Adjusting Entries

and Closing Accounts—

PreCourse 3
Abbreviated Accounting Cycle
 A sequence of activities to accumulate and report financial statements
 Steps in the accounting cycle

End of Accounting Period

Continuously
(Monthly, Quarterly, Annually)
 Steps performed daily, monthly, quarterly, or end of fiscal year; not all
at the same time

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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 have been recorded and posted

ADJUSTING ENTRIES
 Almost never affect Cash, and
 Usually affect at least 1 balance sheet and 1 income statement account

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Preparing an Unadjusted Trial Balance Before Adjustments

Jana Juice
Unadjusted Trial Balance
Accounts are listed in
30-June-16 accounting equation
  Debit Credit order:
Cash $10,460  
Accounts Receivable 4,100 Assets
Inventory 1,600
Prepaid Insurance 800 Liabilities
Security Deposit 1,800
Fixtures and Equipment 10,200 Equities
Accounts Payable $ 2,600
Unearned Revenue 900 Revenues
Long-term Notes Payable 12,000
Share Capital 10,000
Expenses
Retained Earnings 560
Sales Revenue 7,500
Cost of Goods Sold 1,700 The totals of debits
Wages Expense 1,400
Rent Expense 700
and credits must be
Advertising Expense 800   equal.
Totals $33,560 $33,560

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Types of Adjustments
Deferrals
 Deals with an amount
previously recorded in a
balance sheet account
 Decreases a balance sheet
account and increases an
income statement account
Accruals
 Deals with an amount
NOT previously recorded
in a balance sheet
account
 Increases both a balance
sheet account and an
income statement
account

Both types allow a period’s revenues and expenses to be

measured properly.

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Four Types of Adjustments

Deferrals

Accruals

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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

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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

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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
 A contra asset account
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Accrued Revenues

The process of recognising amounts earned

before the cash is received
 Amounts earned from providing services or selling
products must be recognised 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.

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Accruing Expenses

The process of recognising 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

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Summary of Adjustments

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Closing Temporary Accounts (Income Statement Accounts)

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

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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.

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Closing Process

  Individual Expenses     Individual Revenues  

    Credit to Close Debit to Close    
   

2   Retained Earnings   1
Close expenses to     Close revenues to
Retained Earnings   Retained Earnings

Retained earnings is a permanent account

reported on the balance sheet.

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

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

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

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Summarising the Accounting Cycle

 Occurs each fiscal year (period)

 Represents a systematic process for accumulating and
reporting a company’s financial data
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