1. (C) 2013 - Professor Joseph
Finocchiaro
Recording Adjusting, Closing, and
Reversing Entries
2. • Business transactions that have been recorded represent
activities that affect the accounting period in which they
are recorded.
• There may be transactions, however, that will not only
affect the current period, but possible a prior or future
period. In order for the ledger accounts to properly reflect
the activities for the current accounting period it may be
necessary for the accountant to prepare adjusting entries
(C) 2013 - Professor Joseph
Finocchiaro
Adjusting Entries
3. Adjusting Entries
• Journal entries that are recorded in order to properly reflect
the appropriate balances in the various ledger accounts for a
specific accounting period.
• Usually prepared at the end of the accounting period, they
could be prepared at any time it is appropriate to do so.
• We will assume these will be done at the end of an accounting
period
(C) 2013 - Professor Joseph
Finocchiaro
• Adjusting Entry
4. Types of Adjusting Entries
• Two types
(C) 2013 - Professor Joseph
Finocchiaro
• Accruals
• Deferrals
5. • Most businesses use this
• Assumes that revenue is recognized when earned,
regardless of when the revenue is actually received in the
form of cash and that expenses are recognized when
incurred regardless of when payment is actually made.
(C) 2013 - Professor Joseph
Finocchiaro
Accrual Basis
6. Accrual Basis
• Known as the Principle of Matching Costs and Revenue
• Individuals are on a Cash Basis
• We will assume that all businesses are on an accrual basis,
even though there may be times in real life when that is not
the case.
(C) 2013 - Professor Joseph
Finocchiaro
• Revenue is recognized when received and expenses are
recognized when paid.
7. Accruals
(C) 2013 - Professor Joseph
Finocchiaro
• Accrual means to accumulate
• It is necessary to recognize that although things may have
been accumulated, they may not have been recognized.
8. • Expense items have been incurrent but have not necessarily
been recorded either because the business is not obligated
to pay the expense yet or has failed to do so.
• When this occurs, it is necessary to record an adjusting
entry.
(C) 2013 - Professor Joseph
Finocchiaro
Accrued Expenses
9. Accrued Expenses
• Rent Example:
• Rent for December isn’t paid for by December 31.
• This allows us to recognize an expense that was incurred
during the accounting period even though the actual expense
will not be paid until the next accounting period.
• The Principle of Matching Costs and Revenues has been met.
• In the new year when it is paid
• Debit Rent Payable
• Credit Cash
(C) 2013 - Professor Joseph
Finocchiaro
• Debit Rent Expense
• Credit Rent Payable
10. • Supplies Example
• Current Asset is one that will be used up or converted to
cash within a year or less.
• If an accountant takes a physical count at the end of an
accounting period, this count will probably represent a
dollar cost assigned to the supplies that is less than the
value as stated in the ledger account due to use.
(C) 2013 - Professor Joseph
Finocchiaro
Accrued Expenses
11. Accrued Expenses
• Debit Supplies Expense
• Credit Supplies
• This allows you to show the true value of supplies on hand
• These are examples of Unrecorded Expenses that are
adjusted at the end of an accounting period.
(C) 2013 - Professor Joseph
Finocchiaro
• A supply that is used up is considered to have become an
expense.
• It becomes necessary to recognize this expense on the books
12. Accrued Expenses
• It may be necessary to set up a liability account if one does not
already exist
(C) 2013 - Professor Joseph
Finocchiaro
• Any current asset that is subject to use and thus becomes
an expense is treated in the same manner.
• When an expense has been incurred, but not yet paid, it is
treated in a similar fashion.
13. • Record the appropriate
adjusting journal entries
for the following
situations. Assume that
the accounting period
ends on Dec. 31, 2008
and all entries are made
of that date.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 1
14. • 1. A physical count of
office supplies indicates
that $250 worth of office
supplies had been used
up during the accounting
period
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 1
15. EXERCISE 1
(C) 2013 - Professor Joseph
Finocchiaro
• 2. Rent totaling $800 for
the months of November
and December has not
been paid by December
31, 2008.
