ADJUSTING THE ACCOUNTS &

COMPLETING ACCOUNTING CYCLE

WEEK 2

UNIVERSITAS BINA NUSANTARA

SUBJECT MATTER EXPERT

Maria Paramastri Hayuning Adi, S.E., M.Sc., CertDA
 LEARNING OUTCOME

LO 1 : Prepare all steps in accounting cycle as the preparation of financial statement for service and merchandising
company
OUTLINE
ADJUSTING THE ACCOUNTS AND COMPLETING THE ACCOUNTING CYCLE

- Timing Issues
Adjusting the
Accounts - The Basics of Adjusting Entries
- The Adjusted Trial Balance and Financial Statements Balance
- Preparing Financial Statement

- Using a Worksheet
Completing the
Accounting Cycle - Closing the Books
- Summary of the Accounting Cycle
- The Classified Statement of Financial Position
 THESE SLIDES HAVE BEEN ADAPTED FROM:
WEYGANDT, J.J. AND KIMMEL, P.D. (2022). FINANCIAL ACCOUNTING WITH
INTERNATIONAL FINANCIAL REPORTING STANDARDS. 5TH EDITION. JOHN
WILLEY & SONS INC. ISBN: 978-1-119-78700-6

Acknowledgement
UNIVERSITAS BINA NUSANTARA
ADJUSTING THE ACCOUNTS
 WHAT IS ACCOUNTING

Accounting is a process that consists of three activities

1. Identification,
2. Recording, and
3. Communicating economic events.

Image sources : Weygandt et al. (2022) Financial Accounting with IFRS. 5th Edition. Wiley
TIME PERIOD (PERIODICITY) ASSUMPTION

Accountants divide the economic life of a business into artificial time periods.
FISCAL AND CALENDAR YEARS

• Accounting time periods are generally a month, a quarter, or a year.

• Monthly and quarterly time periods are called interim periods.

• Most large companies must prepare both quarterly and annual financial statements.

• Fiscal Year is an accounting time period that is one year in length.

• Calendar Year is from January 1 to December 31.

• Sometimes a company’s year-end will vary from year to year, resulting in accounting
periods of either 52 or 53 weeks.
 ACCRUAL-BASIS ACCOUNTING

• Transactions are recorded in the periods in which the events occur.

• Companies recognize revenues when they perform services (rather than when
they receive cash).

• Expenses are recognized when incurred (rather than when paid).

• Accrual-basis accounting is in accordance with IFRS.
CASH-BASIS ACCOUNTING

• Revenues are recorded when cash is received.

• Expenses are recorded when cash is paid.
• Cash-basis accounting is NOT in accordance with IFRS.
REVENUE RECOGNITION PRINCIPLE

• Companies recognize revenue in the accounting period

in which the performance obligation is satisfied.

• Company satisfies its performance obligation by

performing a service or providing a good to a customer.
EXPENSE RECOGNITION PRINCIPLE
REVENUE AND EXPENSE RECOGNITION

Illustration 3.2 IFRS relationships in revenue and expense

recognition
THE BASIC OF ADJUSTING ENTRIES
THE NEED FOR ADJUSTING ENTRIES

Why are adjusting entries required?

1. Some events are not recorded daily because it is not efficient to do so.

2. Some costs are not recorded during the accounting period because these costs
expire with the passage of time rather than as a result of recurring daily
transactions.

3. Some items may be unrecorded.

 TYPES OF ADJUSTING ENTRIES

Deferrals:

1. Prepaid expenses: Expenses paid in cash before they are used or consumed.
2. Unearned revenues: Cash received before services are performed.
Accruals:

3. Accrued revenues: Revenues for services performed but not yet received in cash or recorded.
4. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

Illustration 3.3 Categories of adjusting entries

ADJUSTING ENTRIES FOR DEFERRALS
LO 2

Deferrals are expenses or revenues that are recognized at a date later than the point
when cash was originally exchanged.

There are two types:

• Prepaid expenses

• Unearned revenues
PREPAID EXPENSES

ILLUSTRATION 3.5 ADJUSTING ENTRIES FOR PREPAID

EXPENSES

•Prepaid expenses are costs that expire either with the

passage of time (e.g., rent and insurance) or through
use (e.g., supplies).

