Far Ca5101 Ajes

Good morning!
1
THE ACCOUNTING
PROCESS
**ADJUSTING
ENTRIES**
FAR-CA5101
TFMRagudo, 8/21/18
THE ACCOUNTING PROCESS
Identification and
Measurement of
Transactions and other
REVERSING Events JOURNALIZATION
ENTRIES (OPTIONAL)
POST-CLOSING POSTING
TRIAL BALANCE
CLOSING TRIAL BALANCE

NOMINAL ACCTS PREPARATION
PREPARATION WORKSHEET ADJUSTMENTS

OF FS (OPTIONAL)
ADJUSTED TRIAL
BALANCE
STEPS IN THE
ACCOUNTING CYCLE
1. Analyzing economic activity
2. Journalizing business transactions
3. Posting to the ledger
4. Preparing a trial balance
5. Adjusting the books (AJEs are posted and
adjusted trial balance is prepared)
6. Preparing Financial Statements
7. Closing the books (CJEs are posted and a
post-closing TB is prepared.)
8. Journalizing reversing entries (RJEs are
posted)
ADJUSTING ENTRIES
 (P.48)
 During the period, revenues and expenses are
usually recorded following the movements of
cash.
 However, under the accrual basis, we need to
do some adjustments in order to faithfully depict
the performance of the entity during the period.
 Revenue and expense recognition principles
must be observed.
 (proceed to slide #51)
ADJUSTING ENTRIES
Why do we need to adjust?
1. To bring the accounts up-to-

date
2. To assure the proper

matching of revenues and
expenses.
7
Accounts to adjust:
1. Accruals
2. Deferrals
3. Depreciation and amortization
4. Estimated uncollectible accounts
5. Ending inventory
(applicable to merchandising and
manufacturing businesses)
8
Things to remember:
 Adjustingof accounts is made at the
end of the period before FS are
prepared.
 Adjusting is done to make sure that

financials comply with the standards
of GAAP.
 Apply appropriate account

relationships.
 Asset & Revenue, Liability and Expense
 Asset and Expense, Liability and Revenue
9
ACCRUALS
1. Accrued Revenues
Accruing revenue – means bringing into
existence an income that is already earned but
not yet received and not yet recorded.
Asset (Accrued revenue) xxx
Revenue xxx
2. Accrued Expenses
Accruing an expense means bringing into
existence an incurred and unrecorded expense
that is unpaid because payment is not yet due.
Expenses xxx
Liability (Accrued Expense) xxx
10
Illustrative case:
 Mr. Clean Service Company – seller
 Ms. Goody Food Corporation – buyer
 One-year service contract that commenced on

December 1, 2017
 Calendar year as accounting period
 Reciprocal accounts
Mr. Clean (Seller) Ms. Goody (Buyer)
 Accruals: Accrued revenue Accrued expense
 Deferrals: Pre-collected revenue Prepaid expense
11
Accruals
 Mr.
Clean Company is engaged in
providing janitorial services to Ms.
Goody Food Corp. Mr. Clean is paid
P10,000 every Friday for a five-day
a week service that begins on
Monday and ends on Friday.
 December31 falls on a
Wednesday.
12
Accruals
December 2017
Sunday Monday Tuesday Wednesday Thursday Friday Saturday

1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31
January 2018
Sunday Monday Tuesday Wednesday Thursday Friday Saturday

1 2 3
4 5 6 7 8 9 10
11 12 1 3 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30
31
13
Journal Entries during the month of
December 2017
Mr. Clean’s (Seller) Ms. Goody’s (Buyer)
12/5/17 Cash P10,000 12/5/17 Utilities P10,000

Revenue P10,000 Cash P10,000
Revenue P10,000 Cash P10,000
12/19/17 Utilities P10,000

12/19/17 Cash P10,000
Cash P10,000
Revenue P10,000
12/26/17 Utilities P10,000

12/26/17 Cash P10,000
Cash P10,000
Revenue P10,000
14
 Mr. Clean  Ms. Goody
Adjusting entry: Adjusting entry:
12/31/17 Accrued Revenue P6,000 12/31/17 Utilities
Revenue P6,000
P6,000 Accrued Utilities
P6,000
Reversing entry:
Reversing entry:
1/1/18 Revenue
P6,000
1/1/18 Accrued Utilities P6,000
Accrued Revenue P6,000 Utilities P6,000
Regular entry: 2018 Regular entry: 2018