16. • 3. You received a bill for
advertisements placed in
the newspaper during
the second week of
November. The bill is for
$200, not to be paid until
January 15, 2009.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 1
17. • 4. You borrowed $1,000
from First City Bank.
Interest is at 10% on the
obligation and not to be
repaid for 90 days.
Record the adjusting
entry to recognize the
interest expense on the
loan from Dec. 1 to Dec.
31, 2008
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 1
18. • 5. On July 1, 2008 you
took out a fire insurance
policy. You recorded this
insurance premium in an
asset account entitled
prepaid insurance for the
amount of the yearly
premium of $600. On
Dec. 31, 2008 record the
adjusting entry for this
asset.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 1
19. • 6. Salaries are paid on
Fridays for the week
ending on the same day.
The salaries for the week
amounts to $5,000. The
last day of the
accounting period is
Wednesday, Dec. 31,
2008. Record the
adjusting entry necessary
to recognize the salaries
expense for the last
three days of they year.
Payment will not take
place until Jan. 2, 2009.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 1
20. • Service is provided but payment is not due from the
customer so we record the transaction as a credit sale of
services.
• This is how we accrue revenue
• This kind of transaction is not normally considered an
adjusting entry as this is how most businesses operate
(C) 2013 - Professor Joseph
Finocchiaro
Accrued Revenues
21. Accrued Revenues
• Accrued revenue that has been accumulated during an
accounting period but whose payment will be receiving in a
future accounting period.
(C) 2013 - Professor Joseph
Finocchiaro
• It is important to record the revenue and resulting
accounts or note receivable so that we have a record of who
owes us money as a result of the credit sale.
• Unrecorded revenue
22. • Customer borrows $1,000 from you on a 90 day
promissory note with an annual rate of interest at 8% on
December 1, 2008.
• The interest isn’t due until the note is due, but we must
record the accrued interest
• Debit Interest Receivable
• Credit Interest Income
(C) 2013 - Professor Joseph
Finocchiaro
Loan Example
23. Loan Example
•
•
•
•
Debit Cash
Credit Interest Receivable
Credit Interest Income
Credit Notes Receivable
1,020.00
6.67
13,33
1,000
(C) 2013 - Professor Joseph
Finocchiaro
• We do not change the Note receivable because the face
value of the note has not changed - $1000
• When note becomes due on March 1, 2009 the following
entry is made
24. Loan Example
(C) 2013 - Professor Joseph
Finocchiaro
• If it had become due DURING the same accounting period,
no adjusting entry would be necessary.
25. • A postponement of the recognition of either an expense or a
revenue item.
• Certain transaction may be interpreted differently
depending on the accountant, philosophy of the business, as
well as the nature of the transaction.
(C) 2013 - Professor Joseph
Finocchiaro
Deferrals
26. • Theory 1 - Rent payment represents a right to use property
that will be used up at the end of each month, the rent
should initially be recorded as an expense
• Theory 2 - Rent payment represents a right to use property
and that property has a money value, the rent can be
considered a form of an asset. Since rent is usually payable
at the beginning of the month and the rights to use the
property extend to the end of the month, it is an asset.
