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Adjusting Entries
and Closing Process
Module 4
SAP 2007 / SAP University Alliances Introductory Accounting
Learning Objectives
SAP 2007 / SAP University Alliances Introductory Accounting
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
SAP 2007 / SAP University Alliances Introductory Accounting
Adjusting the Accounts
SAP 2007 / SAP University Alliances Introductory Accounting
GAAP and the Adjusting Process
SAP 2007 / SAP University Alliances Introductory Accounting
Accounting Principles
SAP 2007 / SAP University Alliances Introductory Accounting
Accounting Principles
SAP 2007 / SAP University Alliances Introductory Accounting
Cash vs. Accrual Basis of Accounting
SAP 2007 / SAP University Alliances Introductory Accounting
Adjustments
SAP 2007 / SAP University Alliances Introductory Accounting
Prepaid Expenses
Prepaid Expenses–Example
Prepaid Insurance Insurance ExpenseJan. 1 1,800
SAP 2007 / SAP University Alliances Introductory Accounting
Prepaid Expenses — Example
Prepaid InsuranceJan. 1 2,400 2,400
$2,400January February March
Cash
$800 $800 $800
SAP 2007 / SAP University Alliances Introductory Accounting
Prepaid Expenses — Example
Prepaid Insurance Insurance ExpenseJan. 1 2,400Jan.31 800 800balance 1,600
$800 $800 $800
$2,400January February March
SAP 2007 / SAP University Alliances Introductory Accounting
Prepaid Expenses — Example
Prepaid Insurance Insurance ExpenseJan. 1 2,400Jan.31 800 800Feb.28 800 800balance 800
$800 $800 $800
$2,400January February March
SAP 2007 / SAP University Alliances Introductory Accounting
Prepaid Expenses — Example
Prepaid Insurance Insurance ExpenseJan. 1 2,400Jan.31 800 800Feb.28 800 800Mar.31 800 800balance 0
$800 $800 $800
$2,400January February March
SAP 2007 / SAP University Alliances Introductory Accounting
SAP 2007 / SAP University Alliances Introductory Accounting
Amortization
Straight-LineAmortization/depreciationExpense
= Asset Cost - Salvage Value
Useful Life
SAP 2007 / SAP University Alliances Introductory Accounting
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
SAP 2007 / SAP University Alliances Introductory Accounting
Amortization/depreciation
Cash96,000 1/1/05 96,000
Equipment
SAP 2007 / SAP University Alliances Introductory Accounting
Amortization Expense,Amortization, Equipment
15,000 12/31/05 15,000Equipment
Accumulated
Amortization/depreciation
SAP 2007 / SAP University Alliances Introductory Accounting
Amortization Expense,Amortization, Equipment
12/31/05 15,00015,000 12/31/06 15,000
balance 60,000
EquipmentAccumulated
Amortization/depreciation
SAP 2007 / SAP University Alliances Introductory Accounting
Amortization Expense,Amortization, Equipment
12/31/05 15,00012/31/06 15,000
15,000 12/31/07 15,000balance 45,000
EquipmentAccumulated
Amortization/depreciation
SAP 2007 / SAP University Alliances Introductory Accounting
Amortization Expense,Amortization, Equipment
12/31/05 15,00012/31/06 15,00012/31/07 15,000
15,000 12/31/08 15,000balance 30,000
EquipmentAccumulated
Amortization/depreciation
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
EquipmentAccumulated
SAP 2007 / SAP University Alliances Introductory Accounting
Amortization/depreciation
Book Value is equal to the Net value of the Fixed Asset Account
SAP 2007 / SAP University Alliances Introductory Accounting
Unearned Revenues
Unearned Revenues — Example
Unearned Revenue19,000 Aug.1 19,000
Cash
SAP 2007 / SAP University Alliances Introductory Accounting
Unearned Revenues — Example
Maintenance Revenue19,000 Aug.1
9,500 Aug.31 9,5009,500 balance
Unearned Revenue
SAP 2007 / SAP University Alliances Introductory Accounting
Unearned Revenues — Example
Maintenance Revenue19,000 Aug.1
9,500 Aug.31 9,5009,500 Sept.30 9,500
0 balance
Unearned Revenue
SAP 2007 / SAP University Alliances Introductory Accounting
SAP 2007 / SAP University Alliances Introductory Accounting
Accrued Expenses
SAP 2007 / SAP University Alliances Introductory Accounting
Accrued Expenses — Example
SAP 2007 / SAP University Alliances Introductory Accounting
Accrued Revenues
SAP 2007 / SAP University Alliances Introductory Accounting
Accrued Revenues — Example
Adjustments and Financial Statements
SAP 2007 / SAP University Alliances Introductory Accounting
Adjusted Trial Balance
SAP 2007 / SAP University Alliances Introductory Accounting
SAP 2007 / SAP University Alliances Introductory Accounting
Financial Statement Preparation
SAP 2007 / SAP University Alliances Introductory Accounting
Correcting Errors
SAP 2007 / SAP University Alliances Introductory Accounting
Correcting Errors — Example
SAP 2007 / SAP University Alliances Introductory Accounting
Correcting Errors — Example
SAP 2007 / SAP University Alliances Introductory Accounting
Correcting Errors — Example
Alternatives in Accounting for Prepaids and Unearned Revenues
SAP 2007 / SAP University Alliances Introductory Accounting
SAP 2007 / SAP University Alliances Introductory Accounting
Alternatives in Accounting for Prepaids and Unearned Revenues
SAP 2007 / SAP University Alliances Introductory Accounting
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
Alternatives in Accounting for Prepaids and Unearned Revenues
SAP 2007 / SAP University Alliances Introductory Accounting
SAP 2007 / SAP University Alliances Introductory Accounting
Alternatives in Accounting for Prepaids and Unearned Revenues
SAP 2007 / SAP University Alliances Introductory Accounting
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
SAP 2007 / SAP University Alliances Introductory Accounting
The Closing Process
SAP 2007 / SAP University Alliances Introductory Accounting
Four-Step Closing Process (REID)
SAP 2007 / SAP University Alliances Introductory Accounting
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
SAP 2007 / SAP University Alliances Introductory Accounting
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
-
SAP 2007 / SAP University Alliances Introductory Accounting
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
SAP 2007 / SAP University Alliances Introductory Accounting
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
SAP 2007 / SAP University Alliances Introductory Accounting
Post-Closing Trial Balance
SAP 2007 / SAP University Alliances Introductory Accounting
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
SAP 2007 / SAP University Alliances Introductory Accounting
Classified Balance Sheet