FINANCIAL ACCOUNTING

Completion of the Accounting Cycle

Prepared by:
Raza Saeed,
FCMA, MBA, ACIS, CIA, DAIBP
 2 of 43

Learning Objectives
After studying this chapter, you should be able to

• State the purpose of adjusting entries and explain how these

entries relate to the concepts of accrual accounting.
• Describe the four basic type of adjusting entries
• Explain the concept of materiality
• Prepare a worksheet and explain its usefulness
• Describe the sequence of steps in the accounting cycle
 3

Type of Adjusting Entries

• Entries to Apportion recorded cost
• Allocation of cost of assets to expense over a span of several
accounting period e.g Depreciation Expenses etc
• Entries to apportion unearned revenue
• Collection in advance for the services to rendered to customer in future

• Entries to record unrecorded expenses

• An expense may incurred during the current period but no bill
received and payment will not occur until a future period.
• Entries to record unrecorded revenue
• Revenue may be earned during the current period, but not yet
billed to the customer or recorded in the accounting record.
 4

General Journal-Adj. Entry

Insurance
November 01, Robert Real Estate Company Paid $ 600 for one year
insurance policy covering the building.

General Journal Account #

Date Account Title and Explanation LP Debit Credit

20----

Nov 01 Un-expired Insurance 600

Cash 600
Purchased a one-year fire insurance policy

Nov 30 Insurance Expense . 50

Unexpired Insurance 50
To record insurance Expense for November
 5

General Journal-Adj. Entry

Supplies
November 02, Robert Real Estate Company purchased enough stationery
and other office supplies to last for several months. The Cost of Supplies was
$720
No entry was made during November to record usage of office Supplies but
at end of November 30, manger estimated that office supplies costing $500
Is in hand

General Journal pplies Account #

Date Account Title and Explanation LP Debit Credit

20----
Nov 02. Office Supplies 720
Cash 720
Purchased office supplies
Nov 30 Office Supplies Expense . 220
Office Supplies 220
To record consumption of office supplies for
November
 6

General Journal-Adj. Entry

Depreciation
November 30, To record depreciation for November as passed in October .
Cost $36,000 /240 Months = $150 per month November

General Journal Account #

Date Account Title and Explanation LP Debit Credit
20----

Nov 30 Depreciation Expense-Building 150

Accumulated Depreciation–Building 150
To record depreciation for November
 7

General Journal-Adj. Entry

Depreciation
November 30, To record depreciation for November as passed in October .
Cost of Office Equipment $5,400 /120 Months = $45 per month November

.
General Journal Account #
Date Account Title and Explanation LP Debit Credit
20----

Nov 30 Depreciation Expense-Office Equipment 45

Accumulated Depreciation–Office Equipment 45
To record depreciation for November
 8

General Journal-Adj. Entry

Unearned Revenue
November 01, Robert Real Estate Company agreed to act as manager of
some rental properties for a monthly fee of $300. The fee of six months was
paid in advance.

General Journal Account #

Date Account Title and Explanation LP Debit Credit
20----

Nov 01 Cash 1,800

Unearned Management fee 1,800
Collected in advance six months fees for
management of properties owned by Frank Day
30 Unearned Management fee 300
Management fee earned 300
Fee earned by managing Frank Day property
during November
 9

General Journal-Adj. Entry

Unrecorded Expense
November 01, Robert Real Estate Company borrowed the sum of $ 3,000
from a bank for a period of three months.
November 30, Adjusting entry to charge November operation with one month
interest expense

General Journal Account #

Date Account Title and Explanation LP Debit Credit
20----

Nov 01 Cash 3,000

Notes Payable 3,000
Obtained from bank three months loan with 12% p.a
30 Interest Expense 30
Interest Payable 30
To record interest expense accrued on NP during
November
 10

General Journal-Adj. Entry

Unrecorded Expense
November 30, Adjusting entry to record Salary Expense earned for 4 days
out of 5 days week salary of $ 225

General Journal Account #

Date Account Title and Explanation LP Debit Credit
20----

Nov 01 Salary Expense 180

Salaries Payable 180
To record salary expense and related liability to
salesperson for the last four evenings in November
Dec 01 Salary Payable 180
Salary Expense 45
Cash 225
Paid weekly salary to salesperson
 11

General Journal-Adj. Entry

Unrecorded Revenue
On November 16, The Company agreed to manage Clayton properties for a
fee of $240 per month but the 1st month fee will not be received untill
December 15
November 30, Adjusting entry to record revenue earned during November

General Journal Account #

Date Account Title and Explanation LP Debit Credit
20----

Nov 30 Management Fee Receivable 120

Management Fee earned 120
To record accrued revenue from service rendered to
Clayton during November

