(C) 2013 - Professor Joseph
Finocchiaro

Recording Adjusting, Closing, and
Reversing Entries
• Business transactions that have been recorded represent
activities that affect the accounting period in which they
are r...
Adjusting Entries
• Journal entries that are recorded in order to properly reflect
the appropriate balances in the various...
Types of Adjusting Entries
• Two types

(C) 2013 - Professor Joseph
Finocchiaro

• Accruals
• Deferrals
• Most businesses use this
• Assumes that revenue is recognized when earned,
regardless of when the revenue is actually re...
Accrual Basis
• Known as the Principle of Matching Costs and Revenue
• Individuals are on a Cash Basis

• We will assume t...
Accruals

(C) 2013 - Professor Joseph
Finocchiaro

• Accrual means to accumulate
• It is necessary to recognize that altho...
• Expense items have been incurrent but have not necessarily
been recorded either because the business is not obligated
to...
Accrued Expenses
• Rent Example:
• Rent for December isn’t paid for by December 31.

• This allows us to recognize an expe...
• Supplies Example
• Current Asset is one that will be used up or converted to
cash within a year or less.
• If an account...
Accrued Expenses

• Debit Supplies Expense
• Credit Supplies

• This allows you to show the true value of supplies on hand...
Accrued Expenses

• It may be necessary to set up a liability account if one does not
already exist

(C) 2013 - Professor ...
• Record the appropriate
adjusting journal entries
for the following
situations. Assume that
the accounting period
ends on...
• 1. A physical count of
office supplies indicates
that $250 worth of office
supplies had been used
up during the accounti...
EXERCISE 1

(C) 2013 - Professor Joseph
Finocchiaro

• 2. Rent totaling $800 for
the months of November
and December has n...
• 3. You received a bill for
advertisements placed in
the newspaper during
the second week of
November. The bill is for
$2...
• 4. You borrowed $1,000
from First City Bank.
Interest is at 10% on the
obligation and not to be
repaid for 90 days.
Reco...
• 5. On July 1, 2008 you
took out a fire insurance
policy. You recorded this
insurance premium in an
asset account entitle...
• 6. Salaries are paid on
Fridays for the week
ending on the same day.
The salaries for the week
amounts to $5,000. The
la...
• Service is provided but payment is not due from the
customer so we record the transaction as a credit sale of
services.
...
Accrued Revenues

• Accrued revenue that has been accumulated during an
accounting period but whose payment will be receiv...
• Customer borrows $1,000 from you on a 90 day
promissory note with an annual rate of interest at 8% on
December 1, 2008.
...
Loan Example

•
•
•
•

Debit Cash
Credit Interest Receivable
Credit Interest Income
Credit Notes Receivable

1,020.00
6.67...
Loan Example

(C) 2013 - Professor Joseph
Finocchiaro

• If it had become due DURING the same accounting period,
no adjust...
• A postponement of the recognition of either an expense or a
revenue item.
• Certain transaction may be interpreted diffe...
• Theory 1 - Rent payment represents a right to use property
that will be used up at the end of each month, the rent
shoul...
Example – Theory 1

• Debit Rent Expense
• Credit Cash

3,000
3,000

(C) 2013 - Professor Joseph
Finocchiaro

• One year l...
Example – Theory 1
• The rent payment is for 6 months, but there is only 2 more
months left in the accounting period so on...
Example – Theory 1

• Prepaid Expense
• An expense that was paid in advance

• Since it is paid for, and not used up, it i...
Example Theory 2
• This assumes the rent payment was IMMEDIATELY an
asset or a prepaid expense
• 200- November 1
3,000
3,0...
Example Theory 2
• When an expense previously paid has not been fully used
up, it is necessary to defer that portion not u...
• Revenue received but not earned within the accounting period
and must be deferred.
• You receive a rent check from your ...
Unearned Revenue

• The landlord has an obligation to supply the premises for
January and February.
• During the next acco...
• Record the following
adjusting entries to
reflect the accrual and
deferral of expenses
and revenue for the
calendar year...
• 1. Recognized the
interest income
accumulated on a
$5,000 note bearing
interest of 9% dated
November 2.

(C) 2013 - Prof...
• 2. Recorded an
adjusting entry to
recognize that the
income from
commissions
previously received by
not yet earned to th...
• 3. Determined that the
balance in the ledger
account for office
supplies was $990, but
that an inventory
showed only $26...
EXERCISE 2

(C) 2013 - Professor Joseph
Finocchiaro

• 4. Accrued Salaries for
the last three days in
the old year amounti...
• 5. Showed a balance of
$2,270 in the prepaid
insurance account.
Insurance records
indicate that $1,245 of
the insurance ...
• 6. Borrowed $6,000 for
90 days with interest
payable at an annual
rate of 12%. Loan was
taken out 45 days
before the end...
• Noncurrent, or plant, assets are subject to a loss in value
due to the item being used.
• The loss in value of plant ass...
• When depreciation is recognized as an adjusting entry at
the end of the accounting period, an expense is charged.
• Sinc...
Straight Line depreciation

• A truck costs $20,000. Expected life is 10 years and then it will
have no value.
• 20,000 / ...
• If a plant asset is to have a residual value (scrap value) at
the end of its life that must be subtracted from the usabl...
• Office equipment
was purchased at a
cost of $3,400. It has
an expected useful
life of 6 years and
after it has been
full...
EXERCISE 3

(C) 2013 - Professor Joseph
Finocchiaro

• 1. How much of the
asset is subject to
depreciation?
EXERCISE 3

(C) 2013 - Professor Joseph
Finocchiaro

• 2. What will be the
annual depreciation
recognized?
• 3. Assuming that the
asset was acquired
at the beginning of
the year, record the
adjusting entry to
recognize
depreciati...
• 4. Determine the
book value of the
asset after the first
year’s adjusting
entry.

