Chapter 5 Completing the accounting cycle PowerPoint presentation by Anne Abraham University of Wollongong 2009 John Wiley & Sons Australia, Ltd Learning Objectives 1. Understand all the steps in the complete accounting cycle 2. Understand why temporary ledger accounts need to be closed 3. Understand how a worksheet can be used to record adjusting entries 4. Understand the closing process, and enter closing entries in accounting records 2 Learning Objectives 5. Prepare a post-closing trial balance 6. Account for accrual items in subsequent periods 7. Understand reversing entries and how to record them 8. Prepare the equity accounts for a partnership and for a company 3 1
THE COMPLETE ACCOUNTING CYCLE 1. 1. Recognise and record transactions 2. 2. Journalise transactions Source documents General journal 3. 3. Post to to ledger accounts General ledger 4. 4. Prepare unadjusted trial balance of of GL GL Trial balance (unadjusted) Continued next slide 4 THE COMPLETE ACCOUNTING CYCLE 5. 5. Determine adjusting entries and/or journalise 6. 6. Post adjusting entries to to general ledger General journal General ledger (accounts adjusted) 7. 7. Prepare adjusted trial balance of of GL GL (adjusted) Trial balance (adjusted) 8. 8. Journalise closing entries Continued next slide General journal 5 THE COMPLETE ACCOUNTING CYCLE 9. 9. Post closing entries to to GL GL 10. 10. Prepare post closing trial balance 11. 11. Prepare financial statements 12. 12. Journalise reversing entries work sheet GL GL temporary accounts closed Trial balance (post closing) Financial statements General journal GL 13. 13. Post reversing entries to to GL GL GL temporary accounts opened accounts opened 6 2
CLOSING TEMPORARY ACCOUNTS Income and expense accounts must be closed at the end of each period to determine the profit or loss for the period They begin and end each accounting period with a zero balance Profit and loss summary account is used to facilitate closing process and determination of profit 7 USING THE WORKSHEET Gathers information together in one place Enables preparation of interim financial statements Adjusting entries easily reflected Facilitates closing journal preparation 8 Recording adjusting entries From worksheet formal adjusting entries are entered in general journal Entries are dated the last day of the accounting period Data for determining the entity s closing entries for the period are found in income statement columns of worksheet which contain temporary income and expense accounts 9 3
THE CLOSING PROCESS Income accounts closed to P & L summary Debit income Credit P & L summary Expense accounts closed to P & L summary Debit P & L summary Credit expense 10 THE CLOSING PROCESS Profit & Loss summary balances to determine profit/loss then closed to capital Debit P & L summary (assuming a profit) Credit capital account Drawings closed to capital Debit capital account Credit drawings account 11 THE CLOSING PROCESS P & L SUMMARY INCOME (CLOSE EXPENSE 28,500 12,000 7,500 9,000 ACCOUNTS) 4,450 24,050 28,500 24,050 SALARY EXP (CLOSE P & L SUMMARY) 1,500 1,800 3,300 800 RENT EXP 800 SUPPLIES EXP 350 350 (CLOSE INCOME ACCOUNT) 2,500 CAPITAL ACCOUNT 24,050 DRAWINGS 2,500 2,500 12 (CLOSE DRAWINGS ACCOUNT) 4
Account balances after the closing process All income accounts have nil balances All expense accounts have nil balances The drawings account has a nil balance The capital account has been increased or decreased by the profit or loss and decreased by the drawings 13 The post-closing trial balance Reflects all accounts with balances after the closing process Assets Liabilities Equity 14 ACCRUAL ENTRIES IN SUBSEQUENT PERIODS Adjusting entries are made at the end of the accounting period to record accruals Cash received or paid in subsequent periods for accruals must be analysed to correctly apportion amount between the two periods e.g. payment for salaries 15 5
ACCRUAL ENTRIES IN SUBSEQUENT PERIODS Adjusting entry (30 June) Jun 30 Salary Expense 1 990 Salary Payable 1 990 (To accrue salaries owing to 30 June) Normal entry (6 July) Jul 6 Salary Payable 1 990 Salary Expense 1 710 Cash at Bank 3 700 (To record payment of salaries from 23 June to 6 July) 16 REVERSING ENTRIES Reversal of accrual entries Dated the first day of the subsequent accounting period Exactly reverse certain adjusting entries An accounting technique used to simplify the recording of regular transactions in the next period 17 REVERSING ENTRIES Adjusting entry Jun 30 Salary Expense 1 990 Salary Payable 1 990 (To accrue salaries owing to 30 June) Reversing entry Jul 1 Salary Payable 1 990 Salary Expense 1 990 (To reverse the adjusting entry to accrue unpaid salaries at end of previous month) July 6 entry Jul 6 Salary Expense 3 700 Cash at Bank 3 700 (Payment of salaries for period 27 June to 6 July) 18 6
REVERSING ENTRIES Not required for all adjusting entries Only used where adjustment is temporary Accrued expenses Accrued income Prepayments originally recorded as expenses Unearned income originally recorded as income 19 REVERSING ENTRIES Reversal of deferral entries Adjusting entries are made for prepaid expenses and unearned or precollected revenue Need for reversal entries depends on whether initial recording occurred in a permanent account 20 ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY Accounting for a partnership Separate capital and drawings accounts for each partner Profit/loss at the end of the period is allocated to each partner in accordance with the partnership agreement Each drawings account is closed off to the partner s capital account 21 7
ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY Accounting for a company Owners are referred to as shareholders Owner s interests are called share capital Not all profits/losses are distributed to shareholders Share capital represents retained profits (or accumulated losses) + share of assets 22 ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY Profits distributed as dividends INTELLECT MANAGEMENT SERVICES LTD Statement of Changes in Equity For the year ended 31 December 2010 Share Capital, 1 January 2010 $120 000 Share Capital, 31 December 2010 120 000 Retained earnings, 1 January 2010 -- Add: Profit for the year 25 000 25 000 Less: Cash dividends for the year 12 000 Retained earnings, 31 December 2010 $13 000 23 ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY Equity section of balance sheet INTELLECT MANAGEMENT SERVICES LTD Balance Sheet (extract) as at 31 December 2010 Share capital (120 000 shares issued for $1) $120 000 Retained earnings 13 000 Total equity $133 000 24 8
25 9