ACCY901

Accounting Foundations for Professionals

Topic 4
Accrual Accounting and Adjusting Entries (cont.)
Cash and Internal Control

Dr Andy Wang
BCom(Hons), MAccg, PhD, CPA
Topic 3 review

Revenue received in advance

Prepaid Expense Amounts received from customers
Amounts paid in cash and recorded as a liability until
Prepayments and recorded as assets services performed or goods
until used. delivered.
(unearned revenue)

Accruals Accrued Expense Accrued Revenue

Expenses incurred but Revenue earned but not yet
(Unrecorded) not yet paid received

Provide a “true” picture of profit for the accounting period.

Complete accounting cycle

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Topic 4 – Accrual accounting and adjusting entries
Ch 3, pp.184-193

Learning objectives
1. Describe the nature and purpose of the adjusted trial balance.
2. Explain the purpose of closing entries.
3. Describe the required steps of the accounting cycle.
4. Describe the purpose and basic form of a worksheet

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The adjusted trial balance and financial statements

• The adjusted trial balance is prepared after all adjusting entries

have been made
• It is used to prove the equality of total debit balances and total credit
balances after the adjusting entries have been made
• The adjusted trial basis is the main basis for preparation of the
financial statements
• To get to the adjusted trial balance…we’ll have a full example…from
the beginning

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An example: Bazinga Inc
• Bazinga Inc is a comic book store in Pasadena, California. It is owned
and managed by four friends: Sheldon, Leonard, Howard, and Raj.
The Trial Balance as at June 2010 for the company, before adjusting
entries are made, is shown on the following slide…

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 BAZINGA inc
As at 30 June 2010
Unadjusted trial balance
Account Debit Credit

Cash at bank 20,000

Accounts receivable 9,000

Supplies 12,500

Prepaid insurance 3,000

Shop fittintgs 15,000

Accounts payable 5,000

Unearned revenue 8,500

Retained earnings, beginning 21,500

Sales revenue 24,500

Total 59,500 59,500
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Bazinga Inc, year end info
• REMEMBER: When doing adjusting entries, you need:
• The trial balance before adjustment
• Information is available at the end of the accounting period so that
you can calculate the correct balances for assets and liability
accounts and determine the amounts to be included as revenue and
expenses.

– Year end information…

(a) Supplies on hand at the end of the period were $8,000
(b) The useful life of shop fittings was 5 years and the residual value is
$5,000.
(c) A three year insurance policy was purchased on 1 July 2009.

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Bazinga Inc, year end info
– Year end information continued…
(d) The business employs one sales assistant who is paid $1,000 for a five
day working week and is paid every Friday. Balance day is a Wednesday.

(e) Comic books worth $3,500 were sent to a collector with an invoice on 29
June 2010.

(f) The subscription revenue recorded in the unearned revenue account

were for a two-year period, therefore half of this money was earned at year
end

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Let’s start adjusting process!

(a) Supplies on hand at the end of the period were $8,000

• In the unadjusted trial balance, supplies at the beginning of the period

were $12,500
• Therefore, an adjusting entry is required to reduce the balance to $8,000

Date Description Debit Credit

a 30/6 Supplies expense 4,500
Supplies 4,500
(to reduce supplies account to $8000)

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(b) The useful life of shop fittings was 5 years and the residual value is
$5,000.

• Type of adjusting entry ~ deferred (prepaid) expense

• Adjusting entry for depreciation expense…
• Annual depreciation expense = (cost – residual value)/estimated useful life
• Annual depreciation expense = ($15,000-$5,000)/5 years

Date Description Debit Credit

b 30/06 Dep exp – fittings 2,000
Accum dep – fittings 2,000
(to record dep expense for the year)

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(c) A three-year insurance policy was purchased on 1 July 2009.

• Type of adjusting entry ~ deferred (prepaid) expense

• Insurance policy purchased at the beginning of the current year. Valid for
three years. Adjusting entry records expiration of policy over this period.

Date Description Debit Credit

c 30/06 Insurance expense 1,000
Prepaid insurance 1,000
(to record insurance expense for the year)

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(d) The business employs one sales assistant who is paid $1,000 for a
five day working week and is paid every Friday. Balance day is a
Wednesday.

• Type of adjusting entry ~ accrued expense

• Work out: how much is paid per day AND how many days fall between date
of last pay and balance date.

Date Description Debit Credit

d 30/06 Salary expense 600
Salaries payable 600
(to record salaries owed but not yet paid)

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(e) Comic books worth $3,500 were sent to a collector with an invoice
on 29 June 2010.

