Financial & Managerial Accounting Decision Makers: Adjusting Accounts For Financial Statements

FINANCIAL & MANAGERIAL
ACCOUNTING
for Decision Makers 3e
DYCKMAN HANLON MAGEE PFEIFFER HARTGRAVES MORSE
CHAPTER 3
Adjusting Accounts
for Financial Statements
© Cambridge Business Publishers, 2018

Learning Objective 1
Identify the major steps

in the accounting cycle.
© Cambridge Business Publishers, 2018 2

Abbreviated Accounting Cycle
 A sequence of activities to accumulate and report financial
statements
 Steps in the accounting cycle
Accounting Cycle—Abbreviated
End of Accounting Period

Continuously (Monthly, Quarterly, Annually)
 Steps performed daily, monthly, quarterly, or end of fiscal year;

not all at the same time
Review the process of journalizing

and posting transactions.

Chart of Accounts
 Lists the titles and numbers of all accounts found in the

general ledger

Review of Accounting Documents
 General journal
 Tabular, chronological record where business activities are
captured in debits and credits
 General ledger
 Listing of all accounts and their balances
 Accounts are grouped in five elements
 Assets
 Liabilities
 Equity
 Revenues
 Expenses

Journalizing and Posting
 Journalize
 Recording a transaction in a journal
 Posting
 Occurs after transactions are journalized
 Debits
Record in and credits in each journal entry are transferred
Post totothe
their related general ledger accounts
Journal Ledger

Record a Note Signed
1. On June 1, Jana Juice signed a 2-year note to borrow $12,000 and

agreed to pay 12% annual interest on the first
Balance Sheet
day of each month
Income Statement
with the principal
Transaction
Cash
+ due= at
Noncash the +end
Liabilities of two
Contrib.
+ years.
Earned
Revenues – Expenses = Net
Asset Asset Capital Capital Income
Signed note +12,000 = +12,000 – =
and received Cash Notes
$12,000 cash Payable
(1) Cash (+A) 12,000

Notes payable (+L) 12,000
Borrow $12,000 on a 2-year note.
Cash (A) Notes Payable (L)

(1) 12,000 12,000 (1)


Record Purchase of Long-Term Assets
2. On June 1, Jana Juice purchased and installed new fixtures and

equipment for $10,200.
Balance Sheet Income Statement
Cash Noncash Contrib. Earned Net
Transaction Asset + Asset = Liabilities + Capital + Capital Revenues – Expenses = Income
Pay $10,200 cash –10,200 +10,200 = – =
for fixtures and Cash Fixtures &
equipment Equipment
(2) Fixtures & Equipment (+A) 10,200

Cash (–A) 10,200
Purchase fixtures and equipment for cash.
Fixtures & Equipment (A) Cash (A)

(2) 10,200 10,200 (2)


Record Advertising Expense
3. On June 8, Jana Juice paid $800 in cash to advertise in the local

newspaper for June. Balance Sheet Income Statement
Paid $800 cash –800 = –800 – +800 = -800
for advertising Cash Retained Advertising
Earnings Expense
(3) Advertising Expense (+E, –SE) 800

Cash (–A) 800
Purchase advertising for June.
Advertising Expense (E) Cash (A)

(3) 800 800 (3)


Paid Suppliers for Inventory
4. On June 10, Jana Juice paid $500 in cash to its suppliers for
inventory delivered during May.
Paid $500 cash –500 = –500 – =
for accounts Cash Accounts
payable Payable
(4) Accounts payable (–L) 500

Cash (–A) 500
Paid $500 of accounts payable for inventory.
Accounts Payable (L) Cash (A)

(4) 500 500 (4)


Purchasing Inventory
5. On June 15, Jana Juice purchased inventory on account for

$2,600. Balance Sheet Income Statement
Purchased $2,600 +2,600 = +2,600 – =
of inventory on Inventory Accounts
account Payable
(5) Inventory (+A) 2,600

Accounts payable (+L) 2,600
Purchase inventory on account.
Inventory (A) Accounts Payable (L)

(5) 2,600 2,600 (5)


Record Sale of Products
6a. During June, Jana Juice sold energy drinks costing $600 to retail
customers for $3,100 cash.Sheet
Balance Income Statement
Sold $3,100 of +3,100 = +3,100 +3,100 – = +3,100
products for cash Cash Retained Sales Net
Earnings Revenue Income
(6a) Cash (+A) 3,100

