Topic 6 - Recording Year End Adjustments

Recording Year End
Topic Adjustments and

Preparing Financial
6
Statements
100 Shares
Adjustments??
$1 par value
© The McGraw-Hill Companies, Inc., 2007

Learning
Learning Objectives
Objectives
 Explain the importance of periodic reporting and the
time period principle
 Identify the types of adjustments and their purpose
 Prepare and explain adjusting entries
 Explain and prepare an adjusted trial balance
 Prepare financial statements from an adjusted trial
balance
 Describe and prepare closing entries
 Explain and prepare a post-closing trial balance
 Explain and prepare a classified balance sheet

The
The Accounting
Accounting Period
Period
Annual
1 2
Semiannual
1 2 3 4
Quarterly
1 2 3 4 5 6 7 8 9 10 11 12
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Monthly
The
The Accounting
Accounting Period
Period
 Calendar year- reporting period of 12 months
covering from 1 January to 31 December
 Fiscal year- reporting period consisting of any 12

consecutive months, in which the starting month
is not necessarily beginning from 1 January. Eg. 1
April 2005 to 31 March 2006

Accrual
Accrual Basis
Basis vs.
vs. Cash
Cash Basis
Basis
Accrual Basis Cash Basis
Revenues are Revenues are
recognized when recognized when
earned and expenses cash is received and
are recognized when expenses recorded
incurred. when cash is paid.
•Revenue Recognition
•Matching Not GAAP
Accounting

The Accounting Cycle
Closing
Entries Source
Financial Documents
Statements
Adjusted Journal
Trial Balance
Adjustments Trial Balance Ledger

Adjusting
Adjusting Accounts
Accounts
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount.
Framework for Adjustments

Adjustments
Paid
Paid (or
(or received)
received) cash
cash before
before Paid
Paid (or
(or received)
received) cash
cash after
after
expense
expense (or
(or revenue)
revenue) recognized
recognized expense
expense (or
(or revenue)
revenue) recognized
recognized
Prepaid
Prepaid Unearned
Unearned Accrued
Accrued Accrued
Accrued
(Deferred)
(Deferred) (Deferred)
(Deferred) expense
expense revenues
revenues
expenses*
expenses* revenues
revenues
*including depreciation © The McGraw-Hill Companies, Inc., 2007
1.
1. Adjusting
Adjusting
Prepaid
Prepaid (Deferred)
(Deferred) Expenses
Expenses
Resources paid for

prior to receiving the
actual benefits.
Here is the check
for my first
6 months’ rent.

1.
1. Adjusting
Adjusting
Prepaid
Prepaid (Deferred)
(Deferred) Expenses
Expenses
Asset Expense
Unadjusted Credit Debit
Balance Adjustment Adjustment
Journal:
Dec 31 Expense Acc xx
Asset Acc xx

Ex:Prepaid
Ex:Prepaid Insurance
Insurance
On 1 December 2006, Suria Company paid RM12,000
to cover rent for December 2006 through May 2007.
Scott recorded the expenditure as Prepaid Insurance
on 1 December. What adjustment is required?
RM12,000 – insurance for 6 month

So, insurance for December 2006?

Ex:Prepaid
Ex:Prepaid Insurance
Insurance
Dec. 31 Insurance Expense 2,000

Prepaid Insurance 2,000
To record first month's expired insurance
637 128
Pre
Adjusting
Adjusting for
for Depreciation
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 =
Expense Useful Life

Ex:
Ex: Adjusting
Adjusting for
for Depreciation
Depreciation
On 1 January 2006, Sykt Batik purchased equipment
for RM62,000 cash. The equipment has an
estimated useful life of 5 years and Barton expects
to sell the equipment at the end of its life for
RM2,000 cash.
Let’s record depreciation expense for the year ended
31 December 2006.
2006 RM62,000 - RM2,000

Depreciation = = RM12,000
Expense 5

Ex:
Ex: Adjusting
Adjusting for
for Depreciation
Depreciation
D e c . 3 1D e p re c i a tio n E x p e n se 1 2 ,0 0 0
A c c u m u la te d D e p re c ia tio n - E q u ip m e n t1 2 , 0 0 0
T o r eco r d eq u i p m en t d ep r eci a ti o n
Accumulated
Accumulated depreciation
depreciation is
is
aa contra
contra asset
asset account.
account.

