chapter 4 bkal
TRANSCRIPT
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BKAL 1013 Chapter 4 1
CHAPTER 4
COMPLETINGTHE
ACCOUNTING CYCLE
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BKAL 1013 Chapter 4 2
OUTLINEAdjusting Entries
Preparing the Adjusted Trial Balance
Closing Entries
Preparing the Financial Statements
Income Statement
Statement of Owners Equity
Balance Sheet
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BKAL 1013 Chapter 4 3
The Accounting Cycle
Source
Documents
Journal
LedgerTrial BalanceAdjustments
Adjusted
Trial Balance
Financial
Statements
Closing
Entries
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BKAL 1013 Chapter 4 4
Fiscal year Vs Calendar year
Fiscal year
Calendar year
1st day of a month and ends
twelve months later on thelast day of a month.
1st January to 31st December
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BKAL 1013 Chapter 4 5
Accrual Vs Cash-basis accounting
Accrual
Cash-basisrevenue is recorded when cashis received, and expenses are
recorded when cash is paid
(Recognized based on cash movement)
revenue and expenses are
recognized at the time they
take place, and not at thetime they are actually paid.(Recognized when the benefit
Transferred)
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BKAL 1013 Chapter 4 6
Recognition of Revenue & Expenses
REVENUERECOGNITION
PRINCIPLE
THE MATCHINGPRINCIPLE
revenue be recognized in the
accounting period in which it
is earned.
efforts (expenses) should be matched
with accomplishments (revenues).
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Adjusting EntriesEntries that required to make sure allthe revenues and expenses are clearly
measured and recognized (realise)Prepared at the end of the period
Do not involved cash account
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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.
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The Basics of Adjusting Entries
Prepayments
Prepaid Expenses
Expenses paid in cash and
recorded as assets before
they are used or consumed
Unearned Revenues
Cash received and recorded as
liabilities before revenue
is earned
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The Basics of Adjusting Entries
Accruals
Accrued Revenues
Revenues earned but not yet
received in cash or recorded
Accrued Expenses
Expenses incurred but not yetpaid in cash or recorded
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Prepaid Expenses
Prior to adjustment, assets are overstated and
expenses are understated.
The adjusting entry results in a debit to an expense
account and a credit to an asset account.
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Prepaid ExpensesAsset Expense
Unadjusted
balanceCredit
Adjustment
Debit
Adjustment
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Prepaid ExpensesSupplies
Insurance
Depreciation
Examples
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SuppliesAn inventory count reveals that RM1,000 of
RM2,500 of supplies are still on hand.Adjustment:
Dr. Supplies Expense 1,500
Cr. Office Supplies 1,500
Dr. Office Supplies 2,500
Cr. Cash 2,500
Entries before
adjustment:
Adjusting
entries:
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Supplies
Office Supplies
Supplies ExpenseCash 2,500 Supp. Exp 1,500
Off. Supp. 1,500
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InsuranceInsurance premium paid for one yearamounting to RM1,200; Expires every month
RM100.Adjustment:
Dr. Insurance Expense 100
Cr. Prepaid Insurance 100
Entries before
adjustment:
Adjusting
entries:
Dr. Prepaid Insurance 1,200
Cr. Cash 1,200
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Insurance
Prepaid Insurance
Insurance ExpenseCash 1,200 Ins. Exp 100
Pre. Insurance 100
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BKAL 1013 Chapter 4 18
DepreciationDepreciation 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.
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BKAL 1013 Chapter 4 19
DepreciationIn recording depreciation,Depreciation Expenseis
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.
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BKAL 1013 Chapter 4 20
Depreciation
Depreciation
MethodsStraight Line Method
Reducing Balance Method
Unit of productions Method
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BKAL 1013 Chapter 4 21
Depreciation
Straight-line depreciation allocates equal amount of anassets net cost to depreciation during the estimated
useful life.
Eg: Equipment costing RM26,000, estimated to have auseful life of 4 years and expected to be sold for
RM8,000 at the end of the 4th year.
Formula: Cost - Scrap Value
Estimated useful life
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BKAL 1013 Chapter 4 22
Depreciation
Calculation: RM26,000 - RM8,000
4 years
= RM4,500 per year
Adjustingentries:
Dr. Depreciation Expense 4,500
Cr. Accumulated Depn. 4,500
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BKAL 1013 Chapter 4 23
Depreciation
Depreciation Expense
Accumulated Depn.Off. Eqpt. 4,500
Depn. Exp. 4,500
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BKAL 1013 Chapter 4 24
Depreciation
Reducing Balance depreciation :
Eg: Equipment costing RM35,000, accumulated depreciation
RM5,250. The depreciation rate is 15% on book value.
Formula:Net Book Value x Depreciation rate
(Cost - Accumulated Depn) x Depreciation rate
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BKAL 1013 Chapter 4 25
Depreciation
Calculation: (RM35,000 - RM5,250) x 15%
= RM4,463 per year
Adjusting
entries:
Dr. Depreciation Expense 4,463
Cr. Accumulated Depn. 4,463
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BKAL 1013 Chapter 4 26
Unearned Revenues
Prior to adjustment, liabilities are overstated and
revenues are understated.
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.