Revenue Cash
P10,000 P10,000
15
MR. Clean Ms. Goody
1/2/18 1/2/18
Cash P10,000 Utilities P4,000
Revenue P4,000 Accrued Utilities 6,000
Accrued Revenue Cash P10,000
6,000
1/9/18
1/9/18 Utilities P10,000
Cash P10,000 Cash P10,000
Revenue P10,000
Reversing not done

16
WATER BREAK
“Let hunger sharpen your awareness.

Abstain liquor and frivolous recreation,
which dull the mind and weaken the
body.” ― Laura Joh Rowland
DEFERRALS
LO4
(Prepayments &
Precollections)
(a) Prepaid expenses
◦ Expenses that are paid in cash and
recorded as assets before they are
used or consumed
(b) Unearned (precollected)

revenue
◦ Cash that is received before revenue is
earned and recorded as liabilities
PowerPoint presentation by Dr Anne
Abraham, University of Western Sydney 18
LO4 Question 1
The primary difference between prepaid
and accrued expenses is that prepaid
expenses have …
A. been incurred and accrued expenses have
not
B. not been paid and accrued expenses have
C. been recorded and accrued expenses
have not
D. not been recorded and accrued expenses
have
Adjusting entries for
prepayments
LO5
1. Prepaid expenses
Expenses paid in cash and recorded as
assets before they are used or
consumed
Expire either with the passage of time
or through use and consumption
Adjusting entry
Asset Expense
Unadjusted Credit Debit
balance adjusting adjusting
entry (-) entry (+)

prepayments continued
(a) Supplies
◦ Supplies on hand 31 December: P1000
◦ Expense of P2500 recorded as an asset 10
May
◦ Journal entry:
Dec. 31 Supplies Expense 1 500
Supplies 1 500
(To record supplies used)
◦ General Ledger entry:

Supplies Supplies Expense
5/10 2 500 12/31 Adj. 1 500 12/31 Adj. 1 500
12/31 Bal. 1 000
prepayments continued
(b) Insurance
◦ Insurance paid for 1 year in advance: P600,
10 Dec.
◦ Insurance for 31 December P600/12 = P50
◦ Journal entry:
Dec. 31 Insurance Expense 50
Prepaid Insurance 50
(To record insurance expired)
◦ General ledger:
Prepaid Insurance Insurance Expense
12/4 600 12/31 Adj. 50 12/31 Adj. 50
12/31 Bal. 550
ALTERNATIVE TREATMENT
continued
(1) Prepaid expenses

◦ Supplies on hand 31 October: $1000
◦ $2500 recorded as an expense on 5
October
Oct.◦ 31
Journal entry:
Advertising Supplies 1 000
Advertising Supplies Expense 1 000
(To record supplies inventory)

Advertising Supplies Advertising Supplies Expense
31/10 Adj. 1 000 5/10 2 500 31/10 Adj. 1 000
31/10 Bal. 1 500
continued
(2) Unearned revenue

◦ $1200 received 2 October for advertising
services to be completed 31 December
◦ Journal entry:
Oct. 31 Service Revenue 800
Unearned Revenue 800
(To record unearned revenue)
◦ General Ledger:
Unearned Revenue Service Revenue

31/10 Adj. 800 31/10 Bal. 800 2/10 1200
31/10 Bal. 400

precollections
2. Unearned revenue
Revenue received before it is earned
and recorded as a liability
It is earned by providing a service to
the customer
e.g., rent, magazine subscriptions
Adjusting entry
Liability Revenue
Debit Unadjusted Credit
adjusting balance adjusting
entry (-) entry (+)

precollections continued
Example
◦ P1,600 received 2 December Year A for
advertising services to be completed 31
March Year B
◦ Journal entry:
Dec. 31 Unearned Revenue 400
Service Revenue 400
(To record revenue for services provided)
Unearned ◦Revenue
General Ledger: Service Revenue
12/31/A Adj. 400 12/2/A 1 600 12/31 Bal. 10 000
12/310 Bal. 1,200 12/31 Adj. 400

