Chapter 5

Completing the accounting cycle

PowerPoint presentation by Anne Abraham University of Wollongong 2009 John Wiley & Sons Australia, Ltd

THE COMPLETE ACCOUNTING CYCLE

1. Recognise and record transactions 2. Journalise transactions Source documents

General journal

3. Post to ledger accounts

General ledger

4. Prepare unadjusted trial balance of GL

Trial balance (unadjusted)

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THE COMPLETE ACCOUNTING CYCLE

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

General journal
General ledger (accounts adjusted)

7. Prepare adjusted trial balance of GL (adjusted) 8. Journalise closing entries

Trial balance (adjusted)

General journal

Continued next slide

THE COMPLETE ACCOUNTING CYCLE

continued
GL temporary accounts closed

9. Post closing entries to GL

10. Prepare post closing trial balance

11. Prepare financial statements 12. Journalise reversing entries 13. Post reversing entries to GL

Trial balance (post closing) work sheet Financial statements

General journal GL temporary accounts opened 4

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

USING THE WORKSHEET

Gathers information together in one place Enables preparation of interim financial statements Adjusting entries easily reflected Facilitates closing journal preparation

Recording adjusting 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 entitys closing entries for the period are found in income statement columns of worksheet which contain temporary income and expense accounts
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THE CLOSING PROCESS

Income accounts closed to P & L summary
Debit income Credit P & L summary

Expense accounts closed to P & L summary

Debit P & L summary Credit expense

THE CLOSING PROCESS continued

Profit & Loss summary balances to determine profit/loss then closed to capital
Debit P & L summary (assuming a profit) Credit capital account

Drawings closed to capital

Debit capital account Credit drawings account

THE CLOSING PROCESS continued

(CLOSE INCOME ACCOUNT)

INCOME
28,500

12,000 7,500 9,000

(CLOSE EXPENSE ACCOUNTS)

P&L SUMMARY
4,450 24,050 28,500 24,050

SALARY EXP
1,500 1,800
3,300

(CLOSE P & L SUMMARY)

CAPITAL ACCOUNT
2,500 24,050

RENT EXP
800 800

DRAWINGS
2,500 2,500
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SUPPLIES EXP
350 350

(CLOSE DRAWINGS ACCOUNT)

Account balances after the closing process

All income accounts have nil balances All expense accounts have nil balances The drawings account has a nil balance The capital account has been increased or decreased by the profit or loss and decreased by the drawings

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The post-closing trial balance

Reflects all accounts with balances after the closing process
Assets Liabilities Equity

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ACCRUAL ENTRIES IN SUBSEQUENT 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
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ACCRUAL ENTRIES IN SUBSEQUENT PERIODS continued

Adjusting entry (30 June)
Jun 30 Salary Expense Salary Payable (To accrue salaries owing to 30 June) 1 990 1 990

Normal entry (6 July)

Jul 6 Salary Payable 1 990 Salary Expense 1 710 Cash at Bank (To record payment of salaries from 23 June to 6 July)

3 700

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REVERSING ENTRIES
Reversal of accrual entries
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

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REVERSING ENTRIES
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Adjusting entry
Jun 30 Salary Expense Salary Payable (To accrue salaries owing to 30 June) 1 990

1 990

Reversing entry
Jul 1 Salary Payable 1 990 Salary Expense (To reverse the adjusting entry to accrue unpaid salaries at end of previous month) 1 990

July 6 entry
Jul 6 Salary Expense 3 700 Cash at Bank (Payment of salaries for period 27 June to 6 July) 3 700
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REVERSING ENTRIES
continued

Not required for all adjusting entries Only used where adjustment is temporary
Accrued expenses Accrued income Prepayments originally recorded as expenses Unearned income originally recorded as income

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REVERSING ENTRIES
continued

Reversal of deferral entries

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

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ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY 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 partners capital account

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ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY

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Accounting for a company

Owners are referred to as shareholders Owners interests are called share capital Not all profits/losses are distributed to shareholders Share capital represents retained profits (or accumulated losses) + share of assets

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ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY

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Profits distributed as dividends

INTELLECT MANAGEMENT SERVICES LTD Statement of Changes in Equity For the year ended 31 December 2010

Share Capital, 1 January 2010 Share Capital, 31 December 2010 Retained earnings, 1 January 2010 Add: Profit for the year
Less: Cash dividends for the year Retained earnings, 31 December 2010

$120 000 120 000 -25 000 25 000 12 000 $13 000
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ACCOUNTING PROCEDURES APPLICABLE TO A PARTNERSHIP OR A COMPANY

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Equity section of balance sheet

INTELLECT MANAGEMENT SERVICES LTD Balance Sheet (extract) as at 31 December 2010 Share capital (120 000 shares issued for $1) Retained earnings Total equity $120 000 13 000 $133 000

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