Topic 4

COMPLETING THE
ACCOUNTING CYCLE

1
 OUTLINE

• Adjusting Entries
• Preparing the Adjusted Trial Balance
• Closing Entries
• Preparing the Financial Statements
– Statements of Comprehensive Income
– Statements of Changes in Equity
– Statements of Financial Position

2
 The Accounting Cycle
Closing
Entries Source
Financial Documents
Statements

Adjusted Journal
Trial Balance

Trial Balance Ledger 3

Adjustments
Fiscal year Calendar year

1st day of a month and

ends twelve months later • 1st January to 31st
on the last day of a December 2018
month.

E.g: 1st June 2018 to

31st May 2019

4
 Accrual Vs Cash-basis accounting

revenue and expenses are

Accrual recognized at the time they
take place, and not at the
time they are actually paid.

revenue is recorded when cash

Cash-basis is received, and expenses are
recorded when cash is paid.

5
 Recognition of Revenue & Expenses

REVENUE revenue be recognized in the

RECOGNITION
accounting period in which it
PRINCIPLE
is earned.

THE MATCHING efforts (expenses) be matched

PRINCIPLE
with accomplishments
(revenues).
6
 The Need for Adjusting Entries

1 Revenues to be recorded in the period in

which they are earned, and for......

2 Expenses to be recognized in the period in

which they are incurred.

7
 The Basics of Adjusting Entries

Prepaid Expenses
ASSETS Expenses paid in cash and
recorded as assets before
they are used or consumed

Prepayments
Unearned Revenues
Cash received and recorded as
LIABILITIES
liabilities before revenue
is earned

8
 Prepaid Expenses
Prior to adjustment, assets are overstated and expenses
are understated.

Types of Accounts Before AdjustingEntries

Adjustments Adjustments

Prepaid Assets overstated Dr. Expense

Expenses Expenses understated Cr. Asset

The adjusting entry results in a debit to an expense

account (increase) and a credit to an asset account
(decrease). 9
 Prepaid Expenses

Asset Expense

Unadjusted
balance
Credit Debit
Adjustment Adjustment

10
 Prepaid Expenses

Supplies

Examples Insurance

Depreciation

11
 Supplies
An inventory count reveals that RM1,000 of
Adjustment: RM2,500 of supplies are still on hand as at 31st
Dec 2018.

Dr. Office Supplies 2,500

Entries before
adjustment: Cr. Cash 2,500

Dr. Supplies Expense 1,500

Adjusting
entries: Cr. Office Supplies 1,500

12
Supplies A/C

Date Description Debit Credit Balance

Jan 25 Cash – purchased supplies 2,500 - 2500

Supplies Expense
Dec 31
(consumed) ? 1,000

Amount of supplies consumed:

? Beginning amount minus ending total

RM2,500 – RM1,000 = RM1,500

13
 Supplies
Office Supplies

Cash 2,500 Supp. Exp 1,500

Bal. 1,000 Supplies Expense

2,500 2,500
Off. Supp. 1,500
Bal. 1,000

Cash

Supplies 2,500

14
 Insurance

Adjustment: Insurance premium paid for one year amounting

to RM1,200; Expires every month RM100.

Dr. Prepaid Insurance 1,200

Entries before
adjustment:
Cr. Cash 1,200

Dr. Insurance Expense 100

Adjusting
entries:
Cr. Prepaid Insurance 100
15
 Prepaid Insurance

Cash 1,200 Insur. Exp 100

Bal. 1,100 Insurance Expense

1,200 1,200
Prpd Insur. 100
Bal. 1,100

Cash

Prpd Insur 1,200

16
 Depreciation

Depreciation is the allocation of the cost of an asset to

expense over its useful life in a rational and systematic
manner.

Depreciation is an estimate rather than a factual

measurement of the cost that has expired.

17
 Depreciation

In recording depreciation, Depreciation Expense is

debited and a contra asset account, Accumulated
Depreciation, is credited

The difference between the cost of any depreciable

asset and its related accumulated depreciation is
referred to as the book value of the asset.