LO5 Question 5
As prepaid expenses expire with the
passage of time, the correct adjusting
entry will be …
A. debit to an asset account and a credit to
an expense account
B. debit to an expense account and a credit
to an asset account
C. debit to an asset account and a credit to
an asset account
D. debit to an expense account and a credit
to an expense account
Provision for Depreciation
◦ Depreciation is the used or expired
portion of productive facilities (tangible
assets), such as building, furniture and
fixtures, equipment which have been
recorded at their acquisition costs as
capital expenditures in accordance
with the cost principle of accounting.
◦ These productive facilities are also

called “property, plant and equipment”
or “fixed assets”.
Provision for Depreciation
◦ Allocation of the cost of the asset to
expense over its useful life
◦ Common method is to divide cost of

asset by useful life (straight-line
method)
29
depreciation continued
◦ On January 1, 2012, Computromix acquired
a computer for office use with an invoice
price of P50,000. It was estimated to have
a useful life of five years and a salvage
value of P5,000.
Dec. 31 Depreciation Expense 9,000
Accumulated Depreciation - Office Equipment 9,000
◦ Journal
(To record annual entry:
depreciation)
Office Equipment
1/1 50 000
◦ General
Accumulated Ledger
Depreciation
Office Equipment Depreciation Expense
12/31 Adj. 9,000 12/31 Adj. 9,000
depreciation continued
◦ Carrying amount or book value is the
difference between the cost of any
depreciable asset and its related
accumulated depreciation
◦ It is usually different from the asset’s
fair value (market value)
◦ Statement of Financial Position
Office Equipment P50, 000
Less: Accumulated Depreciation 9,000
Carrying Value P41,000

IMPAIRMENT OF
ASSETS
32
IMPAIRMENT OF ASSETS
At year-end, before the preparation of
the financial statements, the enterprise
has to ensure that no asset on the SFP is
presented beyond its recoverable value.
◦ Examples: Loans and receivables
In the case that there is uncertainty in

fully realizing collection, the accounts
should be correspondingly reduced in
order to reflect the projected
collectability at the date of the FS.
33
 Therecognition of impairment loss on financial
asset such as receivable is covered by IFRS 9,
which requires an entity to record expected credit
losses at all times and to update its estimate of
such expected credit losses at year-end to reflect
the changes in the credit risk of the financial asset.
 Afterthe AJE, the SFP reports accounts receivable at
its amortized cost. (or recoverable amount, or nrv).
 Instead of maintaining a valuation account that
reduces receivables to recoverable amount (or
amortized cost, as referred to by IFRS 9) a direct
credit to the financial instrument may be made.
(p.54-Vol.3, Intermediate Acctg.)
34
 Thus,in recording impairment loss on
receivable, an alternative entry is:
◦ Impairment Loss – Receivable xx

 Receivable xx
 For illustration, refer to pp. 54-55, Intermediate Acctg,

V3.)
35
ADJUSTMENT FOR
INVENTORY ACCOUNT
No adjustment necessary if the

company uses the perpetual inventory
system unless there are errors, spoilage
or theft that may have occurred.
However, the cost of inventory may be

reduced to net realizable value,
because inventories are measured in
the FS at the lower of cost and net
realizable value.
36
ADJUSTMENT FOR
INVENTORY ACCOUNT
Under the periodic system, an
adjustment is necessary to set-up the
year-end inventory.
◦ Function of expense method – (AJE)

 Inventory, ending xx
 Purchase ret & allow xx
 Cost of goods sold xx
 Inventory, beginning xx
 Purchases xx
 Freight-in xx
37
ADJUSTMENT FOR
INVENTORY ACCOUNT
Ifthe company chooses to present
expenses in the SCI according to nature
where COGS is not established but
merely adjusts the inventory account, a
closing entry is then prepared as follows:
◦ Income Summary xx
 Inventory, beginning xx
Inventory, ending xx
Income Summary xx
38
CLOSING ENTRIES
 Each account affecting the computation of
profit or loss for the period is debited or
credited for the amount that will result to a
zero balance in that account,
 Such
balance is transferred to the income
summary account.
 Theincome summary account and the

drawings or dividends account are finally
transferred to capital or retained earnings.
39
Preparing a post-closing trial
LO3
balance
• A post-closing trial balance is a list of all
permanent accounts 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

40
Abraham, University of Western Sydney
Preparing a post-closing trial balance
continued
PIONEER ADVERTISING AGENCY

Post-Closing Trial Balance
as at 31 October 2010
Debit Credit
CashP15 200
Accounts Receivable 200
Office Equipment 5 000
Accum. Dep’n – Office Equipment P 40
Notes Payable 5 000
Accounts Payable 2 500
Salaries Payable 1 200
Interest Payable 50
C.R. Hill, Capital 12 360
P21 950
PowerPoint presentation by Dr Anne P21 950 41
Question 3
LO3
The purpose of the post-closing trial balance is to …

