Worksheet Over View

3-1
Worksheet Over View

Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
4. Extend adjusted
1. Prepare balance to appropriate
2. Enter 3. Enter columns.
trial balance
adjustment adjusted 5. Calculate income/loss
on the
data. balances and complete the
worksheet.
worksheet.
3-2
ADJUSTMENTS FOR FINANCIAL

REPORTING/
COMPLETION OF ACCOUNTING
CYCLE
3-3
Adjusting Entries
 Adjusting journal entries are made to
update the accounts and bring them to
their correct balances.
 The preparation of adjusting entries is
an application of the accrual concept of
accounting and the matching principle.
3-4
Accrual Basis of Accounting

 States that income is recognized when
earned regardless of when collected
and expense is recognized when
incurred regardless of when paid.
3-5
Accrual Basis vs. Cash Basis

Revenues
Revenuesrecognized
recognized Revenues
Revenuesrecognized
recognized
as
ascash
cashis
isreceived.
received
received.
received as
asthey
theyare
areearned.
earned
earned.
earned
Expenses
Expenses Expenses
Expenses
recognized
recognizedasas recognized
recognizedasas
cash
cashis
ispaid.
paid
paid.
paid they
theyare
areincurred.
incurred
incurred.
incurred
Not
Notconsidered
considered Mandated
Mandatedby
by
GAAP.
GAAP. GAAP.
GAAP.
Cash-Basis
Cash-Basis Accrual
Accrual Basis
Basis
Accounting vs. Accounting
Accounting Accounting
3-6
Matching Principle
 Expenses should be recognized in the
same accounting period as are the
revenues they generated. (i.e., match
revenues and expenses.)
 Aims to align expenses with revenues.
Expenses should be recognized in the
period when the revenues generated by
such expenses are recognized.
3-7
Matching - The Most Important

Accounting Principle
 Matching Principle
 Expenses should be recognized in the
same accounting period as are the
revenues they generated. (i.e., match
revenues and expenses.)
2010 2011 2012
Revenues XXX
Expenses - XX
Net Income X
3-8
Matching - The Most Important

Accounting Principle
 Matching Principle
 Expenses should be recognized in the same
accounting period as are the revenues they
generated. (i.e., match revenues and
expenses.)
2010 2011 2012
Revenues XXX
Expenses - XX
Net Income X
 The Matching Principle is the reason for
using the accrual basis of accounting.
3-9
Purpose of Adjusting Entries

 The main purpose of adjusting entries
is to update the accounts to conform
with the accrual concept. At the end of
the accounting period, some income
and expenses may have not been
recorded, taken up or updated; hence,
there is a need to update the accounts.
3-10
The Need for Adjusting Entries

 If adjusting entries are not prepared,
some income, expense, asset, and
liability accounts may not reflect their
true values when reported in the
financial statements. For this reason,
adjusting entries are necessary.
3-11

 Journal entries are made at the end of
each accounting period to bring about
a proper matching of revenues and
expenses
 Economic events (i.e., transactions)
have been ongoing but never recorded.
3-12

 Journal entries are made at the end of
each accounting period to bring about
a proper matching of revenues and
expenses
 Economic events (i.e., transactions)
have been ongoing but never recorded.
Why not?
 Examples?
3-13

Revenue Example
3-14

Revenue Example
1/1/10 12/31/10
1/1/11 12/31/11
6/30/10 6/30/11
When
When the
thetime
time
necessary
necessaryto to 12-Month Magazine
earn Subscription
earn aa
revenue
revenue
extends
extends into
into
the
thenext
next
period
period ......
3-15

Revenue Example
1/1/10 12/31/10
1/1/11 12/31/11
6/30/10 6/30/11
When
When the
thetime
time .. ....the
theadjusting
adjusting
necessary
necessaryto to 12-Month Magazine process
processallows allowsus us
earn Subscription
earn aa to
toseparate
separate20102010
revenue
revenue subscription
subscription
extends
extends into
into revenue
revenuefromfrom
the
thenext
next from
from2011
2011
period
period ...... subscription
subscription
revenue
revenue... ...
3-16

Revenue Example
1/1/10 12/31/10
1/1/11 12/31/11
6/30/10 6/30/11
When
When the
thetime
time .. ....the
theadjusting
adjusting
necessary
necessaryto to 12-Month Magazine process
processallows allowsusus
earn Subscription
earn aa to
toseparate
separate20102010
revenue
revenue subscription
subscription
extends
extends into
into revenue
revenuefromfrom
the
thenext
next from
from2011
2011
period
period ...... subscription
subscription
revenue
revenueas as
shown.
shown.
3-17

