HI5001 Lecture 5 Version 3

HI5001 Accounting for Business Decisions
Lecture 5
Completing the Accounting Cycle
Click to edit Master title style
Overview
Lecture Lecture Topic Readings/Preparation
1 Role of Accounting for Decision Making Textbook Chapter: 1
2 Financial Statements & Decision Making Textbook Chapter: 2
3 Recording Business Transactions Textbook Chapter: 3
4 Adjusting Entries & Preparing Financial Statements Textbook Chapter: 4
5 Completing The Accounting Cycle Textbook Chapters: 5
6 Accounting Systems Textbook Chapter: 7
7 Cash Management & Control Textbook Chapter: 11
8 Receivables Textbook Chapter: 12
9 Inventories Textbook Chapter: 6 & 13
10 Non-current Assets Textbook Chapter: 14 & 15
11 Liabilities Textbook Chapter: 16
12 Analysis & Interpretation of Financial Reports Textbook Chapter: 19
Applied Business Statistics for Managers Holmes Institute

Overview
Lecture 4 Lecture 5
Adjusting Entries & Completing the Accounting

Preparing Financial Cycle
Statements

Topics
Click toCovered In This
edit Master titleLecture
style
Here’s what you will learn from this lecture:
1 Steps in completing the accounting cycle
2 Closing temporary accounts and the closing process
3 Accruals for future periods using reversing entries
4 Prepare the equity accounts for a partnership and for a company

ClickComplete
The to edit Master
Accounting
title style
Cycle
1. Recognise & record Source documents

transactions
2. Journalise transactions General journal
3. Post to ledger accounts General ledger
4. Prepare unadjusted trial Trial balance

balance of GL (unadjusted)
Continued next slide

ClickComplete
The to edit Master
Accounting
title style
Cycle (cont.)
5. Determine adjusting entries General journal

and/or journalise
6. Post adjusting entries to general General ledger

ledger (accounts adjusted)
7. Prepare adjusted trial balance of Trial balance(adjusted)

GL (adjusted)
8. Journalise closing General journal

entries
Continued next slide
ClickComplete
The to edit Master
Accounting
title style
Cycle (cont.)
GL – temporary
9. Post closing entries to GL
accounts closed
10. Prepare post closing trial Trial balance

balance (post closing)
11. Prepare financial statements Worksheet Financial statements
12. Journalise reversing entries General journal
13. Post reversing entries to GL GL – temporary

accounts opened

ClickComplete
The to edit Master
Accounting
title style
Cycle (cont.)
• The accounting cycle, that sequence of events or steps

which leads from source documents to the final production of
the financial statements, is completed usually once a year.
• Steps 1 to 3 are carried out continuously during the year as
transactions occur.
• Steps 4 to 13 are carried out only at the end of the
accounting period (the financial year).

Using theedit
Click to Worksheet
Master title style
Worksheet
Gather information
in one place

Using theedit
Click to Worksheet
Master title style
Worksheet
Enables preparation
Gather information
of Financial
in one place
Statements

Using theedit
Click to Worksheet
Master title style
Worksheet
Enables preparation
Gather information
of Financial
in one place
Statements
Easy reflection of
adjusting entries

Using theedit
Click to Worksheet
Master title style
Worksheet
Enables preparation
Gather information
of Financial
in one place
Statements
Easy reflection of Facilitates closing

adjusting entries journal preparation

Using theedit
Click to Worksheet
Master to Record
title styleAdjusting Entries
▪ From worksheet formal adjusting entries are entered in

general journal
▪ Entries are dated the last day of the accounting period
▪ Data for determining the entity’s closing entries for the period
are found in income statement columns of worksheet which
contain temporary income and expense accounts

Click to edit Master
Pause Point 1title style
• Review the accounting cycle

• A worksheet can gather together in the one place all the information
needed to adjust account balances and prepare financial statements.
• Enables preparation of interim financial statements. Interim statements are
prepared between the annual reports issued at year‐end.
• Adjusting entries are easily reflected.
• Facilitates closing journal preparation. All the information necessary to record
closing entries in the general journal and post to ledger accounts is readily
available.