(C) 2013 - Professor Joseph
Finocchiar...
• 5. What is the book
value of the asset
after it has been
depreciated for six
years?

(C) 2013 - Professor Joseph
Finocch...
• 6. What happens to
the book value for
the asset during
each year of its
useful life? Why?

(C) 2013 - Professor Joseph
F...
• 7. When recording
annual depreciation,
why doesn’t the
accountant credit
the asset account
directly?

(C) 2013 - Profess...
• To expedite the preparation of financial statements and the
preparation of adjustments prior to statement preparation
th...
Recording Adjusting Entries

(C) 2013 - Professor Joseph
Finocchiaro

• Worksheet is only used/viewed by the accountant.
•...
Recording Adjusting Entries
• Trial balance is prepared on the worksheet
• Necessary adjusting entries are recorded on the...
• Function of the adjustments column is to adjust the
valances in the ledger accounts to match costs and revenue
for the s...
• Record, in
journal form,
the following
adjusted entries
using the
information
provided in the
worksheet
previously
prese...
EXERCISE 4

(C) 2013 - Professor Joseph
Finocchiaro

• A. Depreciation
for the year
amounting to
$500.
• B. Daily payroll
amounts to
$130. Record
adjusting entry
to recognize the
accrual of
salaries for four
days.

(C) 2013 -...
• C. Included in
the rental
income account
is income
received by not
yet earned
amounting to
$1,200

(C) 2013 - Professor ...
• D. Supplies
recognized as
an expense
amounting to
$600 have not
been used up
during the
current
accounting
period. Make
...
EXERCISE 4

(C) 2013 - Professor Joseph
Finocchiaro

• 1. Record the journalized entries to the adjustment columns
EXERCISE 4

(C) 2013 - Professor Joseph
Finocchiaro

• 2. Total Both columns to verify the agreement
EXERCISE 4

(C) 2013 - Professor Joseph
Finocchiaro

• 3. Extend the trial balance amounts through the adjustment
columns ...
EXERCISE 4

(C) 2013 - Professor Joseph
Finocchiaro

• 4. Summarize the last four columns. Difference Should be the
same
EXERCISE 4

(C) 2013 - Professor Joseph
Finocchiaro

• 5. Show the difference in the amounts in the column with the
smalle...
EXERCISE 4

(C) 2013 - Professor Joseph
Finocchiaro

• 6. Compare your worksheet against this master.
• Trial balance only contains those accounts that have
balances
• When adjusting are recorded to the worksheet where
accou...
How to Record Adjusting
Entries on the worksheet

(C) 2013 - Professor Joseph
Finocchiaro

• Once the adjustments have bee...
• Assets and proprietor’s drawing account are extended to
the debit column of the balance sheet.
• Liabilities and proprie...
• Extensions of the accounts that were affected by the
adjustments are treated according to the specific
adjustment. Accou...
Using the completed
worksheet
• If the accountant has been asked to prepare interim
financial statements, information is p...
Using the completed
worksheet

(C) 2013 - Professor Joseph
Finocchiaro

• Actual adjustments can take place at any future ...
EXERCISE 5

(C) 2013 - Professor Joseph
Finocchiaro

• Due to the extensiveness of this example it will not be covered
in ...
• In organizing a ledger there will be a chart of accounts,
which is comparable to a table of contents.
• Purpose of the c...
Chart of Accounts

• There is also numbering of accounts 100 series, 200 series, 300
series depending on type of account.
...
Closing Entries
• This is accomplished by preparing a statement of capital.
• This is necessary to prepare financial state...
Closing Entry
• This is accomplished by the use of a debit or credit to
eliminate the balance and a corresponding entry ma...
Closing Entry
• All revenue accounts are closed to the income summary account
• All expense accounts are closed to the inc...
Closing Entry

• The temporary accounts will still be in the ledger but will have
no balance (or a zero balance).

• These...
EXERCISE 6

(C) 2013 - Professor Joseph
Finocchiaro

• Exercise 6 is mostly dependent on Exercise 5, however we will
look ...
• A. Analysis
indicates there is
a balance in the
insurance
account of $400.
Trial Balance
indicates $600.
(write off $200...
EXERCISE 6

(C) 2013 - Professor Joseph
Finocchiaro

• B. Supplies used
during the year
amounts to
$175.
• C. Depreciation
expense on the
furniture
amounted to
$500 for the
year.

(C) 2013 - Professor Joseph
Finocchiaro

EXERCI...
• D. Of the service
revenue
recorded, it has
been determined
that $400 has
not been earned
for the year.

