FDNACCT Lecture on Adjusting, Closing, and Reversing Entries PDF

ACCOUNTING CYCLE  A process by which companies produce their financial statements for a specific period of time.  Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries). ACCOU...

ACCOUNTING CYCLE  A process by which companies produce their financial statements for a specific period of time.  Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries). ACCOUNTING CYCLE STEPS IN ACCOUNTING CYCLE During 1. Analyzing business transactions thru docs The year 2. Journalizing transactions 3. Posting journal entries to the ledgers 4. Preparing a trial balance 5. Preparing a work sheet At the end 6. Preparing the financial statements Of the year 7. Journalizing and posting adjusting entries 8. Journalizing and posting closing entries 9. Preparing a Post-Closing Trial Balance 10. Journalizing and posting reversing entries ADJUSTING ENTRIES Year-end entries which are necessary to adjust the account balances to avoid understatement Year-end entries which are necessary to adjust the account balances to avoid understatement or overstatement of assets, liabilities, income and expense accounts. or overstatement of assets, liabilities, income and expense accounts. Types of End of Period Adjustments Types of End of Period Adjustments 1. Accrued Expense 1. Accrued Expense 2. Accrued Revenue 2. Accrued Revenue 3. Prepaid Expense 3. Prepaid Expense 4. Deferred or Unearned Revenue 4. Deferred or Unearned Revenue 5. Depreciation 5. Depreciation 6. Amortization of Discount on Notes Payable 6. Amortization of Discount on Notes Payable 7. Bad Debts 7. Bad Debts 8. Merchandise Inventory 8. Merchandise Inventory  CLOSING ENTRIES Year-end entries recorded to reduce all the balances of nominal accounts to zero to prepare the books for Year-end entries recorded to reduce all the balances of nominal accounts to zero to prepare the books for the next accounting period. the next accounting period. Procedure in Closing Entries: Procedure in Closing Entries: Close all nominal accounts with credit balance to income summary account. Close all nominal accounts with credit balance to income summary account. Close all nominal accounts with debit balance to income summary account. Close all nominal accounts with debit balance to income summary account. Close the drawing accounts to capital account. Close the drawing accounts to capital account. Close the income summary account to capital account. Close the income summary account to capital account.  REVERSING ENTRIES  Prepared at the beginning of a new accounting period, before any of the transactions are recorded.  Exact opposite of adjusting entries made at the close of the accounting period.  Optional step in bookkeeping process.  Not strictly required to prepare but is preferred for the following reasons: a) It brings about a segregation of items between accounting periods and simplifies the recording of regular transactions in the new accounting period. b) Restores the ledger accounts to their normal status. Applicable ONLY to the following adjusting journal entries 1. Adjustment for accrued expenses 2. Adjustment for accrued income 3. Adjustment for prepaid expenses when the “Expense Method” is used. 4. Adjustment for deferred income when the “Income Method” is used. DESIDERATA GO PLACIDLY amid the noise and the haste, and remember what peace there may be in silence. As far as possible, without surrender, be on good terms with all persons. Speak your truth quietly and clearly; and listen to others, even to the dull and the ignorant; they too have their story. Avoid loud and aggressive persons; they are vexatious to the spirit. If you compare yourself with others, you may become vain or bitter, for always there will be greater and lesser persons than yourself. DESIDERATA Enjoy your achievements as well as your plans. Keep interested in your own career, however humble; it is a real possession in the changing fortunes of time. Exercise caution in your business affairs, for the world is full of trickery. But let this not blind you to what virtue there is; many persons strive for high ideals, and everywhere life is full of heroism. Be yourself. Especially do not feign affection. Neither be cynical about love; for in the face of all aridity and disenchantment, it is as perennial as the grass. DESIDERATA Take kindly the counsel of the years, gracefully surrendering the things of youth. Nurture strength of spirit to shield you in sudden misfortune. But do not distress yourself with dark imaginings. Many fears are born of fatigue and loneliness. Beyond a wholesome discipline, be gentle with yourself. You are a child of the universe no less than the trees and the stars; you have a right to be here. DESIDERATA And whether or not it is clear to you, no doubt the universe is unfolding as it should. Therefore be at peace with God, whatever you conceive Him to be. And whatever your labors and aspirations, in the noisy confusion of life, keep peace in your soul. With all its sham, drudgery and broken dreams, it is still a beautiful world. Be cheerful. Strive to be happy. DESIDERATA "Desiderata" is an early 1920s prose poem by the American writer Max Ehrmann. Although he copyrighted it in 1927, he distributed copies of it without a required copyright notice during 1933 and c. 1942, thereby forfeiting his US copyright. The text was widely distributed in poster form in the 1960s and 1970s. End of Discussion