Accounting Cycle. Matching Principle

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1 CHAPTER 3 Accounting Cycle Analyze and record the transactions Post the transactions and prepare trial balance Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts and prepare trial Chapter 3 Mugan-Akman balance Matching Principle All revenues must be in the accounting period in which the goods are sold or services are rendered and all expenses must be in the accounting period in which they are incurred to produce such revenues Chapter 3 Mugan-Akman

2 Adjusting Entries Some journal entries are made at the end of the accounting period just to separate the effect of an event into its proper. Each adjusting entry affects: 1) a revenue or expense account 2) an asset or liability account (except cash) Examples include: 1. Recognition of accrued revenues and receivables, 2. Interest calculations, 3. Recognition of accrued expenses and payables, 4. Allocation of prepaid operating costs, and 5. Recognition of depreciation. Chapter 3 Mugan-Akman When do we need adjusting entries? Prepayments 1. Allocation of costs between accounting 2. Allocation of unearned revenues between accounting Accruals 3. Expenses incurred but not 4. Revenues earned but not Chapter 3 Mugan-Akman Trial Balance Trial Balance 31-Jan-2007 Accounts Debit Credit Cash TL Accounts Receivable Office Supplies Prepaid Rent 600 Prepaid Insurance 120 Office Furniture and Equipment Bank Loan TL Accounts Payable Unearned Revenues Capital Withdrawal Commission Revenues Salary Expenses Total TL TL Chapter 3 Mugan-Akman

3 Adjusting Entries Prepayments 1. Allocation of costs between accounting 2. Allocation of unearned revenues between accounting Accruals 3. Expenses incurred but not 4. Revenues earned but not Chapter 3 Mugan-Akman Adjustment (1) Prepaid Rent 31-Jan Rent Expense (Income Statement) 200 Prepaid Rent (Balance Sheet) 200 To record rent expense incurred in January Prepaid Rent 1-Jan Jan 200 Balance 400 Rent Expense 31-Jan 200 Balance 200 Chapter 3 Mugan-Akman Adjustment (2) Prepaid Insurance 31-Jan Insurance Expense 10 Prepaid Insurance 10 To record insurance expense incurred in Prepaid Insurance 3-Jan Jan 10 Balance 110 Insurance Expense 31-Jan 10 Balance 10 Chapter 3 Mugan-Akman

4 Adjustment (3) Office Supplies 31-Jan Supplies Expense 500 Office Supplies 500 To record supplies used in January. Office Supplies 10-Jan Jan 500 Balance 2000 Supplies Expense 31-Jan 500 Balance 500 Chapter 3 Mugan-Akman Adjustment (4) Depreciation of Property Plant & Equipment 31-Jan Depreciation Expense 250 Accumulated Depreciation 250 To record depreciation expense of January Furniture & Equipment 2-Jan Balance Depreciation Expense Accumulated Depreciation 31-Jan Jan 250 Balance 250 Balance 250 Chapter 3 Mugan-Akman Partial Balance Sheet 31January 2007 Plant and Equipment Office Equipment and Furniture TL Less: Accumulated Depreciation (250) Plant and Equipment, net Chapter 3 Mugan-Akman

5 Adjusting Entries 1. Allocation of costs between accounting 3. Expenses incurred but not 2. Allocation of unearned revenues between accounting 4. Revenues earned but not Chapter 3 Mugan-Akman Adjustment (5) Unearned Revenues 31-Jan Unearned Revenues Commission Revenues To record commissions earned in January Unearned Revenues 31-Jan Jan 7500 Balance 3000 Commission Revenues 31-Jan Jan 4500 Balance Chapter 3 Mugan-Akman Adjusting Entries 1. Allocation of costs between accounting 3. Expenses incurred but not 2. Allocation of unearned revenues between accounting 4. Revenues earned but not Chapter 3 Mugan-Akman

6 Adjustment (6) Accrued Salary Expense 31-Jan Salary Expense Salaries Payable To record salaries for the services received Salaries Payable 31-Jan 2500 Balance 2500 Salary Expense 24-Jan Jan 2500 Balance Chapter 3 Mugan-Akman Adjustment (7) Accrued Interest Expense 31-Jan Interest Expense 210 Interest Payable 210 To record interest expense of the bank loan incurred but not paid Interest Payable 31-Jan 210 Balance 210 Interest Expense 31-Jan 210 Balance 210 Chapter 3 Mugan-Akman Adjusting Entries 1. Allocation of costs between accounting 2. Allocation of unearned revenues between accounting 3. Expenses incurred but not 4. Revenues earned but not Chapter 3 Mugan-Akman

7 Adjustment (8) Accrued Revenues 31-Jan Fees Receivable Service Revenues To accrue fees earned in January Service Revenues 31-Jan 3450 Balance 3450 Fees Receivable 31-Jan 3450 Balance 3450 Chapter 3 Mugan-Akman Effects of Adjusting Entries Difference between revenues and expenses TL Effect of adjustment (1) (200) Effect of adjustment (2) (10) Effect of adjustment (3) (500) Effect of adjustment (4) (250) Effect of adjustment (5) Effect of adjustment (6) (2.500) Effect of adjustment (7) (210) Effect of adjustment (8) Difference between revenues and expenses TL Chapter 3 Mugan-Akman Adjusted Trial Adjusting Entries Balance Unadjusted Trial Balance 31-Jan Jan-07 Debit Credit Accounts Debit Credit Debit # Credit Cash Accounts Receivable Fees Receivable (8) Office Supplies (3) Prepaid Rent 600 (1) Prepaid Insurance 120 (2) Office Furniture and Equipment Accumulated Depreciation (4) Bank Loan Accounts Payable Unearned Revenues (5) Salaries Payable (6) Interest Payable (7) Capital Withdrawals Commission Revenues (5) Service Revenues (8) Salary Expenses (6) Rent Expense 200 (1) 200 Insurance Expense 10 (2) 10 Supplies Expense 500 (3) 500 Depreciation Expense 250 (4) 250 Interest Expense 210 (7) 210 Total Chapter 3 Mugan-Akman