Expense Example
1/1/10 12/31/10
1/1/11 12/31/11
6/30/10 6/30/11
12-Month Real Estate Tax
Remember,
Remember,we wecan
canalso
alsouse
use
adjustments
adjustmentsto tohelp
helpususmatch
match
expenses
expenseswith
withrevenues
revenuesby bymaking
making
adjusting
adjustingentries
entriesto
toput
put expenses
expensesin inthe
the
same
sameperiod
period as
asthe
therelated
relatedrevenues.
revenues.
3-18
Adjusting Journal Entries (AJEs)

AJEs use the same recording format as
regular journal entries.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
M/DD Account Name ### ₱₱₱
Account Name ### ₱₱₱
journal entry explanation
3-19
Types of Adjusting Entries

104
Deferrals
Entries involving transfer of amounts
previously recorded in asset and liability
accounts to expense and revenue accounts,
respectively
Accruals
Entries involving the initial, or first, recording
of assets and liabilities and their related
revenues and expenses
3-20

 Generally, there are 4 types of
adjusting entries. Adjusting entries are
prepared for the following:
 Accrued Income/Revenue – income
earned but not yet received
 Accrued Expense – expenses incurred
but not yet paid
3-21

 Deferred Income/Revenue – income
received but not yet earned
 Prepaid Expense – expenses paid but
not yet incurred

Also, adjusting entries are made for:
 Depreciation
 Doubtful Accounts or Bad Debts, and
other allowances
3-22
Prepaid Expenses
An
An asset
asset awaiting
awaiting assignment
assignment to
to an
an
expense.
expense.
Prepaid
Prepaid
Expense
Expense
(debit)
(debit)
Journal
entry when
payment is
made.
Cash
Cash
(credit)
(credit)
3-23
Prepaid Expenses
An
An asset
asset awaiting
awaiting assignment
assignment to
to an
an
expense.
expense.
Prepaid
Prepaid The prepaid
Expense
Expense expense is
(debit)
(debit) consumed
during the
Journal period.
entry when
payment is
made.
Cash
Cash
(credit)
(credit)
3-24
Prepaid Expenses
An
An asset
asset awaiting
awaiting assignment
assignment to
to an
an
expense.
expense.
Prepaid
Prepaid The prepaid Prepaid
Prepaid
Expense
Expense expense is Expense
Expense
(debit)
(debit) consumed (credit)
(credit)
during the
Journal period. AJE at
entry when end of
payment is
made.
period
Cash
Cash Expense
Expense
(credit)
(credit) (debit)
(debit)
3-25
Prepaid Expenses
Example
On September 1, 2010, Bob’s Bait Shop
prepaid its rent for the next twelve
months. Rent is ₱200 per month.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper initial
initial
journal
journal entry.
entry.
3-26
Prepaid Expenses
Example
On September 1, 2010, Bob’s Bait Shop
prepaid its rent for the next twelve
months. Rent is ₱200 per month.
GENERAL JOURNAL
Page: 1
1-Sep Prepaid Rent 2,400
Cash 2,400
to record prepayment of
twelve months of rent
3-27
Prepaid Expenses
Example
Bob’s fiscal year-end is December 31.
Record the adjustment necessary on
December 31 for the prepaid rent.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-28
Prepaid Expenses
Example
Bob’s fiscal year-end is December 31.
Record the adjustment necessary on
December 31 for the prepaid rent.
GENERAL JOURNAL
Page: 1
31-Dec Rent Expense 800
Prepaid Rent 800
to record recognition of four
months of rent expense
₱200 x 4 months = ₱800
3-29
Prepaid Expenses
Example
GVG Company acquired a six-month
insurance coverage for its properties on
September 1, 2014 for a total of ₱6,000.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper initial
initial
journal
journal entry.
entry.
3-30
Prepaid Expenses
Example
GVG Company acquired a six-month
insurance coverage for its properties on
September 1, 2014 for a total of ₱6,000.
GENERAL JOURNAL
Page: 1
1-Sep Prepaid Insurance 6,000
Cash 6,000
to record prepayment of
six months insurance
3-31
Prepaid Expenses
Example
On December 31, 2014, the end of the accounting
period, part of the prepaid insurance already
has expired (hence, expense is incurred).
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-32
Prepaid Expenses
Example
On December 31, 2014, the end of the accounting
period, part of the prepaid insurance already
has expired (hence, expense is incurred).
GENERAL JOURNAL
Page: 1
31-Dec Insurance Expense 4,000
Prepaid Insurance 4,000
to record recognition of four
months of insurance
₱1,000 x 4 months = ₱4,000
3-33
Prepaid Expenses
Other Examples
 Prepaid Insurance
 Premiums are paid in advance.
 Prepaid Subscriptions
 Magazine and newspaper
subscriptions are always
paid in advance.
 Supplies on Hand
 Supplies are “charged” to
expense periodically.
3-34
Prepaid Expenses
Supplies on Hand
Blank paper used in a copier is a great
example of how supplies on hand transform
from being an asset to becoming an
expenses.
n se
xpe
E
Asset
3-35
Bad Debts Expense