A. prove that no mistakes were made
B. prove the equality of the permanent account balances
that are carried forward into the next accounting period
C. prove the equality of the temporary account balances
D. list all the statement of financial position accounts in
alphabetical order for easy reference

42
SUMMARY OF THE
LO4
ACCOUNTING CYCLE
1. Analyse business transactions
2. Journalise the transactions
3. Post to ledger accounts
4. Prepare a trial balance
5. Journalise and post adjusting entries:
prepayments/accruals
6. Prepare an adjusted trial balance
… continued
43
SUMMARY OF THE
ACCOUNTING CYCLE continued
7. Prepare financial statements
• Income statement
• Statement of changes in equity
• Statement of financial position
8. Journalise and post closing entries
9. Prepare a post-closing trial balance

44
Question 4
LO4
The accounting cycle begins with the analysis of

transactions and ends with the …
A. preparation of financial statements
B. posting of transactions to ledger accounts
C. journalising of adjusting entries
D. preparation of a post-closing trial balance

45
Reversing entries
• Reversing entries are made at the beginning of
the next accounting period
• Their purpose is to simplify the recording of a
subsequent transaction related to an adjusting
entry
• They are most often used to reverse two types of
adjusting entries
– accrued revenues
– accrued expenses
• Reversing entries are optional
46
REVERSING ENTRIES
When deferrals are originally recorded
in real accounts (asset and liability)
the year-end adjustment is not
reversed,
as transactions during the succeeding
period would also be recorded using
the same asset and liability accounts,
And expense and revenue balances
would only be set up at year-end.
47
THE USE OF WORKSHEET
48
END… ACCTG 5, AUGUST 2018
49
ADDITIONAL EXAMPLES
MORE FROM WILEY…
50
LO6
accruals
1. Accrued revenue
Revenue earned by not yet received in
cash or recorded
Adjusting entry is required to:
◦ Show receivable exists at balance date
◦ Record income earned in the period
Adjusting entry
Asset Income
Debit Credit
adjusting adjusting
entry (+) entry (+)

accruals continued
Example:
◦ Service Revenue of $200 earned, but not
yet recorded
◦ Journal entry:
Oct. 31 Accounts Receivable 200
Service Revenue 200
(To record revenue for services provided)
◦ General Ledger:
Accounts Receivable Service Revenue

31/10 Adj. 200 31/10 10 000
31/10 400
31/10 Adj. 200
31/10 Bal. 10 600 PowerPoint presentation by Dr Anne
accruals continued
2. Accrued expenses
Expenses incurred by not yet paid
Adjusting entry is required to:
◦ Show record obligations at balance date
◦ Recognise expenses incurred in the period
Adjusting entry
Expenses Liability
Debit Credit
adjusting adjusting
entry (+) entry (+)

accruals continued
(a) Accrued Interest
◦ Company signed a $5000, 3 month
note payable on 1 October
◦ Interest rate: 12% p.a.
◦ Interest determined by considering
 Face value
 Interest rate
 Length of time note is outstanding
◦ Interest owing:
$5000 x 12% x 1/12 = $50

accruals continued
◦ Journal entry
Oct. 31 Interest Expense 50

Interest Payable 50
(To accrue interest on notes payable)
◦ General Ledger
Interest Expense Interest Payable

31/10 Adj. 50 31/10 Adj. 50

accruals continued
(b) Accrued Salaries
◦ Salaries outstanding for October:
$1200
(3 days x $400)

accruals continued
◦ Journal entry
Oct. 31 Salaries Expense 1200

Salaries Payable 1200
(To record accrued salaries)
◦ General Ledger
Salaries Expense Salaries Payable

