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1、Dont forget your PASS Session!,http:/www.uow.edu.au/student/services/pass,In Autumn 2011, students who regularly* attended PASS scored 11 marks higher on average than non-attending students. Students who did not attend PASS were also 5 times as likely to fail.,Chapter 3: Adjusting the accounts,Week
2、3,2,BEFORE WE START.,C = CREDIT,D = DEBIT,Normal balance of these accounts is a debit. To increase balance debit again, to decrease credit out of the account.,Normal balance of these accounts is a credit. To increase balance credit again, to decrease debit out of the account.,Before we start,4,DRD+A
3、+X=C+I+LCR What is the normal balance of Accounts receivable? Accounts payable? Machinery? Tax expense? Dividends/Drawings? Share capital? Retained earnings? Sales revenue?,Before we start,Last week we looked at transactions analysis, journal entries and general ledger accountsElena Lee example,5,1
4、October, office rent for October is paid in cash, $1800,The expense Rent is increased $1800 because the payment pertains only to the current month; the asset Cash is decreased $1800,Debits increase expenses: debit Rent Expense $1800 Credits decrease assets: credit Cash $1800,Before we start,6,Debits
5、 increase expenses: debit Rent Expense $1800 Credits decrease assets: credit Cash $1800,This week,7,Accrual versus cash basis of accounting Revenue recognition criteria Expense recognition criteria Types of adjusting entries Prepayments Accruals Adjusted trial balance Worksheets Financial statements
6、 from worksheets,Accrual versus cash basis of accounting,Cash-based accounting,Accrual-based accounting,8,Revenue recognised when the cash is received or paid. Expenses recognised when the cash is received or paid,Revenue recognised when goods and services are provided Expenses recognised when asset
7、s are consumed or liabilities incurred,Cash versus accrual basis,9,Accrual basis Income example: assume Penny received $20,000 in cash for sales during 2011 and charged clients $2,400 which was to be paid in the following year. How much revenue should Penny record for 2011? Revenue for 2010 would be
8、 $22,400 Why? Sales Cash $20,000 Sales Accounts receivable $ 2,400 Total sales for 2011 $22,400,Cash versus accrual basis,10,Accrual basis Expenses example: Pennys phone bill for March was $400 but she doesnt receive the bill until April. When should Penny record the telephone expense? The $400 is s
9、till a March expense because this is the period in which the expense was incurred. The actual cash wont go out until April, but the expense is still a March expense.,Why do we need adjusting entries?,11,Its a timing issue and related to the period assumption. Because sometimes transactions effect tw
10、o or more accounting periods we need to make sure income and expenses are recorded in the correct period We need to make sure that asset and liability balances are accurately reflected at the end of the accounting period Adjusting entries occur after the transactions have been recorded and posted, b
11、ut before the financial statements are prepared,Types of adjusting entries,12,Types of adjusting entries,13,Adjusting entries,14,One side of the adjusting journal entry affects an account reported in the income statement (ie revenue or expense) and the other side of the entry affects an account reco
12、rded in the balance sheet (asset or liability) The cash account is never adjusted because the cash flow occurs before or after the reporting date,An example: Bazinga Inc,15,Bazinga Inc is a comic book store in Pasadena, California. It is owned and managed by four friends: Sheldon, Leonard, Howard, a
13、nd Raj. The Trial Balance as at June 2010 for the company, before adjusting entries are made, is shown on the following slide,16,An example: Bazinga Inc, year end info,When doing adjusting entries, you will need to determine what information is available at the end of the accounting period so that y
14、ou can calculate the correct balances for assets and liability accounts and determine the amounts to be included as revenue and expenses. In ACCY901, this type of information will be given to you. (a) Supplies on hand at the end of the period were $8,000 (b) The useful life of shop fittings was 5 ye
15、ars and the residual value is $5,000. (c) A three year insurance policy was purchased on 1 July 2009. (d) The business employs one sales assistant who is paid $1,000 for a five day working week and is paid every Friday. Balance day is a Wednesday. (e) Comic books worth $3,500 were sent to a collecto
16、r with an invoice on 29 June 2010. (f) The subscription revenue recorded in the unearned revenue account were for a two-year period, therefore half of this money was earned at year end,17,(a) Supplies on hand at the end of the period were $8,000,Type of adjusting entry prepayment cost paid for befor
17、e consumed In the unadjusted trial balance, supplies at the beginning of the period were $12,500 Therefore, an adjusting entry is required to reduce the balance to $8,000,(b) The useful life of shop fittings was 5 years and the residual value is $5,000.,Type of adjusting entry prepayment depreciatio
18、n Adjusting entry for depreciation expense Annual depreciation expense = (cost residual value)/estimated useful life Annual depreciation expense = ($15,000-$5,000)/5 years,(c) A three year insurance policy was purchased on 1 July 2009.,Type of adjusting entry prepayment prepaid expense Insurance pol
