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Paula Bazemore
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ACC 103 Chapter 5

Chapter 5 Lecture Notes

REVIEW SO FAR:
Step 1: Business transactions occured and generated source documents.
Step 2: Business transactions analyzed and recorded in a journal.
Step 3: Transactions posted or transferred from journal to ledger.
Step 4: Trial Balance prepared.
Step 5: Worksheet completed.
Step 6: Financial statements prepared.

Ch 5 Lecture

In this chapter, we will complete the following steps:

Step 7: Journalize and post adjusting entries.
Step 8: Journalize and post closing entries.
Step 9: Prepare a post-closing trial balance.

Step 7: Recording Journal Entries from Worksheet

A. Information in the worksheet is update. We know this, since the totals for all entries under each section balance.
B. Worksheet does provide a business stand point as of a certain date.
C. Serves as a tool for preparing the financial statements.
D. The problem with worksheet:
d1. Adjusting entries have not been posted to the journal and ledger, which means the books are not up to date.
d2. Books are also not ready for the next accounting cycle.
E. Must post the adjusting entries from the worksheet:
E1. First: to General Journal
E2. Second: from General Journal to General Ledger
E3. EACH Adjustment Entry will affect both the Income Statement and Balance Sheet NEVER AFFECTS CASH.

NOTE: Figure 5.1 and Figure 5.2

Step 8: Journalize and post closing entries

A. Closing is intended to end or close off the revenue, expense, and withdrawal accounts at the end of the accounting period.
B. Information needed to complete closing entries will be located in the Income Statement and Balance Sheet sections of the worksheet.
C. Expanded Accounting Equation: Assets = Liabilities+Capital(-)Withdrawals+Revenue(-) Expenses
D. Real or Permanent Accounts:
d1. Assets, Liabilities, and Capital
d2. Reason: because their balances are carried over from one accounting cycle to the next
E. Nominal or Temporary Accounts:
e1. Revenues, Expenses, and Withdrawals
e2. Reason: balances are not carried over from one accounting cycle to the next.
e3. Balances are "reset" to ZERO at the beginning of each accounting cycle by closing the balances at the end of the prior period. This allows companies to accumulate new information about Revenues, Expenses, and Withdrawals in each accounting cycle.
e4. Process of completing closing entries summarizes the effects on Capital from the nominal or temporary accounts during the accounting cycle.
e5. After Closing entries are complete, the Accounting Equation will look like: ASSETS = LIABILITIES + ENDING CAPITAL

Closing Entry Examples

Figure 5.5 will show where the closing entry amounts can be located on the worksheet.

Step 1: Clear the Revenue balance to ZERO and transfer to Income Summary.
a. Income Summary is a temporary account in the ledger used for closing and will be ZERO balance at the end of each accounting cycle.
b. CLOSING ENTRY EXAMPLE: DEBIT = REVENUE; CREDIT = INCOME SUMMARY (Figure 5.6)

Step 2: Clear the Expense accounts to ZERO and transfer to Income Summary.
a. CLOSING ENTRY EXAMPLE: DEBIT = INCOME SUMMARY; CREDIT = EACH EXPENSE ACCOUNT with a balance (Figure 5.7)

Step 3: Clear the Income Summary to ZERO and transfer to Capital.
a. CLOSING ENTRY EXAMPLE: DEBIT = INCOME SUMMARY; CREDIT = CAPITAL (Figure 5.8)

Step 4: Clear the Withdrawals to ZERO and transfer to Capital.
a. CLOSING ENTRY EXAMPLE: DEBIT = CAPITAL; CREDIT = WITHDRAWALS (Figure 5.9)

Closing Entries Summation

Keep in mind, when you are preparing the closing (or adjusting entries), you will FIRST post to the General Journal and then transfer to the General Ledger.

(Figure 5.10 shows the Closing Entries as they should be listed on the General Journal)
(Figure 5.11 shows the Adjusting and Closing Entries being transferred from the General Journal to the General Ledger, and new account balances reflected.)

Preparing the Post Closing Trial Balance

A. Post Closing Trial Balance
a1. Last step in the accounting cycle
a2. Lists only the permanent accounts in the ledger and the balances after all adjusting and closing entries have been posted.
a3. Serves as a check and balance point to verify accuracy of the adjusting entries, closing entries, and ledger.
a4. Contains the TRUE figure for CAPITAL.
a5. Prepare the same as a Trial Balance.

Accounting Cycle Reviewed (Table 5.1)

Steps of the Manual Accounting Process:

1. Collect source documents from business transactions as they occur. (Sources: cash register tape, sales tickets, bills, checks, payroll cards)
2. Analyze and record business transactions into a journal. (AKA journalizing)
3. Post or transfer information from the General Journal to the General Ledger (copy each debit and credit of the General Journal into the Ledger Accounts.)
4. Prepare a Trial Balance. (Summarize each ledger account. List those accounts to test the mathematical accuracy in recording transactions.)
5. Prepare the worksheet. (Multicolumn document that summarizes accounting information to complete the accounting cycle.)
6. Prepare financial statements. (Income Statement, Statement of Owner's Equity, and Balance Sheet)
7. Journalize and post adjusting entries. (Use figures in the adjustment columns on the worksheet.)
8. Journalize and post closing entries. (Use figures in the Income Statement and Balance Sheet sections of the Worksheet.)
9. Prepare Post-Closing Trial Balance. (Prove the mathemaical accuracy of the adjusting and closing process of the accounting cycle.) Figure 5.13 is a good example.

Additional Examples

1. Demonstration problem = page 181 - 190
2. Blueprint of closing process from the worksheet = page 191
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