Sales revenue (+R, +SE) 3,100
To record sales during June.
Cash (A) Sales Revenue (R)

(6a) 3,100 3,100 (6a)


Record Cost of Sales
6b. During June, Jana Juice recorded the $600 of expense for the
sale of inventory in Transaction
Balance Sheet 5. Income Statement
Record $600 for –600 = –600 – +600 = –600
cost of inventory Inventory Retained Cost of
sold Earnings Goods Sold
(6b) Cost of goods sold (+E, SE) 600

Inventory (–A) 600
Record cost of merchandise sold as expense.
Cost of Goods Sold (E) Inventory (A)

(6b) 600 600 (6b)


Sell Products on Account
7a. During June, Jana Juice sold $1,100 of energy drinks on account
for $4,400. Balance Sheet Income Statement
Sold $4,400 of +4,400 = +4,400 +4,400 – = +4,400
energy drinks on Accounts Retained Sales
account Receivable Earnings Revenue
(7a) Accounts receivable (+A) 4,400

Sales revenue (+R, +SE) 4,400
Sell products on account.
Accounts Receivable (A) Sales Revenue (R)

(7a) 4,400 4,400 (7a)


Record Cost of Sales
7b. During June, Jana Juice recorded the $1,100 cost of sales for
inventory sold in Transaction
Balance Sheet7a. Income Statement
Record $1,100 for –1,100 = –1,100 – +1,100 = –1,100
cost of inventory Inventory Retained Cost of
sold Earnings Goods Sold
(7b) Cost of goods sold (+E, –SE) 1,100

Inventory (–A) 1,100
Sell products on account.
Cost of Goods Sold (E) Inventory (A)

(7b) 1,100 1,100 (7b)


Sold Membership
to Online Health Program
8. During June, Jana Juice received an additional $600 from

customers in exchange for a 3-month membership
Balance Sheet
(July, August,
Income Statement
and September)
Transaction
Cash
+ to an= online
Noncash
Liabilities +health program.
Contrib.
+
Earned
Sold $600 of +600 = +600 – =
3-month online Cash Unearned
memberships Revenue
(8) Cash (+A) 600

Unearned revenue (+L) 600
Sold online memberships.
Cash (A) Unearned Revenue (L)

(8) 600 600 (8)


Record Wages Paid

9.Transaction
During June,
Cash Jana Juice paid wages
Noncash Contrib. of $1,400
Earned to employees. Net
Asset + Asset = Liabilities + Capital + Capital Revenues – Expenses = Income
Paid $1,400 for –1,400 = –1,400 – –1,400 = –1,400
wages Cash Retained Wages
Earnings Expense
(9) Wages expense (+E, –SE) 1,400

Cash (–A) 1,400
Pay wages to employees.
Wages Expense (E) Cash (A)

(9) 1,400 1,400 (9)


Received Cash from Customers
10. During June, Jana Juice received $2,000 cash from customers
who purchased on credit.
Received $2,000 +2,000 –2,000 = – =
cash from Cash Accounts
customers Receivable
(10) Cash (+A) 2,000

Accounts receivable (–A) 2,000
Received cash payments from customers on account.
Cash (A) Accounts Receivable(A)

(10) 2,000 2,000 (10)


Paying Rent
11.
On June 30, Jana Juice
Cash Noncash
paid
Balance $700
Sheet in
Contrib.
rent expense
Earned
for
Income June. Net
Statement
Paid $700 rent for –700 = –700 – +700 = –700
June Cash Retained Rent
Earnings Expense
(11) Rent expense (+E, –SE) 700

Cash (–A) 700
Record payment of rent.
Rent Expense (E) Cash (A)

(11) 700 700 (11)


Paying Dividends to Shareholders
12. On June 30, Jana Juice paid $100 in cash dividends to

shareholders.
Transaction Cash + Noncash = Liabilities + Contrib. + Earned
Paid $100 cash –100 = –100 – =
dividends to Cash Retained
shareholders Earnings
(12) Retained earnings ( –SE) 100

Cash (–A) 100
Pay a cash dividend.
Retained Earnings (SE) Cash (A)