(C) 2013 - Profe...
• E. Salaries
earned but not
paid for the last
week in the fiscal
year amounted
to $300.

(C) 2013 - Professor Joseph
Fino...
• F. Interest
expense incurred
but not yet paid
on a promissory
note amounted
to $40.

(C) 2013 - Professor Joseph
Finocch...
EXERCISE 6

(C) 2013 - Professor Joseph
Finocchiaro

• Post Closing
Entries using the
worksheet from
Exercise 5.
EXERCISE 6

(C) 2013 - Professor Joseph
Finocchiaro

• Posting revenue
to income
summary
account.
EXERCISE 6

(C) 2013 - Professor Joseph
Finocchiaro

• Posting Expenses
to Income
Summary
EXERCISE 6

(C) 2013 - Professor Joseph
Finocchiaro

• Posting Owner’s
drawing account
to Income
Summary
EXERCISE 6

(C) 2013 - Professor Joseph
Finocchiaro

• Posting the net
income / net loss
to the owner’s
capital account.
• The adjusting and closing process has a dramatic effect on
the ledger in that the trial balance prepared to verify the
l...
• The successful completion of the post closing trial balance
will prove that the ledger is in balance at the end of the
a...
EXERCISE 7

(C) 2013 - Professor Joseph
Finocchiaro

• Prepare a post closing trial balance for the Beldon Service
Company
EXERCISE 7

(C) 2013 - Professor Joseph
Finocchiaro

• Cash does not have any
adjustment – as there is
nothing to adjust
r...
EXERCISE 7

(C) 2013 - Professor Joseph
Finocchiaro

• Accounts receivable will
not change as the total
amounts are still ...
EXERCISE 7

(C) 2013 - Professor Joseph
Finocchiaro

• Prepaid insurance
showed the amount
used up ($200).
EXERCISE 7

(C) 2013 - Professor Joseph
Finocchiaro

• Supplies needed to be
adjusted for those
supplies on hand.
• Furniture face value
does not change as we
cannot change the
beginning value of the
asset.

(C) 2013 - Professor Joseph
...
• We reflect the loss of
value of an asset
through the use of the
accumulated
depreciation account.

(C) 2013 - Professor ...
• We then extend out the
new accounts used
after adjusting and
prove that the
adjustments are
accurate and that the
tempor...
•
•
•
•
•
•
•
•

Journalize daily business transactions
Post to the various ledger account
Prepare trial balance monthly
P...
Reversing Entries
• The process of recording adjusting entries creates certain
ledger accounts that are not normally recor...
• The payroll clerk in charge of preparing the payroll at the
end of the week is familiar with the basic procedure of
reco...
• A reversing entry is required whenever an adjusting entry
results in the establishment of an account on the books that
n...
• 1. Salaries
amounted to
$3,500. For the
week ending
January 4, record
the adjusting entry
needed for the old
year.
• (1 ...
• 2. Office supplies
balance is $530,
Inventory is at
$160.
• ($530-$160=$370)

(C) 2013 - Professor Joseph
Finocchiaro

E...
• 3. Insurance
expense has a
balance of $1,350.
An analysis shows
$450 in unexpired
premiums remain.
• (Nothing to add or
...
• 4. You sign a new
lease with a tenant
that requires that
the tenant pay up
front for 6 months
at $100 a month
which bega...
EXERCISE 8

(C) 2013 - Professor Joseph
Finocchiaro

• For 1. we need to
recognize the
reversing entry for
the salary.
EXERCISE 8

(C) 2013 - Professor Joseph
Finocchiaro

• For 3 we have to
recognize the
amount remaining
on the insurance.
• For 4 we have to
recognize the
remaining amount
on the prepaid
rent.

(C) 2013 - Professor Joseph
Finocchiaro

EXERCISE ...
EXERCISE 8

(C) 2013 - Professor Joseph
Finocchiaro

• Notice the date on all
these transactions
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Fse2200 -ACCOUNTING CH 4

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  • Fse2200 -ACCOUNTING CH 4