(C) 2013 - Professor Joseph
Finocchiaro
Example : Rent payment
Theories
27. Example – Theory 1
• Debit Rent Expense
• Credit Cash
3,000
3,000
(C) 2013 - Professor Joseph
Finocchiaro
• One year lease was signed and become effective November
1, 200-. Rent is $6,000 and to be paid in two installments of
50% each. First installment is due November 1. The entry
made to reflect this is
28. Example – Theory 1
• The rent payment is for 6 months, but there is only 2 more
months left in the accounting period so on December 31,
200- we record
2,000
2,000
(C) 2013 - Professor Joseph
Finocchiaro
• Debit Prepaid Rent Expense
• Credit Rent Expense
29. Example – Theory 1
• Prepaid Expense
• An expense that was paid in advance
• Since it is paid for, and not used up, it is considered an asset
(C) 2013 - Professor Joseph
Finocchiaro
• Credit to rent expense reduces the expense to be recognized
for the accounting period (postponement). The debit entry
converts the expense to an account that is known as a
“prepaid expense”
30. Example Theory 2
• This assumes the rent payment was IMMEDIATELY an
asset or a prepaid expense
• 200- November 1
3,000
3,000
• 200- December 31
• Debit Rent Expense
• Credit Prepaid Rent
1,000
1,000
(C) 2013 - Professor Joseph
Finocchiaro
• Debit Prepaid Rent (Rent)
• Credit Cash
31. Example Theory 2
• When an expense previously paid has not been fully used
up, it is necessary to defer that portion not used and
convert it to an asset.
(C) 2013 - Professor Joseph
Finocchiaro
• This is usually indicated by the word “Prepaid” in the name
32. • Revenue received but not earned within the accounting period
and must be deferred.
• You receive a rent check from your tenant on November 1,
2008 for $800 for four months rent beginning with November.
The recorded transaction was
• Debit Cash
• Credit Income from Rental
800
800
• On December 31 you have the following entry
• Debit Income from Rental
• Credit Unearned Rental Income
400
400
(C) 2013 - Professor Joseph
Finocchiaro
Unearned Revenue
33. Unearned Revenue
• The landlord has an obligation to supply the premises for
January and February.
• During the next accounting period when the income is earned:
• Debit Unearned Rental Income
• Credit Income from Rent
400
400
(C) 2013 - Professor Joseph
Finocchiaro
• Deferral of income permits the income to be properly
stated and also results in the recognition of a liability for
the income received but at this point not earned.
34. • Record the following
adjusting entries to
reflect the accrual and
deferral of expenses
and revenue for the
calendar year ending
December 31 of the
current year.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 2
35. • 1. Recognized the
interest income
accumulated on a
$5,000 note bearing
interest of 9% dated
November 2.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 2
36. • 2. Recorded an
adjusting entry to
recognize that the
income from
commissions
previously received by
not yet earned to the
extent of 40% of the
$800 commission.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 2
37. • 3. Determined that the
balance in the ledger
account for office
supplies was $990, but
that an inventory
showed only $260
worth of office supplies
remaining.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 2
38. EXERCISE 2
(C) 2013 - Professor Joseph
Finocchiaro
• 4. Accrued Salaries for
the last three days in
the old year amounting
to $1,500.
39. • 5. Showed a balance of
$2,270 in the prepaid
insurance account.
Insurance records
indicate that $1,245 of
the insurance expired
during the year.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 2
40. • 6. Borrowed $6,000 for
90 days with interest
payable at an annual
rate of 12%. Loan was
taken out 45 days
before the end of the
accounting period and
is due to be paid in full
forty five days into the
new year.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 2
41. • Noncurrent, or plant, assets are subject to a loss in value
due to the item being used.
• The loss in value of plant assets is not obvious because the
asset still exists in its complete form at the end of the
accounting period.
• Depreciation
• The loss of value due to use of a plant asset due to wear and
tear over its useful life.
(C) 2013 - Professor Joseph
Finocchiaro
Adjusting Noncurrent Assets
42. • When depreciation is recognized as an adjusting entry at
the end of the accounting period, an expense is charged.
• Since the expense does NOT represent an actual outlay of
cash, and the cost principle prevents us from reducing the
value of the asset directly, it becomes necessary to credit a
new account called “Accumulated Depreciation”.
• The purpose of this account is merely to offset the plant
asset account
• The net, or book value, of the plant asset will be determined
by subtracting the accumulated depreciation account from the
value of the plant asset.
(C) 2013 - Professor Joseph
Finocchiaro
Adjusting Noncurrent Assets
43. Straight Line depreciation
• A truck costs $20,000. Expected life is 10 years and then it will
have no value.