 Companies provide services or sell goods for
cash or on credit. Allowing credit tends to
encourage more sales.
 However, businesses that allow credit are faced with
the risk that their receivables may not be collected.
 Accounts receivable should be presented in the
balance sheet at net realizable value, i.e. the most
probable amount that the company will be able to
collect.
3-36
Net Realizable Value
Accounts Receivable - Gross Amount ₱ 100,000
Less: Allowance for Bad Debts 3,000
Accounts Receivable - Net Realizable

₱ 97,000
Value
3-37
Bad Debts Expense/

Allowance for Bad Debts
 Allowance for Bad Debts (also often called Allowance
for Doubtful Accounts) represents the estimated portion of
the Accounts Receivable that the company will not be able
to collect.
 Bad Debts Expense (Doubtful Accounts Expense): An
expense account; hence, it is presented in the income
statement. It represents the estimated uncollectible
amount for credit sales/revenues made during the period.
3-38
Bad Debts Expense/

ABC Co. estimates that ₱100.00 of its credit
revenue for the period will not be
collected.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-39
Bad Debts Expense/

ABC Co. estimates that ₱100.00 of its credit
revenue for the period will not be
collected.
GENERAL JOURNAL
Page: 1
31-Dec Bad Debts Expense 100
Allowance for Bad Debts 100
to record uncollectible amounts
3-40
Depreciation
 Some assets are not fully used up in a
single fiscal period.
 A truck may last five years, but its value
as a resource declines with time and
usage.
3-41
Depreciation
 Some assets are not fully used up in a
single fiscal period.
 A truck may last five years, but its value as a
resource declines with time and usage.
 Assets that benefit more than one year

are called non-current or “fixed” assets.
3-42
Depreciation
The
The portion
portion of
of an
an asset’s
asset’s utility
utility that
that is
is used
used
up
up must
must be
be expensed
expensed inin the
the period
period used.
used.
Fixed
Fixed
Asset
Asset
(debit)
(debit)
Journal
entry when
payment is
made.
Cash
Cash
(credit)
(credit)
3-43
Depreciation
The
The portion
portion of
of an
an asset’s
asset’s utility
utility that
that is
is used
used
up
up must
must be
be expensed
expensed inin the
the period
period used.
used.
Fixed
Fixed The asset’s
Asset
Asset usefulness is
(debit)
(debit) partially
consumed
Journal during the
entry when period.
payment is
made.
Cash
Cash
(credit)
(credit)
3-44
Depreciation
The
The portion
portion of
of an
an asset’s
asset’s utility
utility that
that is
is used
used
up
up must
must be
be expensed
expensed inin the
the period
period used.
used.
Fixed
Fixed The asset’s Accumulated
usefulness is Accumulated
Asset
Asset Depreciation
partially Depreciation
(debit)
(debit) (credit)
consumed (credit)
Journal during the AJE at
entry when period.
end of
payment is
made.
period
Depreciation
Depreciation
Cash
Cash Expense
Expense
(credit)
(credit) (debit)
(debit)
3-45
Depreciation
The
The portion
portion of
of an
an asset’s
asset’s utility
utility that
that is
is used
used
up
up must
must be
be expensed
expensed inin the
the period
period used.
used.
This
Thisis
iscalled
calledaacontra-asset
contra-asset Accumulated
Accumulated
account
accountand
andhas
hasaacredit
credit Depreciation
Depreciation
balance.
balance. (credit)
(credit)
AJE at
end of
period
Depreciation
Depreciation
Expense
Expense
(debit)
(debit)
3-46
Depreciation
The
The portion
portion of
of an
an asset’s
asset’s utility
utility that
that is
is used
used
up
up must
must be
be expensed
expensed inin the
the period
period used.
used.
This
Thisis
iscalled
calledaacontra-asset
contra-asset Accumulated
Accumulated
account
accountand
andhas
hasaacredit
credit Depreciation
Depreciation
balance.
balance. (credit)
(credit)
AJE at
end of
Balance
BalanceSheet
SheetPresentation
Presentation period
Asset
Asset(at
(atcost)
cost) ₱40,000
₱40,000 Depreciation
Depreciation
Less:
Less: Accumulated
AccumulatedDepr.
Depr. 5,000
5,000 Expense
Expense
Book
BookValue
Value ₱35,000
₱35,000 (debit)
(debit)
3-47
Depreciation
Definition of Book Value
Asset cost - Accumulated Depreciation
3-48
Depreciation
Book Value = ₱35,000
Truck
Bal. 40,000
Accumulated Dep’n - Truck