(12) 100 100 (12)


General Ledger Before Adjustments
Cash (A) Accounts Payable (L) Common Stock (SE)
Bal. 6,460 500 Bal. 10,000 Bal.
(1) 12,000 10,200 (2) (4) 500 2,600 (5) 10,000 Bal.
(6a) 3,100 800 (3) 2,600 Bal.
(8) 600 500 (4) Retained Earnings (SE)
Equity
(10) 2,000 1,400 (9) Unearned Revenue (L) (12) 100 660 Bal.
700 (11) 300 Bal. 560 Bal.
100 (12) 600 (8)
10,460 900 Bal. Sales Revenue (R )
3,100 (6a)
Assets
Accounts Receivable (A) Note Payable (L) 4,400 (7a)
Bal. 1,700 12,000 (1) 7,500 Bal.
(7a) 4,400 2,000 (10)
Bal. 4,100 12,000 Bal. Cost of Goods Sold (E)
(6b) 600
Inventory (A) (7b) 1,100
Bal. 700
Liabilities Bal. 1,700
(5) 2,600 600 (6b)
1,100 (7b) Wages Expense (E)
Bal. 1,600 (9) 1,400
Income Statement Bal. 1,400
Prepaid Insurance (A) accounts
Bal. 800 Rent Expense (E)
Bal. 800 (11) 700
Bal. 700
Security Deposit (A)
Bal. 1,800 Advertising Expense (E)
Bal. 1,800 (3) 800
Bal. 800
Fixtures and Equipment (A)
(2) 10,200
10,200

Describe the adjusting process

and illustrate adjusting entries.

The Adjusting Process
 Account balances must be reviewed to determine if

adjustments are required
 Caused by accrual accounting
 Adjusting occurs before the financial statements are
prepared
 After all regular transactions
ADJUSTINGhave been recorded and posted
ENTRIES
 Almost never affect Cash, and
 Usually affect at least one balance sheet and one income statement
account

Unadjusted Trial Balance
First Step in Adjusting Process

 What is a trial balance?
 A list of all general ledger accounts with their respective
balances
 Unadjusted means prior to completing the adjusting
entries
 Purpose
 To be sure the general ledger is in balance before adjusting
the accounts
 Listing all accounts in one place eases the review of
accounts in determining which need adjustment
Preparing an Unadjusted Trial Balance
Jana Juice
Unadjusted Trial Balance
30-June-16
Debit Credit
Cash $10,460
Accounts Receivable 4,100  Accounts must be listed
Inventory 1,600
in accounting equation
Prepaid Insurance 800
Security Deposit 1,800 order.
Fixtures and Equipment 10,200
Accounts Payable $ 2,600
1. Assets
Unearned Revenue 900 2. Liabilities
Long-term Notes Payable 12,000
Common Stock 10,000 3. Equities
Retained Earnings 560
4. Revenues
Sales Revenue 7,500
Cost of Goods Sold 1,700 5. Expenses
Wages Expense 1,400
Rent Expense 700
Advertising Expense 800  The totals of debits and
Totals $33,560 $33,560
credits must be equal.
Types of Adjustments
Deferrals Accruals
 Deals with an amount
 Deals with an amount
NOT previously recorded
previously recorded in a
in a balance sheet
balance sheet account
account
 Decreases a balance sheet
 Increases both a balance
account and increases an
income statement account sheet account and an
income statement account
Both types allow a period’s revenues and expenses

to be measured properly.

Four Types of Adjustments

Deferred Revenue
 The process of allocating unearned revenue to revenue

 Amounts received in advance are recorded as liabilities
 Because an obligation exists to provide future services or
assets (such as inventory or a refund of cash)
 Situations requiring adjusting entries:
 Prepaid property casualty insurance is earned over time
 Subscriptions to newspaper and magazines received in
advance are earned

Allocating Unearned Revenue to Revenue
— Example —
a. In May, customers prepaid $300 for a 3-month membership

(June, July, August) to an online health program.
Balance Sheet
One month of
Income Statement
this prepaid
Transaction
Cash membership
+
Noncash was
= Liabilities + earned
Contrib.
+ in June.
Earned
Adjust to recognize = –100 +100 +100 – = +100
earned revenue Unearned Retained Sales
from online Revenue Earnings Revenue
memberships
(a) Unearned revenue (–L) 100

