Steps 5, 6 and 7 are the preparation of adjusting journal entries, the posting of these entries to the accounts, and

, and the completion of an adjusted

HI5001 ACCOUNTING FOR BUSINESS DECISIONS trial balance. These steps are important under an accrual system of accounting to record all accruals and deferrals of income and expenses that
affect an entity at the end of the accounting period. Preparation of the adjusted trial balance after posting to the accounts provides a check on
Tutorial Topic 5 the accuracy of the adjustment process.
The Accounting Cycle
Steps 8 and 9 are the preparation of closing entries at the end of the accounting period in order to close off all temporary equity accounts
(income, expenses and drawings accounts). The step is useful in that it calculates the performance of the entity, and closes off the temporary
accounts, leaving them with zero balances at the beginning of the next accounting period. As a result of this step, an entity’s financial
Reading: Hoggett & Edwards Chapter Five performance, or profit, is determined.
Questions: Hoggett & Edwards Chapter Five
Step 10 is the process of footing the balances in all permanent accounts at the end of the period, and the preparation of a post-closing trial
Discussion questions 1, 2 & 4 balance. The step is important in determining the financial position of the entity, as shown in the entity’s statement of financial position or
Exercise 5.1 balance sheet. The post-closing trial balance provides a further check on the accuracy of posting all closing entries.
Problems 5.3, 5.6, 5.9, 5.11, 5.13 & 5.14
Step 11 is the preparation of financial statements after completion of the recording process. The entity’s statement of financial position can be
Critical Thinking Case prepared directly from the post-closing trial balance, and the income statement can be prepared from temporary account balances listed in the
Ethical Issues adjusted trial balance. Alternatively, the statements can be prepared from a worksheet. These financial statements are important sources of
DISCUSSION information about an entity for the use of interested parties.
QUESTIONS
Steps 12 and 13 are the preparation and posting of reversing entries, which is performed on the first day of the new accounting period. This
step is not necessary, but it is helpful in simplifying the recording of cash transactions in the new period in relation to economic events
SOLUTIONS requiring adjusting entries at the end of the current period. Reversing entries are particularly helpful in the case of accrual adjusting entries at
1. In figure 5.1, the accounting cycle is illustrated. Explain the purpose and importance of each step in the cycle. the end of the period.

Step 1 of the accounting cycle is to capture the data from every transaction involving the entity in the form of source documents, which may
take many different formats. For example, source documents can consist of sales or service invoices, cash dockets, credit card slips, purchase
invoices, delivery notes, credit notes, computerised cash register tapes, EFTPOS records. Step 1 is important in that it is the chief means of 2. Compare and contrast the purposes of adjusting entries, closing entries and reversing entries.
collecting data about the economic activities of the entity, which then must be recorded in the accounting system. The step provides a vital
Adjusting entries are made on the last day of each financial/reporting period in order to account for any accruals and deferrals arising from
first stage in developing an audit trail for auditors to assess the effectiveness of control procedures in the accounting information system. acceptance of the period assumption and the accrual basis of accounting. These entries are necessary to measure correctly the entity’s

Step 2 records (enters), in journals, all of the transactions about the entity from source documents developed in Step 1. This is usually done as profits/performance and financial position, as opposed to the entity’s cash performance and cash position.
a double entry process. The journals are important in that they provide a chronological record of the economic transactions and events that
Closing entries are made on the last day of the financial period in order to close off all temporary equity accounts, so that these accounts are
affect the entity. given zero balances for the beginning of the new financial period. Temporary equity accounts consist of income (revenue), expenses, and

Step 3 posts all of the information from the journals into the entity’s ledger accounts. In so doing, financial information is reclassified into drawings. These temporary accounts are used to determine the total value of such items for the current period. At the end of that period, they
items of a like nature, i.e. into different types of assets, liabilities and equity accounts. are closed into permanent equity accounts (capital or retained earnings) in preparation for the next period.

Step 4 is performed periodically e.g. at the end of each month, whereby the ledger accounts developed in Step 3 are totalled and a trial balance
Reversing entries, which are made on the first day of the new accounting period, are not necessary in the accounting cycle; however, they are
is prepared. This step is important in that it provides a preliminary check on the accuracy of the double entry process. If interim financial handy for reversing certain types of adjusting entries where cash is to be received or paid in relation to that adjustment in the next accounting
statements are to be prepared, a worksheet may be developed outside of the accounting records to generate and summarise the necessary period. The main types of adjustments which benefit from reversing entries are accruals, as, by making reversing entries in relation to
information. accruals, the entries for cash receipts and cash payments in the new period are simplified. Reversing entries are also useful for deferral
adjustments where the initial cash transactions are recorded in temporary accounts rather than in permanent accounts. See the discussion in