26/10 4000 31/10 Adj. 1200
31/10 Adj. 1200
31/10 Bal. 5200

LO6 Question 6
Failure to prepare an adjusting entry at
the end of a period to record an accrued
revenue would cause …
A. profit to be overstated
B. an understatement of assets and an
understatement of revenues
C. an understatement of revenues and an
understatement of liabilities
D. an understatement of revenues and an
overstatement of liabilities
THE ADJUSTED TRIAL
BALANCE
LO7 AND FINANCIAL STATEMENTS
The adjusted trial balance is prepared
after all adjusting entries have been
journalised and posted
Its purpose is to prove equality of the
total debit and credit balances in the
ledger after adjustments have been
made
The adjusted trial basis is the main
basis for preparation of the financial
statements
PIONEER ADVERTISING AGENCY Trial Balances as at 31 October 2010
Before adjustment After adjustment
Dr Cr Dr Cr
Cash $15 200 $15 200
Advertising Supplies 2 500 1 000
Prepaid Insurance 600 550
Office Equipment 5 000 5 000
Accumulated Depreciation – Office
Equipment $ 40
Notes Payable $ 5 000 5 000
Accounts Payable 2 500 2 500
Unearned Income 1 200 800
Interest Payable 50
CR Hill, Capital 10 000 10 000
CR Hill, Drawings 500 500
Service Revenue 10 000 10 600
Salaries Expense 4 000 5 200
Rent Expense 900 900
Insurance Expense 50
Interest Expense 50
Depreciation Expense 40
Profit $28 700 $28 700 University
Abraham, $30of190 $30 19060
Western Sydney
Preparing financial
statements
The income statement is prepared from
the revenue and expense accounts
The statement of changes in equity is
Current prepared using the owner’s
capital and drawings accounts and net
profit (or loss) from income statement
The statement of financial position is
prepared from asset and liability
accounts and ending owner’s capital
balance reported in statement of
changes in equity

PIONEER ADVERTISING AGENCY PIONEER ADVERTISING AGENCY
Adjusted Trial Balance Income Statement
as at 31 October 2010 for the month ended 31 October
Account Debit Credit 2010
Cash $15 200 Income
Accounts Receivable 200 Service revenue $10 600
Prepaid Insurance 550 Expenses
Office Equipment 5 000 Salaries expense $5 200
Accumulated Depreciation Advertising supplies expense 1 500
- Office Equipment $ 40 Rent expense 900
Bank Loan 5 000 Insurance expense 50
Notes Payable 2 500 Interest expense 50
Unearned Income 800 Depreciation expense 40
Salaries Payable 1 200 Total expenses 7 740
Interest Payable 50 Profit $ 2 860
CR Hill, Capital --
CR Hill, Drawings 500
Service Revenue 10 600
Salaries Expense 5 200 PIONEER ADVERTISING AGENCY
Statement of Changes in Equity
Advertising Supplies Expense 1 500 for the month ended 31 October
Insurance Expense 50 CR Hill, Capital, 1 October $ 0
Interest Expense 50 Add: Investment by owners 10 000
Depreciation Expense 40 CR Hill, Capital 10 000
Profit 2 860
$30 190 $30 190 12 860
Less: Drawings
PowerPoint presentation 500
by Dr Anne
CR Hill Capital, 31 University
Abraham, October of Western Sydney
$2 360 62
PIONEER ADVERTISING AGENCY PIONEER
ADVERTISING AGENCY
Adjusted Trial Balance Statement ofBalance Sheet Position
Financial
as at 31 October 2010 as atas31
at 31 October 2007
October 2010
Account Debit Credit Assets
Assets
Cash $15 200 Cash
Cash $15
$15200
200
Accounts Receivable 200 Accounts
AccountsReceivable
Receivable 200
200
Advertising Supplies 1 000 AdvertingSupplies
Adverting Supplies 1 000
Prepaid Insurance 550 PrepaidInsurance
Office Equipment 5 000 OfficeEquipment
Office Equipment $5000
$5 000
Accumulated Depreciation Less:Accumulated
Less: AccumulatedDepreciation
Depreciation 40 40 44 960960
- Office Equipment $ 40 TotalAssets
Total Assets $21 910
$21 910
Notes Payable 5 000
Accounts Payable 2 500 Liabilitiesand
Liabilities andOwner’s
Owner’sEquity
Equity
Unearned Income 800 Liabilities
Liabilities
Salaries Payable 1 200 NotesPayable
Notes Payable $5 000
Interest Payable 50 AccountsPayable
CR Hill, Capital 10 000 UnearnedIncome
Unearned Income 800
CR Hill, Drawings 500 SalariesPayable
Service Revenue 10 600 InterestPayable
Interest Payable 50
Salaries Expense 5 200 Totalliabilities
Total liabilities 9 9550
550
Advertising Supplies Expense 1 500 Owner’sEquity
Owner’s Equity
Rent Expense 900 CRHill,
CR Hill,Capital
Capital 12 360
Insurance Expense 50 TotalLiabilities
Total Liabilities
Interest Expense 50 andOwner’s
Owner’sEquity
Equity $21 910
and
Depreciation Expense 40
$30 190 $30 190 Capital balances at 31 Oct.
from statement of changes in
equity on previous slide
LO7 Question 7
An adjusted trial balance …
A. is prepared after the financial statements
are completed
B. proves the equality of the total debit
balances and total credit balances of ledger
accounts after all adjustments have been
made
C. is a required financial statement under
generally accepted accounting principles
D. cannot be used to prepare financial
statements
APPENDIX
ALTERNATIVE TREATMENT OF PREPAID
EXPENSES AND UNEARNED REVENUE
LO8 Some firms initially use income statement
accounts rather than liability accounts
◦ Debit the expense for prepaid expenses when
cash is paid
◦ Credit the revenue at the time cash is received
After adjustments, the two treatments will
result in the same effect on the financial
statements as the initial entries to the
statement of financial position accounts

