PowerPoint® Slides
to accompany
Basic Bookkeeping,
Seventh Edition
Prepared by
JD Chazan CPA, CA
National Taiwan University
Copyright © 2015 by Nelson Education Ltd.
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Chapter 14
At Year End:
Preparing to Close the Books
Copyright © 2015 by Nelson Education Ltd.
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Chapter 14: At Year-End: Preparing to Close the Books
Chapter Objectives
After completing this chapter, you will be able to:
• prepare a worksheet
• record year-end adjusting entries in the General
Journal
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Chapter 14: At Year-End: Preparing to Close the Books
Before closing the books at year end, it is
necessary to:
• determine an accurate value of inventory on hand
• determine any necessary year-end adjustments
• prepare a worksheet that will aid in preparing
financial statements and recording year-end
closing entries
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Chapter 14: At Year-End: Preparing to Close the Books
Inventory
Periodic Inventory
• A systematic count and valuation of all goods on hand
• Usually done only once or twice a year
Perpetual Inventory
• A system of monitoring the value of goods on hand as
each purchase and sale of merchandise is recorded
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Chapter 14: At Year-End: Preparing to Close the Books
Items on hand
How many
on hand
Cost value of each
item on hand
(including shipping and
importation costs, if
any)
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Total cost value
of each item on
the shelf
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Chapter 14: At Year-End: Preparing to Close the Books
Year-End Adjusting Entries
• Adjustments to recognize revenues and/or expenses that
have not yet been recorded in the current year
• Similar to interim adjustments discussed in Chapter 13
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Chapter 14: At Year-End: Preparing to Close the Books
Types of Adjusting Entries
1. Prepaid Expenses
• sometimes called Unexpired Expenses
• expenses that start as prepaid expenses are
transferred to expense accounts as their value is
“consumed”.
• usually recorded monthly; but in small businesses, it is
sometimes left until year end.
$1,320 × 5/12 = $550
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Chapter 14: At Year-End: Preparing to Close the Books
2. Unearned Revenue
• sometimes called Revenue Received in Advance
• payment made in advance by a customer or
tenant for goods or services that are to be
delivered in the near future
Liability account. The
tenant paid in advance,
so we owe them the
use of our space.
Value is transferred
from the liability
account to the revenue
account.
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Chapter 14: At Year-End: Preparing to Close the Books
3. Accrued Expenses
• expenses that have been incurred and relate to
the current year's activities, but have not yet been
paid for
For example, assume employees are paid every Friday.
Year end fell on a Tuesday, so salaries for two working days
have accrued to year end.
$400 × 2 days = $800
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Chapter 14: At Year-End: Preparing to Close the Books
4. Accrued Revenues
• revenues that have been earned but have not yet
been recorded on the books
For example, a broker concluded negotiations on behalf of his client
for the purchase of specialized equipment and has earned a
commission of $2,400. The client has not yet been invoiced for
the service because the deal was completed just the day before
year end.
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Chapter 14: At Year-End: Preparing to Close the Books
5. Amortization (or Depreciation)
• commonly referred to as Capital Cost Allowance
(CCA) when used for income tax purposes
• the costs of assets, such as furniture, equipment,
and vehicles, are written off as expenses over the
years of the life of each asset because such assets
contribute to the ongoing success of the business
A contra-asset account representing
the total amount of the asset cost
that has so far been written off to
expense since the asset was
purchased.
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Chapter 14: At Year-End: Preparing to Close the Books
5. Amortization (or Depreciation)
Two methods of calculating amortization:
i. Straight Line Amortization:
• An equal portion of the cost of the asset is allocated
to expense each year until the full value of the asset
has been amortized.
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Chapter 14: At Year-End: Preparing to Close the Books
5. Amortization (or Depreciation)
i. Straight Line Amortization:
For example, a machine is purchased at a cost of $3,500 with
an estimated useful life of seven years. The annual
amortization would be $3,500 ÷ 7 years = $500 per year.
Dec 31 Amortization Expense
Accumulated Amortization – Machine
To record amortization for one year.
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500.00
500.00
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Chapter 14: At Year-End: Preparing to Close the Books
5. Amortization (or Depreciation)
ii. Declining-Balance Amortization:
• Amortization is calculated on the book value each
year rather than on the original cost value.
• Book value is the cost of the asset that has not yet
been amortized.