5,000 Bal.
3-49
Depreciation Example
On 12/31/10, Putnam Plumbing, recorded
₱2,000 of Depreciation Expense on a
₱10,000 truck.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-50
Depreciation Example
On 12/31/10, Putnam Plumbing, recorded
₱2,000 of Depreciation Expense on a
₱10,000 truck.
GENERAL JOURNAL
Page: 1
31-Dec Depreciation Expense 2,000
Accumulated Depreciation 2,000
to record depreciation
expense on truck for the year
3-51
Unearned Revenues
Assets
Assets that
that have
have been
been received,
received, but
but
have
have not
not yet
yet been
been earned.
earned
earned.
earned
Unearned
Unearned
Revenue
Revenue
(credit)
(credit)
Journal
entry when
payment is
received.
Cash
Cash
(debit)
(debit)
3-52
Unearned Revenues
Assets
Assets that
that have
have been
been received,
received, but
but
have
have not
not yet
yet been
been earned.
earned
earned.
earned
Unearned
Unearned
Revenue The unearned
Revenue revenue is
(credit)
(credit) earned during
the period.
Journal
entry when
payment is
received.
Cash
Cash
(debit)
(debit)
3-53
Unearned Revenues
Assets
Assets that
that have
have been
been received,
received, but
but
have
have not
not yet
yet been
been earned.
earned
earned.
earned
Unearned
Unearned Unearned
Unearned
Revenue The unearned Revenue
Revenue revenue is Revenue
(credit)
(credit) (debit)
(debit)
earned during
the period.
Journal AJE at
entry when end of
payment is
received.
period
Cash
Cash Revenue
Revenue
(debit)
(debit) (credit)
(credit)
3-54
Unearned Revenues
Example
On 10/1/10,
10/1/10 the Cookeville Gazette received
₱240 for a one-year subscription. The
monthly subscription rate is ₱20.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper initial
initial
journal
journal entry.
entry.
3-55
Unearned Revenues
Example
On 10/1/10,
10/1/10 the Cookeville Gazette received
₱240 for a one-year subscription. The
monthly subscription rate is ₱20.
GENERAL JOURNAL
Page: 1
1-Oct Cash 240
Unearned Subscriptions 240
to record receipt of one-year
subscription payment
3-56
Unearned Revenues
Example
The Cookeville Gazette’s fiscal year-end is
on 12/31/10 (three months later). Record
the adjustment necessary at 12/31/10.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-57
Unearned Revenues
Example
The Cookeville Gazette’s fiscal year-end is
on 12/31/10 (three months later). Record
the adjustment necessary at 12/31/10.
GENERAL JOURNAL
Page: 1
31-Dec Unearned Subscriptions 60
Subscription Revenue 60
to record recognition of three
months of subscription earned
₱20 x 3 months = ₱60
3-58
Unearned Revenues
Example
Suppose on January 10, 2015, ABC Company
made ₱30,000 advanced collections from its
customers.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper initial
initial
journal
journal entry.
entry.
3-59
Unearned Revenues
Example
Suppose on January 10, 2015, ABC
Company made ₱30,000 advanced
collections from its customers.
GENERAL JOURNAL
Page: 1
10-Jan Cash 30,000
Unearned Revenue 30,000
to record advance collection
from customer
3-60
Unearned Revenues
Example
At the end of the month, 20% of the
unearned revenue has been rendered.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-61
Unearned Revenues
Example
At the end of the month, 20% of the
unearned revenue has been rendered.
GENERAL JOURNAL
Page: 1
31-Jan Unearned Revenue 6,000
Service Revenue 6,000
to record recognition of income
from the advance collection earned
  x 20% = ₱6,000
₱30,000
3-62
Accrued Assets/Revenues
Assets
Assets and
and revenues
revenues that
that remain
remain
unrecorded
unrecorded at
at the
the end
end of
of the
the period.
period.
During the period, revenues