18
 Depreciation

1. Straight Line Method

Depreciation
Methods
2. Reducing Balance Method

19
 Depreciation
Straight-line depreciation allocates equal amount of an
assets net cost to depreciation during the estimated
useful life.

Formula: Cost - Scrap Value

Estimated useful life

Eg: A machine costing RM26,000, estimated to have a

useful life of 4 years and expected to be sold for
RM8,000 at the end of the 4th year.

20
 Depreciation

Calculation: RM26,000 - RM8,000

4 years
Deprec Exp: = RM4,500 per year

Adjusting Dr. Depreciation Expense 4,500

entries:
Cr. Accumulated Deprecn.
(Machine) 4,500

21
 Depreciation Expense Accum. Depn. (Machine)

Accum Depreciation.
Deprec Expense. 4,500
(Machine) 4,500

Contra
Account
Statement of Financial
Position
Machine 26,000
Less: Accum deprecn (4,500)
Machine 21,500

22
 Depreciation
Reducing Balance depreciation :

Net Book Value x Depreciation rate

Formula:

(Cost - Accumulated Depn) x Depreciation rate

Eg: Equipment costing RM35,000, accumulated depreciation

RM5,250. The depreciation rate is 15% on book value.

23
 Depreciation

Calculation: (RM35,000 - RM5,250) x 15%

= RM4,463 per year

Dr. Depreciation Expense 4,463

Adjusting
entries:
Cr. Accumulated Depn. 4,463

24
 Unearned Revenues

Prior to adjustment, liabilities are overstated and

revenues are understated.
Types of Accounts Before AdjustingEntries
Adjustments Adjustments

Unearned Liabilities overstated Dr. Liability

Revenues Revenues understated Cr. Revenue

The adjusting entry results in a debit to a liability account

and a credit to a revenue account.
Examples of unearned revenues include rent, magazine
subscriptions, and customer deposits for future services. 25
 Unearned Revenues

Liability Revenue

Unadjusted
balance
Debit Credit
Adjustment Adjustment

26
 Unearned Revenues

Adjustment: RM2,000 subscription fees has been earned, out

of RM5,000 unearned subscription fees that has
been received last month.

Entries before Dr. Cash 5,000

adjustment: Cr. Unearned
Subscription Fees 5,000

Adjusting Dr. Unearned

entries: Subscription Fees 2,000
Cr. Subscription Fees 2,000
27
 Unearned Revenues

Cash

Unearned
Subscription
Fees 5,000

Subscription Fees

Unearned Subcrptn Fees

Unearned
Subcrptn Cash 5,000 Subcrptn 2,000
Fees 2,000
Bal. 3,000

5,000 5,000

Bal. 3,000
28
 The Basics of Adjusting Entries

Accrued Revenues
REVENUES
Revenues earned but not yet
received in cash or recorded

Accruals
Accrued Expenses
Expenses incurred but not yet
EXPENSES paid in cash or recorded

29
 Accrued Revenues

Accrued revenues may accumulate with the

passing of time or through services performed but
not billed or collected.

Prior to adjustment, assets and revenues are

understated.

The adjusting entry requires a debit to an asset

account and a credit to a revenue account.
30
 Accrued Revenues

Asset Revenue

Debit Credit
Adjustment Adjustment

31
 Accrued Revenues

Ali Portman Craft has completed a yacht for a

Adjustment: customer – Tuck Nak Yoo (TNY). The invoice
amount is RM23,000 but yet to be sent.

Adjusting Dr. A/C Rec - TNY 23,000

entries:
Cr. Sales 23,000

32
 Accrued Revenues

A/C Rec - TNY Sales

Sales 23,000 A/C Rec -

TNY 23,000

33
 Accrued Expenses

Prior to adjustment, liabilities and expenses

are understated.

The adjusting entry results in a debit to an expense

account and a credit to a liability account.

