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Chapter 6
Completion of the Accounting Cycle
The Accounts Finalisation Process
Completion of the accounting cycle in one accounting period culminates in the preparation of
financial statements
...
Different users of accounting information and their
varied interests were covered in Chapter One
...
Chapter Eighteen will deal with the Cash Flow
Statement in more depth
...
Errors are easily made in such an undertaking
...
The use of the
worksheet starts immediately a trial balance has been prepared, before any adjusting entries have
been made
...
1
...
1: Format of a Worksheet
Trial Balance
Title of Account
Dr
...
Adjustments
Dr
...
Adjusted Trial
Balance
Dr
...
Income
Statement
Dr
...
Balance Sheet
Dr
...
Titles of all general ledger accounts and their respective general ledger balances are recorded on
the rows on the first three columns
...
A worksheet is not part of the ledger or any formal
accounting records
...
It is a helpful device for bringing together everything in one place
...
100 Introductory Financial Accounting
recording of the trial balance figures before adjustments
recording of adjusting entries
preparation of an adjusted trial balance
preparation of the Income Statement and Balance Sheet
preparation of closing entries
The worksheet has become so successful that it ushered the development of computer application
packages commonly known as spreadsheets
...
Spreadsheet packages have made easier the arithmetic
component of the worksheet
...
Following are the steps taken in preparing a worksheet:
a)
Copy all general ledger accounts on the rows of the first column, which will usually be
the Title of Account column
...
These will usually be the first pair of columns after the Title of
Account column
...
c)
Enter the adjusting entries in the next pair of columns
...
New accounts initiated by adjusting entries, which were not listed in the
original trial balance should be inserted where the original list ended
...
d)
Fill up the next pair of columns under Adjusted Trial Balance by incorporating the
effects of adjusting entries on the original trial balance figures
...
Since the original trial balance and
the adjustment pairs of columns agreed, the pairs under adjusted trial balance must also
come to an agreement when summed
...
Expenses and revenue accounts are extended to the
debit and credit columns of the Income Statement respectively
...
Liabilities, contra-assets and owner's
capital are extended to the credit column of the Balance Sheet
...
The difference
between the debit and credit totals of the Income Statement columns represents a net
profit (if the credit total is larger) or a net loss (if the debit total is larger)
...
A net profit is extended to the credit column of the
Balance Sheet whereas a net loss is extended to the debit column
...
Example
Using the trial balance and adjusting entries prepared for B
...
Asha, Capital
B
...
Balance
Dr
Cr
1,236,000
2,570,000
Depreciation - furniture
Accumulated depreciation
Doubtful debts
Provision for doubtful debts
Prepaid rent
Electricity expense
Accrued electricity
Shop supplies expense
Stock, 31st July
Adjustments
Dr
Cr
37,500
500
9,600
9,600
20,000
1,400
-
1,400
6,000
-
-
-
2,581,500
2,581,500
1,400
6,000
800,000
800,000
1,046,500
1,176,000
2,335,000
2,205,500
129,500
1,176,000
1,176,000
2,335,000
129,500
2,335,000
102 Introductory Financial Accounting
End-of-period entries for Stocks of Merchandise and Supplies
Ordinarily at the end of the accounting period a physical stock taking is carried out to determine
the actual amount and value of unsold merchandise still on hand
...
Supplies consumed are charged to expense while the unused
supplies are carried over to the subsequent accounting period as assets
...
Asha Grocers conducted a stock taking exercise at the end of July, and the following items
were in stock:
i)
ii)
Unused shop supplies of shs
...
Merchandise stocks of shs
...
Consumable Supplies
The entry required to record the existence of shop supplies stock at the end of an accounting
period is in principle similar to that of an adjusting entry for prepaid expenses
...
Folio
Debit
Credit
6,000
6,000
This general journal entry reduces the figure of shop supplies in the trial balance from shs
...
12,000
...
Merchandise stocks
B
...
These are Stocks 1st July shs
...
800,000 as derived from the stock taking
exercise
...
500,000 is known as Opening Stock while Stocks, 31st July, shs
...
The relationship in these two figures is that closing stock in a
current reporting period will be the opening stock for the subsequent accounting period
...
The
value of shs
...
The following general journal entry effects this:
Completion of the Accounting Cycle 103
Date
Description
Folio
20X1
Jul 31 Trading, Profit and Loss
Debit
Credit
500,000
500,000
Stocks, 1st July
To release to the Trading, Profit and
Loss Account the value of opening
stock
...
