Year-end Procedures Part 1

Transcription

1 Year-end Procedures Part 1 Advance Payments Sometimes your business may be the recipient of advanced payments by a customer. cash is received but revenue not yet earned - we owe the customer services in the future credit a new account Unearned Revenue a current liability Mar. 2 Cash 2,300 Unearned Revenue 2,300 To record advance payment received once the services are complete then the revenue will be earn and can be shown in a revenue account Apr. 23 Unearned Revenue 2,300 Sales 2,300 To issue of invoice for work completed advance payment made Mar. 2 Some Examples record the following entries related to advance payments from customers. Cheque ($1,400) received from Aardvark Armor, a new customer, as advance payment for carpet cleaning that was to be completed next month. Feb. 19 Cheque ($900) received Bagheera Brokers as an advanced payment on cleaning services to be completed over the next 2 months. Mar. 5 Invoice issued to Aardvark Armor ($1,400) for services completed. Invoice marked Paid with no outstanding balance as it was prepaid on Feb. 19 th Mar. 21 Invoice issued to Bagheera Brokers ($4,500) for carpet cleaning ($3,000) and upholstery cleaning ($1,500) completed. Invoice shows $900 paid and outstanding balance of $3,600. May 18 From The Other Side What entries would Bagheera Brokers record on Mar. 5 and May 18? Mar. 5 May 18

2 D2D Transactions - depending on the day-to-day recording system, a year-end adjustment may be required Acme Services had a number of customers who made advance payments. In 2014 these advance payments were recorded as a debit to Cash and credit to Sales. No entry was made when the work was completed. The idea was that the revenue was going to be earned so why not put directly in the Sales account. At the end of 2014 the Sales account balance was $456,000. It was noted that on December 31, 2014 there were 5 customers who had paid advances for work that would be completed in January and February of The total of these jobs was $11,300. What year-end adjustment should be made? Support your answer with WLC s. Dec. 31 After the adjustment what would the balances be in Sales $ Unearned Revenue $ 2015 Remember Closing for 2014 would leave a zero balance in the Sales account. Sketch T-accounts for Sales and Unearned Revenue and enter the opening balance in the Unearned Revenue account. In 2015 the total sales recorded was $578,400. At the end of the year it was noted that there were 3 customers who paid advances in 2015 and the work would be completed in early The total advances from these 3 customers was $6,650. What adjustment(s) would be required in 2015 to make the balances correct? Post your entries to the sketched T-accounts. Check Figure The Sales account should end up with a balance of $583,050

3 Year-end Adjustments Part 2 Prepaid Insurance & Prepaid Insurance account o this is a Current Asset (even though it may last for more than 1 year o record purchase of multi-year insurance policy to this account o after year-end adjustment it should represent the unexpired insurance as of the end of the year & Insurance Expense after adjustments balance will represent the amount of insurance that expired during the period & WLC s pick the asset or expense account and show a calculation/comparison of the unadjusted balance and your calculated amount in the case of insurance compare: Whichever calculation you find easier to do. ~ unadjusted Prepaid Insurance balance to your calculation of Unexpired Insurance OR ~ unadjusted Insurance Expense balance to your calculation of Expired Insurance. Example 1 From The Start On May 1, 2010 a NEW business was started. As part of the startup, a 2-year insurance policy. The policy was recorded in a current asset account called Prepaid Insurance. The policy was paid for with a $4,200 May. 1 Prepaid Insurance 4,200 Cash 4,200 No other insurance related entries were made during What adjusting entry would be required at the end of the year? Support your answer with WLC s and sketching T-accounts for the 2 insurance accounts. REMEMBER Closing entries will have taken place so the Insurance Expense will be closed to zero but the Prepaid Insurance account will have the adjusted balance to start The insurance policy would not expire until May 1, During 2011 no insurance related entries were made. What year-end adjustment would be required at the end of 2011? Support with WLC s and T-accounts showing opening balances and the year-end adjustments The original policy expired on May 1, On April 15, 2012 a new 3-year policy was purchased for $7,560. The policy was effective (would start) as of May 1, Record the purchase of the new policy and the yearend adjustment that would be required. Support with WLC s and T-accounts.