Sales revenue (+R, +SE) 100
To record earned membership revenue.
Unearned Revenue (L) Sales Revenue (R)

(a) 100 100 (a)


Prepaid Expenses
 The process of allocating prepaid assets to expenses

 Amounts paid in advance of using assets that benefit
more than one period
 Situations requiring adjusting entries
 Equipment, buildings, or vehicles become used up over time
 Prepayment of advertising, insurance, or rent becomes used
up over time
 Supplies are used over time
 Purchased intangibles may be used over time

Allocating Assets to Expenses
— Example: Prepaid Insurance —
b. One month of Jana Juice’s insurance expired during June. The

original payment wasBalance$800Sheet covering June through

September
Income Statement
($800 / 4Cash
Transaction months
+ = $200).
Noncash
= Liabilities +
Contrib.
+
Earned
Adjust for –200 = –200 – +200 = –200
expiration of one Prepaid Retained Insurance
month of Insurance Earnings Expense
insurance
(b) Insurance expense (+E, –SE) 200

Prepaid insurance (–A) 200
To record insurance expense for June.
Insurance Expense (E) Prepaid Insurance (A)

(b) 200 200 (b)


Depreciation
 The process of allocating equipment, buildings, and

vehicles to expenses
 The asset cost must be allocated to accounting periods
that the cost benefits
 Annual straight-line depreciation
Asset cost
Annual depreciation expense =
Estimated useful life
 Accumulated depreciation
 Special account used instead of reducing the asset account
directly
 Considered a contra asset account

Allocating Assets to Expenses
— Example: Depreciation —
c. Jana Juice’s equipment

Depreciation originally
expense = $10,200cost $10,200
÷ 5 years and
× 1/12 was expected
= $170
to benefit the company for five years.
Cash Noncash Contra Contrib. Earned Net
Transaction + - = Liabilities + + Revenues – Expenses =
Asset Asset Asset Capital Capital Income
Adjust for +170 ‒170 +170 ‒170
depreciation – Accumulated = Retained – Depreciation =
on fixtures & Depreciation Earnings Expense
equipment
(c) Depreciation expense ―fixtures & equipment (+E, –SE) 170

Accumulated depreciation―fixtures & equipment (+XA, –A) 170
To record depreciation expense for June.
Depreciation Expense Accumulated Depreciation

Fixtures & Equipment (E) Fixtures & Equipment (XA)
(c) 170 170 (c)


Depreciation and Related Assets
on the Balance Sheet
Book Value of Long-term Assets at June 30, 2016
Fixtures and Equipment $10,200
Less: Accumulated depreciation 170
Fixtures and Equipment, net $10,030
Net book value of assets
Portion of the equipment’s cost that has been

allocated to expense since acquired
Accumulated depreciation increases and the net book

value declines over the life of the equipment.

Accrued Revenues
The process of recognizing amounts

earned before the cash is received.
 Amounts earned from providing services or selling
products must be recognized in the period earned
 Creates an increase in an asset and an increase in
revenues
 Examples requiring adjusting entries
 Completed services or delivered goods that, for any number
of reasons, have not been billed to customers
 A company earned interest revenue from the bank on its
checking account and had not yet recorded it
Accruing Revenues
— Example —
d. At the end of June, Jana Juice learned that its bank has decided
to provide interest on checking accounts for small businesses.
The interest is paid into the checking account on the 5th day of
the following month.Balance
JanaSheet
Juice earned $60 interest
Income in June.
Statement
Cash + Noncash = Liabilities + Contrib. + Earned Revenues – Expenses = Net
Capital
Transaction
Asset Asset Capital Income
Adjust for +60 = +60 +60 – = +60
interest income Interest Retained Interest
earned Receivable Earnings Income
(d) Interest receivable (+A) 60

Interest income (+R, +SE) 60
To record accrued interest income.
Interest Receivable (A) Interest Income (R)

(d) 60 60 (d)


Accruing Expenses
The process of recognizing expenses

before the cash is paid.
 Examples requiring adjusting entries
 Utility bill received in the mail for the month just completed
 Employees earned wages before the month ended, to be
paid in the following month
 Amounts borrowed from a bank have interest that is not due
until the note is paid off
 Income taxes are paid quarterly and the company earned a
profit during the first month of the quarter

