Introduction

In this session, we will discuss the following:

A. The accounting cycle
B. Closing off
C. Accruals for future periods
D. Reversals
E. And the last area is accounting for profit/loss after
determination.

HI5001
ACCOUNTING FOR BUSINESS
DECISIONS

TOPIC 5
The Accounting Cycle

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The Complete Accounting Cycle

The Complete Accounting Cycle (cont.)

1. Recognise & record

transactions

Source documents

5. Determine adjusting entries

and/or journalise

2. Journalise transactions

General journal

6. Post adjusting entries to

general ledger

3. Post to ledger accounts

4. Prepare unadjusted trial

balance of GL

General journal

General ledger
(accounts adjusted)

General ledger
7. Prepare adjusted trial balance
of GL (adjusted)

Trial balance(adjusted)

8. Journalise closing
entries

General journal

Trial balance
(unadjusted)

Continued next slide

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Continued next slide

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The Complete Accounting Cycle (cont.)

GL temporary
accounts closed

9. Post closing entries to GL

statements

Income and expense accounts must be closed

at the end of each period to determine the profit
or loss for the period

Trial balance

10. Prepare post closing trial

balance
11. Prepare financial

Closing Temporary Accounts

They begin and end each accounting period with

a zero balance

(post closing)
worksheet

Financial statements

12. Journalise reversing entries

General journal

13. Post reversing entries to GL

GL temporary
accounts opened

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Profit and loss summary account is used to

facilitate closing process and determination of
profit

Using the Worksheet

From worksheet formal adjusting entries are

entered in general journal

Enables preparation of interim financial

statements

Entries are dated the last day of the accounting

period

Adjusting entries easily reflected

Facilitates closing journal preparation

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Recording Adjusting Entries

Gathers information together in one place

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Data for determining the entitys closing entries

for the period are found in income statement
columns of worksheet which contain temporary
income and expense accounts

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The Closing Process

The Closing Process (cont.)

Income accounts closed to P & L summary

Profit & Loss summary balances to determine

profit/loss then closed to capital

Debit income

Debit P & L summary (assuming a profit)

Credit P & L summary

Credit capital account

Expense accounts closed to P & L summary

Drawings closed to capital

Debit P & L summary

Debit capital account

Credit expense

Credit drawings account

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The Closing Process (cont.)

(Close Income Account)
28,500

12,000
7,500
9,000

Salary expense
1,500
1,800

3,300

Rent expense
800

800

Supplies expense
350

350

Account Balances after the Closing Process

P&L
Summary

Income
4,450

(Close Expense
Accounts)

1. All income accounts have nil balances

2. All expense accounts have nil balances

28,500

3. The drawings account has a nil balance

24,050

24,050

(Close P & L Summary)

Capita Account

2,500

4. The capital account has been increased or

decreased by the profit or loss and decreased by
the drawings

24,050

Drawings
2,500

2,500

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(Close Drawings Account)

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The Post-closing Trial Balance

Accrual Entries in Subsequent Periods

Adjusting entries are made at the end of the
accounting period to record accruals

Reflects all accounts with balances after the

closing process
Assets

Cash received or paid in subsequent periods for

accruals must be analysed to correctly apportion
amount between the two periods

Liabilities
Equity

e.g. payment for salaries

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Accrual Entries in Subsequent Periods (cont.)

3,980

Salary payable
To accrue salaries owing to 30 June

Prepaid insurance, debited $1,800 on 28/2 (for six months)

Interest earned but not received, $3,600
Receive $7,488 in rent revenue on 1/5 (for 3 months
commencing that date)
4. June electricity account for $828 (not paid or recorded)
received 24/6
5. Consulting fees owed to business (and unrecorded) $7,560
a) Prepare entries when it occurred.
b) Prepare adjusting entries for all.
c) Prepare reversing entries where appropriate.
1.
2.
3.

3,980

Normal entry (6 July)

July 6

Salary payable

3,980

Salary expense
3,420
Cash at bank
7,400
To record payment of salaries from 23 June to 6 July

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In-class Worked Example

Prepare adjustments for 30/6/2014:

Adjusting entry (30 June)

June 30 Salary expense

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Solution

Solution (cont.)