Dec 15 Cash 240

Management fee receivable 120
Management fee earned 120
Collected Management fee from Clayton for the
month ended December 15
 12

Concept of Materiality
• Materiality refers to the relative importance of an item or an
event
• An item is material if the knowledge of the item might
reasonably influence the decision of user of Financial
Statement
• Accounting treatment accorded to immaterial is of little or no
consequences to decision maker
• Materiality and adjusting entries:
• 1.Charging Janitorial supplies etc purchases directly to expense
account
• 2. Telephone or utility bills expense may be charged to expense as the
bills are paid
• 3. Adjusting entries to accrue unrecorded expense or revenue may be
ignored if dollar amount is immaterial
• 4. If the amount of error is not likely material, adjusting entry may be
based on estimates
 13

Work Sheet
1. Prepare Trial Balance: Enter the ledger account
balances in the Trial Balance Columns- WS-1
2. Prepare adjustment entries: Enter the adjustments in
the adjustments columns- WS-2
(a) Portion of insurance cost which expired during November
(b) Office Supplies used during November
(c ) Depreciation Expense during November
(d) Depreciation of Office Equipment
(e) Earned one-sixth of the fee collected in advance on the Day of
properties
(f) Interest Expense accrued during November on NP($3000x 12%x1/12)
(g) Salesperson's salary for the last four day of Nov ..
(h)Management fee accrued on Clayton contract in Nov
 14

Work Sheet
• Determine the adjusted Trial Balance – Enter them in
adjusted Trial Balance Columns – WS-3
• Extend each adjusted amount to the appropriate financial
statements columns – WS-4
• Total both sets of financial statement columns: then enter
“Net Income” as balancing figure” WS-5
 15

Income Statement
Robert Real Estate Company
Income Statement
For the month ended November 30, 20------
Revenue
Sales Commissions earned $15,484
Management fee earned 420
Total Revenue 15,904
Expenses
Advertising Expenses $1,275
Salaries Expenses 9,605
Telephone Expenses 1,195
Insurance 50
Office supplies 220
Depreciation Expenses - Buildings 150
Depreciation Expenses – Office Equipment 45
Interest 30 12,570
Total Expenses
Net Income $3,334
 16

Statement of Owners Equity

Robert Real Estate Company
Statement of Owners Equity
For the month ended November 30, 20------
James Roberts Capital – November 1, 20----- $180,771
Add: Net Income for October 3,334
Sub-total 184,105
Less: Withdrawal by the Owner 1,500
James Roberts Capital – October 31, 20----- 182,605
 17
Robert Real Estate Company
Balance Sheet
November 30, 20------
Assets

Cash $21,740
Accounts Receivable 16,690
Management Fee Receivable 120

Unexpired Insurance 550

Office Supplies 500

Land 130,000

Building 36,000

Accumulated depreciation: Building 300 35,700

Office Equipment 5,400

Accumulated depreciation: Office Equipment 90 5,310

Total Assets $210,910

Liabilities & Owners Equity
Liabilities:
Notes Payable 3,000
Accounts Payable 23,595

Interest Payable 30
Salaries Payable 180
Unearned Management fee 1,500
Total Liabilities 28,305
Owner’s Equity:
James Robert Capital-October -31, 20----- 182,605

Total Liabilities & Owner’s Equity $204,585.

 18

Recording Adjusting Entries

General Journal Account #
Date Account Title and Explanation LP Debit Credit
20--
Nov 30 Insurance Expense . 50
Unexpired Insurance 50
To record insurance Expense for November
30 Office Supplies Expenses 220
Office Supplies 220
Office Supplies used in November
30 Depreciation Expense: Building 150
Accumulated Depreciation – Building 150
Depreciation for November ($ 36,000/240=$150)
30 Depreciation Expense: Office Equipment 45
Accumulated Depreciation – Office Equip 45
Depreciation for November ($ 5,400/120=$45)
30 Unearned Management fee 300
Management fee earned 300
Earned one sixth of fee collected in advance
 19

Recording Adjusting Entries

General Journal Account #

Date Account Title and Explanation LP Debit Credit
20--
Nov 30 Interest Expense . 30
Interest Payable 30
Interest expense accrued during November on NP
( $3,000x12%x1/12)
30 Salaries Expense 180
Salaries Payable 180
To record expense and related liability to Salesperson
for last four evenings work in November
30 Management Fees Receivable 150
Management fee earned 150
To record the receivable and related revenue earned
for managing properties
 20

The Accounting Cycle

1. Journalize transactions
2. Post to Ledgers accounts
3. Prepare a worksheet
4. Prepare financial statements and appropriate notes to
the accounts
5. Journalize and post the adjusting and closing entries
6. Prepare an after closing trial balance
 21

Thank you