Chapter 4: Completion of the Accounting Cycle
The life of a business is divided into ACCOUNTING PERIODS of equal length in order
to measure net income and prepare financial statements.
ADJUSTING ENTRIES are required for those transactions that affect revenue or
expenses of more than one accounting period.
Example:


12 month insurance policy purchased for $1200.00
On a 1 month income statement take 1/12 x $1200.00 as insurance expense.
4 Types of Adjusting Entries
1. ENTRIES TO APPORTION RECORDED COSTS
Ex: -Purchase as asset, Dr Asset
-As we use the asset, we allocate a portion of its cost to expense
Dr Expense
Cr Asset
2. ENTRIES TO APPORTION UNEARNED REVENUE
Ex: -If collect payment in advance of services to be rendered CR liability (unearned
revenue)
-When services are rendered, we record the revenue earned.
i.e. DR Liability (unearned revenue)
CR Revenue
3. ENTRIES TO RECORD UNRECORDED EXPENSES
1. Ex.
2. Ex.
Bills not yet received
Interest owing, but not paid
Year-----------------------------------------------------------Receive Bill
Repair
To
Truck
Repair Expense, in this case, should be recorded as a year one expense. (An adjusting
entry will be made in order to do this- when bill is received)
i.e. DR Repair Expense
CR Account Payable
Or
Dr Interest Expense
CR Interest Payable
4. ENTRIES TO RECORD UNRECORDED REVENUE
i.e. Revenue earned but not yet billed
Legal fees receivable 1000
Legal fees earned
1000
READ pg. 148-160
Pg. 188
Ex. 4-5, 4-6, 4-8, 4-11
Q 1-7 pg. 183
THE WORKSHEET
A large columnar sheet of paper to arrange in a convenient systematic form all of
the accounting data required at the end of the period.
Not part of the permanent accounting records, it is only a worksheet for the
accountant.
Can serve to minimize errors as it catches many errors
Prepared after posting all entries to ledger and before preparing financial
statements at the end of an accounting period
HEADING: WHO, WHAT, WHEN
5 Steps:
1. Enter ledger acct balances in t/b column
2. Enter adjustments in adjusting column
3. Enter adjusting acct balances in adjusted t/b column
4. Extend amounts to i/s or t/b
5. Total i/s + t/b columns. Enter net income or loss as balancing figure + total
again.
USES FOR THE WORKSHEET
1. Preparing Financial Statements
On worksheet, capital is still beginning capital
Changes have been recorded in temporary accounts, R, E, D
Statement of owner’s equity
2. Recording Adjusting Entries to:
Journal
Ledger
3. Recording Closing Entries
Close i/s credit column
Close i/s debit column
Close balancing figure to capital
Close drawings to capital
REVERSING ENTRIES
WHEN TO USE: -on the first day of the next accounting period, with
adjustments that create and accounts receivable or a short term liability.
WHY USE: -to simplify the recording of certain cash receipts and payments in
the following period. In this case all weekly salary payments are $3000.
ACCOUNTS USED: -it contains the same accounts and dollar amounts as the
related adjusting entry, but the debits and credits are reversed, and the date is the
first day of the next accounting period
EXAMPLE
Salaries $600 per day x 5 days per week
Weekly Journal Entry
Salaries Expense
3000
Cash
3000
If the end of the fiscal year falls on a Wednesday, an adjusting entry is required to
record the salaries expense and the related liability to employees for the 3 days
they have worked since the last payday.
Adjusting Entry
Salaries Expense
Salaries Payable
1800
1800
Reversing Entry
Salaries Payable 1800
Salaries Expense
1800
This reversing entry closes the Salaries Payable account and puts the account in
an abnormal credit balance of $1800. On Friday of this first week of the new
fiscal period, the regular journal entry for salaries will be made.
CLOSING ENTRIES
MANUALLY:
1. Dr Revenue, Cr Income Summary
2. Dr Income Summary, Cr Expenses
3. Dr Income Summary, Cr Capital (Net Income situation)
4. Dr Capital, Cr Drawings (CLOSING ENTRIES)
CONTRA-ACCOUNTS:
-A contra-account is one that has a balance opposite to the normal balance assigned to its
classification. All normal balances to an account are entered as positive number and all
balances that are not normal (Contra) are entered as negative amounts in the trial balance.