this chapter of the text, under reversing entries, in relation to the handling of an insurance payment as an example where reversing entries can Summary
be used for deferrals.
Profit or Loss Summary 75 406
Salaries Expense 42 150
4. So far, we have heard of the existence of three trial balances – the unadjusted trial balance, the adjusted trial balance and the post-closing trial
balance. Explain the purpose of each, and indicate the types of account balances which are contained in each. Rent Expense 11 240
The unadjusted trial balance is prepared periodically to provide a preliminary check on the accuracy of the posting process (debits and credits) from Advertising Expense 8 316
the journals to the ledger accounts. This trial balance contains the balances of all general ledger accounts as at the date on which the trial Depreciation Expense 9 800
balance is prepared.
Sundry Expenses 3 900
The adjusted trial balance is prepared only at the end of the accounting period and includes the balances of all general ledger accounts after the
adjusting entries have been posted to the accounts. It provides a preliminary check of the accuracy of posting all adjusting entries. Close expense accounts to Profit or Loss
Summary
The post-closing trial balance is prepared at the end of the accounting period after all closing entries have been posted to the accounts and the account
balances determined. Since all temporary accounts are closed as a result of closing entries, the post-closing trial balance contains the balances
of all permanent accounts only. Hence, the only types of accounts appearing in this trial balance are the assets, the liabilities, and permanent Profit or Loss Summary 11 259
equity accounts such as the capital accounts, or, in the case of a company, the share capital, reserve, and retained earnings accounts. Rob Leigh, Capital 11 259
Close Profit or Loss Summary to Capital
Exercise 5.1 Closing entries Account

ROB’S PETWASHING SERVICE Rob Leigh, Capital 18 000

Rob Leigh, Drawings 18 000
Required:
Close Drawings to Capital Account
Record the required closing entries for Rob’s Petwashing Service.

General Journal
Date Particulars Debit Credit
2014
June 30 Service Fees Revenue $77 265
Interest Revenue 9 400
Profit or Loss Summary $86 665
Close income accounts to Profit or Loss
Exercise 5.3 Completion of worksheet, preparation of financial B.
statements and closing entries
SCHUBERT ESTATE AGENCY
Income Statement
A. for the year ended 31 December 2013
SCHUBERT ESTATE AGENCY INCOME ($’000) ($’000)
Worksheet
for the year ended 31 December 2013 Service revenue $320
($’000)
Unadjusted Adjustments Adjusted Income statement Balance sheet
trial balance trial balance EXPENSES
Account title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Wages expense $192
Cash at Bank 100 100 100
Accounts Receivable 80 80 80 Depreciation expense 40
Prepaid Insurance 20 (a) 9 11 11
Insurance expense 9
Equipment 200 200 200
Accum. Depr. Equipment 80 (c) 40 120 120 Electricity expense 60
Accounts Payable 40 40 40
Karen Schubert, Capital 270 270 270 Sundry expense 30 331
Karen Schubert, Drawings 50 50 50 LOSS $11
Service Revenue 320 320 320
Wages Expense 170 (b) 22 192 192
Electricity Expense 60 60 60
Sundry Expense 30 30 30
710 710
SCHUBERT ESTATEAGENCY
Insurance Expense (a) 9 9 9 Statement of Changes in Equity
Wages Payable (b) 22 22 22 for the year ended 31 December 2013
Depr.Expense- Equipment (c) 40 40 40
69 69 772 772 331 320 441 452 ($’000)
Loss for the period 11 11 Karen Schubert, Capital – 1 January $270
331 331 452 452
Loss for the year (11)
$259
Drawings during the year (50)

Karen Schubert, Capital – 31 December $209 SCHUBERT ESTATE AGENCY

Balance Sheet
as at 31 December 2013
CURRENT ASSETS ($’000) ($’000)
Cash at bank $100
Accounts receivable 80
Prepaid insurance 11 191
NON-CURRENT ASSETS
Equipment 200
Less: Accum. depreciation (120) 80
TOTAL ASSETS $271

CURRENT LIABILITIES
Accounts payable 40
Wages payable 22 62
TOTAL LIABILITIES 62
NET ASSETS $209
EQUITY
Karen Schubert, Capital 209
TOTAL EQUITY $209
C. Adjusting entries
($’000) ($’000)
Insurance Expense 9 Exercise 5.6 Closing entries for a company
Prepaid Insurance 9
Insurance costs expired.
EDEN GARDENS HIRE LTD
Wages Expense 22
Wages Payable 22 Required:
Accrued wages. Prepare the necessary general journal entries to close the accounts of the company.
Depreciation Expense - Equipment 40
Accumulated Depreciation - Equipment 40 General Journal
Depreciation on equipment. Closing Entries
Particulars Debit Credit
Closing entries
Service Revenue 320
Profit or Loss Summary 320 Hire Fees – Heavy Equipment 57 263
Close income accounts.
Hire fees – Light Equipment 46 052
Profit or Loss Summary 331 Profit or Loss Summary 103 315
Wages Expense 192 Close income to Profit or Loss Summary
Electricity Expense 60
Sundry Expense 30
Insurance Expense 9 Profit or Loss Summary 88 679
Depreciation Expense - Equipment 40 Salaries Expense 61 000
Close expense accounts. Depreciation Expense 16 595
Karen Schubert, Capital 11 Insurance Expense 5 208
Profit or Loss Summary 11 Repairs and Maintenance Expense 3 150
Transfer loss to capital account. Supplies Expense 1 400
Karen Schubert, Capital 50 Sundry Expenses 1 326
Karen Schubert, Drawings 50 Close expenses to Profit or Loss Summary
Transfer drawings to capital.