8 Accounting Cycle Analyze and record the transactions Post the transactions and prepare trial balance Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts and prepare trial balance Chapter 3 Mugan-Akman Steps to Close Accounts Close temporary accounts with credit balances to income summary Close temporary accounts with debit balances to income summary Close income summary Close dividends or owners withdrawals Chapter 3 Mugan-Akman Adjusted Trial Balance 31-Jan-07 Accounts Debit Credit Cash TL Accounts Receivable Fees Receivable Office Supplies Prepaid Rent 400 Prepaid Insurance 110 Office Furniture and Equipment Accumulated Depreciation TL 250 Bank Loan Accounts Payable Unearned Revenues Salaries Payable Interest Payable 210 Capital Withdrawals Commission Revenues Service Revenues Salary Expenses Rent Expense 200 Insurance Expense 10 Supplies Expense 500 Depreciation Expense 250 Interest Expense 210 Total TL TL Chapter 3 Mugan-Akman

9 Closing Credit Balances 31 Jan 2007 Commission Revenues Service Revenues Income Summary To close revenue accounts Chapter 3 Mugan-Akman Adjusted Trial Balance 31-Jan-07 Accounts Debit Credit Cash TL Accounts Receivable Fees Receivable Office Supplies Prepaid Rent 400 Prepaid Insurance 110 Office Furniture and Equipment Accumulated Depreciation TL 250 Bank Loan Accounts Payable Unearned Revenues Salaries Payable Interest Payable 210 Capital Withdrawals Commission Revenues Service Revenues Salary Expenses Rent Expense 200 Insurance Expense 10 Supplies Expense 500 Depreciation Expense 250 Interest Expense 210 Total TL TL Chapter 3 Mugan-Akman Closing Debit Balances 31 Jan 2007 Income Summary Salary Expense Rent Expense 200 Insurance Expense 10 Supplies Expense 500 Depreciation Expense 250 Interest Expense 210 To close expense accounts Chapter 3 Mugan-Akman

10 Closing Income Summary Income Summary 31-Jan Jan Balance Jan 2007 Income Summary Capital To close income summary account Chapter 3 Mugan-Akman Closing Withdrawals 31 Jan 2007 Capital Withdrawals To close withdrawals account Chapter 3 Mugan-Akman Post Closing Trial Balance 31 January 2007 Accounts Debit Credit Cash TL Accounts Receivable Fees Receivable Office Supplies Prepaid Rent 400 Prepaid Insurance 110 Office Furniture and Equipment Accumulated Depreciation TL 250 Bank Loan Accounts Payable Unearned Revenues Salaries Payable Interest Payable 210 Capital Withdrawals 0 Commission Revenues 0 Service Revenues 0 Salary Expenses 0 Rent Expense 0 Insurance Expense 0 Supplies Expense 0 Depreciation Expense 0 Interest Expense 0 Chapter 3 Total TL Mugan-Akman 2007 TL

11 Accounting Cycle Analyze and record the transactions Post the transactions and prepare trial balance Adjust the accounts and prepare trial balance Prepare the financial statements Close the accounts and prepare trial Chapter 3 Mugan-Akman balance Income Statement For the Month Ended 31-Jan-07 Commission Revenues TL Service Revenues Total Revenues Salary Expense Rent Expense 200 Insurance Expense 10 Supplies Expense 500 Depreciation Expense 250 Interest Expense 210 Total Expenses Net Income TL Chapter 3 Mugan-Akman Balance Sheet as of 31-Jan-07 Assets Liabilities and Owners' Equity Cash Bank Loans Accounts Receivable Accounst Payable Fees Receivable Salaries Payable Office Supplies Unearned Revenues Prepaid Rent 400 Interest Payable 210 Prepaid Insurance 110 Total Liabilities Office Furniture and Equipment Accumulated Depreciation Owners' Equity Capital Total Owners' Equity Total Assets TL Total Liabilities and Owners' Equity TL Chapter 3 Mugan-Akman

12 Appendix 3 Closing Entries for Limited Liability Corporations and Corporations Chapter 3 Mugan-Akman Cradle Corporation Adjusted Trial Balance 31-Dec-04 Cash TL Accounts Receivable Office Supplies 475 Prepaid Insurance 200 Equipment Accumulated Depreciation- Equipment TL 700 Accounts Payable 400 Unearned Revenue 300 Salaries Payable 120 Share Capital Revenues Salary Expense Rent Expense 400 Insurance Expense 40 Office Supplies Expense 105 Depreciation Expense 100 TL TL Chapter 3 Mugan-Akman Closing Credit Balances 31 Dec 2004 Revenues Period Income/Loss To close revenue accounts Chapter 3 Mugan-Akman

13 Closing Debit Balances 31 Dec 2004 Period Income/Loss Salary Expense Rent Expense 400 Insurance Expense 40 Supplies Expense 105 Depreciation Expense 100 To close expense accounts Chapter 3 Mugan-Akman Closing Income Summary Period Income/Loss 31.Dec Dec Balance Jan 2004 Period Income/Loss Net Income For the Period To close income summary account Chapter 3 Mugan-Akman Chapter 3 Mugan-Akman

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