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Chapter 14: At Year-End: Preparing to Close the Books
5. Amortization (or Depreciation)
ii. Declining-Balance Amortization:
For example, a delivery truck is purchased for $20,000 with
amortization to be calculated at an annual rate of 25%.
This calculation would
continue year after year on an
ever-decreasing book value.
Year 1
Dec 31
Amortization Expense
Accumulated Amortization – Truck
To record amortization for Year 1.
5000.00
Amortization Expense
Accumulated Amortization – Truck
To record amortization for Year 2.
3750.00
5000.00
Year 2
Dec 31
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3750.00
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Chapter 14: At Year-End: Preparing to Close the Books
5. Amortization (or Depreciation)
• At the end of each year, the balance sheet will show the
original cost of the asset and its accumulated amortization.
Capital Assets
Truck
less Accumulated Amortization
20,000.00
8,750.00
11,250.00
Net book value:
the unamortized
value of the asset.
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Chapter 14: At Year-End: Preparing to Close the Books
6. Bad Debts
• An estimate of the amount of current receivables that
will become uncollectible in the near future (as
discussed in Chapter 12)
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Chapter 14: At Year-End: Preparing to Close the Books
7. Inventory
Three accounts are used to represent inventory values:
i. Inventory: An asset account to show the value of
merchandise on hand at the time the financial
statements are prepared, usually at year-end. This
balance will appear on the Balance Sheet.
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Chapter 14: At Year-End: Preparing to Close the Books
7. Inventory
ii. Opening Inventory: An expense account to show what
the value of inventory was at the beginning of the
current operating year. This balance will appear on the
Income Statement.
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Chapter 14: At Year-End: Preparing to Close the Books
7. Inventory
iii. Closing Inventory: A contra-expense (negativeexpense) account to show the value of goods on the
shelf at year end. This balance also appears on the
Income Statement.
• It is the same value as the asset Inventory account.
• Since these goods have not yet been sold, their cost
cannot be recognized as an operating expense this year.
The value is deducted from this year's expenses and
carried over to the next operating year when the goods are
expected to be sold.
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Chapter 14: At Year-End: Preparing to Close the Books
7. Inventory
Two adjusting entries are needed for inventory at year
end:
1. To remove the old value from the Inventory account
since this was the balance a year ago. This value will be
transferred to the Opening Inventory account.
2. To record the current inventory balance in the
Inventory account, and also in the Closing Inventory
account.
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Chapter 14: At Year-End: Preparing to Close the Books
7. Inventory
Two adjusting entries are needed at year end:
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Chapter 14: At Year-End: Preparing to Close the Books
The Worksheet
• a multi-column page (similar to a spreadsheet) designed
to arrange systematically all the accounting data that
will be needed for the preparation of financial
statements (the Income Statement and the Balance
Sheet) and for closing the revenue and expense
accounts at year end
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Chapter 14: At Year-End: Preparing to Close the Books
Revenue and expense
account balances are
extended to these
columns. These will
be used to prepare the
Income Statement
The end-of-year trial
later.Asset, liability, and
Adjustments are
balance is the starting point
organized here. These are the
equity account balances
for organizing the
Adjusting journalbalances after
are extended to these
worksheet information.
entries will be
columns. These will be
adjustments have
recorded based on
used to prepare the
been added or
these amounts. subtracted.
Balance Sheet later.
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Chapter 14: At Year-End: Preparing to Close the Books
Each pair of columns is
totalled and balanced
before proceeding with
the next pair.
The same
The difference
difference
between debits
should be
and credits is
found here as
the profit or
well.
loss.
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Chapter 14: At Year-End: Preparing to Close the Books
Recording Adjusting Journal Entries
• Adjustments are recorded in the General Journal, based
on the adjustments entered in the Adjustments columns
of the worksheet.
• Keyed entries, such as (a), (b), (c), etc., make it easy to
find the debit and credit sides of each adjustment.
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Chapter 14: At Year-End: Preparing to Close the Books
For example:
Find the debit and
credit sides of the
adjustment keyed
as (a).
The debit is
Insurance Expense.
The credit is
Insurance Prepaid.
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Chapter 14: At Year-End: Preparing to Close the Books
Then enter the adjustment in the General Journal as usual.
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Chapter 14: At Year-End: Preparing to Close the Books
End of Chapter 14
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