28/2/14
Prepaid insurance
1,800
Bank
To record prepaid insurance (6 months)

30/6/2014
Consulting fees receivable
7,560
Consulting fees revenue
7,560
To record consulting fees earned but not yet received

1,800

1/5

Bank
7,488
Prepaid rent
7,488
To record prepaid rent revenue received for 3 months (from 1/5)

Prepaid rent
4,965
Rent revenue
4,965
To record rent revenue for period 1/5 to 30/6 that was prepaid

24/6
Electricity expense
828
Electricity payable
828
To record electricity account incurred but not paid

Insurance expense
1,200
Prepaid insurance
1,200
To recognise the insurance expended from 1/3/ to 30/6 (4 months)

30/6

Interest receivable
3,600
Interest revenue
3,600
To record interest earned to 30/6 but not received

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Reversing Entries

Solutions (cont.)
30/6

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Profit & Loss (part of)

Interest revenue
3,600
Consulting fees revenue
7,560
Rent Revenue
4,965
Electricity expense
828
Insurance expense
1,200
Balance (Profit)
14,097
To close temporary accounts to P/L account (as provided)

Reversal of accrual entries

Dated the first day of the subsequent accounting

period
Exactly reverse certain adjusting entries
An accounting technique used to simplify the

recording of regular transactions in the next period

Note: This would be only a part of the adjustments but covers the ones
provided

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Reversing Entries (cont.)

Reversing Entries (cont.)

Adjusting entry
June 30 Salary expense

Not required for all adjusting entries

3,980

Salary payable
To accrue salaries owing to 30 June

Only used where adjustment is temporary

3,980

Accrued expenses

Reversing entry
July 1

Salary payable

Accrued income

3,980

Salary expense

Prepayments originally recorded as expenses

3,980

Unearned income originally recorded as income

To reverse the adjusting entry to accrue unpaid salaries at end

of previous month

July 6 entry
July 6 Salary expense

7,400

Cash at bank
Payment of salaries for period 27 June to 6 July

7,400

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Accounting Procedures Applicable to a Partnership or a

Company

Reversing Entries (cont.)

Reversal of deferral entries

Accounting for a partnership

Adjusting entries are made for prepaid expenses and

Separate capital and drawings accounts for each

unearned or pre-collected revenue

Need for reversal entries depends on whether initial
recording occurred in a permanent account

Profit/loss at the end of the period is allocated to each

partner

partner in accordance with the partnership agreement

Each drawings account is closed off to the partners

capital account

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Accounting Procedures Applicable to a Partnership or a

Company (cont.)

Accounting Procedures Applicable to a Partnership or a

Company (cont.)
Profits distributed as dividends

Accounting for a company

INTELLECT MANAGEMENT SERVICES LTD

Owners are referred to as shareholders

Statement of Changes in Equity

Owners interests are called share capital

For the year ended 31 December 2014

Not all profits/losses are distributed to shareholders

Share Capital, 1 January 2014

Share capital represents retained profits (or

$240,000

Share Capital, 31 December 2014

accumulated losses) + share of assets

240,000

Retained earnings, 1 January 2014

--

Add: Profit for the year

50,000

Less: Cash dividends for the year

24,000

Retained earnings, 31 December 2014

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Accounting Procedures Applicable to a Partnership or a

Company (cont.)

Equity section of balance sheet

$26,000

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Tutorial
Topic 5
The accounting cycle

INTELLECT MANAGEMENT SERVICES LTD

Balance Sheet (extract)
as at 31 December 2014

Share capital (120,000 shares issued for $1)

Retained earnings

Reading:

$240,000

Hoggett & Edwards Chapter Five

26,000

Total equity

$266,000

Questions:
Hoggett & Edwards Chapter 5
Discussion questions 1, 2 & 4
Exercise 5.1
Problems 5.3, 5.6, 5.9, 5.11, 5.13 & 5.14
Critical Thinking Case
Ethical Issues

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