Ex:
Ex: Adjusting
Adjusting for
for Depreciation
Depreciation
Dec. 31 Depreciation Expense 12,000
Accumulated Depreciation - Equipment 12,000
To record equipment depreciation
Equipment Depreciation Expense

1/1 62,000 31/12 12,000
Accumulated Depreciation
31/12 12,000

Adjusting
Adjusting for
for Depreciation
Depreciation
Equipment is
RM
shown net of
accumulated
depreciation.

2.
2. Adjusting
Adjusting
Unearned
Unearned (Deferred)
(Deferred) Revenues
Revenues
Cash
Cash received
received in
in
advance
advance ofof Buy your season tickets for
providing
providing products
products all home basketball games NOW!
or
or services.
services.
Liability Revenue
Debit Unadjusted Credit
Adjustment Balance Adjustment

2.
2. Adjusting
Adjusting
Unearned
Unearned (Deferred)
(Deferred) Revenues
Revenues
Journal:
Dec 31 Unearned Revenue Acc xx

Revenue Acc xx

Ex:Adjusting
Ex:Adjusting
Unearned
Unearned (Deferred)
(Deferred) Revenues
Revenues
On 1 October 2006, Universiti Utama(UU) sold 1,000
season tickets to its 20 home basketball games for
RM100 each. UU makes the following entry:
Oct. 1 Cash 100,000
Unearned Revenue 100,000
Basketball revenue received in advance
Unearned Revenue
Oct. 1 100,000

Ex:
Ex: Adjusting
Adjusting
Unearned
Unearned (Deferred)
(Deferred) Revenues
Revenues
On 31 December, UU has played 10 of its
regular home games, winning 2 and losing 8.
Dec. 31 Unearned Revenue 50,000
Basketball Revenue 50,000
To recognized 10-game basketball revenue
Unea rned Reve nue

De c 31 50,000Oct. 1 100,000
Bal. 50,000

3.
3. Adjusting
Adjusting
for
for Accrued
Accrued Expenses
Expenses
Costs We’re about one-half
Costs incurred
incurred in
in aa
done with this job and
period
period that
that are
are want to be paid for
both
both unpaid
unpaid and
and our work!
unrecorded.
unrecorded.
Expense Liability
Debit Credit
Adjustment Adjustment

3.
3. Adjusting
Adjusting
for
for Accrued
Accrued Expenses
Expenses
Journal:
Dec 31 Expense Acc xx

Liability Acc xx

Ex:Adjusting
Ex:Adjusting
for
for Accrued
Accrued Expenses
Expenses
Sykt
Sykt Beras
Beras pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
31/12/06,
31/12/06, falls
falls on
on aa Wednesday.
Wednesday. As As of
of 31/12/06,
31/12/06, the
the
employees
employees havehave earned
earned salaries
salaries ofof RM47,250
RM47,250 for
for
Monday
Monday through
through Wednesday
Wednesday of of the
the week
week ended
ended
2/01/07.
2/01/07.
Last pay Next pay

date date
26/12/06 2/01/07
1/12/06 31/12/06 Record

Record adjusting
adjusting
Year end journal
journal entry.
entry.

Ex:
Ex: Adjusting
Adjusting
for
for Accrued
Accrued Expenses
Expenses
Sykt.
Sykt. Beras
Beras pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end, 31/12/06,
31/12/06,
falls
falls on
on aa Wednesday.
Wednesday. As As of
of 31/12/06,
31/12/06, the
the employees
employees have
have earned
earned
salaries
salaries ofof RM47,250
RM47,250 forfor Monday
Monday through
through Wednesday
Wednesday ofof the
the week
week
ended
ended 2/01/07.
2/01/07.
Dec. 31 Salaries Expense 47,250

Salaries Payable 47,250
To accrue 3-days' salary
Salaries Expense
Other salaries
657,500
Dec. 31 47,250
Bal. 704,750

4.
4. Adjusting
Adjusting
Accrued
Accrued Revenues
Revenues
Revenues earned Yes, I’ve completed your
in a period that tax return, but have not had
time to bill you yet.
are both
unrecorded and
not yet received.
Asset Revenue
Debit Credit
Adjustment Adjustment

4.
4. Adjusting
Adjusting
Accrued
Accrued Revenues
Revenues
Journal:
Dec 31 Asset Acc xx

