Chapter 4 BKAL

8/3/2019 Chapter 4 BKAL

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BKAL 1013 Chapter 4 1

CHAPTER 4

COMPLETINGTHE

ACCOUNTING CYCLE


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OUTLINEAdjusting Entries

Preparing the Adjusted Trial Balance

Closing Entries

Preparing the Financial Statements

Income Statement

Statement of Owners Equity

Balance Sheet


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The Accounting Cycle

Source

Documents

Journal

LedgerTrial BalanceAdjustments

Adjusted

Trial Balance

Financial

Statements

Closing

Entries


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Fiscal year Vs Calendar year

Fiscal year

Calendar year

1st day of a month and ends

twelve months later on thelast day of a month.

1st January to 31st December


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Accrual Vs Cash-basis accounting

Accrual

Cash-basisrevenue is recorded when cashis received, and expenses are

recorded when cash is paid

(Recognized based on cash movement)

revenue and expenses are

recognized at the time they

take place, and not at thetime they are actually paid.(Recognized when the benefit

Transferred)


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Recognition of Revenue & Expenses

REVENUERECOGNITION

PRINCIPLE

THE MATCHINGPRINCIPLE

revenue be recognized in the

accounting period in which it

is earned.

efforts (expenses) should be matched

with accomplishments (revenues).


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Adjusting EntriesEntries that required to make sure allthe revenues and expenses are clearly

measured and recognized (realise)Prepared at the end of the period

Do not involved cash account



The Need for Adjusting Entries

1 Revenues to be recorded in the period in

which they are earned, and for......

2 Expenses to be recognized in the period in

which they are incurred.



The Basics of Adjusting Entries

Prepayments

Prepaid Expenses

Expenses paid in cash and

recorded as assets before

they are used or consumed

Unearned Revenues

Cash received and recorded as

liabilities before revenue

is earned



The Basics of Adjusting Entries

Accruals

Accrued Revenues

Revenues earned but not yet

received in cash or recorded

Accrued Expenses

Expenses incurred but not yetpaid in cash or recorded



Prepaid Expenses

Prior to adjustment, assets are overstated and

expenses are understated.

The adjusting entry results in a debit to an expense

account and a credit to an asset account.



Prepaid ExpensesAsset Expense

Unadjusted

balanceCredit

Adjustment

Debit

Adjustment



Prepaid ExpensesSupplies

Insurance

Depreciation

Examples



SuppliesAn inventory count reveals that RM1,000 of

RM2,500 of supplies are still on hand.Adjustment:

Dr. Supplies Expense 1,500

Cr. Office Supplies 1,500

Dr. Office Supplies 2,500

Cr. Cash 2,500

Entries before

adjustment:

Adjusting

entries:



Supplies

Office Supplies

Supplies ExpenseCash 2,500 Supp. Exp 1,500

Off. Supp. 1,500



InsuranceInsurance premium paid for one yearamounting to RM1,200; Expires every month

RM100.Adjustment:

Dr. Insurance Expense 100

Cr. Prepaid Insurance 100

Entries before

adjustment:

Adjusting

entries:

Dr. Prepaid Insurance 1,200

Cr. Cash 1,200



Insurance

Prepaid Insurance

Insurance ExpenseCash 1,200 Ins. Exp 100

Pre. Insurance 100


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DepreciationDepreciation is the allocation of the cost of an asset to

expense over its useful life in a rational and systematic

manner.

Depreciation is an estimate rather than a factual

measurement of the cost that has expired.


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DepreciationIn recording depreciation,Depreciation Expenseis

debited and a contra asset account,Accumulated

Depreciation, is credited

The difference between the cost of any depreciable

asset and its related accumulated depreciation is

referred to as the book value of the asset.


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Depreciation

Depreciation

MethodsStraight Line Method

Reducing Balance Method

Unit of productions Method


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Depreciation

Straight-line depreciation allocates equal amount of anassets net cost to depreciation during the estimated

useful life.

Eg: Equipment costing RM26,000, estimated to have auseful life of 4 years and expected to be sold for

RM8,000 at the end of the 4th year.

Formula: Cost - Scrap Value

Estimated useful life


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Depreciation

Calculation: RM26,000 - RM8,000

4 years

= RM4,500 per year

Adjustingentries:

Dr. Depreciation Expense 4,500

Cr. Accumulated Depn. 4,500


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Depreciation

Depreciation Expense

Accumulated Depn.Off. Eqpt. 4,500

Depn. Exp. 4,500


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Depreciation

Reducing Balance depreciation :

Eg: Equipment costing RM35,000, accumulated depreciation

RM5,250. The depreciation rate is 15% on book value.

Formula:Net Book Value x Depreciation rate

(Cost - Accumulated Depn) x Depreciation rate


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Depreciation

Calculation: (RM35,000 - RM5,250) x 15%

= RM4,463 per year

Adjusting

entries:

Dr. Depreciation Expense 4,463

Cr. Accumulated Depn. 4,463


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Unearned Revenues

Prior to adjustment, liabilities are overstated and

revenues are understated.