Accruing Expenses
— Example: Wages —
e. Jana Juice’s employees earned $550 during the last week of

June thatCash
will be paid
Noncash
on July 6.
Contrib. Earned Net
Capital
Transaction + = Liabilities + + Revenues – Expenses =
Asset Asset Capital Income
Adjust for accrued = +550 -550 – +550 = -550
wages expense Wages Retained Wages
Payable Earnings Expense
(e) Wages expense (+E, –SE) 550

Wages payable (+L) 550
To record accrued wages earned for the last week of June.
Wages Expense (E) Wages Payable (L)

(e) 550 550 (e)


Accruing Expenses
— Example: Interest —
f. The $12,000 loanexpense

Interest borrowed by Jana
= $12,000 Juice
× 12% on =June
x 1/12 $1201 carries a
12% annual interest rate.
Adjusting entry = +120 -120 – +120 = -120
to record Interest Retained Interest
interest owed Payable Earnings Expense
not yet paid
(f) Interest expense (+E, –SE) 120

Interest payable (+L) 120
To record accrued wages earned for the last week of June.
Interest Expense (E) Interest Payable (L)

(f) 120 120 (f)


Calculating Income Before Taxes
Revenue and expense account balances prior to
accruing
income taxes:
Sales Revenue (R ) Cost of Goods Sold (E) Wages Expense (E)
7,500 Bal. Bal. 1,700 Bal. 1,400
100 (a) (e) 550
7,600 Adj.Bal Adj. Bal 1,700 Adj.Bal 1,950
Rent Expense (E) Advertising Expense (E) Insurance Expense (E)

Bal. 700 Bal. 800 (b) 200
Adj.Bal 700 Adj. Bal 800 Adj.Bal 200
Depreciation Expense (E) Interest Income (R) Interest Expense (E)

(c) 170 60 (d) (f) 120
Adj.Bal 170 60 Adj. Bal Adj. Bal 120
Income before taxes:

$7,600 ‒ $1,700 ‒ $1,950 ‒ $700 ‒ $800 ‒ $200 ‒ $170 + 60 ‒ $120 =
$2,020
Calculating Income Tax Expense
To determine income tax expense:

Step 1: Journalize all adjusting entries (except for
income taxes) and post to T-accounts.
Income before taxes = $2,020
Step 2: Calculate income
From the revenue before
and expense taxes(on
T-accounts based on the
the previous slide):
balances of the revenue and expense accounts.
Step 3: Multiply income before taxes by the income tax
rate, in this case, 30%:
$2,020 × 30%* = $606 *Assumed tax rate
Net income = $2,020 - $606 = $1,414

Accruing Expenses
— Example: Income Taxes —
g. Income taxes are paid during the month after accrual, and have
not
Transaction
been paid
Cash +
for June.
Noncash = Liabilities + Contrib. + Earned
Adjust for taxes = +606 -606 – +606 = -606
owed but not yet Income Tax Retained Income Tax
paid Payable Earnings Expense
(g) Income tax expense (+E, –SE) 606

Income tax payable (+L) 606
To record estimated income tax for the month of June.
Income Tax Expense (E) Income Tax Payable (L)

(g) 606 606 (g)


Summary of Adjustments

Ethics and Adjusting Entries
 Adjusting entries are dependent upon estimates.

 Management’s estimates are affected by corporate
pressures.
 Desire to meet analysts expectations
 Desire to disguise a planned course of action
 Controls are imposed by the financial reporting
environment.

Prepare financial statements

from adjusted accounts.