4 Example 2 Simple Balances At the end of 2012, the unadjusted balance in the Prepaid Insurance account was $3,500 and the Insurance Expense account had a zero balance (it was closed at the end of the prior year and the only insurance transaction was the renewal of an insurance policy which was recorded to the prepaid account). The current insurance policies were examined and it was calculated that the unexpired total was $990. Give the journal entry for the year-end adjustment (support with WLC). Give the final balances Prepaid Insurance $ Insurance Expense $ Example 2 Monthly Dunn Heating & Air Conditioning started business on March 1, A 1-year insurance policy was purchased for $1,800. The owner would like to produce monthly statements so they would like to record a monthly adjustment for insurance on the first of each month. Sketch T-accounts for Prepaid Insurance and Insurance Expense. Give the journal entries for March 1 st and April 1 st make a note below the Apr. 1 date May 1 Dec. 1 - the above entry is repeated Prepaid Insurance Insurance Expense Post, to the T-accounts, the entry for the purchase of the policy and the monthly adjustments. Give the final balances for: Prepaid Insurance $ $ and Insurance Expense Year 2 à If the policy is renewed on March 1, 2013 with a 2-year policy at the cost of $5,040 and the business decides not to make monthly adjustments, instead they will make one year-end adjustment. What will the 2013 balances be? Record the renewal as well as the year-end adjustment. Prepaid Insurance $ and Insurance Expense $

5 Year-end Adjustments Part 3 & unused supplies or supplies on hand is determined by a count or inventory of supplies & adjust the asset account to be the unused supplies or the supplies on hand. This will result in the used supplies ending up in the Expense account as it should be Example Unadjusted Balance $7,843 (per GL) On Hand 1,022 (per supplies count) Adjustment Required $6,821 (credit to supplies) Dec. 31 Expense 6,821 6,821 To adjust supplies to amount on hand. Scenario 1 Acme Services (2011) Assume the 2011 opening balance in the supplies account is $475. Sketch T-accounts for the and Expense accounts. On Jan. 28, 2012 invoice ($1,195) from Aloe Industries for purchase of supplies. Terms net 30. Jan. 28 Expense Post the above entry. Assume that supplies are purchased 5 more times during the year for $2,087 $3,495 $1,288 $2,573 and $873. Assume these supply purchases are recorded similar to the Jan. 28 entry, post these purchases to the T-accounts and calculate an unadjusted balances. At year-end, supplies are counted/estimate to be $794. Show WLC to support the year-end adjustment required. Then journalize and post the adjustment.

6 Scenario 2 Acme Services (2012) Continuing from The new comptroller would like supply purchases recorded as debits to Expense rather than this will give a Expense closer to accurate for interim statements (without having to do interim adjustments). The first purchase in 2012 was a cash purchase of $684 on Jan. 21, Journalize according to new accounting procedures. Also, sketch the and Expense T-accounts and record the opening balances (remember closing) and this first purchase of supplies. Jan. 21 Assume supplies are purchased 6 more times during the year for $2,369 $2,014 $734 $3,106 $2,744 and $3,245. Record these purchases in the T-accounts and show updated unadjusted balances. Expense Also, there was a delivery of supplies on Dec. 29, The receiving report showed receipt of $1,102 of supplies but no invoice had been received. Journalize the accrual and post to the T-accounts. Dec. 31 At year-end, supplies are counted/estimate to be $2,234. Show WLC to support the year-end adjustment required. Then journalize and post the adjustment.

7 Year-end Adjustments Part 4 Prepaid Rent when you start renting, you may be required to pay a security deposit and possibly the advance payment of rent for the first few months & Security Deposit amount paid to as security that the renter will not leave on short notice o when you stop renting, usually 1 month notice is required the security deposit will be used to pay rent for the last month and/or pay for repairs/renovations required any excess will be refunded and any shortfall will have to be paid o until you stop renting, the security deposit amount will be shown as a current asset prepaid rent & Advanced Rent rent paid in advance o when pay rent in advance, it is recorded as prepaid rent (asset) o as months pass, the asset becomes rent expense o can adjust each month or wait until year-end & Monthly Rent usually pay rent on the first of the each month o technically rent us used up over the month but it is recorded as an expense when paid Example: 2010 Begin Renting Acme started renting a warehouse from Proper-T Real-T on November 1, The rental agreement required Acme to rent for a minimum of 2 years at a monthly rent of $400 per month. An initial payment of $3,100 was paid on Nov. 1 st which covered the rent for the first 6 months plus a security deposit of $ Start Monthly Payments Acme continued to rent the warehouse and started making regular monthly payments on May 1, 2011 after the advance payment ran out. Remember, the security deposit is not used until Acme gives notice that they are going to stop renting Full Year just renting Monthly payments are made on the first of each month Stop Renting Regular monthly rent payments are made from Jan. 1 to Aug. 1, On August 22 nd Acme gives notice that they will stop renting as of the end of September. As a result, no Sept. 1 st payment was required part of the security deposit was used. On Nov. 10, a cheque for $42 is received from Proper-T Real-T along with a bill for $258 for renovations/repairs required to return the warehouse to its original state. REQUIRED: 1. For each year that Acme rented the warehouse, a. Record all journal entries required along with any adjustments required. b. Sketch T-accounts for Prepaid Rent and Rent Expense and include entries and balances 2. Explain/show how Proper-T Real-T would account for the advanced payments. (UR)