•Prior to adjustment, assets are overstated and

expenses are understated.
LO 2
 SUPPLIES ADJUSTMENT EXAMPLE

Assume: Yazici Advertising purchased

supplies costing ₺2,500 on October 5.
Yazici recorded the purchase by
increasing (debiting) the asset Supplies.
This account shows a balance of
₺2,500 in the October 31 trial balance.
An inventory count at the close of
business on October 31 reveals that
₺1,000 of supplies are still on hand.

Demonstrate: How do you record the

adjustment for supplies?

Illustration 3.6 Adjustment for supplies

 INSURANCE ADJUSTMENT EXAMPLE

Assume: On October 4, Yazici

Advertising paid ₺600 for a one-
year fire insurance policy.
Coverage began on October 1.
Yazici recorded the payment by
increasing (debiting) Prepaid
Insurance.

Demonstrate: How do you record

the adjustment for insurance?

Illustration 3.7 Adjustment for insurance

 DEPRECIATION EXAMPLE

Assume: For Yazici Advertising, depreciation

on equipment is ₺480 a year, or ₺40 per
month.

Demonstrate: How do you record the

adjustment for depreciation?

Illustration 3.8 Adjustment for depreciation

 UNEARNED REVENUES

• When companies receive cash before services are

performed, they record a liability by increasing
(crediting) a liability account called unearned revenues.

• Prior to adjustment, liabilities are overstated and

revenues are understated.

Illustration 3.11 Adjusting entries for unearned revenues

 UNEARNED REVENUE EXAMPLE

Assume: Yazici Advertising received ₺1,200 on October 2 from R. Knox for advertising
services expected to be completed by December 31. Yazici credited the payment to
Unearned Service Revenue. This liability account shows a balance of ₺1,200 in the October
31 trial balance.

Demonstrate: How do you record the adjustment for advertising revenue?

 ADJUSTING ENTRIES FOR ACCRUALS

Accruals are made to record the following:

• Revenues for services performed but not yet recorded at the statement date –
accrued revenues
or

• Expenses incurred but not yet paid or recorded at the statement date – accrued
expenses

• Prior to adjustment, both assets and revenues are understated.

• An adjusting entry for accrued revenues results in an increase (a debit) to an asset

account and an increase (a credit) to a revenue account.
 ACCRUED REVENUE EXAMPLE

Assume: In October, Yazici

Advertising performed services worth
₺200 that were not billed to clients
on or before October 31. Because
these services were not billed, they
were not recorded.

Demonstrate: How do you adjust for

accrued revenue?
ACCRUED EXPENSES

• Prior to adjustment, both liabilities and expenses are understated.

• An adjusting entry for accrued expenses results in an increase (a
debit) to an expense account and an increase (a credit) to a liability
account.

ILLUSTRATION 3.17 ADJUSTING ENTRIES FOR ACCRUED EXPENSES LO 3

 ACCRUED INTEREST EXAMPLE

Assume: Yazici Advertising signed a three-month note payable in the amount of ₺5,000 on October 1. The note
requires Yazici to pay interest at an annual rate of 12%.

Demonstrate:

1) How do you determine the interest to be recorded?

2) How do you create the adjustment for accrued interest for the month of October?

Annual Time in
Face Value
× Interest × Terms of = Interest
of Note
Rate One Year
1
₺5,000 × 12% × = ₺50
12
ACCRUED INTEREST – SOLUTION PART 2

Illustration 3.19 Adjustment for accrued interest

 ADJUSTED TRIAL BALANCE AND FINANCIAL STATEMENTS
LO 4

Adjusted trial balance:

• Shows the balance of all accounts, including those

adjusted.

• Proves the equality of the total debit balances and the

total credit balances in the ledger after all
adjustments.

• Primary basis for the preparation of financial

statements.
 PREPARING FINANCIAL STATEMENTS (1/2)

Illustration 3.27 Preparation of the income statement and retained earnings statement from the adjusted trial balance
PREPARING FINANCIAL STATEMENTS (2/2)

Illustration 3.28 Preparation

of the statement of financial
position from the adjusted
trial balance.
COMPLETING THE ACCOUNTING
CYCLE
WORKSHEET

Illustration 4.1: Form and Procedure for a worksheet

WORKSHEET: STEP 1

Illustration 4.2: Preparing a trial balance

 WORKSHEET : STEP 2

• Enter all adjustments in the adjustments columns.

• If additional accounts are needed, insert them on

the lines immediately below the trial balance
totals.

• Use letters to cross-reference the debit and credit

adjustments.