    1. 1. (C) 2013 - Professor Joseph Finocchiaro Recording Adjusting, Closing, and Reversing Entries
    2. 2. • Business transactions that have been recorded represent activities that affect the accounting period in which they are recorded. • There may be transactions, however, that will not only affect the current period, but possible a prior or future period. In order for the ledger accounts to properly reflect the activities for the current accounting period it may be necessary for the accountant to prepare adjusting entries (C) 2013 - Professor Joseph Finocchiaro Adjusting Entries
    3. 3. Adjusting Entries • Journal entries that are recorded in order to properly reflect the appropriate balances in the various ledger accounts for a specific accounting period. • Usually prepared at the end of the accounting period, they could be prepared at any time it is appropriate to do so. • We will assume these will be done at the end of an accounting period (C) 2013 - Professor Joseph Finocchiaro • Adjusting Entry
    4. 4. Types of Adjusting Entries • Two types (C) 2013 - Professor Joseph Finocchiaro • Accruals • Deferrals
    5. 5. • Most businesses use this • Assumes that revenue is recognized when earned, regardless of when the revenue is actually received in the form of cash and that expenses are recognized when incurred regardless of when payment is actually made. (C) 2013 - Professor Joseph Finocchiaro Accrual Basis
    6. 6. Accrual Basis • Known as the Principle of Matching Costs and Revenue • Individuals are on a Cash Basis • We will assume that all businesses are on an accrual basis, even though there may be times in real life when that is not the case. (C) 2013 - Professor Joseph Finocchiaro • Revenue is recognized when received and expenses are recognized when paid.
    7. 7. Accruals (C) 2013 - Professor Joseph Finocchiaro • Accrual means to accumulate • It is necessary to recognize that although things may have been accumulated, they may not have been recognized.
    8. 8. • Expense items have been incurrent but have not necessarily been recorded either because the business is not obligated to pay the expense yet or has failed to do so. • When this occurs, it is necessary to record an adjusting entry. (C) 2013 - Professor Joseph Finocchiaro Accrued Expenses
    9. 9. Accrued Expenses • Rent Example: • Rent for December isn’t paid for by December 31. • This allows us to recognize an expense that was incurred during the accounting period even though the actual expense will not be paid until the next accounting period. • The Principle of Matching Costs and Revenues has been met. • In the new year when it is paid • Debit Rent Payable • Credit Cash (C) 2013 - Professor Joseph Finocchiaro • Debit Rent Expense • Credit Rent Payable
    10. 10. • Supplies Example • Current Asset is one that will be used up or converted to cash within a year or less. • If an accountant takes a physical count at the end of an accounting period, this count will probably represent a dollar cost assigned to the supplies that is less than the value as stated in the ledger account due to use. (C) 2013 - Professor Joseph Finocchiaro Accrued Expenses
    11. 11. Accrued Expenses • Debit Supplies Expense • Credit Supplies • This allows you to show the true value of supplies on hand • These are examples of Unrecorded Expenses that are adjusted at the end of an accounting period. (C) 2013 - Professor Joseph Finocchiaro • A supply that is used up is considered to have become an expense. • It becomes necessary to recognize this expense on the books
    12. 12. Accrued Expenses • It may be necessary to set up a liability account if one does not already exist (C) 2013 - Professor Joseph Finocchiaro • Any current asset that is subject to use and thus becomes an expense is treated in the same manner. • When an expense has been incurred, but not yet paid, it is treated in a similar fashion.
    13. 13. • Record the appropriate adjusting journal entries for the following situations. Assume that the accounting period ends on Dec. 31, 2008 and all entries are made of that date. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 1
    14. 14. • 1. A physical count of office supplies indicates that $250 worth of office supplies had been used up during the accounting period (C) 2013 - Professor Joseph Finocchiaro EXERCISE 1
    15. 15. EXERCISE 1 (C) 2013 - Professor Joseph Finocchiaro • 2. Rent totaling $800 for the months of November and December has not been paid by December 31, 2008.
    16. 16. • 3. You received a bill for advertisements placed in the newspaper during the second week of November. The bill is for $200, not to be paid until January 15, 2009. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 1
    17. 17. • 4. You borrowed $1,000 from First City Bank. Interest is at 10% on the obligation and not to be repaid for 90 days. Record the adjusting entry to recognize the interest expense on the loan from Dec. 1 to Dec. 31, 2008 (C) 2013 - Professor Joseph Finocchiaro EXERCISE 1
    18. 18. • 5. On July 1, 2008 you took out a fire insurance policy. You recorded this insurance premium in an asset account entitled prepaid insurance for the amount of the yearly premium of $600. On Dec. 31, 2008 record the adjusting entry for this asset. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 1
    19. 19. • 6. Salaries are paid on Fridays for the week ending on the same day. The salaries for the week amounts to $5,000. The last day of the accounting period is Wednesday, Dec. 31, 2008. Record the adjusting entry necessary to recognize the salaries expense for the last three days of they year. Payment will not take place until Jan. 2, 2009. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 1
    20. 20. • Service is provided but payment is not due from the customer so we record the transaction as a credit sale of services. • This is how we accrue revenue • This kind of transaction is not normally considered an adjusting entry as this is how most businesses operate (C) 2013 - Professor Joseph Finocchiaro Accrued Revenues