Preparing an Adjusted Trial Balance
Unadjusted Balances Adjustments Adjusted Trial Balance
Debit Credit Debit Credit Debit Credit
Cash 10,460 10,460
Accounts Receivable 4,100 4,100
Inventory 1,600 1,600
Prepaid Insurance 800 (b) 200 600  Lists all ledger
Interest Receivable (d) 60 60
Security Deposit 1,800 1,800
balances after
Fixtures and Equipment
Accum. Depr - Fixt. & equip.
10,200
( c) 170
10,200
170
adjustments
Accounts Payable 2,600 2,600
Unearned Revenue 900 (a) 100 800  Prepared from
Wages Payable (e) 550 550
Interest Payable (f) 120 120
the balances
Income Tax Payable
Long-Term Notes Payable 12,000
(g) 606 606
12,000
in the general
Common Stock 10,000 10,000 ledger accounts
Retained Earnings 560 560
Sales Revenue 7,500 (a) 100 7,600
Interest Income (d) 60 60
Cost of Goods Sold 1,700 1,700
Wages Expense 1,400 (e) 550 1,950
Rent Expense 700 700 T-Accounts
Advertising Expense 800 800
Insurance Expense (b) 200 200 supporting the
Depreciation Expense ( c) 170 170 balances are
Interest Expense (f) 120 120
Income Tax Expense (g) 606 606
found on the
Totals $33,560 $33,560 $1,806 $1,806 $35,066 $35,066 next three slides.
Summary of T-Accounts
Cash (A) Inventory (A)

Bal. 700 600 (6b)
Bal. 6,460 (5) 2,600 1,100 (7b)
(1) 12,000 10,200 (2) Adj. Bal. 1,600
(6a) 3,100 800 (3)
Security Deposit (A)
(8) 600 500 (4) Bal. 1,800
(10) 2,000 1,400 (9) Adj. Bal. 1,800
 Assets
700 (11)
Fixtures and Equipment (A)
100 (12) (2) 10,200
Adj Bal 10,460 Adj. Bal. 10,200
Accumulated Depreciation (XA)

Accounts Receivable (A) 170 (c)
Bal. 4,100 170 Adj. Bal.
Adj.Bal. 4,100
Interest Receivable (A)
(d) 60
Prepaid Insurance (A) Adj. Bal. 60
Bal. 800 200 (b)
Adj. Bal. 600

Accounts Payable (L) Income Tax Payable (L)

(4) 500 500 Bal. 606 (g)
2,600 (5) 606 Adj. Bal.
2,600 Adj.Bal.
Notes Payable (L)
Unearned Revenue (L) 12,000 (1)
300 Bal.
 Liabilities
(a) 100and Equities
600 (8)
12,000 Adj. Bal.
800 Adj.Bal. Common Stock (SE)

10,000 Bal.
Wages Payable (L) 10,000 Adj. Bal.
550 (e)
550 Adj.Bal. Retained Earnings (SE)
(12) 100 660 Bal.
Interest Payable (L) 560
120 (f)
120 Adj. Bal.

Sales Revenue (R) Wages Expense (E)

7,500 Bal. 1,400
100 (a) (e) 550
7,600 Adj. Bal. Adj. Bal. 1,950
Rent Expense (E) Advertising Expense (E)

Bal. 700 Bal. 800
Adj. Bal. 700 Adj. Bal. 800
 Revenues and Expenses Insurance Expense (E)
Depreciation Expense (E)
(c) 170 (b) 200
Adj. Bal. 170 Adj. Bal. 200
Cost of Goods Sold (E) Interest Expense (E)

Bal. 1,700 (f) 120
Adj. Bal. 1,700 Adj. Bal. 120
Interest Income (R) Income Tax Expense (E)

60 (d) (g) 606
60 Adj. Bal. Adj. Bal. 606
Preparing Financial Statements

Income Statement
Jana Juice
Income Statement
For Month Ended June 30, 2016
Revenues
Sales revenue $7,600.
Expenses
Cost of goods sold $1,700
 The income statement is prepared first.

Wages expense
Rent expense
1,950
700
Advertising expense 800
Insurance expense 200
Depreciation expense 170
Operating expenses 5,520.
Income from operations 2,080.
Interest expense (120) Jana Juice reported
Interest income 60. net income of $1,414
Income before taxes 2,020.
Income tax expense 606.
for the month ending
Net income $1,414. June 30, 2016.

Statement of Stockholders’ Equity
Contributed Earned Total

Capital Capital Equity
Balance, June 1, 2016 $10,000 $ 660. $10,660.
 The amount of net income from the
Net income income statement
1,414. 1,414.
isCommon
linked toissued
stock the statement of stockholders’ equity.
―.
Cash dividends (100) (100)
Balance, June 30, 2016 $10,000 $1,974. $11,974.