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Closing Temporary
Master Accounts
title style
Types of accounts
Temporary (nominal) accounts Permanent (real) accounts

Click to edit
Closing Temporary
Master Accounts
title style
Types of accounts
Income accounts Income

& statement
expense accounts accounts

Click to edit
Closing Temporary
Master Accounts
title style
Types of accounts
Income accounts Income

& statement
expense accounts accounts
Accounts closed off at end of Final step of the

Closing process
accounting period accounting cycle

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Closing Temporary
Master Accounts
title style
During period
Expense account Income account

Closing
process $____ $____
$____ $____
$____ $____

Click to edit
Closing Temporary
Master Accounts
title style
End of period

Closing
process
NIL NIL
$____ $____ Balances

$____ $____ transferred
$____ $____ to another
account
$____ $____
$____ $____
$____ $____

Click to edit
Closing Temporary
Master Accounts
title style
End of period

Closing
process
Closing Closing
entries entries
NIL NIL

$____ $____ to another
account
$____ $____
$____ $____
$____ $____

Click to edit
Closing Temporary
Master Accounts
title style
End of period

Closing
process
Closing Closing
entries entries
NIL NIL

$____ Temporary account called $____ to another
Profit or Loss Summary account account
$____ $____
$____ $____
$____ $____

Click to edit
Closing Temporary
Master Accounts
title style
Closing Temporary Accounts
Income and expense accounts must be closed at the end of
each period to determine the profit or loss for the period
They begin and end each accounting period with a ZERO

balance
Profit and loss summary account is used to facilitate

closing process and determination of profit

The Closing
Click to editProcess
Master title style
• Income accounts closed to Profit or Loss summary

✓ Debit income
✓ Credit P & L summary

The Closing
Master title style
• Expense accounts closed to Profit or Loss summary

✓ Debit P & L summary
✓ Credit expense

The Closing
Master (cont.)
title style
▪ Profit & Loss Summary balances to determine profit/loss then

closed to Capital
✓ Debit P & L summary (assuming a profit)
✓ Credit capital account

The Closing
Master (cont.)
title style
▪ Drawings closed to Capital
✓ Debit capital account
✓ Credit drawings account

The Closing
Click Processtitle
to edit Master (cont.)
style
(Close Income Account) P&L

Income Summary
28,500 12,000 4,450 28,500

7,500 (Close
9,000 Expense 24,050 24,050
Accounts)
Salary expense (Close P & L Summary)
1,500
1,800 3,300 Capital Account
Rent expense 2,500 24,050
800 800 Drawings

2,500 2,500
Supplies expense
350 350 27
(Close Drawings Account)
Account
Click to Balances after
edit Master thestyle
title Closing Process
1. All income accounts have nil balances

2. All expense accounts have nil balances
3. The drawings account has a nil balance
4. The Capital Account has been increased or decreased by
the profit or loss and decreased by the drawings

The Post-closing
Click Trialtitle
to edit Master Balance
style
▪ The post-closing trial balance reflects all accounts with

balances after the closing process
– Prepared to verify the equality of debits and credits.
– Confirm that the ledger is ‘in balance’.
– These balances are also the starting point for the next
accounting period.

Pause the video here and take few moments to do a search online.
Understand how income, expenses, and drawings are closed.
Understand steps for creating a post-closing trial balance.

Click to edit
Accrual Entries
Master
in Subsequent
title style Periods
I must account for

services provided by
us for which cash
receipt is still to be
received
B
B
b
Ordinary
Illegal

Click to edit
Accrual Entries
Master
in Subsequent
title style Periods
▪ Adjusting entries are made at the end of the accounting

period to record accruals
▪ Cash received or paid in subsequent periods for accruals
must be analysed to correctly apportion amount between the
two periods
✓ e.g. payment for salaries

Accrual
Click toEntries in Subsequent
edit Master title stylePeriods (cont.)
Example of the payment of salaries

➢ Adjusting entry (30 June)
June 30 Salary expense 3,980
Salary payable 3,980
To accrue salaries owing to 30 June
➢ Normal entry (6 July)

July 6 Salary payable 3,980
Salary expense 3,420
Cash at bank 7,400
To record payment of salaries from 23 June to 6 July