Revenue Acc xx

Ex:Adjusting
Ex:Adjusting
for
for Accrued
Accrued Revenues
Revenues
Kamal
Kamal Amin,
Amin, CA(M),
CA(M), had
had RM31,200
RM31,200 of of work
work
completed
completed but
but not
not yet
yet billed
billed to
to clients.
clients. Let’s
Let’s make
make
the
the adjusting
adjusting entry
entry necessary
necessary on on 31
31 December
December 2006,
2006,
the
the end
end of
of the
the company’s
company’s fiscal
fiscal year.
year.
Dec. 31 Accounts Receivable 31,200
Service Revenue 31,200
To accrue revenue earned
Accounts Receivable Service Revenue

Other receivables Other revenues
1,325,268 6,589,500
Dec. 31 31,200 Dec. 31 31,200
Bal. 1,356,468 Bal . 6,620,700

Links
Links to
to Financial
Financial Statements
Statements
Summary of Adjustments and Financial Statement Links
Before Adjustment
Income
Balance Statement
Type Sheet Account Account Adjusting Entry
Prepaid Asset Expense Dr. Expense
Expenses Overstated Understated Cr. Asset
Unearned Liability Revenue Dr. Liability
Revenues Overstated Understated Cr. Revenue
Accrued Liability Expense Dr. Expense
Expenses Understated Understated Cr. Liability
Accrued Asset Revenue Dr. Asset
Revenues Understated Understated Cr. Revenue

Closing
Entries Source
Financial Documents
Statements
Adjusted Journal
Trial Balance

Adjusted
Adjusted Trial
Trial Balance
Balance
 List of accounts and balances prepared after
adjusting entries have been recorded and
posted to the ledger.
 Use a work sheet to prepare adjusted trial

balance & financial statement (as a tool)

Benefits
Benefits of
of aa Work
Work Sheet
Sheet
Aids
Aidsthe
the Assists
Assistsinin
preparation
preparationofof planning
planningand
and
financial
financial organizing
organizingan an
statements. audit.
audit.
statements.
Reduces Helps
Helpsinin
Reduces Not a preparing
possibility
possibilityof
of preparing
required interim
interimfinancial
financial
errors.
errors. report. statements.
statements.
Shows
Showsthethe
Links
Linksaccounts
accounts effects
effectsof
of
and
andtheir
their proposed
proposed
adjustments.
adjustments. transactions.
transactions.

SYKT MAJU
TRIAL BALANCE
31 DECEMBER 2006
First,
First, the
the
$
initial
initial
unadjusted
unadjusted
amounts
amounts are are
added
added to to the
the
worksheet.
worksheet.
$ $

SYKT. MAJU
TRIAL BALANCE
31 DECEMBER 2006
$ Next,
Next, Sykt
Sykt
$ Maju’s
$
Maju’s
adjustments
adjustments
are
are added.
added.
$ (pg96-102)
(pg96-102)
$ $ $ $

SYKT MAJU
Finally,
Finally, the
the totals
totals TRIAL BALANCE
are
are determined.
determined. 31 DECEMBER 2006
$ $
$
$
$
$
$ $ $ $ $ $

Closing
Entries Source
Financial Documents
Statements
Adjusted Journal
Trial Balance

Sort FastForward
Sort adjusted
adjusted trial balance
Work Sheet balance
trial
amounts
amounts to financial
toEnded
For Month financial statements.
statements.
December 31, 2004

Total FastForward
Total statement
statement columns,
columns, compute
compute
Work Sheet
income
income or
or loss,
loss, and
and
balance
balance
For Month Endedcolumns.
columns.
December 31, 2004

Prepare
Prepare the
the Financial
Financial Statements
Statements
Prepare the Income

Statement.
A
A work
work sheet
sheet does
does
not
not substitute
substitute for
for
financial
financial
statements.
statements.

Prepare the Statement of
Changes in Owner’s Equity.

Prepare the
Balance Sheet.
SYKT MAJU
BALANCE SHEET
31 DECEMBER 2006
Non-current assets
Equipment $ 26,000
Less: accum. depr. 375 $25,625
Current assets
Cash 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Total assets $42,345
Equity
C. Taylor, Capital $33,185
Current liabilities
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenues 2,750
Total equity and liabilities $42,345

Closing
Entries Source
Financial Documents
Statements
Adjusted Journal
Trial Balance

Closing
Closing Process
Process
 Resets revenue,
expense and Identify accounts for
withdrawal account closing.
balances to zero at
the end of the period.
Record and post closing
 Helps summarize a entries.
period’s revenues
and expenses in the
Income Summary Prepare post-closing trial
account. balance.