• 20,000 / 10 = 2,000 a year depreciation.
• To find a value for a specific month, divide the yearly
amount by 12.
(C) 2013 - Professor Joseph
Finocchiaro
• Most common form used
• Value of asset is divided by its useful life to determine the
amount of depreciation annually
• Example:
44. • If a plant asset is to have a residual value (scrap value) at
the end of its life that must be subtracted from the usable
amount.
• Let’s assume the $20,000 truck has a scrap value of $1,000
after 10 years of use.
• (20,000 – 1,000) / 10 = 1,900 a year depreciation
(C) 2013 - Professor Joseph
Finocchiaro
Straight Line depreciation
45. • Office equipment
was purchased at a
cost of $3,400. It has
an expected useful
life of 6 years and
after it has been
fully depreciated, it
will have a scrap
value of $400.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 3
46. EXERCISE 3
(C) 2013 - Professor Joseph
Finocchiaro
• 1. How much of the
asset is subject to
depreciation?
47. EXERCISE 3
(C) 2013 - Professor Joseph
Finocchiaro
• 2. What will be the
annual depreciation
recognized?
48. • 3. Assuming that the
asset was acquired
at the beginning of
the year, record the
adjusting entry to
recognize
depreciation for the
first full year.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 3
49. • 4. Determine the
book value of the
asset after the first
year’s adjusting
entry.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 3
50. • 5. What is the book
value of the asset
after it has been
depreciated for six
years?
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 3
51. • 6. What happens to
the book value for
the asset during
each year of its
useful life? Why?
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 3
52. • 7. When recording
annual depreciation,
why doesn’t the
accountant credit
the asset account
directly?
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 3
53. • To expedite the preparation of financial statements and the
preparation of adjustments prior to statement preparation
the worksheet is prepared.
• The trial balance is prepared and becomes the backbone of
the worksheet.
• A worksheet can be defined as an expanded trial balance.
(C) 2013 - Professor Joseph
Finocchiaro
Recording Adjusting Entries
54. Recording Adjusting Entries
(C) 2013 - Professor Joseph
Finocchiaro
• Worksheet is only used/viewed by the accountant.
• Form consists of a column to list the accounts from the
ledger followed by eight money columns.
55. Recording Adjusting Entries
• Trial balance is prepared on the worksheet
• Necessary adjusting entries are recorded on the worksheet
using the adjustments column
• Information is extended along with the trial balance info to
the remaining two sets of the worksheet columns (Income
Statement and Balance Sheet)
• Assets, liabilities, permanent capital, and proprietor’s
drawing account are extended from the trial balance columns
through the adjustments column and recorded to the
appropriate income statement columns
(C) 2013 - Professor Joseph
Finocchiaro
• Preparation of the worksheet precedes the recording of
adjusting entries.
56. • Function of the adjustments column is to adjust the
valances in the ledger accounts to match costs and revenue
for the specific accounting period covered.
• No journal entries or relating postings are made at this
time, although these adjusting entries made on the
worksheet will later become the basis for recording
adjusted journal entries and related postings at the end of
the accounting period.
• If the accountant is preparing interim statements, no
adjusting journal entries or postings would be made.
(C) 2013 - Professor Joseph
Finocchiaro
Recording Adjusting Entries
57. • Record, in
journal form,
the following
adjusted entries
using the
information
provided in the
worksheet
previously
presented
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 4
58. EXERCISE 4
(C) 2013 - Professor Joseph
Finocchiaro
• A. Depreciation
for the year
amounting to
$500.
