Financial Accounting Lesson 4: Completing the Accounting Cycle - PowerPoint Presentation

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Financial Accounting Lesson 4: Completing the Accounting Cycle

Ben Trnka/Boz Bostrom

www.benandboz.com

Let’s start with an example!

Here we have Salesforce’s Income Statement and Balance sheet. What accounts require adjusting at period end?

Overview:

Learn how to create an unadjusted trial balance from T-Accounts

Understand and apply the four types of adjusting journal entries

Understand how to create an adjusted trial balance and financial statements

Understand how and why a company completes closing entries

T-Accounts  Unadjusted Trial Balance

Adjusting Entries

Cash Before - Deferral

Cash After - Accrual

Accruals and Deferrals

Revenues

Expenses

Summary of the 4 types:

Accrued Revenue

Deferred Revenue

Accrued Expense

Deferred Expense

Accrued Revenue

Example: Salesforce provides $1,000 worth of support services to a client during the month, but doesn’t receive payment until after the end of the year. What is the journal entry on December 31?

Entry at the end of the month:

Accounts Receivable $1,000

Revenue $1,000

Entry when payment is received:

Cash $1,000

Accounts Receivable $1,000

Deferred Revenue

Example: On the 1

st

of the month Salesforce received payment from a client for $1,000 for cloud services starting on the 15

th of the month. What is the journal entry on the 1st and at the end of the month (after services have been provided)?

Entry on the 1

st

of the month:

Cash $1,000

Unearned Revenue $1,000

Entry at the end of the month:Unearned Revenue $1,000 Revenue $1,000

Accrued Expense

Example: Salesforce pays employees after every 10 business days. At the end of the month, employees were owed for 7 days of work, or $7,000. What is the journal entry at the end of the year, and what is the journal entry when employees are paid?

Entry at the end of the year:

Wages Expense $7,000

Wages Payable $7,000

Entry when employees are paid:

Wages Payable $7,000Wages Expense $3,000 Cash $10,000

Deferred Expense

Example: Salesforce pays rent for 6 months in advance. The total rent paid for the 6 months is $6,000. What is the entry when payment is made, and what is the entry after the end of one month?

Entry on the 1

st

of the month:

Prepaid Rent $6,000

Cash $6,000

Entry at the end of one month:

Rent Expense $1,000

Prepaid Rent $1,000

Bonus Accrued Expense!!!

Example: Salesforce takes out a one year, $1,000,000 loan on 7/1. The loan has an 8% interest rate, and interest payments are due each year on 6/30. What is the journal entry related to interest on 12/31, and what is the journal entry on 6/30 of year 2?

Entry on 12/31:

Interest Expense $40,000

Interest Payable $40,000

Entry on 6/30 of year 2:

Notes Payable $1,000,000Interest Expense $40,000Interest Payable $40,000 Cash $1,080,000

Entry on 7/1:Cash $1,000,000

Notes Payable $1,000,000

Unadjusted Trial Balance  Adjusted Trial Balance

Adjusted Trial Balance  Financial Statements

Closing Entries

Debit

Credit

-

Dividends

and Losses

+

Income

Debit

Credit

-

+

Debit

Credit

+

-

Expenses

Revenues

Retained Earnings

Closing Entries - Examples

Total revenue for our company was $38,000, and we have two expenses: wages expense for $24,000 and rent expense for $12,000. What are the closing entries?

Close out revenue:

Revenue $38,000

Retained Earnings $38,000

Close out Expenses:

Retained Earnings $36,000 Wages Expense $24,000 Rent Expense $12,000

Post-Closing Trial Balance

Key Takeaways

Unadjusted Trial Balance

 Adjusted Trial Balance  Financial Statements  Post-closing trial balance

4 Types of Adjusting Entries

Accrued RevenuesDeferred Revenues

Accrued ExpensesDeferred ExpensesClosing Entries are completed at the end of each periodRevenues are debited while Retained Earnings is credited

Expenses are credited while Retained Earnings is debitedThanks for tuning in!