Reversing Entries
• Reversal of accrual entries

⎯ Alternative to previous treatment
⎯ Dated the first day of the subsequent accounting period
⎯ Exactly reverse certain adjusting entries
⎯ An accounting technique used to simplify the recording of regular
transactions in the next period

Reversing Entries
Click to edit (cont.)
Master title style
June 30 Salary expense 3,980

Adjusting
Entry Salary payable 3,980
To accrue salaries owing to 30 June
July 1 Salary payable 3,980

Reversing Salary expense 3,980
Entry To reverse the adjusting entry to accrue unpaid salaries at end of previous month
July 6 Salary expense 7,400

Subsequent Cash at bank 7,400
Entry Payment of salaries for period 27 June to 6 July

Reversing Entries
Master title style
▪ Not required for all adjusting entries

▪ Only used where adjustment is temporary: 4 cases:
✓ Accrued expenses
✓ Accrued income
✓ Prepayments originally recorded as expenses
✓ Unearned income originally recorded as income

Reversing Entries
Master title style
• Reversal of deferral entries

✓ Adjusting entries are made for prepaid expenses and unearned or
pre-collected revenue
✓ Need for reversal entries depends on whether initial recording
occurred in a permanent account

Reversing Entries
Master title style
Prepaid B Unearned
Deferrals B
expenses (adjusting entry) b revenue
Reversal entry – whether initial recording in

permanent account

Understand reversing entries.

Click toProcedures
Accounting edit Master title style
Applicable to a Partnership or a company
Types of Business Structure
Ordinary
Sole
Illegal
Partnership Company
Trader

Click toProcedures
• Accounting for a partnership

✓ Separate capital and drawings accounts for each partner
✓ Profit/loss at the end of the period is allocated to each partner in
accordance with the partnership agreement
✓ Each drawings account is closed off to the partner’s capital account

Click toProcedures
• Accounting for a company

✓ Owners are referred to as shareholders
✓ Owner’s interests are called ‘share capital’
✓ Not all profits/losses are distributed to shareholders
✓ Share capital represents the amount invested by the shareholders
✓ Retained profits (or accumulated losses) reflect accumulated profit
(or losses) earned by the company and retained in the business

Click toProcedures
Note: profits are distributed as dividends

INTELLECT MANAGEMENT SERVICES LTD
Statement of Changes in Equity
For the year ended 31 December 2015
Share Capital, 1 January 2015 $240,000
Share Capital, 31 December 2015 240,000
Retained earnings, 1 January 2015 --

Add: Profit for the year 50,000
Less: Cash dividends for the year 24,000
Retained earnings, 31 December 2015 $26,000

Click toProcedures
INTELLECT MANAGEMENT SERVICES LTD

Balance Sheet (extract)
as at 31 December 2015
EQUITY
Share capital (240,000 shares issued for $1) $240,000
Retained earnings 26,000
Total equity $266,000

Search and download the annual report of a company.
Review the equity section of its balance sheet.
Review the statement of changes in equity.

Click to edit
In-class Worked
Master
Example
title style
The following information is provided at 30/6/2014:
1. Prepaid insurance was debited for $1,800 on 28/2 (for six months
policy beginning on 1 March)
2. Interest earned but not received, $3,600
3. Received $7,488 in rent revenue on 1/5 (for 3 months commencing
that date)
4. June electricity account for $828 has not been paid or recorded. A tax
invoice is received on 24/6.
5. Consulting fees owing to the business and unrecorded as at 30 June
amounted to $7,560
Required:
a) Prepare entries when it occurred.
b) Prepare adjusting entries for all at 30/06/2014
c) Prepare closing entries where appropriate.
Click to edit MasterSolution
title style
a) Journal Entries:
28/2
Prepaid insurance 1,800
Cash at Bank 1,800
To record prepaid insurance (6 months)
1/5
Cash at Bank 7,488
Unearned rent revenue 7,488
To record prepaid rent revenue received for 3 months (from 1/5)
24/6
Electricity expense 828
Electricity payable 828
To record electricity account incurred but not paid
Solution
Click to edit Master title (cont.)
style
b) Adjusting Entries:
30/6 Insurance expense 1,200
Prepaid insurance 1,200
To recognise the insurance expended from 1/3/ to 30/6 (4 months)
30/6 Interest receivable 3,600

