusting Entries
Chapter 3
1.
Allocation of
costs between
accounting
periods
3.
Expenses
incurred but not
recorded
2.
Allocation of
unearned
revenues between
accounting
periods
4.
Revenues earned
but not recorded
13
Adjustment (5)
Unearned Revenues
Unearned Revenues
31-Jan
4500
22-Jan
Balance
Service Revenues
31-Jan
31-Jan
Balance
Chapter 3
7500
3000
12500
4500
17000
14
Adjusting Entries
Chapter 3
1.
Allocation of
costs between
accounting
periods
3.
Expenses
incurred but not
recorded
2.
Allocation of
unearned
revenues between
accounting
periods
4.
Revenues earned
but not recorded
15
Adjustment (6)
Accrued Salary Expense
Salaries Payable
31-Jan
Balance
24-Jan
31-Jan
Balance
Chapter 3
2500
2500
Salary Expense
9000
2500
11500
16
Adjustment (7)
Accrued Interest Expense
Interest Payable
31-Jan
Balance
31-Jan
Balance
Chapter 3
210
210
Interest Expense
210
210
17
Adjusting Entries
Chapter 3
1.
Allocation of
costs between
accounting
periods
3.
Expenses
incurred but not
recorded
2.
Allocation of
unearned
revenues
between
accounting
periods
4.
Revenues
earned but not
recorded
18
Adjustment (8)
Accrued Revenues
Accounts Receivable
31-Jan
7500
31-Jan
3450
Balance
10950
Service Revenues
31-Jan
31-Jan
31-Jan
Balance
Chapter 3
12500
4500
3450
20450
19
Effects of Adjusting Entries
Chapter 3
20
Worksheet – Unadjusted to Adjusted Accounts
Chapter 3
21
Accounting Cycle
Analyze and
record the
transactions
Prepare the
financial
statements
Chapter 3
Post the
transactions and
prepare trial
balance
Adjust the
accounts
and prepare
trial balance
Close the
accounts and
prepare trial
balance
22
Steps to Close Accounts
•
•
•
•
Chapter 3
Close temporary accounts with credit
balances to income summary
Close temporary accounts with debit
balances to income summary
Close income summary
Close dividends or owners’ withdrawals
23
Express Travel Agency
Adjusted Trial Balance
31-Jan-14
Accounts
Cash
Accounts Receivable
Office Supplies
Prepaid Rent
Prepaid Insurance
Office Furniture
and Equipment
Accumulated Depreciation
Bank Loan
Accounts Payable
Unearned Revenues
Salaries Payable
Interest Payable
Capital
Withdrawals
Service Revenues
Salary Expenses
Rent Expense
Insurance Expense
Supplies Expense
Depreciation Expense
Interest Expense
Total
Chapter 3
Debit
TL 102.280
10.950
2.000
400
110
15.000
Credit
TL 250
15.000
5.000
3.000
2.500
210
100.000
3.000
20.450
11.500
200
10
500
250
210
TL 146.410
TL 146.410
24
Closing Credit Balances
Chapter 3
25
Express Travel Agency
Adjusted Trial Balance
31-Jan-14
Accounts
Cash
Accounts Receivable
Office Supplies
Prepaid Rent
Prepaid Insurance
Office Furniture
and Equipment
Accumulated Depreciation
Bank Loan
Accounts Payable
Unearned Revenues
Salaries Payable
Interest Payable
Capital
Withdrawals
Service Revenues
Salary Expenses
Rent Expense
Insurance Expense
Supplies Expense
Depreciation Expense
Interest Expense
Total
Chapter 3
Debit
TL 102.280
10.950
2.000
400
110
15.000
Credit
TL 250
15.000
5.000
3.000
2.500
210
100.000
3.000
20.450
11.500
200
10
500
250
210
TL 146.410
TL 146.410
26
Closing Debit Balances
Chapter 3
27
Closing Income Summary Account
31-Jan
Income Summary
12670
31-Jan
Balance
Chapter 3
20450
7780
28
Closing Withdrawals
Chapter 3
29
Post
Closing
Trial
Balance
Chapter 3
Express Travel Agency
Post Closing Trial Balance
31 January 2014
Accounts
Debit
Cash
TL 102.280
Accounts Receivable
10.950
Office Supplies
2.000
Prepaid Rent
400
Prepaid Insurance
110
Office Furniture and Equipment
15.000
Accumulated Depreciation
Bank Loan
Accounts Payable
Unearned Revenues
Salaries Payable
Interest Payable
Capital
Withdrawals
0
Service Revenues
Salary Expenses
0
Rent Expense
0
Insurance Expense
0
Supplies Expense
0
Depreciation Expense
0
Interest Expense
0
Total
TL 130.740
Credit
TL 250
15.000
5.000
3.000
2.500
210
104.780
0
TL 130.740
30
Trial Balance after Closing Entriesincludes the accounts of which
statement?
Chapter 3
31
Accounting Cycle
Analyze and
record the
transactions
Prepare the
financial
statements
Chapter 3
Post the
transactions and
prepare trial
balance
Adjust the
accounts
and prepare
trial balance
Close the
accounts and
prepare trial
balance
32
Income Statement
Chapter 3
33
Statement of Financial Position
Chapter 3
34
Appendix 3
Closing Entries for Limited Liability
Corporations and Corporations
Chapter 3
35
Corporation Trial Balance
Chapter 3
36
Closing Credit Balances
Chapter 3
37
Closing Debit Balances
Chapter 3
38
Closing Income Summary Account
Chapter 3
39
Post closing trial balance
Chapter 3
40
Chapter 3
41