Closing Stock
The value of shs
...
This figure is included in the figure of total purchases as at the end of
July
...
In this regard the figure of purchases cannot be taken
to be the total cost of goods sold
...
Because of existence of unsold stocks, the following two events must be recorded in the
accounting records:
the existence of stocks as an asset, and
the reduction of the cost of goods available for sale by the value of closing stock in order
for the cost of goods sold to be determined
...
The effect of the two entries made to record opening and closing stocks would appear in the
ledger accounts as follows:
Stocks, 1st July
Date
Details
Account no
...
Debit
20X1
Jul1 Capital, B
...
Credit
20X1
GJ1
500,000
500,000
Jul31 Trading, Profit and Loss GJ0
500,000
500,000
104 Introductory Financial Accounting
Stocks, 31st July
Date
Details
Account no
...
Debit
20X1
Date
Details
Fol
...
500,000 ceased to exist, while Stocks, 31st July, shs
...
800,000, an item to be listed on the balance sheet as
a current asset
...
There is no need to distinguish between opening and closing stock of the same
category of stocks because the closing stock of the current period is the opening stock for the
subsequent period
...
00
Fol
...
Credit
20X1
GJ1
500,000
Jul31 Trading, Profit and Loss GJ0
500,000
Jul31 Trading, Profit and Loss GJ0
800,000
Jul31 Balance
800,000
Jul1 Capital, B
...
The Closing Stock is extended to the credit column under Income Statement and to the debit
column under Balance Sheet
...
Preparation of financial statements
Once the worksheet has been completed, the outlines of financial statements can be seen clearly
...
Completion of the Accounting Cycle 105
The Income Statement or Trading and Profit and Loss Account
This statement shows the results of operations for the business during an accounting period
...
TFASs do not
prescribe a format
...
This is the format students of accounting should follow
...
For a trading firm it is important that the
first subsection of the income statement shows clearly, how the trading results or gross profit is
arrived at
...
Asha Grocers the Income Statement or Trading and
Profit and Loss Account is prepared as follows:
Account format
B
...
Asha Grocers
Income Statement
for the Month ended 31 July, 20X1
shs
...
shs
...
Completion of the Accounting Cycle 107
Balance Sheet
This statement shows the financial position of the business at a given date usually the last day of
the accounting period
...
It is important to show clearly in the balance sheet the various classification of accounts
and as much information as possible concerning the financial condition of the business
...
Asha Grocers
Balance Sheet as at July 31, 20X1
shs
...
depreciation
65,000
500
less: Prov
...
Liabilities and Capital:
Owner's equity
B
...
profits 1st July
64,500 Net profit for the year
Net book value
Current assets
Stocks
Debtors
shs
...
2,000,000
0
129,500
129,500
800,000 less: Drawings
192,000
9,600
10,000
119,500
Accum
...
Asha, Grocers
Balance Sheet as at 31 July, 20X1
shs
...
shs
...
Asha, Capital
Accumulated profits 1st July
Net profit for the year
2,000,000
0
129,500
129,500
10,000
Less: Drawings
Accumulated profits
31st
July
119,500
Total Owner's equity
2,119,500
Total Capital employed
2,119,500
Completion of the Accounting Cycle 109
Closing entries
Revenue and expense accounts
Revenue and expense accounts are temporary accounts
...
The net result which is profit or
loss is carried on to the Balance Sheet
...
The entries to record the closing entries for B
...
Folio
Debit
Credit
370,000
6,000
376,000
The compound journal entry is a standard feature of closing entries
...
They are reproduced here as they had been made
...
Date
Description
20X1
Jul 31 Stocks
Trading, Profit and Loss
To record closing stock of
merchandise at the end of July
...
The traditional approach was to close the net profit or loss in the Trading,
Profit and Loss Account to the Capital Account as follows:
Completion of the Accounting Cycle 111
Date
Description
Folio
Debit
20X1
Jul 31 Trading, Profit and Loss
Credit
129,500
129,500
B
...
On the Balance Sheet the capital section would look as follows:
Balance Sheet (extract only)
shs
B
...
Asha, Capital, 31st July
shs
2,000,000
129,500
10,000
2,119,500
The above presentation will in subsequent periods obscure the figure of initial and incremental
equity brought in by the owners
...