• Type of adjusting entry ~ accrued revenue

• Adjusting entry for unrecorded revenue…

Date Description Debit Credit

e 30/06 Accounts receivable 3,500
Sales revenues 3,500
(to record revenue earned but not yet received)

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(f) The subscription revenue recorded in the unearned revenue account
were for a two-year period, therefore half of this money was earned
at year end
• Type of adjusting entry ~ deferred (prepaid) revenue
• Adjusting entry for unearned revenue now earned

Date Description Debit Credit

f 30/06 Unearned revenue 4,250
Service revenues 4,250
(to record unearned revenue earned during the year)

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An example: Bazinga Inc
• Once adjusting entries are posted to ledger accounts, new totals are
calculated and an adjusted trial balance is taken
• After the adjusting process is completed, the adjusted trial balance is used
to prepare the financial statements
• We will use worksheets to help us with this process

• Now lets complete the 10 column worksheet

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 Income statement
Bazinga Inc
Income Statement
As at 30 June 2010
Sales revenue 32,250
Insurance expense 1,000
Supplies expense 4,500
Salaries expense 600
Depreciation expense 2,000
Total expenses 8,100
Profit/loss 24,150

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 Bazinga Inc
Statement of Changes in Equity
for the year ended 30 June 2010

Retained earnings, beginning 21,500

Add: net profit 24,150
45,650
Less: dividends -
Retained earnings, 30 June 2010 45,650

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 Bazinga Inc
Balance Sheet
as at 30 June 2010

Assets
Current assets
Cash at bank 20,000
Accounts receivable 12,500
Supplies 8,000
Prepaid insurance 2,000
Non-current assets 42,500
Shop fittings 15,000
Less: Accumulated depreciation - shop fittings 2,000 13,000
Total assets 55,500

Liabilities
Accounts payable 5,000
Salaries payable 600
Unearned revenue 4,250
Total liabilities 9,850

Equity
Retained earnings, ending 45,650
Total liabilities and equity 55,500
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Next step: Closing process
• Closing entries are used to transfer the temporary account balances
to the permanent equity account, retained earnings

• Temporary accounts relate to only a given accounting period

– i.e., revenues, expenses, dividends
• Permanent accounts are carried forward to future accounting periods
– i.e., assets, liabilities, equity

§ Income and expense accounts must be reduced to zero at the end of each
period in order to determine the profit or loss for the period
§ Income and expense accounts then begin the next accounting period with
a zero balance
§ The Profit or Loss Summary account is used to summarise balances and
calculate profit
§ Note: Balance sheet accounts are NOT closed

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Preparing closing entries
• Each revenue and expense account is closed to the Profit & Loss Summary,
another temporary account

• The Profit & Loss Summary account is closed to Retained Earnings

• Dividends are closed to the Retained Earnings

• This will result in all temporary accounts having a closing balance of zero

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 FOUR STEPS…
1 Close revenue accounts to Profit and Loss Summary
2 Close expenses accounts to Profit and Loss Summary
1. To close all Income accounts
Dr revenue
Cr P & L Summary
2. To close all Expense accounts:
(Individual)
(Individual) Dr P & L summary
Revenue
Expenses Cr expenses

2 1
Profit and Loss
Summary

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 3 Close Profit & Loss Summary to Retained earnings
Loss:
Dr Retained earnings
Cr P & L Summary
Or
Profit and Loss Profit:
Summary Dr P & L summary
Cr Retained earnings

Retained earnings

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4 Close Dividends to Retained earnings

Retained earnings

Dr Retained earnings
Cr Dividends

Dividends

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 Closing Entries Illustrated: Bazinga Inc

GENERAL JOURNAL J3
Date Account titles and explanations Ref. Debit Credit
2010
June 30 Sales Revenue 32 250
Profit & Loss Summary 32 250
(To close income account) 1
30 Profit & Loss Summary 8 100
Supplies Expense 4 500
Depreciation Expense - fittings 2 000
Insurance Expense 1 000
Salaries Expense 2 600
(To close expense accounts)
30 Profit & Loss Summary 24 150
Retained earnings 3 24 150
(To close Profit and Loss Summary account and
transfer profit to Retained Earnings)
IF THERE HAD BEEN A DIVIDEND PAID…
30 Retained earnings 500
Dividends 4 500
(To close dividends and recognise decrease in retained earnings)
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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
• Retained earnings
– Balance represents total retained earnings at end of accounting period
– No entries are journalised and posted to retained earnings during the year
• Permanent accounts
– Not closed (assets, liabilities, equity)

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Preparing a post-closing trial 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

Bazinga Inc
Post-Closing Trial Balance
as at 30 June 2010
Debit Credit
Cash at bank 20,000
Accounts receivable 12,500
Supplies 8,000
Prepaid insurance 2,000
Shop fittings 15,000
Accumulated depreciation - shop fittings 2,000
Accounts payable 5,000
Salaries payable 600
Unearned revenue 4,250
Retained earnings, ending 45,650
Total 57,500 57,500

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 Chapter 7
Reporting and analyzing cash pp.406-446.