The adjusting entry results in a debit to a liability account

and a credit to a revenue account.

Examples of unearned revenues include rent, magazine

subscriptions, and customer deposits for future services.


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Unearned Revenues

Liability Revenue

Unadjusted

balance

Credit

Adjustment

Debit

Adjustment


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Unearned Revenues

RM2,000 subscription fees has been earned,

out of RM5,000 unearned subscription fees

that has been received last month.

Adjustment:

Dr. Unearned

Subscription Fees 2,000

Cr. Subscription Fees 2,000

Dr. Cash 5,000

Cr. Unearned

Subscription Fees 5,000

Entries before

adjustment:

Adjusting

entries:


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Unearned Revenues

Unearned Subscription Fees

Suscription FeesSubscriptionFees 2,000

Balance 5,000

Unearned

Subscription

Fees 2,000


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Accrued Revenues

Prior to adjustment, assets and revenues are understated.

Accrued revenues may accumulate with the passing of time

or through services performed but not billed or collected.

The adjusting entry requires a debit to an asset account

and a credit to a revenue account.


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Accrued Revenues

Asset Revenue

Debit

Adjustment Credit

Adjustment


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Accrued Revenues

The company has completely performed the

audit service but has not bill the customer

yet, RM7,000.

Adjustment:

Dr. Account Receivable 7,000

Cr. Audit Fees 7,000

Adjusting

entries:


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Accrued Revenues

Account

Receivable 7,000

Audit Fees

Audit Fees 7,000

Account Receivable


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Accrued Expenses

Prior to adjustment, liabilities and expenses

are understated.

The adjusting entry results in a debit to an expense

account and a credit to a liability account.


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Accrued Expenses

Expense Liability

Debit

Adjustment Credit

Adjustment


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Accrued Expenses

Salaries accrued at the end of the month

RM4,000.Adjustment:

Dr. Salary Expense 4,000

Cr. Salary Payable 4,000

Adjusting

entries:


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Accrued Expenses

Salary Exp. 4,000

Audit Fees

Salary Payable 4,000

Salary Expense


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Summary of Adjusting Entries

Types of Accounts Before AdjustingEntries

Adjustments Adjustments

Prepaid

Expenses

Assets overstated

Expenses understated

Dr. Expense

Cr. Asset

Unearned

Revenues

Liabilities overstated

Revenues understated

Dr. Liability

Cr. Revenue

Accrued

Revenues

Dr. Asset

Cr. Revenue

Dr. Expense

Cr. Liability

Assets understated

Revenues understated

Accrued

Expenses

Liabilities understated

Expenses understated


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The adjusted trial balance An Adjusted Trial Balance is prepared after all

adjusting entries have been journalized and posted.

Its purpose is to prove the equality of the total debit

and credit balances in the ledger after all adjustments

have been made.

Financial statements can be prepared directly from

the adjusted trial balance.


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Closing Entries

Temporary /

Nominal Accounts

Permanent /Real Accounts

All revenue accounts

All expense accounts

Owners drawings

All asset accounts

All liability accounts

Owners capital account

CL

O

S

E

C

N L

O O

T S

E


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Closing Entries

Revenues

Expenses

Income

Summary

Drawings

Owners

Capital


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Closing Entries

Revenues

Expenses

Dr. Revenue Account

Cr. Income Summary

Dr. Income SummaryCr. Expense Account


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Closing Entries

Drawings Dr. Owners Capital

Cr. Drawings Account

Income

Summary

Loss

ProfitDr. Income Summary

Cr. Owners Capital

Dr. Owners Capital

Cr. Income Summary


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Preparing the Financial Statements~ The income statement is prepared from the revenue

and expense accounts.

~ The owners equity statement is derived from the

owners capital and drawing accounts and the net

income (or net loss) from the income statement.

~ The balance sheet is then prepared from the asset

and liability accounts and the ending owners capital

balance as reported in the owners equity statement.


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The Income StatementThe statement that reports the profitability ofa business organization for a stated period of

timeContent of the statement

Title

Revenues

Expenses

Net profit/(loss) difference between revenuesand expenses


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The income statement .. contFormat

Single

Did not classified the revenues and expenses based ontheir category

Multiple

More detailed and classified all the revenues andexpenses based on their nature/function

SummaryReports the important/significant item and support withthe notes


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The owners equity

statementThe statement that reports the changesin owners equity for a period of time.

Must be prepared after the incomestatement

Connect the link between IS and BS


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The owners equity

statement - ContFormat

Title

Beginning balanceAdditional investment during period (if any)

Net income of the period (from IS)

WithdrawalsEnding balance


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The Balance SheetThe statement that list all the assets,liabilities and equities of a specific moment intime

Purpose to show the financial position ofthe organization

Assets classified into current and non-current assets

Liabilities classified into current and longterm liabilities


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The balance sheet .. contFormat

Report form

Account formWorking capital form


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Chapter 4 BKAL

Documents

Transcript of Chapter 4 BKAL