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Recording Adjusting & Closing Entries for a Service Business. Accounting Chapter 8. Adjusting Entries. Remember the Adjustment Column of the Work Sheet? Adjustments must be journalized and posted WHY? Accounting Period Cycle Adequate Disclosure Matching Expenses with Revenue - PowerPoint PPT Presentation
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Accounting
Chapter 8
Remember the Adjustment Column of the Work Sheet?Adjustments must be journalized and posted
WHY?Accounting Period CycleAdequate DisclosureMatching Expenses with Revenue
Adjusting Entries are journal entries recorded to update general ledger accounts at the end of a fiscal period
Information for adjusting entries are found in the Adjustment columns of the Work Sheet
Which accounts are impacted?Supplies, Prepaid Insurance, Supplies Exp.,
Insurance ExpenseA new journal page is started for adjusting
entriesThe title: Adjusting Entries is written in the
middle of the Account Title column of the General Journal – WHY?
Name of Company
General Journal
Page: n+1
Date Account TitleDoc No.
Post. Ref Debit Credit
Adjusting Entries
8 31 Supplies Expense 715
Supplies 715
All journal entries must be postedPosting to the General Ledger insures that
all account balances are up to date and match the information on the company’s financial statements
Remember the steps for posting?Don’t forget to record the account
number on the general journal entryWT 81-83.xls
Permanent Accounts collect information from one fiscal period to the nextAKA Real AccountsEnding account balances for permanent
accounts become the beginning account balances for the next fiscal period
Balance Sheet items are permanent accountsWHY?
Temporary Accounts accumulate information that is transferred to the owner’s capital account at the end of the fiscal periodAKA Nominal Accounts
Income Statement items are temporary accountsWHY?
Temporary accounts begin a new fiscal period with a zero balance
Temporary Accounts balances must be reduced to zero at the end of each fiscal period
Closing entries prepare temporary accounts for a new fiscal period
To close a temporary account, an amount equal to its balance is recorded in the amount on the opposite to its balance:If Advertising Expense has a $100 debit
balance, then a $100 credit to Advertising Expense will reduce the balance to zero
The Income Summary account is a temporary account that summarizes the closing entries associated with Revenues and Expenses
All expenses (debit normal balances) are debits to Income Summary
All revenues (credit normal balances) are credits to Income Summary
Income Summary is eventually closed to Capital
What is relationship between the Income Summary account and Net Income(Loss)?
The balance of the Income Summary account is determined by whether the business earns net income or suffers a net loss
There are four closing entries for a service business (sole proprietorship):An entry to close income statement accounts
with credit balancesAn entry to close income statement accounts
with debit balancesAn entry to record net income or loss and close
Income SummaryAn entry to close the owner’s drawing account
Which accounts are these?
Name of CompanyGeneral Journal
Page: n+1Date Account Title Doc No. Post. Ref Debit Credit
Closing Entries 31 Sales 3,565.00
Income Summary 3,565.00
Only one closing entry is required to close all expense accounts
Name of Company
General Journal
Page: n+1
Date Account Title
Doc No.
Post. Ref Debit Credit
Closing Entries
31 Sales 3,565.00
Income Summary 3,565.00
31 Income Summary 1,466.00 Advertising Expense 213.00 Insurance Expense 100.00 Miscellaneous Expense 28.00 Rent Expense 300.00 Supplies Expense 715.00 Utilities Expense 110.00
Income Summary is a temporary account that is closed to the Capital account – WHY?
If there is net income:
If there is net loss
Supplies Expense 715.00
Utilities Expense 110.00
31 Income Summary 2,099.00 Owner, Capital 2,099.00
Utilities Expense 110.00
31 Owner, Capital 2,099.00 Income Summary 2,099.00
Drawing is not a revenue or expense account and cannot be closed through the Income Summary account
WT 81-83.xls
Owner, Capital 2,099.00
31 Owner, Capital 625.00 Owner, Drawing 625.00
Closing entries must be posted to prepare the company’s books for the next fiscal period
Accounts that are closed have a zero balance at the end of the fiscal period
Lines are drawn in both the Balance Debit and Balance Credit columns of closed temporary accounts to verify that the account has been closedDelivery Exp
Acct No. 510
Balance
Date Item Post Ref
Debit Credit Debit Credit
10
27
G1 335.00 335.00
11
30
Gn+1
335.00 -------- ----------
A Post Closing Trial Balance is a trial balance prepared after the closing entries are postedVerifies that debits equal credits in the general
ledgerOnly general ledger accounts with balances
are included on a post-closing trial balanceOnly balance sheet items – WHY?
A Post-Closing Trial Balance is included on page 216It follows a similar format to the Trial Balance
prepared on the Work Sheet
The series of accounting activities included in recording financial information for a fiscal period
Since it is a cycle, step 1 begins again after step 8
Source documents are analyzedTransactions are recorded in the General JournalJournal Entries are posted to the General LedgerA Work Sheet is prepared from the General LedgerFinancial statements are prepared from the Work
SheetAdjusting and closing entries are journalized from
the Work SheetAdjusting an closing entries are posted to the
General LedgerA Post-Closing Trial Balance of the General Ledger
is preparedWT 81-83.xls