Balance Sheet
Jana Juice
Balance Sheet
June 30, 2016
Assets Liabilities
Cash $10,460 Accounts payable $ 2,600
 The amount of retained earnings from the statement

Accounts receivable
Interest receivable
4,100
60
Unearned revenue
Wages payable
800
550
of stockholders’ equity is linked to the balance sheet.
Inventory 1,600 Interest payable 120
Prepaid insurance 600 Income tax payable 606
Security deposit 1,800 Current liabilities 4,676
Current assets 18,620 Notes payable 12,000
Fixtures and equipment $10,200 Total liabilities 16,676
Less: Accum. depreciation― Fixtures
& equipment (170) Equity
Equipment, net 10,030 Common stock 10,000
Total assets $28,650 Retained earnings 1,974
Total liabilities & equity $28,650
Statement of Cash Flows
Cash flows from operating activities

Cash flows
Cash from are reported
the company’s in three
transactions primary
and events business
that relate to
primary operations
activities:
Cash flows from investing activities
Cash from the acquisitions and divestitures of investments and
long-term assets
Cash flows from financing activities

Cash from issuances of and payments toward equity, borrowings,
and long-term debt
Jana Juice
For Month Ended June 30, 2016
Cash Flows from Operating Activities
Cash received from customers $ 5,700.
Cash paid for inventory (500)
Cash paid for wages (1,400)
Cash paid for rent (700)
Cash paid for advertising (800)
Net cash provided by operating activities 2,300.
Cash Flows from Investing Activities

Cash paid for fixtures and equipment (10,200)
Net cash used by investing activities (10,200)
Cash Flows from Financing Activities

Cash received from loans 12,000. The amount of
Cash paid for dividends (100)
Net cash provided by financing activities 11,900. cash at June 30
Net change in cash 4,000. is linked to the
Cash balance, June 1, 2016 6,460.
Cash balance, June 30, 2016 $ 10,460.
balance sheet.

Describe the process of closing

temporary accounts.

Closing Temporary Accounts
 Closing process
 Occurs at the end of the accounting period
 Balances in temporary accounts are transferred to
permanently update Retained Earnings.

Closing Temporary Accounts
Two transactions to close temporary accounts:

1. Close revenue accounts
Debit each revenue account for an amount equal to its balance,
and credit Retained Earnings for the total of revenues.
2. Close expense accounts

Credit each expense account for an amount equal to its
balance, and debit Retained Earnings for the total of expenses.

Closing Process
Individual Expenses Individual Revenues

Credit to Close Debit to Close

2 Retained Earnings
1
Close expenses Close revenues
to to

Retained Earnings Retained Earnings
Retained earnings is a permanent account reported on the balance sheet.

Closing Jana Juice’s Accounts
June 30 Sales revenue (–R) 7,600 Sales Revenue (R )
Interest income (-R) 60 7,600 7,600 Adj.Bal
Retained earnings (+SE) 7,660 Interest Income (R )
60 60 Adj.Bal
June 30 Retained earnings (–SE) 6,246
Cost of Goods Sold (E)
Cost of goods sold (–E) 1,700 Adj.Bal 1,700 1,700
Wages expense (–E) 1,950
Rent expense (–E) 700 Wages Expense (E)
Advertising expense (–E) 800 Adj.Bal 1,950 1,950
Insurance expense (–E) 200
Depreciation expense (–E) 170 Rent Expense (E)
Adj.Bal 700 700
Interest expense (–E) 120
Income tax expense (–E) 606
Advertising Expense (E)
Adj.Bal 800 800
Interest Expense (E) Retained Earnings (SE)

Adj.Bal 120 120 Insurance Expense (E)
(12) 100 660 Beg.Bal Adj.Bal 200 200
Income Tax Expense (E) 6,246 7,660
Adj.Bal 606 606 1,974 Depreciation Expense (E)
Adj.Bal 170 170

Preparing a Post-Closing Trial Balance
Jana Juice
Post-Closing Trial Balance
June 30, 2016
Debit Credit
 Prepared
Cash after
Accounts Receivable
the closing
$10,460 process
4,100
Inventory 1,600  All temporary accounts
Prepaid Insurance 600
Interest Receivable 60 have zero balances
Security Deposit 1,800
Fixtures and Equipment 10,200  Contains only
Accum. Depreciation-Fixtures & equip. $ 170
Accounts Payable 2,600
balance sheet
Unearned Revenue 800 (permanent) accounts
Wages Payable 550
Interest Payable 120
Income Tax Payable 606
Notes Payable 12,000
Common Stock 10,000
Retained Earnings 1,974
Totals $28,820 $28,820

Summarizing the Accounting Cycle
Accounting Cycle
 Occurs each fiscal year (period)

 Represents a systematic process for accumulating and
reporting a company’s financial data
Analyze changes in
balance sheet accounts.