Conforming to this argument, the net profit or loss is closed to an
Accumulated Profits Account instead of the Capital Account
...
The capital section of the Balance Sheet will be presented as follows after the above entry has
been effected:
Balance Sheet (extract only)
shs
B
...
The traditional closing entry for
drawings was to close it to the Capital account
...
Since owners make
drawings against profits it is logical that drawings should be closed and offset against
Accumulated Profits
...
Presentation of drawings and accumulated profits in the capital section of the balance sheet will
be as illustrated earlier
...
A post-closing trial balance ensures that all closing entries have been
accurately posted and the resulting balances can be used as opening balances for the new
accounting period
...
The post-closing trial balance for B
...
B
...
Asha, Capital
Accumulated profits
Accrued electricity
1,236,000
192,000
Total
2,325,000
Cr
9,600
800,000
12,000
65,000
500
194,000
20,000
2,000,000
119,500
1,400
2,325,000
The preparation of the post-closing trial balance completes the accounting cycle
...
This is especially the case
with manual accounting systems
...
Production of audited financial statements must be completed within six
months of the year-end
...
The finalization and audit will
have impact, if any, on only the opening balances of the new accounting period
...
The bookkeeper is used to recording of payment of wages for
Completion of the Accounting Cycle 113
example as a debit in the wages expense account
...
This kind of situation often creates
problems in the first month of the new accounting period
...
Reversing entries reverse the
effects of adjusting entries so that bookkeeping can proceed in the new accounting period as if no
adjusting entries were made
...
The
depreciation and provision for depreciation adjustments for example, do not affect routine
recording of transactions
...
Reversing entries for Accrued Expenses
Example
The following ledger accounts were opened for the payment and accrual of electricity expenses in
Chapter Five:
Electricity Expense
Date
Details
Account no
...
Debit
Date
Details
Fol
...
Account no
...
Credit
20X1
Balance
68,000 Dec31
Electricity Expense
68,000
68,000
68,000
20X2
Jan1 Balance
68,000
Assuming on January 1st 20X2, TANESCO brought bills amounting to shs
...
If B
...
80,000 is expense for 20X2
...
12,000 is electricity charge for
January, the remainder of shs
...
The payment of shs
...
80,000
This entry when posted will ensure the elimination of the credit balance of shs
...
12,000 in
the Electricity Expenses account
...
Usually a senior accountant does this task
...
When posted to the two ledger accounts, the reversing entry and the payment would look as
follows:
Electricity Expense
Date
Details
Account no
...
Debit
Date
Details
Fol
...
Account no
...
Credit
20X1
68,000 Dec31
Balance
68,000
Electricity Expense
68,000
20X2
68,000
20X2
Jan1 Electricity Expenses
GJ0
68,000
Jan1 Balance
68,000
Notice that the Electricity Expense Account has a credit balance of shs
...
After the payment of shs
...
12,000 debit balance remains in that account as desired
...
This is an attractive feature of the mixed account that makes it popular with
accountants, especially in manual accounting systems
...
Appendix I: The trading account revisited
Before the report format of financial statements became common there was no Income Statement
...
It
was an account in the real sense of the word and it presented results of operations as follows:
Trading, Profit and Loss
Details
Debit
Details
Stock, 1st July
500,000
Sales
370,000
Purchases
500,000
Stock, 31st July
800,000
Carriage Inwards
Gross Profit c/f
Fol
...
Credit
5,000
165,000
1,170,000
1,170,000
Gross Profit b/f
165,000
Notice that Stocks, 1st July shs
...
However,
Stocks, 31st July shs
...
By posting closing stock on the credit side
of the Trading, Profit and Loss Account the effect achieved is the reduction of the sum of
Opening Stock, Purchases and Carriage Inwards by the value of closing stock
...
Sales
Stocks, 1st July
Purchases
Carriage Inwards
Cost of Goods Available for sale
Less: Stocks, 31st July
Cost of Goods Sold
Gross Profit
Shs
...
Completion of the Accounting Cycle 117
Review questions
1
...
What is a worksheet and what basic purpose does it serve?
3
...
What is the purpose of closing entries?
5
...
In the "Income Statement columns" of the worksheet the credit column total is shs
...
Would the income statement report a
profit or a loss? Explain
...
In the following list, identify the accounts that should be closed to Income Statement
at the end of the accounting period
...
8
...
9
...
Give one example of an adjusting entry that could be reversed and another that could
not be reversed
...
