Adjustment & Closing Section

Session 4 Prepare adjustments for unrecorded business transactions. Adjusting Entries

• Adjustments or adjusting entries are journal entries made to update accounts for items that were not recorded during the period. Four accounts will be used for the adjustments

• Prepaid • Unearned • Accrued revenues • Accrued

End of Period Adjusting Entries

• Prepaid Expenses - items or services that are paid for up-front. They are classified as when purchased.

• Unearned Revenues - revenues received before they are earned. They are classified as liabilities when is received. End of Period Adjusting Entries

• Accrued Revenues - revenues that have been earned but cash has not yet been received and no transaction has been recorded.

• Accrued Expenses - expenses that have been incurred but not paid for yet and no transaction has been recorded.

Adjustments Section

• These adjusting entries are first entered in the Adjustments section of the worksheet.

The Adjusted Section

1. Combine the figures from the Trial Balance section and the Adjustments section. Record the results in the Adjusted Trial Balance columns. 2. Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits.

ExamplesEnd of Period Adjusting entries Adjusting for Supplies Used

• Matrix Marketing Group began the month with $2000 in supplies. At the end of the month, $1,500 in supplies remained. What dollar amount of supplies was used during the month? And show journal entry. Adjusting for Expired Rent

• On November 20, 2012, Matrix Marketing Group paid $6,000 for the December and January rent. As of December 31, 2012, one month’s rent had already been used up. What dollar amount of rent was used during the month of December? And show journal entry. Adjusting for

• In November, Carter Consulting Services purchased equipment for $35,000. Instead the is recorded as an and charged to expense over the time the asset is used for the business. • This expense is called depreciation. • Useful life = 5 yrs; Salvage value = $0 • What dollar amount of depreciation expense should be recorded for the month? Show journal entry and book value.

Closing Nominal Accounts

• Nominal accounts are accounts that are zeroed out at each closing period. Each time the accounts are closed, the account reverts back to zero to start the next period. • Examples: – expense – – owner withdrawing accounts Closing Accounts

• At the end of the period, temporary or nominal accounts are closed; these include expense, revenue, and owner withdrawing accounts. • To facilitate closing, a clearing account called Income Summary is used. • The Income Summary account is used only momentarily. • Revenue and expensed are closed into it and then that balance is immediately closed out to Owner's (or Retained Earnings). Step 1

• Close revenue accounts by debiting each for its credit balance and crediting Income Summary.

Step 2

• Close expense accounts by crediting each for its debit balance and debiting Income Summary.

Step 3

• Income Summary is closed into the Capital account by debiting (for a net income) or crediting (for a net loss) the balance.

Step 4

• Close the Withdrawals account by crediting it by its balance and debiting the Capital account.

Closing Journal Entries (Example)

Account Balance Account Balance Rent expense 1400 Sales revenue 6000 Salary expense 1200 Owner’s equity Office supplies 400 Capital Account 9000 expense Utilities Expense 320 Withdrawals 1000 versus Cash-Basis Accounting

• Accrual- and Cash-Basis. • The accrual basis is used by most companies; only very small businesses use cash-basis. Accrual versus Cash-Basis Accounting

• Under the accrual method, expenses and revenue are recognized in the period they occur regardless of whether a cash transaction has occurred. • For example, if a sale is made in January but payment is not expected until February, the revenue from the sale would be recognized in January (when it was earned) and the amount due to the company is recorded (accrued) in accounts receivable.