19、icy purchased at the beginning of the current year. Valid for three years. Adjusting entry records expiration of policy over this period.,(d) The business employs one sales assistant who is paid $1,000 for a five day working week and is paid every Friday. Balance day is a Wednesday.,Type of adjustin
20、g entry accrual unrecorded expenses Work out: how much is paid per day AND how many days fall between date of last pay and balance date.,(e) Comic books worth $3,500 were sent to a collector with an invoice on 29 June 2010.,Type of adjusting entry accrual unrecorded revenue Adjusting entry for unrec
21、orded revenue,(f) The subscription revenue recorded in the unearned revenue account were for a two-year period, therefore half of this money was earned at year end,Type of adjusting entry deferral unearned revenue Adjusting entry for unearned revenue now earned,An example: Bazinga Inc,24,Once adjust
22、ing entries are posted to ledger accounts, new totals are calculated and an adjusted trial balance is taken After the adjusting process is completed, the adjusted trial balance is used to prepare the financial statements We will use worksheets to help us with this process,Using a worksheet,25,Why us
23、e a worksheet? It helps to compile the information necessary for the preparation of the financial statements The balances of ledger accounts appear in one location The affect of adjustments can be viewed easily and corrected if necessary Because the adjusted trial balance is easily visible, the work
24、sheet can simplify the preparation of financial statements,What does a worksheet look like?,26,An example: Bazinga Inc,27,Once the adjustments are entered, the adjusted balances are extended to the appropriate columns in the adjusted trial balance. Expenses debit column Revenue credit column Assets
25、and dividends/drawings debit columns Liabilities, equity, contra assets credit columns,28,An example: Bazinga Inc,29,Finally, the amounts in the adjusted trial balance are entered in the income statement and balance sheet columns. Expenses = debit column of income statement Revenue = credit column o
26、f income statement Assets and dividends/drawings = debit column of balance sheet Liabilities, equity, contra assets = credit column of balance sheet These columns are then used to prepare the financial statements,30,Income statement from worksheet,31,Statement of changes in equity,32,Balance sheet f
27、rom worksheet,33,Chapter 4: Completion of the accounting cycle,Week 3,34,Closing entries,To make the accounts ready for the next accounting period, the books must be closed. Understand the difference between Temporary (or nominal) accounts Permanent (or real) accounts Temporary accounts include all
28、the income statement accounts and dividend/drawing accounts that are useful for one period only (to determine profit for the year). These accounts are closed at the end of the year. Permanent accounts include all balance sheet accounts and relate to one or more accounting periods. These accounts are
29、 not closed.,35,Preparing closing entries,Closing entries Formally transfer profit or loss and owners drawings or dividends to owners capital Produce a zero balance in each temporary account Profit and Loss Summary This is another temporary account which is used to help with the closing process This
30、 account is also closed (example coming!),36,The closing process,1 Close revenue accounts to Profit and Loss Summary 2 Close expenses accounts to Profit and Loss Summary,37,1,2,The closing process continued,3 Close Profit & Loss Summary to Retained earnings,38,3,The closing process continued,4 Close
31、 Dividends to Retained earnings,39,4,Closing Entries Illustrated: Bazinga Inc,40,GENERAL JOURNAL J3 Date Account titles and explanations Ref. Debit Credit 2010 June 30 Sales Revenue 32 250 Profit & Loss Summary 32 250 (To close income account) 30 Profit & Loss Summary 8 100 Supplies Expense 4 500 De
32、preciation Expense - fittings 2 000 Insurance Expense 1 000 Salaries Expense 600 (To close expense accounts) 30 Profit & Loss Summary 24 150 Retained earnings 24 150 (To close Profit and Loss Summary account and transfer profit to Retained Earnings) IF THERE HAD BEEN A DIVIDEND PAID 30 Retained earn
33、ings 500 Dividends 500 (To close dividends and recognise decrease in retained earnings),1,2,3,4,Post closing entries,Temporary accounts All will have zero balances after posting the closing entries All revenue and expense accounts are totalled, balanced and double-ruled Retained earnings Balance rep
34、resents total retained earnings at end of accounting period No entries are journalised and posted to retained earnings during the year Permanent accounts Not closed (assets, liabilities, equity),41,Preparing a post-closing trial balance,A post-closing trial balance is a list of all permanent account
35、s and their balances after closing entries are journalised and posted The purpose of the post-closing trial balance is to prove the equality of the permanent accounts that are carried forward to the next accounting period,42,Preparing a post-closing trial balance continued,43,SUMMARY OF THE ACCOUNTI
36、NG CYCLE,Analyse business transactions Journalise the transactions Post to ledger accounts Prepare a trial balance Journalise and post adjusting entries: prepayments/accruals Prepare an adjusted trial balance Prepare financial statements Income statement Statement of changes in equity Statement of financial position Journalise and post closing entries Prepare a post-closing trial balance,44,