are earned, but are not
recorded at that time.
GENERAL JOURNAL
Page: 1
3-63
Assets
Assets and
and revenues
revenues that
that remain
remain
unrecorded
unrecorded at
at the
the end
end of
of the
the period.
period.
During the period, revenues Asset

Asset
are earned, but are not (debit)
(debit)
AJE at
GENERAL JOURNAL
Page: 1 end of
period
Revenue
Revenue
(credit)
(credit)
3-64
Example
On 12/31/10, First Bank owes your company
₱100 of interest on your account. You will
receive the interest on 1/10/11.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-65
Example
On 12/31/10, First Bank owes your company
₱100 of interest on your account. You will
receive the interest on 1/10/11.
GENERAL JOURNAL
Page: 1
31-Dec Interest Receivable 100
Interest Revenue 100
to record interest earned but
not yet received
3-66
Example
ABC Company lent ₱9,000 at 10% interest on December 1,
2014. The amount will be collected after 1 year. At the
end of December, no entry was entered in the journal to
take up the interest income.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-67
Example
ABC Company lent ₱9,000 at 10% interest on December 1, 2014.
The amount will be collected after 1 year. At the end of
December, no entry was entered in the journal to take up the
interest income.
GENERAL JOURNAL
Page: 1
31-Dec Interest Receivable 75
Interest Revenue 75
to record interest earned but
not yet received
3-68
Accrued Liabilities/Expenses
Liabilities
Liabilities and
and expenses
expenses that
that remain
remain
unrecorded
unrecorded at at the
the end
end of
of the
the period.
period.
During the period, expenses

are incurred, but are not
GENERAL JOURNAL
Page: 1
3-69
Liabilities
Liabilities and
and expenses
expenses that
that remain
remain
unrecorded
unrecorded at at the
the end
end of
of the
the period.
period.
Expense
Expense
During the period, expenses (debit)
are incurred, but are not (debit)
AJE at
GENERAL JOURNAL
Page: 1 end of
period
Liability
Liability
(credit)
(credit)
3-70
Example
At 12/31/10, your company owes ₱235 of
interest to Big Corp. You will not
actually pay the interest until 1/10/11.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-71
Example
At 12/31/10, your company owes ₱235 of
interest to Big Corp. You will not
actually pay the interest until 1/10/11.
GENERAL JOURNAL
Page: 1
31-Dec Interest Expense 235
Interest Payable 235
to recognize interest owed to
Big Corporation
3-72
Example
For the month of December 2014, Gray Electronic
Repair Services used a total of ₱1,800 worth of
electricity and water. The company received the
bills on January 10, 2015.
GENERAL JOURNAL
Page: 1
Prepare
Prepare the
the proper
proper adjusting
adjusting
journal
journal entry.
entry.
3-73
Example
For the month of December 2014, Gray Electronic
Repair Services used a total of ₱1,800 worth of
electricity and water. The company received the
bills on January 10, 2015.
GENERAL JOURNAL
Page: 1
31-Dec Utilities Expense 1,800
Utilities Payable 1,800
To recognize electricity and
Water consumption for Dec. 2014
3-74
Adjusting Journal Entries

Question
On
On 10/1/11,
10/1/11, BeeBee
BeeBee Inc.
Inc. pays
pays ₱3,600
₱3,600 for
for aa
12-month
12-month insurance
insurance policy.
policy. What
What kind
kind
of
of transaction
transaction would
would this
this be
be called?
called?
a.
a. Accrued
Accrued Liability
Liability
b.
b. Prepaid
Prepaid Expense
Expense
c.
c. Accounting
Accounting Estimate
Estimate
d.
d. Unearned
Unearned Revenue
Revenue
3-75

