HI5001

TOPIC 5
The Accounting Cycle
 Introduction
In this session, we will discuss the following:
A. The accounting cycle
B. Closing off
C. Accruals for future periods
D. Reversals
E. And the last area is accounting for profit/loss
after determination.
 The Complete Accounting Cycle
1. Recognise & record Source documents
transactions

2. Journalise transactions General journal

3. Post to ledger accounts General ledger

4. Prepare unadjusted trial Trial balance

balance of GL (unadjusted)

Continued next slide

 The Complete Accounting Cycle (cont.)
5. Determine adjusting entries General journal
and/or journalise

6. Post adjusting entries to General ledger

general ledger
(accounts adjusted)

7. Prepare adjusted trial balance Trial balance(adjusted)

of GL (adjusted)

8. Journalise closing General journal

entries
Continued next slide
 The Complete Accounting Cycle (cont.)
GL – temporary
9. Post closing entries to GL
accounts closed

10. Prepare post closing trial Trial balance

balance (post closing)

Worksheet
11. Prepare financial statements Financial statements

12. Journalise reversing entries General journal

13. Post reversing entries to GL GL – temporary

accounts opened
 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
 Using the Worksheet
•Gathers information together in one place
•Enables preparation of interim financial
statements
•Adjusting entries easily reflected
•Facilitates closing journal preparation
 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
 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
 The Closing Process (cont.)
•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
 The Closing Process (cont.)
(Close Income Account) P&L
Income Summary

28,500 12,000 4,450 28,500

7,500 (Close Expense
9,000 Accounts) 24,050 24,050

Salary expense
1,500
(Close P & L Summary)
1,800 3,300 Capita Account

Rent expense 2,500 24,050

800 800 Drawings

2,500 2,500
Supplies expense

350 350 11
(Close Drawings Account)
 Account Balances after the Closing Process

1. All income accounts have nil balances

2. All expense accounts have nil balances
3. The drawings account has a nil balance
4. The capital account has been increased or
decreased by the profit or loss and decreased
by the drawings
 The Post-closing Trial Balance
•Reflects all accounts with balances after the
closing process
Assets
Liabilities
Equity
 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
 Accrual Entries in Subsequent Periods (cont.)

Adjusting entry (30 June)

June 30 Salary expense 3,980
Salary payable 3,980
To accrue salaries owing to 30 June

Normal entry (6 July)

July 6 Salary payable 3,980
Salary expense 3,420
Cash at bank 7,400
To record payment of salaries from 23 June to 6 July
 In-class Worked Example
Prepare adjustments for 30/6/2014:
1. Prepaid insurance, debited $1,800 on 28/2 (for six months)
2. Interest earned but not received, $3,600
3. Receive $7,488 in rent revenue on 1/5 (for 3 months
commencing that date)
4. June electricity account for $828 (not paid or recorded)
received 24/6
5. Consulting fees owed to business (and unrecorded) $7,560
a) Prepare entries when it occurred.
b) Prepare adjusting entries for all.
c) Prepare reversing entries where appropriate.
 Solution
28/2/14
Prepaid insurance 1,800
Bank 1,800
To record prepaid insurance (6 months)
1/5
Bank 7,488
Unearned rent revenue 7,488
To record prepaid rent revenue received for 3 months (from 1/5)
24/6
Electricity expense 828
Electricity payable 828
To record electricity account incurred but not paid
30/6
Interest receivable 3,600
Interest revenue 3,600
To record interest earned to 30/6 but not received
 Solution (cont.)
30/6/2014
Consulting fees receivable 7,560
Consulting fees revenue 7,560
To record consulting fees earned but not yet received

Unearned rent revenue 4,965

Rent revenue 4,965
To record rent revenue for period 1/5 to 30/6 that was prepaid

Insurance expense 1,200

Prepaid insurance 1,200
To recognise the insurance expended from 1/3/ to 30/6 (4 months)
 Solutions (cont.)
30/6 Profit & Loss (part of)
Interest revenue 3,600
Consulting fees revenue 7,560
Rent Revenue 4,965
Electricity expense 828
Insurance expense 1,200
Balance (Profit) 14,097
To close temporary accounts to P/L account (as provided)

Note: This would be only a part of the adjustments but covers the
ones provided
 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
 Reversing Entries (cont.)
June 30 Salary expense 3,980
Salary payable 3,980
To accrue salaries owing to 30 June

July 1 Salary payable 3,980

Salary expense 3,980
To reverse the adjusting entry to accrue unpaid salaries at end
of previous month

July 6 Salary expense 7,400

Cash at bank 7,400
Payment of salaries for period 27 June to 6 July
 Reversing Entries (cont.)
•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
 Reversing Entries (cont.)
•Reversal of deferral entries
Adjusting entries are made for prepaid expenses and
unearned or pre-collected revenue
Need for reversal entries depends on whether initial
recording occurred in a permanent account
 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
 Accounting Procedures Applicable to a Partnership
or a Company (cont.)

•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
 Accounting Procedures Applicable to a Partnership
or a Company (cont.)

•Profits distributed as ‘dividends’

INTELLECT MANAGEMENT SERVICES LTD
Statement of Changes in Equity
For the year ended 31 December 2015
Share Capital, 1 January 2015 $240,000
Share Capital, 31 December 2015 240,000

Retained earnings, 1 January 2015 --

Add: Profit for the year 50,000
Less: Cash dividends for the year 24,000
Retained earnings, 31 December 2015 $26,000
 Accounting Procedures Applicable to a Partnership
or a Company (cont.)

•Equity section of Balance Sheet

INTELLECT MANAGEMENT SERVICES LTD
Balance Sheet (extract)
as at 31 December 2015
Share capital (120,000 shares issued for $1) $240,000
Retained earnings 26,000
Total equity $266,000
 Tutorial
Topic 5
The accounting cycle

Reading:
Hoggett & Edwards Chapter Five

Questions:
Hoggett & Edwards Chapter 5
Discussion questions 1, 2 & 4
Exercise 5.1
Problems 5.3, 5.6, 5.9, 5.11, 5.13 & 5.14
Critical Thinking Case
Ethical Issues
The END