Accounting Closing Process Quiz

Financial Accounting, IFRS

• Financial accounting is a core subject for first-year Global BBA students.
• The course covers accrual accounting, contrasting it with cash-basis accounting.
• IFRS (International Financial Reporting Standards) is the framework used.
• The learning objectives include explaining accrual accounting differences, applying revenue/expense principles, adjusting accounts, preparing financial statements, and closing the books.

Chapter 3: Accrual Accounting

• Accrual accounting records transactions when they occur.
• Income is recorded when earned, expenses when incurred.
• This differs from cash-basis accounting, which only records cash transactions.
• Cash-basis accounting doesn't capture underlying economics, leading to incomplete financial statements.
• It's used by businesses that don't follow accounting standards.

Learning Objective 3.1: Accrual Accounting vs. Cash-Basis Accounting

• Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of cash flow.
• Cash-basis accounting recognizes revenue/expenses when cash changes hands.
• Accrual accounting provides a more accurate picture of a company's financial position and performance over time.
• It's essential for long-term financial analysis and decision-making.

Learning Objective 3.2: Revenue and Expense Recognition Principles

• Revenue Principle: Revenue recognition occurs when risks and rewards of ownership transfer to the buyer. The entity must maintain neither continuing managerial involvement nor effective control over the good sold. The amount must be measurable reliably and likely to flow to the entity. Costs related to the transaction should be measurable.
• Expense Recognition Principle: Expenses are recognized in the same period as the related revenues. All expenses for the period must be identified and measured.

Learning Objective 3.2: The Matching Principle

• The matching principle relates expenses to the revenues they generate. Expenses are recognized in the period of the related revenue.
• Steps to apply the matching principle: Identify expenses for the period, and measure and recognize them in the same period as the related revenue.

Learning Objective 3.3: Adjusting the Accounts

• Adjusting entries are needed to bring accounts to their correct balances at the end of the accounting period.
• This includes handling prepaid expenses (like rent or supplies), unearned revenue (cash received before earning revenue), accrued expenses (things like salaries not yet paid), and accrued revenues (revenue earned but not yet collected).
• Adjusting entries are critical for accurate financial statements.

Exhibit 3-6: Unadjusted Trial Balance

• Demonstrates a sample trial balance for a company (RedLotus Security) before adjustments.
• Presents various accounts like cash, accounts receivable, supplies, prepaid rent, land, equipment, payable accounts, service revenue, salary expense, utilities expense, and dividends.
• Shows debits and credits for the accounts.

Categories of Adjusting Entries

• Deferrals: Recognize expenses or revenues when cash is received or paid in advance of the actual expense or revenue generation.
• Accruals: Recognize expenses or revenues when incurred/earned, even if cash hasn't changed hands yet.
• Depreciation: Allocate the cost of property, plant, and equipment (PPE) over their useful lives.

Learning Objective 3.4: Prepare Updated Financial Statements

• Adjusting entries update account balances.
• Updated accounts prepare financial statements.
• This involves the income statement, statement of cash flows, statement of changes in equity, and balance sheet.

Learning Objective 3.5: Close the Books

• Close temporary accounts (like income statement accounts -- revenues, expenses, dividends).
• Do not close permanent accounts (like balance sheet accounts – assets, liabilities, shareholders' equity).
• This prepares the accounts for the next period.

Exhibit 3-10: Summary of Adjusting Entries

• This chart shows the debit and credit impacts of adjusting entries for different account categories.

Exhibit 3-11: The Adjusting Process of RedLotus (1 of 2)

Exhibit 3-11: The Adjusting Process of RedLotus (2 of 2)

• These exhibits show the journal entries for the adjusting process, including prepaid rent, supplies, unearned service revenue, accrued salary expense, accrued service revenue, depreciation, and income tax expense.

Exhibit 3-12: Adjusted Trial Balance

• A complete trial balance showing accounts after adjusting entries are completed

Exhibit 3-13: Income Statement

• A sample income statement for RedLotus Security at the end of June.
• Shows revenue, expenses, and net income

Exhibit 3-14: Statement of Changes in Equity

• A statement of changes in equity for RedLotus Security at the end of June.
• Shows opening equity, net income, dividends, and ending equity

Exhibit 3-15: Balance Sheet

• A balance sheet for RedLotus Security at the end of June.
• Shows assets, liabilities, and equity.