Lecture 3

adjusting and closing
entries LECTURE 3
Learning objectives
After studying this chapter, you should have developed an
appreciation of:
1. what is meant by “closing entries”,
2. what is meant by “adjusting entries”,
3. how the accountant accounts for supplies,
LECTURE 3
4. how the accountant accounts for bad debts,
5. how the accountant accounts for depreciation.
Closing entries
Closing entries formally recognize, in the general ledger,
the transfer of
- net income (or net loss) and
- dividends
to retained earnings.
Closing entries are only made at the end of the annual

accounting period.
Closing entries
Closing entries
Closing the book
Note:
Dividends are closed directly to
Closed Expenses
retained earnings and not to
Income Summary because
dividends are not an expense.
Consistency
Accounting methods and practices must
be applied consistently across reporting
periods to ensure financial statements
are comparable.
Closing entries
Closing the book
Closed Expenses
Consistency
Accounting methods and practices must
be applied consistently across reporting
periods to ensure financial statements
are comparable.
Adjusting
Ensure that the Necessary because Will include one
revenue recognition the trial balance Required every time income statement
and expense may not contain a company prepares account and one
recognition principles up-to-date and financial statements statement of
are followed complete data financial position
account
Types of adjusting entries
Prepaid Expenses Accrued Revenues
Expenses paid in cash before they Revenues for services performed but
are used or consumed. not yet received in cash or recorded..
Unearned Revenues Accrued Expenses

Cash received before services are Expenses incurred but not yet paid in
performed. cash or recorded.
Prepaid expenses
Prepaid expenses
Prepaid expenses
Imagine that on 1st January
20X1 Winnipeg’s Trudeau Inn
took advantage of a special
insurance offer and purchased
18 months’ insurance coverage
for $3,000. On 30th June 20X2
this policy was renewed for a
further 12 months at a cost of
$2,400. Trudeau Inn's
accounting year- end is on the
31st December.
accrues expenses
◆ Adjusting entry records the obligation
and recognizes the expense.
◆ Adjusting entry:
► Increase (debit) an expense
account and
► Increase (credit) a liability
account.
accrued expenses
Illustration: Winnipeg’s Trudeau Inn last
paid salaries on October 26; the next
payment of salaries will not occur until
November 9. The employees receive total
salaries of $2,000 for a five-day work week,
or $400 per day. Thus, accrued salaries at
October 31 are $1,200 ($ 400 x 3 days).
Unearned revenues
Unearned revenues
Unearned revenues
Imagine that on 1st December the Captain
Cook Hotel in Whitby, Yorkshire received
£50,000 as an advance payment from a
conference organizer, covering the cost of a
five-day conference that the hotel will host
commencing on 30th December. At the close
of business on 31st December (the hotel’s
accounting year- end), 40 per cent of the
conference service can be seen to have been
provided (i.e., the hotel has completed the
hosting of two days of the five-day
conference).
Accrued revenues
Accrued revenues
Accrued revenues
Imagine Aberdeen’s Scrooge
Hotel has an investment of
£24,000 yielding 10 per cent
annual interest with cash interest
paid semi- annually. The last time
the Scrooge Hotel updated its
records with respect to this
investment occurred on 30th
September which is when it last
received an interest payment of
£1,200 earned for the six months
commencing 1st April.
supplies
Suzy Defoe is the office manager of Manchester’s Old Trafford Hotel. The hotel operates a periodic
inventory system with respect to office supplies. At the year-end, the hotel accountant asked Suzy to
oversee a year-end stocktake of supplies, in order that the cost of supplies used during the year could be
determined. The year-end stocktake revealed that £2,000 of office supplies were held on 31st December
20X1. Suzy then consulted the supplies inventory account, which had last been updated 12 months
previously (i.e., following the previous year-end’s stocktake), and noted a debit balance of £2,800.
Throughout the year she debited the “supplies purchases” account whenever purchasing supplies. She
notes that prior to making any adjusting entries, this account had a year- end debit balance of £14,000.
Bad debt expenses
If every month we
make $100,000 of
credit sales and we
believe that on
average 2 per cent
will prove to be
uncollectible
depreciation
◆ Buildings, equipment, and vehicles (assets with long lives) are
recorded as assets, rather than an expense, in the year acquired.
◆ Depreciation allocates a portion of the asset’s cost as an expense
during each period of the asset’s useful life.
◆ Depreciation does not attempt to report the actual change in the
value of the asset.
depreciation
For Premier Staffing Agency, Inc., assume that depreciation on
the equipment is $480 a year, or $40 per month

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adjusting and closing

Closing entries are only made at the end of the annual

Unearned Revenues Accrued Expenses

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