    21. 21. Accrued Revenues • Accrued revenue that has been accumulated during an accounting period but whose payment will be receiving in a future accounting period. (C) 2013 - Professor Joseph Finocchiaro • It is important to record the revenue and resulting accounts or note receivable so that we have a record of who owes us money as a result of the credit sale. • Unrecorded revenue
    22. 22. • Customer borrows $1,000 from you on a 90 day promissory note with an annual rate of interest at 8% on December 1, 2008. • The interest isn’t due until the note is due, but we must record the accrued interest • Debit Interest Receivable • Credit Interest Income (C) 2013 - Professor Joseph Finocchiaro Loan Example
    23. 23. Loan Example • • • • Debit Cash Credit Interest Receivable Credit Interest Income Credit Notes Receivable 1,020.00 6.67 13,33 1,000 (C) 2013 - Professor Joseph Finocchiaro • We do not change the Note receivable because the face value of the note has not changed - $1000 • When note becomes due on March 1, 2009 the following entry is made
    24. 24. Loan Example (C) 2013 - Professor Joseph Finocchiaro • If it had become due DURING the same accounting period, no adjusting entry would be necessary.
    25. 25. • A postponement of the recognition of either an expense or a revenue item. • Certain transaction may be interpreted differently depending on the accountant, philosophy of the business, as well as the nature of the transaction. (C) 2013 - Professor Joseph Finocchiaro Deferrals
    26. 26. • Theory 1 - Rent payment represents a right to use property that will be used up at the end of each month, the rent should initially be recorded as an expense • Theory 2 - Rent payment represents a right to use property and that property has a money value, the rent can be considered a form of an asset. Since rent is usually payable at the beginning of the month and the rights to use the property extend to the end of the month, it is an asset. (C) 2013 - Professor Joseph Finocchiaro Example : Rent payment Theories
    27. 27. Example – Theory 1 • Debit Rent Expense • Credit Cash 3,000 3,000 (C) 2013 - Professor Joseph Finocchiaro • One year lease was signed and become effective November 1, 200-. Rent is $6,000 and to be paid in two installments of 50% each. First installment is due November 1. The entry made to reflect this is
    28. 28. Example – Theory 1 • The rent payment is for 6 months, but there is only 2 more months left in the accounting period so on December 31, 200- we record 2,000 2,000 (C) 2013 - Professor Joseph Finocchiaro • Debit Prepaid Rent Expense • Credit Rent Expense
    29. 29. Example – Theory 1 • Prepaid Expense • An expense that was paid in advance • Since it is paid for, and not used up, it is considered an asset (C) 2013 - Professor Joseph Finocchiaro • Credit to rent expense reduces the expense to be recognized for the accounting period (postponement). The debit entry converts the expense to an account that is known as a “prepaid expense”
    30. 30. Example Theory 2 • This assumes the rent payment was IMMEDIATELY an asset or a prepaid expense • 200- November 1 3,000 3,000 • 200- December 31 • Debit Rent Expense • Credit Prepaid Rent 1,000 1,000 (C) 2013 - Professor Joseph Finocchiaro • Debit Prepaid Rent (Rent) • Credit Cash
    31. 31. Example Theory 2 • When an expense previously paid has not been fully used up, it is necessary to defer that portion not used and convert it to an asset. (C) 2013 - Professor Joseph Finocchiaro • This is usually indicated by the word “Prepaid” in the name
    32. 32. • Revenue received but not earned within the accounting period and must be deferred. • You receive a rent check from your tenant on November 1, 2008 for $800 for four months rent beginning with November. The recorded transaction was • Debit Cash • Credit Income from Rental 800 800 • On December 31 you have the following entry • Debit Income from Rental • Credit Unearned Rental Income 400 400 (C) 2013 - Professor Joseph Finocchiaro Unearned Revenue
    33. 33. Unearned Revenue • The landlord has an obligation to supply the premises for January and February. • During the next accounting period when the income is earned: • Debit Unearned Rental Income • Credit Income from Rent 400 400 (C) 2013 - Professor Joseph Finocchiaro • Deferral of income permits the income to be properly stated and also results in the recognition of a liability for the income received but at this point not earned.
    34. 34. • Record the following adjusting entries to reflect the accrual and deferral of expenses and revenue for the calendar year ending December 31 of the current year. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 2
    35. 35. • 1. Recognized the interest income accumulated on a $5,000 note bearing interest of 9% dated November 2. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 2
    36. 36. • 2. Recorded an adjusting entry to recognize that the income from commissions previously received by not yet earned to the extent of 40% of the $800 commission. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 2
    37. 37. • 3. Determined that the balance in the ledger account for office supplies was $990, but that an inventory showed only $260 worth of office supplies remaining. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 2
    38. 38. EXERCISE 2 (C) 2013 - Professor Joseph Finocchiaro • 4. Accrued Salaries for the last three days in the old year amounting to $1,500.
    39. 39. • 5. Showed a balance of $2,270 in the prepaid insurance account. Insurance records indicate that $1,245 of the insurance expired during the year. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 2
    40. 40. • 6. Borrowed $6,000 for 90 days with interest payable at an annual rate of 12%. Loan was taken out 45 days before the end of the accounting period and is due to be paid in full forty five days into the new year. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 2
    41. 41. • Noncurrent, or plant, assets are subject to a loss in value due to the item being used. • The loss in value of plant assets is not obvious because the asset still exists in its complete form at the end of the accounting period. • Depreciation • The loss of value due to use of a plant asset due to wear and tear over its useful life. (C) 2013 - Professor Joseph Finocchiaro Adjusting Noncurrent Assets