Question
On
On 10/1/11,
10/1/11, BeeBee
BeeBee Inc.
Inc. pays
pays ₱3,600
₱3,600 for
for aa
12-month
12-month insurance
insurance policy.
policy. What
What kind
kind
of
of transaction
transaction would
would this
this be
be called?
called?
BeeBee
BeeBee has
has an
an
a.
a. Accrued Liability
Accrued Liability asset
asset that
that is
is
b.
b. Prepaid
Prepaid Expense
Expense awaiting
awaiting
c.
c. Accounting
Accounting Estimate
Estimate assignment
assignment to to
d.
d. Unearned
Unearned Revenue
Revenue an
an expense
expense
account.
account.
3-76

Question
The
The last
last day
day of
of 2009
2009 is
is on
on aa Thursday.
Thursday.
CeeCee
CeeCee Inc.
Inc. will
will pay
pay its
its employees
employees on on
Friday.
Friday. What
What kind
kind of
of adjusting
adjusting entry
entry is
is
required?
required?
a.
a. Accrued
Accrued Liability
Liability
b.
b. Accrued
Accrued Asset
Asset
c.
c. Accounting
Accounting Estimate
Estimate
d.
d. Unearned
Unearned Revenue
Revenue
3-77

Question
The
The last
last day
day of
of 2009
2009 is
is on
on aa Thursday.
Thursday.
CeeCee
CeeCee Inc.
Inc. will
will pay
pay its
its employees
employees on on
Friday.
Friday. What
What kind
kind of
of adjusting
adjusting entry
entry is
is
required?
required?
CeeCee
CeeCee has
has
a.
a. Accrued
Accrued Liability
Liability incurred
incurred an
an
b.
b. Accrued
Accrued Asset
Asset obligation
obligation toto pay
pay
c.
c. Accounting
Accounting Estimate
Estimate its
its workers
workers after
after
d.
d. Unearned
Unearned Revenue
Revenue year-end.
year-end.
3-78
Finally
HOW PRECISE IS
ACCOUNTING?
110
Annual depreciation expense =

Asset cost - Estimated Salvage value
Estimated years of useful life
3-79
Finally
HOW PRECISE IS
ACCOUNTING?
110
Estimated
^ Annual depreciation expense =
Asset cost - Estimated Salvage value
Estimated years of useful life
3-80
Adjusted Trial Balance

 An adjusted trial balance is prepared
after adjusting entries are made and
posted to the ledger.
 This is the second trial balance
prepared in the accounting cycle.
 Its purpose is to test the equality
between debits and credits after
adjusting entries are entered into the
books of the company.
3-81
Gray Electronic Repair Services

Unadjusted Trial Balance
31-Dec-14
Account Title Debit Credit

Cash P 7,480.00
Accounts Receivable 3,400.00
Service Supplies 1,500.00
Furniture and Fixtures 3,000.00
Service Equipment 16,000.00
Accounts Payable P 9,000.00
Loans Payable 12,000.00
Mr. Gray, Capital 13,200.00
Mr. Gray, Drawing 7,000.00
Service Revenue 9,550.00
Rent Expense 1,500.00
Salaries Expense 3,500.00
Taxes and Licenses 370
Totals P 43,750.00 P 43,750.00
3-82
At the end of the period, the following adjusting entries

were made:
Dec 31 Accounts Receivable 300

Service Revenue 300
31 Utilities Expense 1,800.00

Utilities Payable 1,800.00
31 Service Supplies Expense 900

Service Supplies 900
31 Depreciation Expense 720

Accumulated Depreciation 720
3-83
31-Dec-14

Cash P 7,480.00
Service Supplies 600.00
Accumulated Depreciation P 720.00
Accounts Payable 9,000.00
Taxes and Licenses 370.00
Utilities Expense 1,800.00
Service Supplies Expense 900.00
Depreciation Expense 720.00
Totals P 46,570.00 P 46,570.00
3-84
COMPLETION OF THE
ACCOUNTING CYCLE
- Closing Entries -
3-85
 Closing journal entries are made at

year-end to prepare temporary
accounts for the next accounting
period.
 Temporary or nominal accounts, (also
called income statement accounts), are
measured periodically.
 Take note that closing entries are
prepared only for temporary accounts.
Permanent accounts are never closed.
3-86
 The amounts in one accounting period

should be closed or brought to zero so
that they won't be mixed with those of
the next period.
 Temporary accounts consist of all
revenue and expense accounts, and
also withdrawal accounts of owner/s in
the case of sole proprietorships and
partnerships.
3-87
Four Steps in Preparing Closing