continued
(1) Prepaid expenses

◦ Supplies on hand 31 October: $1000
◦ $2500 recorded as an expense on 5
October
◦ Journal entry:
Oct. 31 Advertising Supplies 1 000
(To record supplies inventory)

Advertising Supplies Advertising Supplies Expense
31/10 Adj. 1 000 5/10 2 500 31/10 Adj. 1 000
31/10 Bal. 1 500
continued
(2) Unearned revenue

◦ $1200 received 2 October for advertising
services to be completed 31 December
◦ Journal entry:
Oct. 31 Service Revenue 800
(To record unearned revenue)
◦ General Ledger:
Unearned Revenue Service Revenue

31/10 Adj. 800 31/10 Bal. 800 2/10 1200
31/10 Bal. 400

Chapter 4
Completion of the
accounting cycle
PowerPoint presentation by
Dr Anne Abraham
University of Western Sydney
©2009 John Wiley & Sons Australia, Ltd
68
LO2
CLOSING THE BOOKS
• Temporary or nominal accounts relate to only a
given accounting period
– i.e. revenues, expenses, dividends
• All temporary accounts are closed at the end of
the accounting period
• Permanent or real accounts are carried forward to
future accounting periods
– i.e. assets, liabilities, equity
• Permanent accounts are not closed
69
Preparing closing entries
Closing entries
• Formally transfer profit (loss) and owner’s drawings
to owner’s capital
• Produce a zero balance in each temporary account
Profit and Loss Summary
• Another temporary account to which revenue and
expense accounts are closed
• Avoids excessive detail in owner’s capital account

70
The closing process
1 Close revenue accounts to Profit and Loss Summary
2 Close expenses accounts to Profit and Loss Summary
(Individual) (Individual)
Expenses Revenue
2 1
Profit and Loss
Summary

71
The closing process continued
3 Close Profit & Loss Summary to Owner’s Capital
Profit and Loss
Summary
Owner’s
Capital

72
The closing process continued
4 Close Owner’s Drawings to Owner’s Capital
Owner’s
Capital
Owner’s
Drawings

73
Closing Entries Illustrated
GENERAL JOURNAL J3
Date Account titles and explanations Ref. Debit Credit
2007
Oct 31 Service Revenue 400 10 600
Profit & Loss Summary 1 350 10 600
(To close income account)
31 Profit & Loss Summary 350 7 740
Advertising Supplies Expense 631 1 500
Depreciation Expense 711 40
Insurance Expense 722 50
Salaries Expense 2 726 5 200
Interest Expense 905 50
(To close expense accounts)
31 Profit & Loss Summary 350 2 860
CR Hill, Capital 3 301 2 860
(To close profit to capital)
31 CR Hill, Capital 301 500
CR Hill, Drawings 4 306 500
(To close drawings to capital)
74
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
• Owner’s capital
– Balance represents total equity of owner at end of
accounting period
– No entries are journalised and posted to owner’s capital
during the year
• Permanent accounts
– Not closed (assets, liabilities, owner’s capital)

75
LO2
Question 2
Closing entries …
A. are prepared before the financial statements
B. reduce the number of permanent accounts
C. cause the revenue and expense accounts to have
zero balances
D. summarise the activity in every account