Learning objectives
7.1 identify the effect of business transactions on cash
7.2 describe electronic banking processes
7.3 explain the application of internal control principles for handling cash
7.4 prepare a bank reconciliation
7.5 discuss the basic principles of cash management

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Cash
• Cash is the most desirable asset because it is readily convertible
into any other asset

• Cash consists of
– Cash on hand (notes and coins)
– Cash at bank
– Cheque accounts
– Cash equivalents (bank overdrafts, deposits on money market, 90-day bank
acceptance bills)

• Cash is the asset most subject to theft

• Need good internal control systems for handling cash and recording cash
transactions

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Effect of major accounting transactions on cash

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Internal control over cash
Internal control over cash
Bank reconciliation
§ Cash at Bank account balance rarely agrees with balance as per
bank statement
§ Mainly due to “timing” differences
§ Common reasons:
– Items in journals not on bank statement
₋ Unpresented (outstanding) cheques
₋ Outstanding or late deposits
– Items originated by the bank
₋ Service and bank charges, interest, EFT transactions etc.
– Errors either by bank or entity

• To prepare a bank reconciliation you require:

ü Last bank reconciliation
ü Cash receipts and cash payments journals
ü Cash at bank ledger balance
ü Bank statement for the period since last reconciliation

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Bank reconciliation
Step 1 Compare current bank statement to:
a. previous month’s bank reconciliation
b. current month's cash receipts and cash payments journal.
ü Tick items that match
ü Correct errors in cash books
ü Bank statement errors added to bank reconciliation

Step 2
a. Identify ‘unticked’ items on bank statement:
– adjust cashbook for dishonoured cheques and direct
deposits and own errors.
b. Examine cash journals and unticked items (outstanding deposits
and unpresented cheques):
– list in bank reconciliation.
c. Unticked items from opening reconciliation are carried forward to
current bank reconciliation.
Bank reconciliation
Step 3 Total cash journals and post to Cash at Bank ledger.

Step 4 Complete bank reconciliation:

– outstanding deposits increase the bank account
– unpresented cheques decrease the bank account.

Adjusted bank balance should equal the balance of the Cash at Bank
account
Bank reconciliation example
The following information relates to the cash position of Cathy Fraser, loan
broker:
1. Cash at Bank account balance as at 30 June 2016: $45 451 debit.
2. Bank statement balance as at 30 June 2016: $47 512 credit.
3. 30 June receipts amounting to $1820 have not been deposited.
4. Cheques issued but not presented total $3468.
5. A $312 cheque was returned marked ‘dishonoured’. The cheque had been
received from J. Simms, a new customer.
6. A $750 deposit made by L. Richards was incorrectly credited to the bank
account of Cathy Fraser.
7. The bank statement shows that the bank has charged the business’s
account with fees and charges of $25.
8. Items 5, 6 and 7 have not yet been entered in the cash journals.

Required
Prepare a bank reconciliation at 30 June 2016 based on the provided
information.

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Bank reconciliation example

CATHY FRASER, LOAN BROKER

Bank Reconciliation Statement
as at 30 June 2016

Balance as per bank statement Cr $47 512

Add: Deposit not credited 1 820
49 332
Less: Cheques not presented 3 468
45 864
Less: Deposit incorrectly credited 750
Balance as per cash at bank account *$45 114

Cash at bank balance – 30 June 2016 $45 451

Less: Bank fees $25
Cheque not honoured by J. Simms 312 337
Adjusted cash at bank balance – 30 June 2016 $45 114

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Journal entries to adjust the company’s cash balance

Monthly service charge

Bank service charge 25
Cash 25
Dishonoured cheque
Accounts receivable - J. Simms 312
Cash 312

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Petty cash fund
• A petty cash fund is an amount of cash kept on hand to pay for minor
expenditures.
• While the size and scope of a petty cash fund varies, its operation will
involve the following three activities:
– Establishing the fund
– Making payments from the fund
– Replenishing the fund

Journal entry to establish petty cash fund

On 1 May, Design Group cashes a $100 cheque to establish a petty cash fund and gives the
cash to Sue, the custodian.

General journal
Date Description Debit Credit
1 May Petty cash 100
Cash 100
(To establish $100 petty cash fund)

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Petty cash fund continued
Journal entry to replenish the fund

Petty cash fund replenishment report

Petty cash fund $100
Less: cash remaining in the fund 15
Cash requested to replenish fund $ 85
Receipts in the funds:
Postage $ 25
Office supplies 47
Miscellaneous 13
Total receipts $ 85

Journal entry to replenish the fund

General journal
Date Description Debit Credit
31 May Postage expense 25
Supplies expense 47
Miscellaneous expense 13
Cash 85

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