Entries
1. Close all income accounts to Income
Summary
2. Close all expense accounts to Income
Summary
3. Close Income Summary to the
appropriate capital account
4. Close withdrawals to the capital
account/s (this step is for sole
proprietorship and partnership only)
3-88
Worksheet Over View

Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
4. Extend adjusted
1. Prepare balance to
2. Enter 3. Enter
trial balance appropriate columns.
adjustment adjusted
on the balances 5. Calculate
data.
worksheet. income/loss and
complete the
worksheet.
3-89
31-Dec-14

Cash P 7,480.00
Service Supplies 600.00
Accumulated Depreciation P 720.00
Accounts Payable 9,000.00
Taxes and Licenses 370.00
Utilities Expense 1,800.00
Service Supplies Expense 900.00
Depreciation Expense 720.00
Totals P 46,570.00 P 46,570.00
3-90
Closing Entry Concepts
 The final stage of the accounting cycle is to prepare

the accounts for the next fiscal period.
 To do this, you must understand which accounts have

balances that continue from one period to the next
and which do not.
3-91
Closing Entry Concepts (Continued)

 When a new accounting period begins, the revenue and
expense accounts should show zero balances so that
they contain only data that refer to the new period.
 This allows the calculation of net income according to the

matching principle, which states:
 Revenue for each accounting period is matched

with expenses for that accounting period to
determine the net income or net loss.
3-92
Purpose of Closing Entries

1. Updates the owner’s capital account in the
ledger by transferring net income (loss)
and owner’s drawings to owner’s capital.
2. Prepares the temporary accounts (revenue,

expense, drawings) for the next period’s
postings by reducing their balances to
zero.
3-93
Closing Entries
 The revenue and expense accounts are reduced to zero
by a process called closing the books.
 Closing the books is the process by which revenue

and expense accounts are reduced to zero of the end
of each accounting period.
 Closing the accounts is sometimes called clearing
the accounts.
3-94
Real Accounts and Nominal Accounts

Real Accounts
 All asset and liability accounts, as well as the
owner's capital account, are considered to be real
accounts.
 Real accounts have balances that continue into the
next fiscal period.
 Examples of real accounts are Bank, Trucks, and
Accounts Payable.
3-95
Nominal Accounts
 Nominal accounts (Revenue, Expense, and Drawings)
have balances that do not continue into the next fiscal
period.
 Nominal accounts, with the exception of the Drawings
account, are related to the income statement, and the
income statement deals only with a single fiscal period.
 All nominal accounts begin each fiscal period with
a nil balance.
3-96
Income Summary
 A special nominal account, called the Income
Summary account, is used only during the closing
entry process.
 The Income Summary account summarizes the

revenues and expenses of the period.
 The temporary balance in this account represents

either the amount of net income or the amount of net
loss.
3-97
Real Accounts and Nominal

Accounts
 Other names for REAL and NOMINAL accounts are
Permanent and TEMPORARY accounts.
 These alternative terms help you remember which

accounts will continue to have balances (PERMANENT)
and which will be closed out (TEMPORARY).
3-98
Temporary Versus Permanent

TEMPORARY (NOMINAL) PERMANENT (REAL)
These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawings Owner’s capital account
(Income Statement / (Balance Sheet

Drawings Accounts) Accounts)
3-99
Diagram of the Closing Process

(INDIVIDUAL) (INDIVIDUAL)
EXPENSES REVENUES
Normal Dr. Normal Cr.
Cr. to close Dr. to close
Balance Balance
-0- -0-
2
1
OWNER’S
CAPITAL
Opening Balance
Expenses Revenues
11 Debit
Debit each
each revenue
revenue account
account for
for its
its balance,
balance, and
and credit
credit the
the
owner’s
owner’s capital
capital account
account for
for total
total revenues.
revenues.
22 Debit
Debit the
the owner’s
owner’s capital
capital account
account forfor total
total expenses,
expenses, and
and
credit
credit each
each expense
expense account
account for
for its
its balance.
balance.
3-100
Diagram of the Closing Process

OWNER’S
CAPITAL
Expenses Opening Balance
Drawings Revenues
Ending Balance
OWNER’S
DRAWINGS
Normal Dr. Cr. to close
Balance
-0-
3 Debit
Debit owner’s
owner’s capital
capital for
for the
the balance
balance in
in the
the owner’s
owner’s drawings
drawings
account
account and
and credit
credit owner’s
owner’s drawings
drawings for
for the same
same amount.
3-101
1 Summary
2
In summary, there are
four steps involved in
closing the books:
1.Close the revenue

accounts into Income
Summary.
3 2.Close the expense

accounts into Income
Summary.
3.Close Income
Summary into Capital.
4 4.Close Drawings into