Coffee Tree Inn - a hotel is completing the process of finalization of accounts
...
The following information before adjusting
entries were made is available
...
3,000 for the current year
...
2
...
Cash
Debtors
Prepaid Insurance
Machinery
Accumulated Depreciation
Creditors
Wages Payable
Capital
Retained Profits
Drawings
Revenues
Expenses
Total
Dr
330 000
270 000
40 000
500 000
Cr
40 000
60 000
620 000
100 000
30 000
600 000
250 000
1 420 000
1 420 000
Other information not yet taken account of
a) Insurance expired during 20X1 shs
...
b) Depreciation is 10% on cost
...
30,000
...
ii) Using a worksheet obtain an adjusted Trial balance and complete the
Income Statement and Balance Sheet employing the vertical formats
...
Zuakuu Enterprises has finalized its accounts for the current year, ending 31st
December, 20X1
...
Following are the relevant 'T' accounts
...
Accrued Wages? Explain
...
AC 100 Consultants, a small service company, keeps its records without the help of an
accountant
...
Total
shs
...
20,000
remaining on hand; to be used in 20X2
...
4,000
iii)
Depreciation expense for 20X1, shs
...
5,000
...
2
...
b)
Give the 20X1 adjusting entries
...
The trial balance of Makini & Co
...
Trial Balance, December 31, 20X1
Debit
shs
...
30,250
20,700
8,200
536,500
197,000
9,250
241,800
126,000
541,250
162,150
60,000
39,150
6,350
989,300
989,300
Adjustment data:
a)
b)
c)
d)
Inventory of Laundry supplies at December 31, shs
...
4,500
Depreciation on equipment during the year, shs
...
2,500
Required:
3
...
ii)
Complete the worksheet
...
iv)
Based on the adjustment data in the worksheet journalize the adjusting entries
...
The trial balance of Vinyozi Shop at June 30, the end of the current financial year and
the data needed to determine year-end adjustments are presented below:
122 Introductory Financial Accounting
Vinyozi Shop
Trial Balance, June 30, 20X1
Cash
Berber supplies
Prepaid insurance
Barber equipment
Accumulated depreciation
Accounts payable
Promissory notes payable
A
...
Mosele, Capital
A
...
Mosele, Drawings
Revenues
Wages expense
Rent expense
Electricity expense
Miscellaneous expense
Total
Debit
Credit
shs
...
31,500
20,000
15,250
438,700
231,250
22,200
50,000
250,000
250,000
720,000
355,000
90,000
61,000
12,000
1,273,450
1,273,450
Adjustment data:
a)
b)
c)
d)
e)
Inventory of barber supplies at June 30, shs
...
11,000
Depreciation on equipment during the year, shs
...
5,000
Interest expense accrued but not paid at June 30, shs
...
i)
Record the trial balance on an eight column worksheet
ii)
Complete the worksheet
...
iv)
Based on the adjustment data in the worksheet journalize the adjusting
entries
...
Mashi Enterprises is completing the accounting information processing cycle for the
year ended December 31, 20X3
...
a
...
a
...
shs
...
Additional data for adjusting entries:
a)
Expired insurance during 20X3 was shs
...
b)
Interest on the Fixed deposit is collected annually each August 31
...
d)
At December 31, 20X3 wages earned but not yet paid or recorded amounted
to shs
...
e)
Interest on the Long Term Loan is paid annually each April 30
...
a)
Complete a worksheet for the year ended December 31, 20X3
...
b)
Prepare an income statement
...
d)
Give the closing entries in general journal form
...
It also undertakes storage
...
a
...
Shs
...
400 on hand
...
Office
supplies purchased during 20X1 were debited to this inventory account
...
6,000 it was debited to prepaid insurance
...
6,000
...
12,000
...
300,000 Bank Loan was obtained on October 1, 20X1, 12% interest
is payable every 1st January
...
4,000 collected in advance from one customer for storage
time to be used in 20X2
...
3,000 has neither been paid for
nor recorded (this is considered maintenance expense)
...
a)
Enter the unadjusted trial balance on a worksheet; then based on the above
data enter the adjusting entries and complete the worksheet
...
c)
Using the worksheet prepare the 20X1 adjusting entries in general journal
form
...
Pepe Company was organized on January 1, 20X1
...
a
...
b)
Based upon the above data, give the 20X1 closing entries with brief
explanations