59. • B. Daily payroll
amounts to
$130. Record
adjusting entry
to recognize the
accrual of
salaries for four
days.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 4
60. • C. Included in
the rental
income account
is income
received by not
yet earned
amounting to
$1,200
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 4
61. • D. Supplies
recognized as
an expense
amounting to
$600 have not
been used up
during the
current
accounting
period. Make
the necessary
adjustment.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 4
62. EXERCISE 4
(C) 2013 - Professor Joseph
Finocchiaro
• 1. Record the journalized entries to the adjustment columns
63. EXERCISE 4
(C) 2013 - Professor Joseph
Finocchiaro
• 2. Total Both columns to verify the agreement
64. EXERCISE 4
(C) 2013 - Professor Joseph
Finocchiaro
• 3. Extend the trial balance amounts through the adjustment
columns of either the income statement or the balance sheet.
65. EXERCISE 4
(C) 2013 - Professor Joseph
Finocchiaro
• 4. Summarize the last four columns. Difference Should be the
same
66. EXERCISE 4
(C) 2013 - Professor Joseph
Finocchiaro
• 5. Show the difference in the amounts in the column with the
smaller total then double underscore the two amounts in each
set of columns that now agree.
67. EXERCISE 4
(C) 2013 - Professor Joseph
Finocchiaro
• 6. Compare your worksheet against this master.
68. • Trial balance only contains those accounts that have
balances
• When adjusting are recorded to the worksheet where
accounts are needed then the needed account is added
below the trial balance.
• Letters are used to relate debit adjustments to corresponding
credits
(C) 2013 - Professor Joseph
Finocchiaro
How to Record Adjusting
Entries on the worksheet
69. How to Record Adjusting
Entries on the worksheet
(C) 2013 - Professor Joseph
Finocchiaro
• Once the adjustments have been recorded, foot the
adjustments column then double underscore the values.
• Accounts not having adjustments are just extended.
70. • Assets and proprietor’s drawing account are extended to
the debit column of the balance sheet.
• Liabilities and proprietor’s capital are extended to the
credit column of the balance sheet.
• Revenue and expense accounts that were not adjust are
extended to the credit and debit columns respectively
(C) 2013 - Professor Joseph
Finocchiaro
How to Record Adjusting
Entries on the worksheet
71. • Extensions of the accounts that were affected by the
adjustments are treated according to the specific
adjustment. Accounts that had no modification are
extended.
• Following the extensions of the trial balance and
adjustments the four remaining columns are footed.
Results of the footing cause 4 different totals
• This is a result of the net profit / net loss.
(C) 2013 - Professor Joseph
Finocchiaro
How to Record Adjusting
Entries on the worksheet
72. Using the completed
worksheet
• If the accountant has been asked to prepare interim
financial statements, information is pulled from the
worksheet.
• Financial Statement preparation is greatly expedited by the
preparation of the worksheet.
(C) 2013 - Professor Joseph
Finocchiaro
• Do not post adjusting entries for interim statements
73. Using the completed
worksheet
(C) 2013 - Professor Joseph
Finocchiaro
• Actual adjustments can take place at any future time
without holding up the interim statements.
• Columns provide the information for the respective
documents (statement of income, balance sheet, etc.)
74. EXERCISE 5
(C) 2013 - Professor Joseph
Finocchiaro
• Due to the extensiveness of this example it will not be covered
in class – please take the time to do this on your own.
75. • In organizing a ledger there will be a chart of accounts,
which is comparable to a table of contents.
• Purpose of the chart of accounts is to provide the user of
the ledger with a means of determining the accounts found
in the ledger and their location within the ledger.
(C) 2013 - Professor Joseph
Finocchiaro
Chart of Accounts
76. Chart of Accounts
• There is also numbering of accounts 100 series, 200 series, 300
series depending on type of account.
• Although numbers may be used, sequential numbering within
a series is not necessary (301, 302, 305, 310, 322, etc) to allow
for future expansion.
(C) 2013 - Professor Joseph
Finocchiaro
• The organization of the chart of accounts follows the
accounting equation format very closely listing assets first,
liabilities second, and capital third.
77. Closing Entries
• This is accomplished by preparing a statement of capital.
• This is necessary to prepare financial statements and must be
reflected in the various ledger accounts.