76
Preparing a post-closing trial
LO3
balance
• A post-closing trial balance is a list of all
permanent accounts 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

77
Preparing a post-closing trial balance
continued

Post-Closing Trial Balance
as at 31 October 2010
Debit Credit
Cash$15 200
Office Equipment 5 000
Accum. Dep’n – Office Equipment $ 40
Notes Payable 5 000
Interest Payable 50
C.R. Hill, Capital 12 360
$21 950
PowerPoint presentation by Dr Anne $21 950 78
Question 3
LO3
The purpose of the post-closing trial balance is to …

A. prove that no mistakes were made
B. prove the equality of the permanent account balances
C. prove the equality of the temporary account balances
D. list all the statement of financial position accounts in
alphabetical order for easy reference

79
SUMMARY OF THE
LO4
ACCOUNTING CYCLE
1. Analyse business transactions
2. Journalise the transactions
3. Post to ledger accounts
4. Prepare a trial balance
5. Journalise and post adjusting entries:
prepayments/accruals
6. Prepare an adjusted trial balance
… continued
80
SUMMARY OF THE
ACCOUNTING CYCLE continued
7. Prepare financial statements
• Income statement
• Statement of changes in equity
• Statement of financial position
8. Journalise and post closing entries
9. Prepare a post-closing trial balance

81
Question 4
LO4
The accounting cycle begins with the analysis of

transactions and ends with the …
A. preparation of financial statements
B. posting of transactions to ledger accounts
C. journalising of adjusting entries
D. preparation of a post-closing trial balance

82
Reversing entries
• Reversing entries are made at the beginning of
the next accounting period
• Their purpose is to simplify the recording of a
subsequent transaction related to an adjusting
entry
• They are most often used to reverse two types of
adjusting entries
– accrued revenues
– accrued expenses
• Reversing entries are optional
83
CLASSIFIED STATEMENT OF
LO6 FINANCIAL POSITION
• Financial statements become more useful
when the elements are classified into
significant subgroups
• IAS 1 prescribes the basis for presentation of
financial statements
• Assets and liabilities are presented on the
statement of financial position in current and
non-current classifications

84
Standard classifications
• Current assets
– Cash and other resources expected to be
converted to cash or sold or used in the business
within 1 year
– The operating cycle of a business is the average
time required to go from cash to cash in producing
income

85
Standard classifications continued
VIRGIN BLUE HOLDINGS LIMITED AND ITS
CONTROLLED ENTITIES
Balance Sheet (partial)
as at 30 June 2008
(in millions)
Current assets
Cash and cash equivalents $603.9
Trade and other receivables 108.5
Inventories 0.6
Derivative financial instruments 187.7
Current tax assets 23.5
Total current assets $924.2

86
• Financial assets
– Cash and accounts receivable are current financial
assets that are shown as separate line items
– Other financial assets include investments in debt
and investment securities issued by other entities
WESFARMERS LIMITED AND ITS CONTROLLED ENTITITES
Balance Sheet (partial)
as at 30 June 2008
(in millions)
Current assets
Available-for-sale investments $36

87
• Investment property
– Line item on statement of financial position
– Notes reveal further details
THE MIRVAC GROUP
Balance Sheet (Extract)
as at 30 June 2008
(in thousands)
Non-current assets
Investment properties $3 436 782

88
• Property, plant and equipment
– Tangible resources, of a relatively permanent
nature, used in the business, and not intended for
sale
– Includes land, buildings, machinery and
equipment, delivery equipment, furniture and
fittings
– Assets subject to depreciation should be reported
at cost less accumulated depreciation

89
• Intangible assets
– Non-current resources that do not have physical
substance
– Recorded at cost and expensed over useful life of
the intangible asset
– Include patents, copyrights, trademarks or trade
names that give the holder exclusive right of use
for a specified period of time

90
FOSTER’S GROUP
Consolidated Balance Sheet (partial)
as at 30 June 2008
(in millions)
Non-current assets
Intangible assets
Brand names and licences
At cost 1 422.5
Accumulated amortisation and impairment (98.7) 1 323.8
IT development costs
At cost 2.1
Accumulated amortisation - 2.1
Goodwill
Goodwill at cost less impairment 1 423.6
2 749.5
91
• Current liabilities
– Obligations reasonably expected to be paid from
existing current assets or through the creation of
other current liabilities within one year or the
operating cycle, whichever is longer
– Liquidity is the ability of a company to pay
obligations that are expected to become due
within the next year or operating cycle