Closing
Closing Process
Process
Revenues Assets
Withdrawals
Liabilities
Expenses
Owner’s
Capital
Temporary Permanent
Accounts Accounts
Income
Summary The
The closing
closingprocess
process
applies
applies only
onlyto
to
temporary
temporaryaccounts.
accounts.
Recording
Recording Closing
Closing Entries
Entries

Close
Close Revenue
Revenue accounts
accounts
to
to Income
Income Summary.
Summary. Let’s see how the
closing process

Close
Close Expense
Expense accounts
accounts works!
to
to Income
Income Summary.
Summary.

Close
Close Income
Income Summary
Summary
account
account to
to Owner’s
Owner’s
Capital.
Capital.

Close
Close Withdrawals
Withdrawals to
to
Owner’s
Owner’s Capital.
Capital.
Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 25,000
10,000 25,000
Income Summary
Owner's Capital Withdrawals Account

30,000 5,000
30,000 Balances before closing. 5,000

Closing
Closing Process
Process
10,000 Close Revenue 25,000 25,000
accounts to Income
Summary.
10,000 -
Income Summary
25,000
Owner's Capital 25,000 Withdrawals Account

30,000 5,000
30,000 5,000

Closing
Closing Process
Process
10,000 10,000
Close Expense 25,000 25,000
accounts to Income
Summary.
- -
Income Summary
10,000 25,000
Owner's Capital 15,000 Withdrawals Account

30,000 5,000
The
Thebalance
balancein
inIncome
Income
30,000 Summary
Summaryequals
equalsprofit
profit 5,000
for
forthe
theperiod
period
Closing
Closing Process
Process
10,000 10,000
Close Income 25,000 25,000
Summary to
Owner’s Capital.
- -
Income Summary
10,000 25,000
15,000
Owner's Capital - Withdrawals

Withdrawals Account
Account
30,000
30,000 5,000
5,000
15,000
45,000 5,000
5,000

Closing
Closing Process
Process
10,000 10,000 25,000 25,000
- -
Income Summary
10,000 25,000
15,000
-
Owner's Capital Withdrawals Account
5,000 30,000 5,000 5,000
15,000 Close Withdrawals
account to Owner’s 5,000
-
45,000
40,000
Capital.
Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.

Close Revenue
accounts to
Income Summary.

 Close
 Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary
D e c . 3 C1 o n su l ti n g r e v e n u e 7,850
R e n ta l r e v e n u e 300
I n c o m e su m m a r y 8,150
Now, let’s look at the ledger accounts after

posting this closing entry.

 Close
 Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary
Consulting Revenue
7,850 7,850
-
Income Summary
7,850
300
Rental Revenue
300 300

Close Expense
accounts to
Income Summary.

 Close
 Close Expense
Expense Accounts
Accounts to
to Income
Income
Summary
Summary
Dec. 31 Income summary 4,365

Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230




Close
Close
CloseExpense Accounts
Accounts
Expense to
to
Accounts Income
Close Expense Accounts toIncome
Expense to Income
Income
Summary
Summary Summary
Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-
Income Summary
Salaries Expense Supplies Expense 4,365 7,850
1,610 1,610 1,050 1,050 300
3,785
- -
Insurance Expense Utilities Expense Profit for

100 100 230 230 the period
- -
Close Income
Summary to
Owner’s Capital.

 Close
 Close Income
Income Summary
Summary to
to Owner’s
Owner’s
Capital
Capital
Dec. 31 Income summary 3,785

C. Taylor, Capital 3,785




Close
Close
CloseIncome Summary
Summary
Income to
to
Summary Owner’s
Close Income Summary toOwner’s
Income to Owner’s
Owner’s
Capital
Capital Capital
Capital
C. Taylor, Capital Income Summary

30,000 4,365 7,850
3,785 3,785 300
-
33,785

Close
Withdrawals to
Owner’s Capital.

 Close
 Close Withdrawals
Withdrawals to
to Owner’s
Owner’s
Capital
Capital
Dec. 31 C. Taylor, Capital 600

C. Taylor, Withdrawals 600


 Close
 Close Withdrawals
Withdrawals to
to Owner’s
Owner’s
Capital
Capital
C. Taylor,
Withdrawals C. Taylor, Capital
600 600 600 30,000
3,785
- 33,185

Post-Closing
Post-Closing Trial
Trial Balance
Balance
Let’s look at
 List
List of
of permanent
permanent FastForward’s
accounts
accounts and
and their
their post-closing trial
balances balance.
balances after
after posting
posting
closing
closing entries.
entries.
 Total
Total debits
debits and
and
credits
credits must
must be
be equal.
equal.