    42. 42. • When depreciation is recognized as an adjusting entry at the end of the accounting period, an expense is charged. • Since the expense does NOT represent an actual outlay of cash, and the cost principle prevents us from reducing the value of the asset directly, it becomes necessary to credit a new account called “Accumulated Depreciation”. • The purpose of this account is merely to offset the plant asset account • The net, or book value, of the plant asset will be determined by subtracting the accumulated depreciation account from the value of the plant asset. (C) 2013 - Professor Joseph Finocchiaro Adjusting Noncurrent Assets
    43. 43. Straight Line depreciation • A truck costs $20,000. Expected life is 10 years and then it will have no value. • 20,000 / 10 = 2,000 a year depreciation. • To find a value for a specific month, divide the yearly amount by 12. (C) 2013 - Professor Joseph Finocchiaro • Most common form used • Value of asset is divided by its useful life to determine the amount of depreciation annually • Example:
    44. 44. • If a plant asset is to have a residual value (scrap value) at the end of its life that must be subtracted from the usable amount. • Let’s assume the $20,000 truck has a scrap value of $1,000 after 10 years of use. • (20,000 – 1,000) / 10 = 1,900 a year depreciation (C) 2013 - Professor Joseph Finocchiaro Straight Line depreciation
    45. 45. • Office equipment was purchased at a cost of $3,400. It has an expected useful life of 6 years and after it has been fully depreciated, it will have a scrap value of $400. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 3
    46. 46. EXERCISE 3 (C) 2013 - Professor Joseph Finocchiaro • 1. How much of the asset is subject to depreciation?
    47. 47. EXERCISE 3 (C) 2013 - Professor Joseph Finocchiaro • 2. What will be the annual depreciation recognized?
    48. 48. • 3. Assuming that the asset was acquired at the beginning of the year, record the adjusting entry to recognize depreciation for the first full year. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 3
    49. 49. • 4. Determine the book value of the asset after the first year’s adjusting entry. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 3
    50. 50. • 5. What is the book value of the asset after it has been depreciated for six years? (C) 2013 - Professor Joseph Finocchiaro EXERCISE 3
    51. 51. • 6. What happens to the book value for the asset during each year of its useful life? Why? (C) 2013 - Professor Joseph Finocchiaro EXERCISE 3
    52. 52. • 7. When recording annual depreciation, why doesn’t the accountant credit the asset account directly? (C) 2013 - Professor Joseph Finocchiaro EXERCISE 3
    53. 53. • To expedite the preparation of financial statements and the preparation of adjustments prior to statement preparation the worksheet is prepared. • The trial balance is prepared and becomes the backbone of the worksheet. • A worksheet can be defined as an expanded trial balance. (C) 2013 - Professor Joseph Finocchiaro Recording Adjusting Entries
    54. 54. Recording Adjusting Entries (C) 2013 - Professor Joseph Finocchiaro • Worksheet is only used/viewed by the accountant. • Form consists of a column to list the accounts from the ledger followed by eight money columns.
    55. 55. Recording Adjusting Entries • Trial balance is prepared on the worksheet • Necessary adjusting entries are recorded on the worksheet using the adjustments column • Information is extended along with the trial balance info to the remaining two sets of the worksheet columns (Income Statement and Balance Sheet) • Assets, liabilities, permanent capital, and proprietor’s drawing account are extended from the trial balance columns through the adjustments column and recorded to the appropriate income statement columns (C) 2013 - Professor Joseph Finocchiaro • Preparation of the worksheet precedes the recording of adjusting entries.
    56. 56. • Function of the adjustments column is to adjust the valances in the ledger accounts to match costs and revenue for the specific accounting period covered. • No journal entries or relating postings are made at this time, although these adjusting entries made on the worksheet will later become the basis for recording adjusted journal entries and related postings at the end of the accounting period. • If the accountant is preparing interim statements, no adjusting journal entries or postings would be made. (C) 2013 - Professor Joseph Finocchiaro Recording Adjusting Entries
    57. 57. • Record, in journal form, the following adjusted entries using the information provided in the worksheet previously presented (C) 2013 - Professor Joseph Finocchiaro EXERCISE 4
    58. 58. EXERCISE 4 (C) 2013 - Professor Joseph Finocchiaro • A. Depreciation for the year amounting to $500.
    59. 59. • B. Daily payroll amounts to $130. Record adjusting entry to recognize the accrual of salaries for four days. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 4
    60. 60. • C. Included in the rental income account is income received by not yet earned amounting to $1,200 (C) 2013 - Professor Joseph Finocchiaro EXERCISE 4
    61. 61. • D. Supplies recognized as an expense amounting to $600 have not been used up during the current accounting period. Make the necessary adjustment. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 4
    62. 62. EXERCISE 4 (C) 2013 - Professor Joseph Finocchiaro • 1. Record the journalized entries to the adjustment columns
    63. 63. EXERCISE 4 (C) 2013 - Professor Joseph Finocchiaro • 2. Total Both columns to verify the agreement
    64. 64. EXERCISE 4 (C) 2013 - Professor Joseph Finocchiaro • 3. Extend the trial balance amounts through the adjustment columns of either the income statement or the balance sheet.
    65. 65. EXERCISE 4 (C) 2013 - Professor Joseph Finocchiaro • 4. Summarize the last four columns. Difference Should be the same
    66. 66. EXERCISE 4 (C) 2013 - Professor Joseph Finocchiaro • 5. Show the difference in the amounts in the column with the smaller total then double underscore the two amounts in each set of columns that now agree.
