Notesale: Turn your study into money

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Financial accounting: Overview
Chapters
1
...
BS equation
3
...
Posting to ledger
5
...
Correcting mistakes
7
...
Preparing BS 1: Layout
& inventory value
9
...
Income Statement
11
...
Using accounts

1
...
Accounting cycle and the Balance Sheet equation
3
...
Posting to ledger accounts
5
...
Detecting and correcting mistakes in the trial balance
7
...
Preparing Balance Sheet 1: Layout of the BS & questions of inventory value
9
...
Preparing the Income Statement
11
...
Using published accounts to evaluate companies
13
...
Adjusting trial
balance
Why adjust the trial
balance?
Journalising &
posting
adjustments
Closing IS accounts
to the BS
Quiz

1
...
Prepare a postclosing trial balance:
check maths again
8
...
Journalise
transactions: write
entity‘s financial diary

THE
ACCOUNTING
CYCLE

7
...
Prepare adjusted
trial balance: check
posting & maths again

PR-07

3
...
Prepare a trial
balance: check transaction posting & maths

5
...
Adjusting trial
balance

Session 7: Adjusting the trial balance and closing Income
Statement accounts

Why adjust the trial
balance?

Why even corrected trial balances must still be adjusted to meet
accruals criteria

Journalising &
posting
adjustments

Journalising and posting trial balance adjustments

Closing IS accounts
to the BS

Session revision quiz on trial balance adjustments

Closing Income Statement accounts to the Balance Sheet

Quiz

PR-07

3

7
...
Adjusting trial
balance

Adjustments to trial balances: types of adjustment
revenue

Why adjust the trial
balance?
Journalising &
posting
adjustments

not
yet
recorded

Closing IS accounts
to the BS
Quiz

PR-07

earned
or
expired
later

expenses

Revenues earned but not yet
recorded
e
...
consulting services already
performed but not yet billed to
client
Adjustments: BS asset

P&L revenue 

Expenses incurred but not yet
recorded
e
...
interest on a note payable
or electricity bill not yet
received
Adjustments: BS liability 
P&L expense 

Initially unearned revenues
have been earned
e
...
quarterly prepaid rental
income at end of first month of
quarter is now 1/3 earned
Adjustments: BS liability

P&L revenue 

Initially prepaid expenses have
expired
e
...
quarterly prepaid rent at
end of first month of quarter is
now 1/3 expired
Adjustments: BS asset

P&L expense 
5

7
...

LJB applies US GAAP and reports its results in millions of US $
...
On November 1, 2008, LJB gives a 90-day note to a supplier in
exchange for inventory purchased costing $180 000
...
1
...
180 000
To record issue of note for stock purchase
a
...
Interest Expense ($180 000 x 0,08 x 60/360) ……
...
…………………………………………………… 2 400
To record interest expense on note payable

PR-07

6

7
...
On December 5, 2008, LJB receives $842 000 in cash from a customer
for products and services that LJB will deliver in January 2009
...
1
...
……… 842 000
Advances from Customers ………………………
...
Adjusting trial
balance
Why adjust the trial
balance?

Journalising adjustments to the trial balance
c
...
It
expects the machine to have a salvage value of $160 000 and a 10year life

Journalising &
posting
adjustments

c
...
Equipment ………………………………………………
...
1 400 000
To record purchase of machine for cash

Closing IS accounts
to the BS

c
...
Depreciation Expense (3/12 x ($1 400 - $160)) ……
...
……………………………… 31 000
To record depreciation expense on machine purchased on October 1

Quiz

PR-07

8

7
...
On December 30, 2008 LJB sells merchandise to a customer, on
credit, for $565 000
...
1
...
…………………………… 565 000
Sales Revenues ……………………………………………………………
...
2
...
… 422 000
Merchandise Inventory …………
...
Adjusting trial
balance
Why adjust the trial
balance?

Journalising adjustments to the trial balance
e
...
It
pays the $360 000 insurance premium in cash

Journalising &
posting
adjustments

e
...
Prepaid Insurance ……………………………………………… 360 000
Cash ……………………………………
...
2
...
120 000
To record expiration of 4 months prepaid insurance premium

Quiz

PR-07

10

7
...
On November 16, 2008, LJB issues 40 000 shares of common stock
with a par value of $1 per share for $26 per share
...
1
...
1 040 000
Common Stock (par value) ……………………………………
...
1 000 000
To record issue of 40 000 common shares with par value of $1 for $26 per share

Closing IS accounts
to the BS
Quiz

PR-07

f
...
Accounts Payable ………………
...
1 040 000
To record cash payments to suppliers

11

7
...

Cr
...
Merchandise purchased on
account for $25 000

Merchandise
Inventory

Accounts
Payable

2
...
Cost of merchandise sold in 2
...
During February, Miller incurs
and pays $14 500 Selling and
Administrative Expenses

Journalising &
posting
adjustments

Selling &
Administrative
Expense

Cash
12

7
...
Miller collects $35 000 from
customers for sales made on
account
6
...
Miller declares and pays a
dividend of $1 000 to
shareholders
8
...
Prepaid Insurance on 1
...

was $600

Accounts involved:
Dr
...

Cash

Accounts
Receivable

Accounts
Payable

Cash

Retained
Earnings

Cash

Selling &
Administrative
Expense

Prepaid
Insurance

13

7
...

Cr
...
Depreciation on the building
in February was $167 on a
historical cost of $40 000

Selling &
Admin
...
)

Accumulated
Depreciation
(contra
account)

11
...
Miller recognises 35% Inc
...
Miller receives rental services
in February of 1/12 of the
prepayment of $12 000

Income Tax
Expense

Income Tax
Payable
14

7
...
Close the Income Statement
accounts to Retained Earnings

Retained
Earnings

13
...
Close the Cost of Goods Sold
account to Retained Earnings

Retained
Earnings

Cost of Goods
Sold

Accounts involved:
Dr
...

Selling &
Admin
...

Interest
Expense
Income Tax
Exp
...
Adjusting trial
balance
Why adjust the
trial balance?
Journalising &
posting
adjustments
Closing IS
accounts to BS
Quiz
Closing temporary IS
accounts to IS
...
then closing NET
INCOME (IS) to
RETAINED EARNINGS
...
transfers all
temporary (IS)
account balances to
the BALANCE SHEET
PR-07

11 Adj
...
Note Pay
...


Income Tax payable (L)
12 Income Tax Feb
...


Common Stock (SE)

40 000
Cr
...

107 000

Dr
...

1 382 13 To: Retained Earn
...

Retained Earnings (IS-SE)
7 Dividends paid

Dr
...


Sales revenues (IS-SE)
50 000

2

Dr
...
: Inte
...

333 13 To: Retained Earn
...

0
50 000
0
Cr
...


1 000 13 To: Retained Earn
...

1 382
Cr
...


Cost of Goods Sold (IS-SE)
0
3 CGS
30 000 13 To: Retained Earn
...

Selling & Administrative Expenses (IS-SE)
Cr
...
& Adm exp
...
: Prepaid Insur
...
: Prepaid rent
1 000
10 Adj
...
deprec
...
15 717
0

Income Statement for February
Sa l es
less CGS
Gross Profit
less Sel l i ng & Admi n

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