Post-Closing
Post-Closing Trial
Trial Balance
Balance

Classified
Classified Balance
Balance Sheet
Sheet
Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current Assets Current Liabilities
Noncurrent Assets Noncurrent Liabilities
Long-Term Investments Equity
Fixed Assets
Intangible Assets
Current items are those expected to come due (both
collected and owed) within the longer of one year or
the company’s normal operating cycle.

SNOWBOARDING COMPONENTS
BALANCE SHEET
AS AT 31 JANUARY 2006
Non-current assets
Store equipment $33,200
Less accumulated depreciation 8,000 $25,200
Buildings 170,000
Less accumulated depreciation 45,000 125,000
Land 73,200
Current assets are expected to$ be 223.400
Long-term investments
sold, collected, or used within
Notes receivable 1.500 one
year orinthe
Investments stockscompany’s
and bonds operating
18.000
Land held for future expansion 48.000
Total investments cycle. 67.500
Intangible assets 10.000
Total non-current assets $ 300.900
Current Assets
Cash $6,500
Short-term investments 2,100
Merchandise inventory 27,500
BALANCE SHEET
31 JANUARY 2006
Non-current assets
Buildings 170,000
Land 73,200
$223,400
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Long-term investments are 67,500
Total investments
expected to be held for the longer
Total assets $300.900
of one year or the operating cycle.
Current Assets
Cash 6.500
Short-term investments 2.100
BALANCE SHEET
31 JANUARY 2006
Non-current assets
Buildings 170,000
Land 73,200
Fixed assets are tangible long-lived $223,400
assets
Notes receivableused to produce or sell
1.500
products
Investments and services.
in stocks and bonds 18.000
Land held for future expansion 48.000
Total investments 67.500
$300,900
Current assets
Cash $6,500
Short-term investments 2,100
BALANCE SHEET
31 JANUARY 2006
Non-current assets
Buildings 170,000
Land 73,200
$223,400
Notes receivable $1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Intangible assets are long-term $67,500
resources used to produce or sell
$300.900
products and services and that
Current Assets
Cash lack physical form. 6.500
BALANCE SHEET
Current liabilities
Accounts payable $ 15.300
Wages payable 3.200
Notes payable 3.000
Current portion of long-term liabilities 7.500
Total current liabilities $29,000
Current liabilities are obligations due

within the longer of one year or the
company’s operating cycle.
BALANCE SHEET
Equity and liabilities

T.Hawk, Capital $164,800
Non-current liabilities
Notes payable (net of current portion) $150,000
Current liabilities
Long-term liabilities are obligations

not due within the longer of one year
or the company’s operating cycle.

Topic 6 - Recording Year End Adjustments

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Recording Year End

Topic Adjustments and

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

 Fiscal year- reporting period consisting of any 12

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Adjustments Trial Balance Ledger

© The McGraw-Hill Companies, Inc., 2007

Framework for Adjustments

Resources paid for

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

RM12,000 – insurance for 6 month

© The McGraw-Hill Companies, Inc., 2007

Dec. 31 Insurance Expense 2,000

Straight-Line Asset Cost - Salvage Value

© The McGraw-Hill Companies, Inc., 2007

2006 RM62,000 - RM2,000

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Equipment Depreciation Expense

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Dec 31 Unearned Revenue Acc xx

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Unea rned Reve nue

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Dec 31 Expense Acc xx

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Last pay Next pay

1/12/06 31/12/06 Record

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Dec. 31 Salaries Expense 47,250

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Dec 31 Asset Acc xx

© The McGraw-Hill Companies, Inc., 2007

Accounts Receivable Service Revenue

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© The McGraw-Hill Companies, Inc., 2007

Adjustments Trial Balance Ledger

© The McGraw-Hill Companies, Inc., 2007

 Use a work sheet to prepare adjusted trial

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© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Adjustments Trial Balance Ledger

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© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Prepare the Income

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© The McGraw-Hill Companies, Inc., 2007

© The McGraw-Hill Companies, Inc., 2007

Adjustments Trial Balance Ledger

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