    67. 67. EXERCISE 4 (C) 2013 - Professor Joseph Finocchiaro • 6. Compare your worksheet against this master.
    68. 68. • Trial balance only contains those accounts that have balances • When adjusting are recorded to the worksheet where accounts are needed then the needed account is added below the trial balance. • Letters are used to relate debit adjustments to corresponding credits (C) 2013 - Professor Joseph Finocchiaro How to Record Adjusting Entries on the worksheet
    69. 69. How to Record Adjusting Entries on the worksheet (C) 2013 - Professor Joseph Finocchiaro • Once the adjustments have been recorded, foot the adjustments column then double underscore the values. • Accounts not having adjustments are just extended.
    70. 70. • Assets and proprietor’s drawing account are extended to the debit column of the balance sheet. • Liabilities and proprietor’s capital are extended to the credit column of the balance sheet. • Revenue and expense accounts that were not adjust are extended to the credit and debit columns respectively (C) 2013 - Professor Joseph Finocchiaro How to Record Adjusting Entries on the worksheet
    71. 71. • Extensions of the accounts that were affected by the adjustments are treated according to the specific adjustment. Accounts that had no modification are extended. • Following the extensions of the trial balance and adjustments the four remaining columns are footed. Results of the footing cause 4 different totals • This is a result of the net profit / net loss. (C) 2013 - Professor Joseph Finocchiaro How to Record Adjusting Entries on the worksheet
    72. 72. Using the completed worksheet • If the accountant has been asked to prepare interim financial statements, information is pulled from the worksheet. • Financial Statement preparation is greatly expedited by the preparation of the worksheet. (C) 2013 - Professor Joseph Finocchiaro • Do not post adjusting entries for interim statements
    73. 73. Using the completed worksheet (C) 2013 - Professor Joseph Finocchiaro • Actual adjustments can take place at any future time without holding up the interim statements. • Columns provide the information for the respective documents (statement of income, balance sheet, etc.)
    74. 74. EXERCISE 5 (C) 2013 - Professor Joseph Finocchiaro • Due to the extensiveness of this example it will not be covered in class – please take the time to do this on your own.
    75. 75. • In organizing a ledger there will be a chart of accounts, which is comparable to a table of contents. • Purpose of the chart of accounts is to provide the user of the ledger with a means of determining the accounts found in the ledger and their location within the ledger. (C) 2013 - Professor Joseph Finocchiaro Chart of Accounts
    76. 76. Chart of Accounts • There is also numbering of accounts 100 series, 200 series, 300 series depending on type of account. • Although numbers may be used, sequential numbering within a series is not necessary (301, 302, 305, 310, 322, etc) to allow for future expansion. (C) 2013 - Professor Joseph Finocchiaro • The organization of the chart of accounts follows the accounting equation format very closely listing assets first, liabilities second, and capital third.
    77. 77. Closing Entries • This is accomplished by preparing a statement of capital. • This is necessary to prepare financial statements and must be reflected in the various ledger accounts. (C) 2013 - Professor Joseph Finocchiaro • Temporary accounts are eventually eliminated and the contents transferred to permanent capital.
    78. 78. Closing Entry • This is accomplished by the use of a debit or credit to eliminate the balance and a corresponding entry made in a special temporary account exclusively for that purpose called the Income Summary or Net Earnings Summary (C) 2013 - Professor Joseph Finocchiaro • Transfers the values of the temporary capital accounts to the proprietor’s permanent capital account.
    79. 79. Closing Entry • All revenue accounts are closed to the income summary account • All expense accounts are closed to the income summary account • Proprietor’s drawing account is closed to the income summary account • Income summary account is closed to the proprietor’s permanent capital account (C) 2013 - Professor Joseph Finocchiaro • The name(closing entry) can change from business to business or place to place but the process is the same:
    80. 80. Closing Entry • The temporary accounts will still be in the ledger but will have no balance (or a zero balance). • These closing entries ONLY take place at the end of the accounting period when the ledger is closed. The ledger will be reopened in a new accounting period with the proper balances ready to start again. (C) 2013 - Professor Joseph Finocchiaro • After closing entries have been journalized and posted, the only accounts that will have balances will be the permanent accounts
    81. 81. EXERCISE 6 (C) 2013 - Professor Joseph Finocchiaro • Exercise 6 is mostly dependent on Exercise 5, however we will look at the postings to the journal and the closing entries.
    82. 82. • A. Analysis indicates there is a balance in the insurance account of $400. Trial Balance indicates $600. (write off $200) (C) 2013 - Professor Joseph Finocchiaro EXERCISE 6
    83. 83. EXERCISE 6 (C) 2013 - Professor Joseph Finocchiaro • B. Supplies used during the year amounts to $175.
    84. 84. • C. Depreciation expense on the furniture amounted to $500 for the year. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 6
    85. 85. • D. Of the service revenue recorded, it has been determined that $400 has not been earned for the year. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 6
    86. 86. • E. Salaries earned but not paid for the last week in the fiscal year amounted to $300. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 6
    87. 87. • F. Interest expense incurred but not yet paid on a promissory note amounted to $40. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 6
    88. 88. EXERCISE 6 (C) 2013 - Professor Joseph Finocchiaro • Post Closing Entries using the worksheet from Exercise 5.