Using Information on Levels and Flows
 Levels
 Portrayed on the balance sheet as levels of resources and
claims to those resources
 Point in time
 Flows
 Portrayed on the income statement as changes in the levels
of resources
 Period of time

Using Information on Levels and Flows
Suppose a service business has an inventory of office supplies:
 On July 1, an inventory count determines $2,400 of supplies on hand.
 During the third quarter, office supplies costing $5,700 were purchased and
received.
 On Sept 30, an inventory count determines $1,900 of supplies on hand.
What amount of supplies expense should be recognized for the

quarter?
6,200
6,200
6,200

The End

Financial & Managerial Accounting Decision Makers: Adjusting Accounts For Financial Statements

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Financial & Managerial Accounting Decision Makers: Adjusting Accounts For Financial Statements

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FINANCIAL & MANAGERIAL

© Cambridge Business Publishers, 2018

Identify the major steps

© Cambridge Business Publishers, 2018 2

End of Accounting Period

 Steps performed daily, monthly, quarterly, or end of fiscal year;

Review the process of journalizing

© Cambridge Business Publishers, 2018 4

 Lists the titles and numbers of all accounts found in the

© Cambridge Business Publishers, 2018 5

© Cambridge Business Publishers, 2018 6

© Cambridge Business Publishers, 2018 7

1. On June 1, Jana Juice signed a 2-year note to borrow $12,000 and

(1) Cash (+A) 12,000

Cash (A) Notes Payable (L)

© Cambridge Business Publishers, 2018 8

2. On June 1, Jana Juice purchased and installed new fixtures and

(2) Fixtures & Equipment (+A) 10,200

Fixtures & Equipment (A) Cash (A)

© Cambridge Business Publishers, 2018 9

3. On June 8, Jana Juice paid $800 in cash to advertise in the local

(3) Advertising Expense (+E, –SE) 800

Advertising Expense (E) Cash (A)

© Cambridge Business Publishers, 2018 10

(4) Accounts payable (–L) 500

Accounts Payable (L) Cash (A)

© Cambridge Business Publishers, 2018 11

5. On June 15, Jana Juice purchased inventory on account for

(5) Inventory (+A) 2,600

Inventory (A) Accounts Payable (L)

© Cambridge Business Publishers, 2018 12

(6a) Cash (+A) 3,100

Cash (A) Sales Revenue (R)

© Cambridge Business Publishers, 2018 13

(6b) Cost of goods sold (+E, SE) 600

Cost of Goods Sold (E) Inventory (A)

© Cambridge Business Publishers, 2018 14

(7a) Accounts receivable (+A) 4,400

Accounts Receivable (A) Sales Revenue (R)

© Cambridge Business Publishers, 2018 15

(7b) Cost of goods sold (+E, –SE) 1,100

Cost of Goods Sold (E) Inventory (A)

© Cambridge Business Publishers, 2018 16

8. During June, Jana Juice received an additional $600 from

(8) Cash (+A) 600

Cash (A) Unearned Revenue (L)

© Cambridge Business Publishers, 2018 17

Balance Sheet Income Statement

(9) Wages expense (+E, –SE) 1,400

Wages Expense (E) Cash (A)

© Cambridge Business Publishers, 2018 18

(10) Cash (+A) 2,000

Cash (A) Accounts Receivable(A)

© Cambridge Business Publishers, 2018 19

(11) Rent expense (+E, –SE) 700

Rent Expense (E) Cash (A)

© Cambridge Business Publishers, 2018 20

12. On June 30, Jana Juice paid $100 in cash dividends to

(12) Retained earnings ( –SE) 100

Retained Earnings (SE) Cash (A)

© Cambridge Business Publishers, 2018 21

© Cambridge Business Publishers, 2018 22

Describe the adjusting process