Adjusting Entries and Closing Process Module 4. SAP 2007 / SAP University Alliances Introductory Accounting Explain the purpose of adjustments.Outline

Adjusting Entries

and Closing Process

Module 4

SAP 2007 / SAP University Alliances Introductory Accounting

Learning Objectives


The Accounting Cycle

Analyze transactions

Journalize

Post

Prepare statements

Close

Prepare post-closingtrial balance

Adjust

Prepareunadjusted trial balance

Prepare adjusted

trial balance

22

3

4

5 6

7

8

91


Adjusting the Accounts


GAAP and the Adjusting Process


Accounting Principles


Accounting Principles


Cash vs. Accrual Basis of Accounting


Adjustments


Prepaid Expenses

Prepaid Expenses–Example

Prepaid Insurance Insurance ExpenseJan. 1 1,800


Prepaid Expenses — Example

Prepaid InsuranceJan. 1 2,400 2,400

$2,400January February March

Cash

$800 $800 $800



Prepaid Insurance Insurance ExpenseJan. 1 2,400Jan.31 800 800balance 1,600

$800 $800 $800




Prepaid Insurance Insurance ExpenseJan. 1 2,400Jan.31 800 800Feb.28 800 800balance 800

$800 $800 $800




Prepaid Insurance Insurance ExpenseJan. 1 2,400Jan.31 800 800Feb.28 800 800Mar.31 800 800balance 0

$800 $800 $800




Amortization

Straight-LineAmortization/depreciationExpense

= Asset Cost - Salvage Value

Useful Life


Amortization/depreciation — Example

On January 1,2005, a company purchased a piece of equipment for $96,000. The equipment is expected to have a useful life of six years and have a salvage value of $6,000.

Straight-LineAmortizationExpense

= Asset Cost - Salvage Value

Useful Life

= $96,000 - $6,000

6 years

= $15,000/year


Amortization/depreciation

Cash96,000 1/1/05 96,000

Equipment


Amortization Expense,Amortization, Equipment

15,000 12/31/05 15,000Equipment

Accumulated




12/31/05 15,00015,000 12/31/06 15,000

balance 60,000

EquipmentAccumulated




12/31/05 15,00012/31/06 15,000

15,000 12/31/07 15,000balance 45,000





12/31/05 15,00012/31/06 15,00012/31/07 15,000

15,000 12/31/08 15,000balance 30,000



2005 2006 2007 2008Equipment $96,000 $96,000 $96,000 $96,000 Less: Accumulated Amortization 15,000 30,000 45,000 60,000Equipment-net $81,000 $66,000 $51,000 $36,000

December 31

Amortization, Equipment96,000 12/31/05 15,000

12/31/06 15,00012/31/07 15,00012/31/08 15,00012/31/09 15,000




Book Value is equal to the Net value of the Fixed Asset Account


Unearned Revenues

Unearned Revenues — Example

Unearned Revenue19,000 Aug.1 19,000

Cash



Maintenance Revenue19,000 Aug.1

9,500 Aug.31 9,5009,500 balance

Unearned Revenue



Maintenance Revenue19,000 Aug.1

9,500 Aug.31 9,5009,500 Sept.30 9,500

0 balance

Unearned Revenue



Accrued Expenses


Accrued Expenses — Example


Accrued Revenues


Accrued Revenues — Example

Adjustments and Financial Statements


Adjusted Trial Balance



Financial Statement Preparation


Correcting Errors


Correcting Errors — Example





Alternatives in Accounting for Prepaids and Unearned Revenues





Payment Recorded as an Asset Payment Recorded as an Expense

Jan.1 Prepaid Insurance 2,400 Insurance Expense 2,400 Cash 2,400 Cash 2,400

Jan.31 Insurance Expense 800 Prepaid Insurance 1,600 Prepaid Insurance 800 Insurance Expense 1,600

Prepaid Insurance2,400 Jan.1

800 Jan.31 1,6001,600 balance 1,600

Jan.1 2,400800 Jan.31 1,600800 balance 800

Insurance ExpenseInsurance Expense

Prepaid Insurance






Receipt Recorded as a Liability Receipt Recorded as a Revenue

Mar.1 Cash 18,000 Cash 18,000 Unearned Revenue 18,000 Maintenance Revenue 18,000

Mar.31 Unearned Revenue 9000 Maintenance Revenue 9,000 Maintenance Revenue 9000 Unearned Revenue 9,000

Unearned Revenue18,000 Mar.1

9,000 Mar.31 9,0009,000 balance 9,000

Mar.1 18,0009,000 Mar.31 9,0009,000 balance 9,000

Maintenance RevenueMaintenance Revenue

Unearned Revenue


The Closing Process


Four-Step Closing Process (REID)


Income Summary7,350

7,350

Consulting Revenue6,850 6,850

-

Rental Revenue500 500

-

Step 1: Close Revenue accounts to Income Summary

Consulting Revenue 6850Rental Revenue 500 Income Summary 7,350


Amortization Expense150 150

-

Step 2: Close Expense Accounts to Income Summary

Income Summary4,105 7,350

3,245

Rent Expense1,400 1,400

-

Income Summary 4,105 Insurance Expense 300 Rent Expense 1,400 Interest Expense 65 Amortization Expense 150 Salaries Expense 1,100 Supplies Expense 900 Utilities Expense 190

Interest Expense65 65

-

Insurance Expense300 300

-

Utilities Expense190 190

-

Supplies Expense900 900

-

Salaries Expense1,100 1,100

-


Carol Finlay, Capital

9,500 3,245

bal. 12,745

Income Summary4,105 7,350

bal. 3,245 3,245 -

Step 3: Close Income Summary to Owner’s Capital

Income Summary 3,245 Ms Owner, Capital 3,245


Carol Finlay, Capital

9,500 945 3,245

balance 11,800

Step 4: Close Drawings to Owner’s Capital

Carol Finlay, Withdrawals

945 945

balance -

Carol Finlay, Capital 945 Carol Finlay, Withdrawals 945


Post-Closing Trial Balance


The Accounting Cycle

Analyze transactions

Journalize

Post

Prepare statements

Close

Prepare post-closingtrial balance

Adjust

Prepareunadjusted trial balance

Prepare adjusted

trial balance

22

3

4

5 6

7

8

91


Classified Balance Sheet

Documents

Adjusting Entries and Closing Process Module 4. SAP 2007 / SAP University Alliances Introductory Accounting Explain the purpose of adjustments.Outline