    89. 89. EXERCISE 6 (C) 2013 - Professor Joseph Finocchiaro • Posting revenue to income summary account.
    90. 90. EXERCISE 6 (C) 2013 - Professor Joseph Finocchiaro • Posting Expenses to Income Summary
    91. 91. EXERCISE 6 (C) 2013 - Professor Joseph Finocchiaro • Posting Owner’s drawing account to Income Summary
    92. 92. EXERCISE 6 (C) 2013 - Professor Joseph Finocchiaro • Posting the net income / net loss to the owner’s capital account.
    93. 93. • The adjusting and closing process has a dramatic effect on the ledger in that the trial balance prepared to verify the ledger was in balance is no longer valid. • It becomes necessary to prove the ledger is still in balance so the accountant will prepare another trial balance that is called the Post Closing Trial Balance • These accounts reflect the adjusting entries that have been made and its temporary accounts no longer have balances. (C) 2013 - Professor Joseph Finocchiaro Post Closing Trial Balance
    94. 94. • The successful completion of the post closing trial balance will prove that the ledger is in balance at the end of the accounting period. • Prior to recording ANY business transactions for the new accounting period, this post closing trial balance must be prepared. (C) 2013 - Professor Joseph Finocchiaro Post Closing Trial Balance
    95. 95. EXERCISE 7 (C) 2013 - Professor Joseph Finocchiaro • Prepare a post closing trial balance for the Beldon Service Company
    96. 96. EXERCISE 7 (C) 2013 - Professor Joseph Finocchiaro • Cash does not have any adjustment – as there is nothing to adjust regarding cash on hand.
    97. 97. EXERCISE 7 (C) 2013 - Professor Joseph Finocchiaro • Accounts receivable will not change as the total amounts are still due.
    98. 98. EXERCISE 7 (C) 2013 - Professor Joseph Finocchiaro • Prepaid insurance showed the amount used up ($200).
    99. 99. EXERCISE 7 (C) 2013 - Professor Joseph Finocchiaro • Supplies needed to be adjusted for those supplies on hand.
    100. 100. • Furniture face value does not change as we cannot change the beginning value of the asset. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 7
    101. 101. • We reflect the loss of value of an asset through the use of the accumulated depreciation account. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 7
    102. 102. • We then extend out the new accounts used after adjusting and prove that the adjustments are accurate and that the temporary accounts have been closed out (C) 2013 - Professor Joseph Finocchiaro EXERCISE 7
    103. 103. • • • • • • • • Journalize daily business transactions Post to the various ledger account Prepare trial balance monthly Prepare worksheet with necessary adjusting entries at the end of the accounting period Prepare financial statements Journalize and post adjusting entries Journalize and post closing entries Prepare a post closing trial balance. (C) 2013 - Professor Joseph Finocchiaro Steps in the Accounting Cycle
    104. 104. Reversing Entries • The process of recording adjusting entries creates certain ledger accounts that are not normally recorded in the accounting period. • While salaries payable is listed on chart of accounts and an page for it will be found in the ledger, no entries are normally made in this account during the year with the exception of the adjusting entry just illustrated. (C) 2013 - Professor Joseph Finocchiaro • An example of this is salaries payable
    105. 105. • The payroll clerk in charge of preparing the payroll at the end of the week is familiar with the basic procedure of recording the salaries expense and reducing the amount of cash. • As a result of closing the ledger at the end of the accounting period salaries expense will have a zero balance going into the new accounting period. We recognize that salaries payable will appear on the post closing trial balance and will have a balance at the beginning of the new accounting period. We must then reverse it as the first day of the new accounting period to put it back in the Salaries Expense. • A Reversing entry is the exact opposite of an adjusting entry. (C) 2013 - Professor Joseph Finocchiaro Reversing Entries
    106. 106. • A reversing entry is required whenever an adjusting entry results in the establishment of an account on the books that normally does not carry a balance during the year. • It must take place on the first day of the new accounting period and will be the exact reverse of the adjusting entry. • Process • Record Adjusting entry • Record the closing entry necessary based on the information provided • Record the reversal entry • It is not mandatory to use reversing entries but it IS advisable. (C) 2013 - Professor Joseph Finocchiaro When to use reversing entries
    107. 107. • 1. Salaries amounted to $3,500. For the week ending January 4, record the adjusting entry needed for the old year. • (1 day is $700 and we are computing Dec. 31 to Jan. 1) (C) 2013 - Professor Joseph Finocchiaro EXERCISE 8
    108. 108. • 2. Office supplies balance is $530, Inventory is at $160. • ($530-$160=$370) (C) 2013 - Professor Joseph Finocchiaro EXERCISE 8
    109. 109. • 3. Insurance expense has a balance of $1,350. An analysis shows $450 in unexpired premiums remain. • (Nothing to add or subtract – they stated what the balance remaining to be used is) (C) 2013 - Professor Joseph Finocchiaro EXERCISE 8
    110. 110. • 4. You sign a new lease with a tenant that requires that the tenant pay up front for 6 months at $100 a month which began in November. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 8
    111. 111. EXERCISE 8 (C) 2013 - Professor Joseph Finocchiaro • For 1. we need to recognize the reversing entry for the salary.
    112. 112. EXERCISE 8 (C) 2013 - Professor Joseph Finocchiaro • For 3 we have to recognize the amount remaining on the insurance.
    113. 113. • For 4 we have to recognize the remaining amount on the prepaid rent. (C) 2013 - Professor Joseph Finocchiaro EXERCISE 8
    114. 114. EXERCISE 8 (C) 2013 - Professor Joseph Finocchiaro • Notice the date on all these transactions
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