(C) 2013 - Professor Joseph
Finocchiaro
• Temporary accounts are eventually eliminated and the
contents transferred to permanent capital.
78. Closing Entry
• This is accomplished by the use of a debit or credit to
eliminate the balance and a corresponding entry made in a
special temporary account exclusively for that purpose called
the Income Summary or Net Earnings Summary
(C) 2013 - Professor Joseph
Finocchiaro
• Transfers the values of the temporary capital accounts to
the proprietor’s permanent capital account.
79. Closing Entry
• All revenue accounts are closed to the income summary account
• All expense accounts are closed to the income summary account
• Proprietor’s drawing account is closed to the income summary
account
• Income summary account is closed to the proprietor’s permanent
capital account
(C) 2013 - Professor Joseph
Finocchiaro
• The name(closing entry) can change from business to business
or place to place but the process is the same:
80. Closing Entry
• The temporary accounts will still be in the ledger but will have
no balance (or a zero balance).
• These closing entries ONLY take place at the end of the
accounting period when the ledger is closed. The ledger will
be reopened in a new accounting period with the proper
balances ready to start again.
(C) 2013 - Professor Joseph
Finocchiaro
• After closing entries have been journalized and posted, the
only accounts that will have balances will be the permanent
accounts
81. EXERCISE 6
(C) 2013 - Professor Joseph
Finocchiaro
• Exercise 6 is mostly dependent on Exercise 5, however we will
look at the postings to the journal and the closing entries.
82. • A. Analysis
indicates there is
a balance in the
insurance
account of $400.
Trial Balance
indicates $600.
(write off $200)
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 6
83. EXERCISE 6
(C) 2013 - Professor Joseph
Finocchiaro
• B. Supplies used
during the year
amounts to
$175.
84. • C. Depreciation
expense on the
furniture
amounted to
$500 for the
year.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 6
85. • D. Of the service
revenue
recorded, it has
been determined
that $400 has
not been earned
for the year.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 6
86. • E. Salaries
earned but not
paid for the last
week in the fiscal
year amounted
to $300.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 6
87. • F. Interest
expense incurred
but not yet paid
on a promissory
note amounted
to $40.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 6
88. EXERCISE 6
(C) 2013 - Professor Joseph
Finocchiaro
• Post Closing
Entries using the
worksheet from
Exercise 5.
89. EXERCISE 6
(C) 2013 - Professor Joseph
Finocchiaro
• Posting revenue
to income
summary
account.
90. EXERCISE 6
(C) 2013 - Professor Joseph
Finocchiaro
• Posting Expenses
to Income
Summary
91. EXERCISE 6
(C) 2013 - Professor Joseph
Finocchiaro
• Posting Owner’s
drawing account
to Income
Summary
92. EXERCISE 6
(C) 2013 - Professor Joseph
Finocchiaro
• Posting the net
income / net loss
to the owner’s
capital account.
93. • The adjusting and closing process has a dramatic effect on
the ledger in that the trial balance prepared to verify the
ledger was in balance is no longer valid.
• It becomes necessary to prove the ledger is still in balance
so the accountant will prepare another trial balance that is
called the Post Closing Trial Balance
• These accounts reflect the adjusting entries that have been
made and its temporary accounts no longer have balances.
(C) 2013 - Professor Joseph
Finocchiaro
Post Closing Trial Balance
94. • The successful completion of the post closing trial balance
will prove that the ledger is in balance at the end of the
accounting period.
• Prior to recording ANY business transactions for the new
accounting period, this post closing trial balance must be
prepared.
(C) 2013 - Professor Joseph
Finocchiaro
Post Closing Trial Balance
95. EXERCISE 7
(C) 2013 - Professor Joseph
Finocchiaro
• Prepare a post closing trial balance for the Beldon Service
Company
96. EXERCISE 7
(C) 2013 - Professor Joseph
Finocchiaro
• Cash does not have any
adjustment – as there is
nothing to adjust
regarding cash on hand.