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BKAL 1013 Chapter 4 27
Unearned Revenues
Liability Revenue
Unadjusted
balance
Credit
Adjustment
Debit
Adjustment
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BKAL 1013 Chapter 4 28
Unearned Revenues
RM2,000 subscription fees has been earned,
out of RM5,000 unearned subscription fees
that has been received last month.
Adjustment:
Dr. Unearned
Subscription Fees 2,000
Cr. Subscription Fees 2,000
Dr. Cash 5,000
Cr. Unearned
Subscription Fees 5,000
Entries before
adjustment:
Adjusting
entries:
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BKAL 1013 Chapter 4 29
Unearned Revenues
Unearned Subscription Fees
Suscription FeesSubscriptionFees 2,000
Balance 5,000
Unearned
Subscription
Fees 2,000
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BKAL 1013 Chapter 4 30
Accrued Revenues
Prior to adjustment, assets and revenues are understated.
Accrued revenues may accumulate with the passing of time
or through services performed but not billed or collected.
The adjusting entry requires a debit to an asset account
and a credit to a revenue account.
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BKAL 1013 Chapter 4 31
Accrued Revenues
Asset Revenue
Debit
Adjustment Credit
Adjustment
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BKAL 1013 Chapter 4 32
Accrued Revenues
The company has completely performed the
audit service but has not bill the customer
yet, RM7,000.
Adjustment:
Dr. Account Receivable 7,000
Cr. Audit Fees 7,000
Adjusting
entries:
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BKAL 1013 Chapter 4 33
Accrued Revenues
Account
Receivable 7,000
Audit Fees
Audit Fees 7,000
Account Receivable
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BKAL 1013 Chapter 4 34
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.
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BKAL 1013 Chapter 4 35
Accrued Expenses
Expense Liability
Debit
Adjustment Credit
Adjustment
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BKAL 1013 Chapter 4 36
Accrued Expenses
Salaries accrued at the end of the month
RM4,000.Adjustment:
Dr. Salary Expense 4,000
Cr. Salary Payable 4,000
Adjusting
entries:
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BKAL 1013 Chapter 4 37
Accrued Expenses
Salary Exp. 4,000
Audit Fees
Salary Payable 4,000
Salary Expense
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BKAL 1013 Chapter 4 38
Summary of Adjusting Entries
Types of Accounts Before AdjustingEntries
Adjustments Adjustments
Prepaid
Expenses
Assets overstated
Expenses understated
Dr. Expense
Cr. Asset
Unearned
Revenues
Liabilities overstated
Revenues understated
Dr. Liability
Cr. Revenue
Accrued
Revenues
Dr. Asset
Cr. Revenue
Dr. Expense
Cr. Liability
Assets understated
Revenues understated
Accrued
Expenses
Liabilities understated
Expenses understated
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BKAL 1013 Chapter 4 39
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.
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BKAL 1013 Chapter 4 40
Closing Entries
Temporary /
Nominal Accounts
Permanent /Real Accounts
All revenue accounts
All expense accounts
Owners drawings
All asset accounts
All liability accounts
Owners capital account
CL
O
S
E
C
N L
O O
T S
E
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BKAL 1013 Chapter 4 41
Closing Entries
Revenues
Expenses
Income
Summary
Drawings
Owners
Capital
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BKAL 1013 Chapter 4 42
Closing Entries
Revenues
Expenses
Dr. Revenue Account
Cr. Income Summary
Dr. Income SummaryCr. Expense Account
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BKAL 1013 Chapter 4 43
Closing Entries
Drawings Dr. Owners Capital
Cr. Drawings Account
Income
Summary
Loss
ProfitDr. Income Summary
Cr. Owners Capital
Dr. Owners Capital
Cr. Income Summary
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BKAL 1013 Chapter 4 44
Preparing the Financial Statements~ The income statement is prepared from the revenue
and expense accounts.
~ The owners equity statement is derived from the
owners capital and drawing accounts and the net
income (or net loss) from the income statement.
~ The balance sheet is then prepared from the asset
and liability accounts and the ending owners capital
balance as reported in the owners equity statement.
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BKAL 1013 Chapter 4 45
The Income StatementThe statement that reports the profitability ofa business organization for a stated period of
timeContent of the statement
Title
Revenues
Expenses
Net profit/(loss) difference between revenuesand expenses
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BKAL 1013 Chapter 4 46
The income statement .. contFormat
Single
Did not classified the revenues and expenses based ontheir category
Multiple
More detailed and classified all the revenues andexpenses based on their nature/function
SummaryReports the important/significant item and support withthe notes
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BKAL 1013 Chapter 4 47
The owners equity
statementThe statement that reports the changesin owners equity for a period of time.
Must be prepared after the incomestatement
Connect the link between IS and BS
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BKAL 1013 Chapter 4 48
The owners equity
statement - ContFormat
Title
Beginning balanceAdditional investment during period (if any)
Net income of the period (from IS)
WithdrawalsEnding balance
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BKAL 1013 Chapter 4 49
The Balance SheetThe statement that list all the assets,liabilities and equities of a specific moment intime
Purpose to show the financial position ofthe organization
Assets classified into current and non-current assets
Liabilities classified into current and longterm liabilities
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BKAL 1013 Chapter 4 50
The balance sheet .. contFormat
Report form
Account formWorking capital form
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