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A = L + OE
+ Owner Investments
- Owner Withdrawals
+ Revenues
+ Gains
- Expenses
- Losses
A = L + SE
+ Paid-in Capital
+ Retained Earnings
Source
documents
Transaction
Analysis
Record in
Journal
Post to
Ledger
Financial
Statements
Adjusted
Trial Balance
At the End
of the Year
Close Temporary
Accounts
Post-Closing
Trial Balance
Unadjusted
Trial Balance
The
Accounting
Processing
Cycle
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-5
60,000
60,000
General Ledger
After
Afterrecording
recording all
all entries
entriesfor
forthe
theperiod,
period,Dress
DressRights
Rights
Unadjusted
UnadjustedTrial
TrialBalance
Balance would
would be
be as
asfollows:
follows:
AATrial
Trial
Balance
Balance is
isaa
list
list of
of all
all
accounts
accounts
and
andtheir
their
balances
balancesat
at
aaparticular
particular
date.
date.
Debits = Credits
Adjusting Accounts
An adjusting entry is recorded to bring an asset
or liability account balance to its proper amount.
The adjusting process is based on ACCRUAL
ACCOUNTING of Revenue Recognition and
Matching Principle.
Adjusting accounts is a 3-step process:
(1) Determine the current account balance,
(2) Determine what the current account balance
should be, and
(3) Record adjusting entry to get from step 1
to step 2.
P1
Supplies
During 2009, Scott Company purchased $15,500 of
supplies. Scott recorded the expenditures as
Supplies (Asset). On December 31, a count of the
supplies indicated $2,655 on hand.
What adjustment is required?
126
652
3-13
Adjusting Entries
At the end of the period, adjusting entries are
required to satisfy the realization principle and
the matching principle.
Prepayments
Accruals
Estimates
Transactions where
cash is paid or received
before a related
expense or revenue is
recognized.
Transactions where
cash is paid or received
after a related expense
or revenue is
recognized.
C2, P1
Adjusting Accounts
Framework for
Adjustments
Adjustments
Paid
Paid (or
(or received)
received) cash
cash before
before
expense
expense (or
(or revenue)
revenue) recognized
recognized
Prepaid
Unearned
Prepaid
Unearned
(Deferred)
(Deferred)
(Deferred)
(Deferred)
expenses*
revenues
expenses*
revenues
*including depreciation
Paid
Paid (or
(or received)
received) cash
cash after
after
expense
expense (or
(or revenue)
revenue) recognized
recognized
Accrued
Accrued
expenses
expenses
Accrued
Accrued
revenues
revenues
3-15
Supplies
During 2009, Scott Company purchased $15,500 of
supplies. Scott recorded the expenditures as
Supplies. On December 31, a count of the supplies
indicated $2,655 on hand.
What adjustment is required?
126
652
3-16
P1
Depreciation
Depreciation is the process of computing
expense from allocating the cost of plant and
equipment over their expected useful lives.
Straight-Line
Asset Cost - Salvage Value
Depreciation =
Useful Life
Expense
3-17
Depreciation
Recall the Furniture and Fixtures for $12,000 listed on
Dress Rights unadjusted trial balance. Assume the
following:
Asset Cost
$
12,000
Salvage Value
Useful Life
60 months
Depreciation
$12,000 - $0
=
60 months
July 31
Depreciation expense
200
Accumulated depreciationfurniture and fixtures
200
Depreciation
After posting, the accounts look like this:
Furniture and Fixtures
Beg. bal.
12,000
Bal.
12,000
Depreciation Expense
Beg. bal.
200
Bal.
200
Accumulated Depreciation
Beg. bal.
200
200 Bal.
P1
Liability
Debit
Adjustment
Unadjusted
Balance
Go Big Blue
Revenue
Credit
Adjustment
3-21
P1
3-22
P1
3-23
Accrued Expenses
P1
Costs
Costs incurred
incurred in
in aa
period
period that
that are
are
both
both unpaid
unpaid and
and
unrecorded.
unrecorded.
Expense
Debit
Adjustment
Liability
Credit
Adjustment
3-24
Accrued Expenses
P1
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
Last pay
date
12/26/09
12/1/09
Next pay
date
12/31/09
Year end
Record
Record adjusting
adjusting
journal
journal entry.
entry.
3-25
P1
Accrued Expenses
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
3-26
P1
Accrued Revenues
Smith
Smith &
& Jones,
Jones, CPAs,
CPAs, had
had $31,200
$31,200 of
of work
work
completed
completed but
but not
not yet
yet billed
billed to
to clients.
clients.
Lets
Lets make
make the
the adjusting
adjusting entry
entry necessary
necessary on
on
December
December 31,
31, 2009,
2009, the
the end
end of
of the
the companys
companys fiscal
fiscal
year.
year.
3-27
Estimates
Accountants often must make estimates of
future events to comply with the accrual
accounting model.
Examples
Depreciation
Uncollectible accounts
C3
The Statement of
Shareholders Equity
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-36
Income
Summary
Liabilities
Permanent
Accounts
Shareholders
Equity
Temporary
Accounts
Assets
Dividends
Expenses
Revenues
P4
1.
2.
3.
4.
3-38
P4
Consulting Revenues
Examine the
accounts
presented.
Income Summary
$ 25,000
Retained Earnings
$ 7,000
3-39
P4
Consulting Revenues
$ 25,000
$ 18,100
Income Summary
$ 25,000
$ 25,000
Close revenues
with a debit to the
revenue account
and a credit to
Income Summary.
3-40
P4
$ 18,100
Income Summary
$ 18,100
$ 25,000
Consulting Revenues
$ 25,000
$ 25,000
Close expense
accounts with a
credit to expenses
and a debit to
Income Summary.
3-41
P4
$ 18,100
Income Summary
$ 18,100
$ 25,000
$ 6,900
Consulting Revenues
$ 25,000
$ 25,000
Determine the
balance in the
Income Summary
account.
3-42
P4
$ 18,100
Income Summary
$ 18,100
$ 6,900
$ 25,000
$ 6,900
3-43
P4
$ 2,000
Retained Earnings
$ 2,000
$ 7,000
6,900
3-44
P4
$ 2,000
Retained Earnings
$ 2,000
$ 7,000
6,900
$ 11,900
3-45
C3
Start
Prepare
post-closing
trial balance
Analyze
transactions
POST
Closing
Entries
Journalize
Post
Prepare
statements
Prepare
unadjusted
trial balance
Prepare
adjusted
trial balance
Adjusting
Entries
POST
3-46
P5
3-47
Increases
Decreases
Assets
Add
Deduct
Liabilities
Deduct
Add