92
MYOB
as at 31 December 2007
(in thousands)
Current liabilities
Trade and other payables $19 458
Unearned revenue 36 661
Interest bearing loans and borrowings 899
Income tax payable 3 092
Provisions 10 713
Total current liabilities $70 823

93
• Non-current liabilities
– Obligations expected to be paid after one year
– Includes bonds payable, mortgages payable, long-
term notes payable, lease liabilities, obligations
under superannuation plans

94
BILLABONG INTERNATIONAL LIMITED
as at 30 June 2008
(in thousands)
Non-current liabilities
Borrowings $471 411
Deferred tax liabilities 55 223
Provisions and other payables 10 475
Deferred payment 76 147
Total non-current liabilities $613 256

95
• Owner’s equity
– Varies with the form of business entity
– Proprietorship
• One capital account
– Partnership
• Capital account for each partner
– Company
• Share Capital
• Reserves
• Retained Earnings
96
LO6
Question 6
Categories usually found on the face of a

classified balance sheet include …
A. assets, liabilities, equity
B. revenues, expenses, profit
C. cash receipts, cash payments
D. retained earnings dividends

97
APPENDIX
LO7 REVERSING ENTRIES
• Example
Initial salary entry
Oct 26 Salaries Expense 4000
Cash 4000
Adjusting entry
Oct 31 Salaries Expense 1200
Salaries Payable 1200
Closing entry
Oct 31 Profit and Loss Summary 5200
Salaries Expense 5200
Reversing entry
Nov 1 Salaries Payable 1200
Salaries Expense 1200
Subsequent salary entry
Nov 9 Salaries expense 4000
Cash PowerPoint presentation by Dr Anne 4000 98
LO7
Question 7
When is a reversing journal entry made?
A. At the end of the financial year in which
adjusting entries are made
B. At the beginning of the next accounting
period
C. At the end of the next accounting period
D. At the same time as the adjusting entries are
made

99
100

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Good morning!

CLOSING TRIAL BALANCE

PREPARATION WORKSHEET ADJUSTMENTS

1. To bring the accounts up-to-

2. To assure the proper

 Adjusting is done to make sure that

 Apply appropriate account

 Ms. Goody Food Corporation – buyer

 One-year service contract that commenced on

 Calendar year as accounting period

Mr. Clean (Seller) Ms. Goody (Buyer)

 Accruals: Accrued revenue Accrued expense

 Deferrals: Pre-collected revenue Prepaid expense

Sunday Monday Tuesday Wednesday Thursday Friday Saturday

Sunday Monday Tuesday Wednesday Thursday Friday Saturday

12/5/17 Cash P10,000 12/5/17 Utilities P10,000

12/12/17 Cash P10,000 12/12/17 Utilities P10,000

Revenue P10,000 Cash P10,000

12/19/17 Utilities P10,000

12/26/17 Utilities P10,000

Regular entry: 2018 Regular entry: 2018

Reversing not done

“Let hunger sharpen your awareness.

(b) Unearned (precollected)

PowerPoint presentation by Dr Anne

◦ General Ledger entry:

(1) Prepaid expenses

◦ General Ledger entry:

(2) Unearned revenue

Unearned Revenue Service Revenue

PowerPoint presentation by Dr Anne

PowerPoint presentation by Dr Anne

PowerPoint presentation by Dr Anne

◦ These productive facilities are also

◦ Common method is to divide cost of

PowerPoint presentation by Dr Anne

In the case that there is uncertainty in

◦ Impairment Loss – Receivable xx

 For illustration, refer to pp. 54-55, Intermediate Acctg,

No adjustment necessary if the

However, the cost of inventory may be

◦ Function of expense method – (AJE)

 Theincome summary account and the

• The purpose of the post-closing trial balance is

PowerPoint presentation by Dr Anne

PIONEER ADVERTISING AGENCY

The purpose of the post-closing trial balance is to …

PowerPoint presentation by Dr Anne

PowerPoint presentation by Dr Anne

The accounting cycle begins with the analysis of

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MORE FROM WILEY…

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Accounts Receivable Service Revenue

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Oct. 31 Interest Expense 50

Interest Expense Interest Payable

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