How to close the accounts for the financial year 2015
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Transcript of How to close the accounts for the financial year 2015
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End of Year Accounts
Reversing entries, balance day adjustments, trade account, profit
& loss account…closing journal entries
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The Typical Format of an Accounting Question
- Check the dates
- In the additional information there maybe other prepayments (rent is a common one)
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Extracts of Last Years Accounts• these are the opening balances for your ledger
accounts
• in particular you need to take note of any accrued prepayments (prepaid expenses) or received in advance (unearned income)balances. Examples can be– rent received in advance
– interest receivables
– accrued utilities
– any prepayments
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1st Step --- Reverse the Accrued/Prepayments
• Unearned Income Reversal
– for example interest receivableDR Interest revenue
CR Interest receivable
• Prepaid Expense Reversal
– for example prepaid rentDR Rent expense
CR Prepaid Rent
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The Next Step – Balance Day Journal Adjustments
• The information for these journal entries will be found in the additional information and extracts from the current year
– you may have to do the general ledger for some accounts BEFORE you can do the balance day journal entries
• for example – the Accounts Receivable general ledger will need to have been completed BEFORE you can make the Provision/Allowance for Doubtful Debt Journal Entry
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Balance Day Journal Entries
• The entries will usually be
– Revenues received (interest, service, dividends)
– Depreciation (land, buildings, equipment)
– Prepayments (rent for example)
these adjustments bring the general ledgers up to date
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Problematic Balance Day Journal Entries
• Provision/Allowance for Doubtful Debts
– you need to look at the balance in last years account extract
– look in the additional information
• current bad debts expense (Dr Bad Debt Cr: Accounts Receivable)
• a percentage of Accounts receivable will be indicated somewhere in the additional information
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Provision/Allowance for Doubtful Debts continued
• Workings for this Ledger:
– work out what the balance should be (normal balance is DEBIT)
– NOTE: you have to work out the closing balance of the Accounts Receivable for the current financial year.
Account Receivable Ledger
Opening balance xxxx Sales discounts xxxx
Sales (credit sales) xxxx Sales returns xxxx
Bank (debtors payments) xxxx
Bad debts (current year) xxxx
BALANCE C/D XXXX
DR CR
% of this balance
From last years account extract
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Provision/Allowance for Doubtful Debts continued
• Check to make sure that you have taken the current years bad debt expense from the Accounts receivable general ledger (otherwise your final figure will be wrong)
• Work out what the % of Accounts Receivable should be
• Check what the balance is in the last years extract (You are looking for provision/allowance for doubtful debt)
• Make the adjustment so that it equals the % you worked out.
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Example of Provision/Allowance for Doubtful Debts
• Provision for Doubtful Debts is 4% of Accounts Receivable (the closing balance for the current year =
$200,000) - $200,000 * 4% = $8,000
• Last years extract says Provision/Allowance was $6,000
(Bad debt expense has been entered into Accounts Receivable Ledger)
• thus the Balance Day Journal Entry will be– DR: Doubtful Debts Expense $2000
CR: Provision/Allowance for Doubtful Debts $2000
($6000+ $2000 = $8000)
This is what should be in the account at the current year end
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Problematic Balance Day Journal Entries
• Depreciation– the additional information will give the opening balance of
the asset to be depreciated
• this is the balance that you use to work out the current years depreciation expense
• for example – depreciation on a building is 2%– extract says building = $500,000
– current year depreciation = $500,000 * 2% = $10,000
Make sure you add the current year’s depreciation into the Accumulated Depreciation on Building General Ledger
DR: Depreciation on Building
CR: Accumulated Depreciation on Building
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Closing Journal Entries
• Trade Account (this is the matching of the sold
goods/services with the cost of goods sold so that we can
work out the gross profit/loss of the financial year)
• Profit and Loss Account (this shows the financial
performance of the business of the financial year)
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1st Step: Trade Account
• The accounts you will send to the Trade Account are
– sales, sales returns, opening and closing inventory, purchases, purchases returns, transport costs for purchases (carriage inwards)
– these are the accounts that you would use to work out the Cost of Goods sold
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Trade Account Cont’d
Sales Sales Return
Inventory (opening stock) Inventory (Opening Stock)
Purchase Returns Purchases
Transport Costs
DR CR
The Journal Entries will be:
Dr SalesCr Trade Account
Dr Inventory Opening StockCr Trade Account
Dr Purchase ReturnsCr Trade Account
The Journal Entries will be:
Dr Trade AccountCr Inventory (Opening Stock)
Dr Trade AccountCr Purchases
Dr Trade AccountCr Transport Costs
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Closing Entry for Trade Account
• You will send the balance carried down (ie. this is the Gross Profit/Loss) to the Profit and Loss Account (Gross Profit)
• ie. if it is a Gross Profit – Trade Account will be a DEBIT entry
• – if it is Gross LOSS – Trade Account will be a CREDIT entry
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2nd Step: Profit &Loss Account
• All the other indirect expenses and revenues (that are NOT shown in the Trade Account) are shown in the Profit/Loss Account
• these accounts can be
– all other expenses: doubtful debts, bad debts, depreciation (building, land, vehicles etc), Transport costs (outwards), salaries, rent, maintenance, Other expenses, sales discounts, utilities…..etc
– all other revenues: interest, purchases discounts,,etc.
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Profit/Loss Account (Expenses) Cont’dDepreciation (for current year)
Salaries/Wages
Rent
Maintenance
Transport Costs (inwards)
Bad Debts
Utilities
Profit/Loss Account
DR CR
The Journal Entry will be:DR: Profit & Loss Account
CR: DepreciationSalaries/WagesRentMaintenanceetc …all the other expenses
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Profit/Loss Account (Revenues) Cont’d
Interest Revenue Profit and Loss Account
Purchase Discounts
The Journal Entries will be
DR Interest RevenueCR Profit and Loss Account
ETC …ETC
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Final Journal Entry
• Send the Profit and Loss Account to Retained Earnings– DR Profit and Loss Account
• CR Retained Earnings
Remember Retained Earnings is an EQUITY account and is normally has a CREDIT balance (so Profit means an increase of Retained Earnings while Loss means an decrease !!!)
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General Ledger Accounts for Year Ended
• You will have a Ledger Account for EVERY line entry in the extracts– yes this means that you will have to be fast if you
are in a test/exam …..cause there is at least 30 odd ledgers usually
– remember that last year’s extract is the opening balances for the ledger accounts
– so open all the accounts (you need to know the NORMAL balance of each ledger)
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General Ledger Accounts for Year Ended ….cont’d
• Ledger Accounts that will usually require some adjustments– accounts receivable– accounts payable– bank– purchases– Interest received– Service revenue– Prepaid rent– Accrued Utilities– Depreciation (land, building, equipment)– Accumulated Depreciation– etc..etc…
Remember some are stock accounts (carried over to next year) but others are flow accounts (you have closed these off to Trade Account or Profit and Loss Account ..so you will have Trade Account
or Profit and Loss as an entry in the ledger ) …examplePurchases Returns:
Dr: Trade Account….Cr. Accounts Payable
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Final General Ledger Accounts
• These will be
– Contributed Equity
– Retained Earnings Account (this one you will definitely be adjusting
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Phew …You Made It
The End&
Thank you