Interest revenue 3,600
To record interest earned to 30/6 but not received

Solution
Click to edit Master (cont.)
title style
Adjusting Entries:
30/06 Unearned rent revenue 4,965

Rent revenue 4,965
To record rent revenue for period 1/5 to 30/6 that was prepaid
30/06 Consulting fees receivable 7,560

Consulting fees revenue 7,560
To record consulting fees earned but not yet received

Solutions
Click to edit Master (cont.)
title style
c) Closing Entries:
30/6 Interest revenue 3,600
Consulting fees revenue 7,560
Rent Revenue 4,965
Profit or Loss Summary 16,125
Profit or Loss Summary 2028

Electricity expense 828
Insurance expense 1,200
Profit or Loss Summary 14,097

Capital 14,097
To close temporary accounts to P/L account (as provided)
Note: This would be only a part of the adjustments but covers the ones provided

Key Take
Click Aways
to edit Master title style
Summary of Lecture 5
• Steps in completing the accounting cycle and record

adjustments using a worksheet
• Closing temporary accounts and the closing process
• Accruals for future periods using reversing entries
• Prepare the equity accounts for a partnership and for a company

End ofto
Click Lecture 5
edit Master title style
• Recommended Readings
Hoggett & Edwards - Chapter 5
• Tutorial Questions
Hoggett & Edwards Textbook - Chapter End Questions
• Discussion Board & Drop-in Session

Post your questions in the discussion board
• Next Lecture
Lecture 6 – Accounting Systems

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HI5001 Accounting for Business Decisions

Applied Business Statistics for Managers Holmes Institute

Adjusting Entries & Completing the Accounting

Applied Business Statistics for Managers Holmes Institute

1 Steps in completing the accounting cycle

2 Closing temporary accounts and the closing process

3 Accruals for future periods using reversing entries

4 Prepare the equity accounts for a partnership and for a company

Applied Business Statistics for Managers Holmes Institute

1. Recognise & record Source documents

2. Journalise transactions General journal

3. Post to ledger accounts General ledger

4. Prepare unadjusted trial Trial balance

Continued next slide

5. Determine adjusting entries General journal

6. Post adjusting entries to general General ledger

7. Prepare adjusted trial balance of Trial balance(adjusted)

8. Journalise closing General journal

10. Prepare post closing trial Trial balance

11. Prepare financial statements Worksheet Financial statements

12. Journalise reversing entries General journal

13. Post reversing entries to GL GL – temporary

Applied Business Statistics for Managers Holmes Institute

• The accounting cycle, that sequence of events or steps

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Easy reflection of Facilitates closing

Applied Business Statistics for Managers Holmes Institute

▪ From worksheet formal adjusting entries are entered in

Applied Business Statistics for Managers Holmes Institute

• Review the accounting cycle

Applied Business Statistics for Managers Holmes Institute

Temporary (nominal) accounts Permanent (real) accounts

Applied Business Statistics for Managers Holmes Institute

Temporary (nominal) accounts Permanent (real) accounts

Income accounts Income

Applied Business Statistics for Managers Holmes Institute

Temporary (nominal) accounts Permanent (real) accounts

Income accounts Income

Accounts closed off at end of Final step of the

Applied Business Statistics for Managers Holmes Institute

Expense account Income account

Applied Business Statistics for Managers Holmes Institute

Expense account Income account

$____ $____ Balances

Applied Business Statistics for Managers Holmes Institute

Expense account Income account

$____ $____ Balances

Applied Business Statistics for Managers Holmes Institute

Expense account Income account

$____ $____ Balances

Applied Business Statistics for Managers Holmes Institute

They begin and end each accounting period with a ZERO

Profit and loss summary account is used to facilitate

Applied Business Statistics for Managers Holmes Institute

• Income accounts closed to Profit or Loss summary

Applied Business Statistics for Managers Holmes Institute

• Expense accounts closed to Profit or Loss summary

Applied Business Statistics for Managers Holmes Institute

▪ Profit & Loss Summary balances to determine profit/loss then

Applied Business Statistics for Managers Holmes Institute

$ $ Balances

$ $ Balances

$ $ Balances