Capital.
3-102
Journalizing and Posting the Closing

Entries
Don’t forget to post to
the General Ledger
Closing Entry No. 1
3-103

Entries Don
th ’t for
eG g
ene et to
ral p
Led ost to
ger
Closing Entry No. 2
3-104

Entries
the General Ledger
Closing Entry No. 3

3-105

Entries
the General Ledger
Closing Entry No. 4

3-106
Closing Entries
STOP AND CHECK
1. Does the balance in your
Owner’s Capital account
equal the ending capital
balance reported in the
Balance Sheet and
Statement of Owner’s
Equity?
2. Are all of your temporary

account balances zero?
3-107
Post - Closing Trial Balance

 After all closing entries have been
journalized and posted, a post-closing
trial balance is prepared.
 The purpose of this trial balance is to

prove the equality of the permanent
(balance sheet) account balances that
are carried forward into the next
accounting period.
3-108
Post - Closing Trial Balance

Pioneer Advertising Agency
Post-Closing Trial Balance
October 31, 2002
After Adjustment
The post-closing trial Debit Credit
Cash balance is prepared $ 15,200
Accounts Receivable from the permanent 200
Advertising Supplies 1,000
accounts in the
Prepaid Insurance 550
Office Equipment ledger. 5,000
Accumulated Amortization $ 83
Notes Payable The post-closing trial 5,000
Accounts Payable 2,500
balance provides
Unearned Revenue 800
Salaries Payable
evidence that the 1,200
Interest Payable journalizing and posting 25
C.R. Byrd, Capital of closing entries has 12,342
been properly $ 21,950 $ 21,950
completed.
3-109
Steps in the Accounting Cycle

1. Source
Documents:
Analyse 2. Journalize the
9. Prepare Transactions
post-closing transactions
trial balance
3. Post to ledger
accounts
8. Journalize
and post 4. Prepare a
closing entries trial balance
7. Prepare 5. Journalize
financial and post
statements adjusting
6. Prepare
adjusted trial entries
balance
3-110
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3-1

Worksheet Over View

ADJUSTMENTS FOR FINANCIAL

Accrual Basis of Accounting

Accrual Basis vs. Cash Basis

Matching - The Most Important

Matching - The Most Important

Purpose of Adjusting Entries

The Need for Adjusting Entries

The Need for Adjusting Entries

The Need for Adjusting Entries

The Need for Adjusting Entries

The Need for Adjusting Entries

The Need for Adjusting Entries

The Need for Adjusting Entries

The Need for Adjusting Entries

12-Month Real Estate Tax

Adjusting Journal Entries (AJEs)

Types of Adjusting Entries

Types of Adjusting Entries

Types of Adjusting Entries

not yet incurred

 Doubtful Accounts or Bad Debts, and

Bad Debts Expense

Net Realizable Value

Accounts Receivable - Gross Amount ₱ 100,000

Less: Allowance for Bad Debts 3,000

Accounts Receivable - Net Realizable

Bad Debts Expense/

Bad Debts Expense/

Bad Debts Expense/

 Assets that benefit more than one year

Accumulated Dep’n - Truck

During the period, revenues

During the period, revenues Asset

During the period, expenses

Adjusting Journal Entries

Adjusting Journal Entries

Adjusting Journal Entries

Adjusting Journal Entries

Annual depreciation expense =

Adjusted Trial Balance

Gray Electronic Repair Services

Account Title Debit Credit

At the end of the period, the following adjusting entries

Dec 31 Accounts Receivable 300

31 Utilities Expense 1,800.00

31 Service Supplies Expense 900

31 Depreciation Expense 720

Account Title Debit Credit

 Closing journal entries are made at

 The amounts in one accounting period

Four Steps in Preparing Closing

Worksheet Over View

Account Title Debit Credit

Closing Entry Concepts

 The final stage of the accounting cycle is to prepare

 To do this, you must understand which accounts have

Closing Entry Concepts (Continued)

 This allows the calculation of net income according to the

 Revenue for each accounting period is matched

Purpose of Closing Entries

2. Prepares the temporary accounts (revenue,