97. EXERCISE 7
(C) 2013 - Professor Joseph
Finocchiaro
• Accounts receivable will
not change as the total
amounts are still due.
98. EXERCISE 7
(C) 2013 - Professor Joseph
Finocchiaro
• Prepaid insurance
showed the amount
used up ($200).
99. EXERCISE 7
(C) 2013 - Professor Joseph
Finocchiaro
• Supplies needed to be
adjusted for those
supplies on hand.
100. • Furniture face value
does not change as we
cannot change the
beginning value of the
asset.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 7
101. • We reflect the loss of
value of an asset
through the use of the
accumulated
depreciation account.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 7
102. • We then extend out the
new accounts used
after adjusting and
prove that the
adjustments are
accurate and that the
temporary accounts
have been closed out
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 7
103. •
•
•
•
•
•
•
•
Journalize daily business transactions
Post to the various ledger account
Prepare trial balance monthly
Prepare worksheet with necessary adjusting entries at the
end of the accounting period
Prepare financial statements
Journalize and post adjusting entries
Journalize and post closing entries
Prepare a post closing trial balance.
(C) 2013 - Professor Joseph
Finocchiaro
Steps in the Accounting Cycle
104. Reversing Entries
• The process of recording adjusting entries creates certain
ledger accounts that are not normally recorded in the
accounting period.
• While salaries payable is listed on chart of accounts and an
page for it will be found in the ledger, no entries are
normally made in this account during the year with the
exception of the adjusting entry just illustrated.
(C) 2013 - Professor Joseph
Finocchiaro
• An example of this is salaries payable
105. • The payroll clerk in charge of preparing the payroll at the
end of the week is familiar with the basic procedure of
recording the salaries expense and reducing the amount of
cash.
• As a result of closing the ledger at the end of the accounting
period salaries expense will have a zero balance going into
the new accounting period. We recognize that salaries
payable will appear on the post closing trial balance and
will have a balance at the beginning of the new accounting
period. We must then reverse it as the first day of the new
accounting period to put it back in the Salaries Expense.
• A Reversing entry is the exact opposite of an adjusting
entry.
(C) 2013 - Professor Joseph
Finocchiaro
Reversing Entries
106. • A reversing entry is required whenever an adjusting entry
results in the establishment of an account on the books that
normally does not carry a balance during the year.
• It must take place on the first day of the new accounting
period and will be the exact reverse of the adjusting entry.
• Process
• Record Adjusting entry
• Record the closing entry necessary based on the information
provided
• Record the reversal entry
• It is not mandatory to use reversing entries but it IS
advisable.
(C) 2013 - Professor Joseph
Finocchiaro
When to use reversing entries
107. • 1. Salaries
amounted to
$3,500. For the
week ending
January 4, record
the adjusting entry
needed for the old
year.
• (1 day is $700 and
we are computing
Dec. 31 to Jan. 1)
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 8
108. • 2. Office supplies
balance is $530,
Inventory is at
$160.
• ($530-$160=$370)
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 8
109. • 3. Insurance
expense has a
balance of $1,350.
An analysis shows
$450 in unexpired
premiums remain.
• (Nothing to add or
subtract – they
stated what the
balance remaining
to be used is)
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 8
110. • 4. You sign a new
lease with a tenant
that requires that
the tenant pay up
front for 6 months
at $100 a month
which began in
November.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 8
111. EXERCISE 8
(C) 2013 - Professor Joseph
Finocchiaro
• For 1. we need to
recognize the
reversing entry for
the salary.
112. EXERCISE 8
(C) 2013 - Professor Joseph
Finocchiaro
• For 3 we have to
recognize the
amount remaining
on the insurance.
113. • For 4 we have to
recognize the
remaining amount
on the prepaid
rent.
(C) 2013 - Professor Joseph
Finocchiaro
EXERCISE 8
114. EXERCISE 8
(C) 2013 - Professor Joseph
Finocchiaro
• Notice the date on all
these transactions