• Total adjustments columns and check for equality.

ILLUSTRATION 4.3: ENTERING THE ADJUSTMENTS IN THE
ADJUSTMENTS COLUMNS
 WORKSHEET : STEP 3

• Combine trial balance amounts with adjustment

amounts to obtain the adjusted trial balance.

• Total adjusted trial balance columns and check for

equality.

ILLUSTRATION 4.4: ENTERING ADJUSTED BALANCES IN THE

ADJUSTED TRIAL BALANCE COLUMNS
 WORKSHEET : STEP 4

• Extend all revenue and expense account balances to

the income statement columns.

• Extend all asset and liability account balances, Share

Capital-Ordinary, Retained Earnings and Dividends to
the statement of financial position columns.

ILLUSTRATION 4.5: EXTENDING THE ADJUSTED TRIAL

BALANCE AMOUNTS TO APPROPRIATE FINANCIAL
STATEMENT COLUMNS
 STEP 5 – ILLUSTRATION PART 1

• Total each of the financial statement columns. The

net income or loss for the period is the difference
between the totals of the two income statement
columns.

• If either the income statement columns or the

statement of financial position columns are not
equal after the net income or net loss has been
entered, there is an error in the worksheet.

ILLUSTRATION 4.6: COMPUTING NET

INCOME OR NET LOSS AND COMPLETING
THE WORKSHEET.
STEP 5 – ILLUSTRATION PART 2

Illustration 4.6: Computing net income or net loss and completing

the worksheet.
PREPARING FINANCIAL STATEMENTS FROM A WORKSHEET

• Income statement is prepared from the income statement columns

• Statement of financial position and retained earnings statement are

prepared from the statement of financial position columns

• Companies can prepare financial statements before they journalize

and post adjusting entries
INCOME STATEMENTS FROM A WORKSHEET

Illustration 4.7: Financial statements from a worksheet

RETAINED EARNINGS FROM A WORKSHEET

Illustration 4.7: Financial statements from a worksheet

(continued)
STATEMENT OF FINANCIAL POSITION FROM WORKSHEET

Illustration 4.7: Financial statements from a worksheet (continued)

CLOSING THE BOOKS

At the end of the accounting period, the company makes the accounts ready
for the next period.

Illustration 4.8: Temporary versus permanent accounts

 PREPARING CLOSING ENTRIES

Closing entries formally recognize in the ledger the

transfer of:

• Net income (or net loss) and Dividends to

retained earnings

• Produce a zero balance in each temporary

account.

• Companies generally journalize and post

closing entries only at the end of the
annual accounting period.

Illustration 4.10: Closing entries journalized

POST CLOSING TRIAL BALANCE

Illustration 4.12: Post-closing trial balance

CORRECTING ENTRIES—AVOIDABLE STEP

• Unnecessary if accounting records are free of errors

• Made whenever an error is discovered

• Must be posted before closing entries

Instead of preparing a correcting entry, it is possible to reverse the incorrect

entry and then prepare the correct entry.
 CORRECTING ENTRIES—CASE 1

Case 1: On May 10, Mercato Co. journalized and posted a NT$500 cash collection on account
from a customer as a debit to Cash and a credit to Service Revenue for NT$500. The error was
discovered when the customer paid the remaining balance in full.

ILLUSTRATION 4.16-17: COMPARISON OF ENTRIES (16)

AND CORRECTING ENTRY (17)

• LO 3
 CORRECTING ENTRIES—CASE 2

Case 2: On May 10, 18, Mercato purchased on account equipment costing NT$4,500. The
transaction was journalized and posted as a debit to Equipment NT$450 and a credit to Accounts
Payable NT$450. The error was discovered on June 3.

Illustration 4.18-19: Comparison of entries (18) and Correcting entry (19)

• LO 3
 DO IT! 3: CORRECTING ENTRIES

Sanchez Company discovered the following errors made in January 2025 (amounts in thousands).
1. A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600.
2. A collection of $3,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200.
3. The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Accounts Payable
$680.
Correct the errors without reversing the incorrect entry.
ANSWER :
THE ACCOUNTING CYCLE

ILLUSTRATION 4.15: REQUIRED STEPS IN THE ACCOUNTING CYCLE

 CLASSIFIED STATEMENT OF FINANCIAL POSITION

• Presents a snapshot at a point in time

• To improve users’ understanding, companies group

together similar assets and similar liabilities

Assets Equity and Liabilities

Intangible assets Equity
Property, pant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets

ILLUSTRATION 4.20: STANDARD STATEMENT OF FINANCIAL POSITION CLASSIFICATIONS (IFRS)

NOTE : Untuk PSAK di Indonesia, Penyusunan laporan keuangan dimulai dari Current Asset terlebih dahulu baru Non Current Asset.
Demikian juga untuk liabilitas dan ekuitas. Dimulai dari Current Liabilities terlebih dahulu
ILLUSTRATION 4.21

Illustration 4.21: Classified statement of financial position

ILLUSTRATION 4.21 (CONTINUED)

Illustration 4.21: Classified statement of financial position (Continued)

 APPENDIX: PSAK INDONESIA

• PSAK 2022 Pocket Guide PWC

https://www.pwc.com/id/en/publications/assurance/psak-pocket-guide-2022.pdf

- Delloite : A Guide to the Indonesian Financial Accounting Standards 2023

https://www2.deloitte.com/content/dam/Deloitte/id/Documents/audit/id-aud-guidances-to-the-
indonesian-financial-accounting-standards.pdf
 GAAP AND IFRS – SIMILARITIES

Key Points

• In general, G A A P follows the similar guidelines as this text for presenting items
in the current asset section, except that under G A A P items are listed in order of
liquidity, while under I F R S they are often listed in reverse order of liquidity. For
example, under G A A P cash is listed first, but under I F R S it is listed last.

• Both G A A P and I F R S are increasing the use of fair value to report assets.
However, at this point I F R S has adopted it more broadly. As examples, under I F
R S companies can apply fair value to property, plant, and equipment; natural
resources; and in some cases intangible assets.
GAAP AND IFRS – FURTHER SIMILARITIES

•Both IFRS and GAAP require disclosures about (1) accounting

policies followed, (2) judgments that management has made in the
process of applying the entity’s accounting policies, and (3) the key
assumptions and estimation uncertainty that could result in a
material adjustment to the carrying amounts of assets and liabilities
within the next financial year.
•Comparative prior-period information must be presented and
financial statements must be prepared annually.
 GAAP AND IFRS – DIFFERENCES

• I F R S requires that specific items be reported on the statement of financial position,

whereas no such general standard exists in G A A P. However, under G A A P, public
companies must follow U.S. Securities and Exchange Commission (SEC) regulations,
which require specific line items as well. In addition, specific G A A P standards
mandate certain forms of reporting statement of financial position information. The S
E C guidelines are more detailed than I F R S .

• I F R S requires that a complete set of financial statements must include comparative

information from the preceding period. There is no similar requirement in G A A P.
However, public companies following U.S. S E C regulations have a similar
requirement.
GAAP AND IFRS – FURTHER DIFFERENCES

• While IFRS companies often report non-current assets before current

assets in their statements of financial position, this is never seen under G AA
P. Also, some IFRS companies report the subtotal “net assets,” which equals
total assets minus total liabilities. This practice is also not seen under G AAP.

• A key difference in valuation is that under I FRS companies, under certain

conditions, can report property, plant, and equipment at cost or at fair
value, whereas under GAAP this practice is not allowed.

• IFRS requires that a company must make an explicit and unreserved

statement that the financial statements comply with I FRS standards. No
similar statement is required under US G AAP.
DIFFERENCES IN TERMINOLOGY

• GAAP has many differences in terminology from what are shown in your
textbook. For example, in the investment category, shares are called stock.
Also note that Share Capital—Ordinary is referred to as Common Stock. In
addition, the format used for statement of financial position presentation is
often different between GAAP and IFRS.

• IFRS officially uses the term statement of financial position in its literature,
while in the United States it is often referred to as the balance sheet.
REFERENCES

Weygandt, J.J. and Kimmel, P.D. (2022). Financial Accounting with International
Financial Reporting Standards. 5th Edition. John Willey & Sons Inc.

PSAK 2022 Pocket Guide PWC

https://www.pwc.com/id/en/publications/assurance/psak-pocket-guide-2022.pdf

- Delloite : A Guide to the Indonesian Financial Accounting Standards 2023

https://www2.deloitte.com/content/dam/Deloitte/id/Documents/audit/id-aud-
guidances-to-the-indonesian-financial-accounting-standards.pdf
 THANK YOU
INTRODUCTION TO ACCOUNTING
UNIVERSITAS BINA NUSANTARA