34
 Accrued Expenses

Expense Liability

Debit Credit
Adjustment Adjustment

35
 Accrued Expenses

Salaries accrued at the end of the month

Adjustment: RM4,000.

Adjusting Dr. Salaries Expense 4,000

entries:
Cr. Salaries Payable 4,000

36
 Accrued Expenses

Salaries Expense

Salaries Payable 4,000

Salaries Payable

Salaries Exp. 4,000

37
 Summary of Adjusting Entries
Types of Accounts Before AdjustingEntries
Adjustments Adjustments

Prepaid Assets overstated Dr. Expense

Expenses Expenses understated Cr. Asset

Unearned Liabilities overstated Dr. Liability

Revenues Revenues understated Cr. Revenue

Accrued Assets understated Dr. Asset

Revenues Revenues understated Cr. Revenue

Accrued Liabilities understated Dr. Expense

Expenses Expenses understated Cr. Liability
38
 The Adjusted Trial Balance

 An Adjusted Trial Balance is prepared after all

adjusting entries have been journalized and posted.

 Its purpose is to prove the equality of the total debit

and credit balances in the ledger after all adjustments
have been made.

 Financial statements can be prepared directly from

the adjusted trial balance.

39
 Closing Entries

All Revenue accounts

Temporary / CLOSED
All Expense accounts ‘0’
Nominal Accounts A/C Balance
Owner’s Drawings

All Asset accounts

Permanent / A=L+E
All Liability accounts Financial
Real Accounts Position
Owner’s Equity account

40
 Closing Entries

Revenues

Stmnt of
Comp. Inc
Expenses

Owner’s
Capital
Drawings

41
 Closing Entries

Dr. Revenue Account

Revenues
Cr. Income Summary

Dr. Income Summary

Expenses
Cr. Expense Account

42
 Closing Entries

Dr. Income Summary

Profit
Income Cr. Owner’s Capital
Summary

Dr. Owner’s Capital

Loss
Cr. Income Summary

Drawings Dr. Owner’s Capital

Cr. Drawings Account

43
 Preparing the Financial Statements

• The Statement of Profit or Loss and Other Comprehensive

Income is prepared from the revenue and expense accounts.

• The Statement of Changes in Equity is derived from the owner’s

capital and drawing accounts and the net income (or net loss)
from the Statement of Profit or Loss and Other Comprehensive
Income.

• The Statement of Financial Position is then prepared from the

asset and liability accounts and the ending owner’s capital
balance as reported in the owner’s equity statement.

44
XYZ Company purchased an office equipment for RM4,500. XYZ
Company signed a note for the transaction. The journal entries
for XYZ Company are debited to Office Equipment account for
RM4,500, and:

A. credited to Cash Account for RM4,500

B. credited to Accounts Payable Account for RM4,500
C. credited to Notes Payable Account for RM4,500
D. credited to Notes Receivable Account for RM4,500

The first step in the recording process is to:

A. prepare financial statements

B. analyze each transaction for its effect on the accounts
C. post to a ledger
D. prepare a trial balance

All of the following rules are true EXCEPT:

A. credits decrease the drawing account

B. debits increase the capital account
C. credits increase revenue accounts
D. debits decrease liability accounts 45
On 1 June 2011 Dewi Enterprise reported a cash balance in the bank of
RM42,000. During June, Dewi Enterprise made deposits of RM40,000 and
made disbursements totaling RM85,000. What is the cash balance at the
end of June?

A. RM3,000 debit balance

B. RM82,000 debit balance
C. RM3,000 credit balance
D. RM82,000 credit balance

At 31 January 2011, the balance in Mary Sdn Bhd’s supplies account was
RM750. During February, Mary Sdn Bhd. purchased supplies of RM550 and
used supplies of RM250. At the end of February, the balance in the
supplies account should be:

A. RM750 debit
B. RM1,050 credit
C. RM1,550 debit
D. RM1,050 debit

The entire group of accounts maintained by a company is called the:

A. chart of accounts
B. general journal
C. general ledger
D. trial balance 46
47
48
49
50
51
52