Profit or Loss Summary 14 636 Exercise 5.9 Adjusting entries and reversing entries
Retained Earnings 14 636
Close Profit or Loss Summary to Retained
Earnings ENDLESS CAR RENTALS

Required:
A. Prepare the adjusting entries that would have been recorded on 30 June for both items.
No closing entry is necessary for dividends paid (unlike drawings) as the dividend paid is debited directly to retained earnings. However, if a separate B. Prepare any necessary reversing entries that would be made on 1 July.
Dividend Paid account (similar to a Drawings account for a sole trader) had been used by the company, then another closing entry would be required C. Prepare the entries on 10 July assuming that cash of $48 000 had been received on the outstanding rentals and $7 000 was paid in interest.
to close the Dividend Paid account (credit) to Retained Earnings (debit) for the amount of $12 000. D. Assuming that any reversing entries in B. were not made, what entries would be made on 10 July for the cash receipt and cash payment.
E.
General Journal
Date Particulars Debit Credit
2014
A. June 30 Interest Expense $9 000
Interest Payable $9 000
Accruals of interest

June 30 Rentals Receivable 52 000

Rental Revenue 52 000
Accruals of rental revenue

B. July 1 Interest Payable 9 000

Interest Expense 9 000
Reverse adjusting entry for accrued interest

July 1 Rental Revenue 52 000

Rentals Receivable 52 000
Reversing entry for accrued rental revenue

C. July 10 Interest Expense 9 500

Cash at Bank 9 500
Payment of interest
 July 10 Cash at Bank 52 000
Rental Revenue 52 000
Receipt of rental revenue Profit or Loss Summary 20 250
Salary Expense 14 750
D. July 10 Interest Payable 9 000
Interest Expense 500 Supplies Expense 1 000
Cash at Bank 9 500 Depreciation Expense - Furniture 1 500
Payment for interest
Depreciation Expense - Building 3 000
(if no reversing entry).
Close expense accounts.
July 10 Cash at Bank 52 000
Rentals Receivable 52 000
Cash received for rentals (if no reversing entry). Profit or Loss Summary $(53 250 - 20 250) 33 000
S. Tromble, Capital 33 000
Exercise 5.11 Closing entries, income statement and statement Transfer profit to capital.
of changes in equity

S. Tromble, Capital 26 200

S. TROMBLE, SOLICITOR S. Tromble, Drawings 26 200
Close drawings to capital.
Required:
A. Prepare the closing entries of the law firm at 30 June 2013.
B. Prepare the income statement and the statement of changes in equity for the year ended 30 June 2013.

General Journal
Date Particulars Debit Credit
2013

June 30 Service Revenue 53 250

Profit or Loss Summary 53 250
Close revenue accounts.

B.

S. TROMBLE, SOLICITOR
Exercise 5.13 Recording capital transactions of a company
Income Statement
for the year ended 30 June 2013
INCOME
ATLAS LTD
Service revenue $53 250
Required:
Prepare the general journal entries that are needed to record the transactions of Atlas Ltd.
EXPENSES
Salary expense $14 750
Depreciation expense - furniture 1 500 1. Cash at Bank 10 000
Depreciation expense – building 3 000 Share Capital 10 000
Issue of 10 000 shares at $1.
Supplies expense 1 000 20 250
PROFIT $33 000 2. Retained Earnings 1 000
Cash Dividends Payable 1 000
Declaration of dividend of 10c per share.

3. Cash Dividends Payable 1 000

S. TROMBLE, SOLICITOR Cash at Bank 1 000
Statement of Changes in Equity Payment of dividend.
for the year ended 30 June 2013
4. Profit or Loss Summary 7 800
Retained Earnings 7 800
S. Tromble, Capital – 1 July 2012 $24 700 Transfer profit to retained earnings.
Profit for the year 33 000
$57 700
Drawings during the year 26 200
S. Tromble, Capital – 30 June 2013 $31 500
Exercise 5.14 Reversing entries – accrued revenue Reversing entry for the accrual

Feb. 12 Cash at Bank 330

PAYNE PTY LTD Answering Service Fees Revenue 300
GST Collections 30
Required: Receipt of service fees and GST
A. Prepare the adjusting entry in the general journal to record the fees revenue.
B. Assuming that reversing entries are not made, record the receipt of a $330 quarterly payment from a client on 12 February and the receipt of $220 Feb. 13 Cash at Bank 220
on 13 February from a new client who had contracted for the service to start on 1 December. Answering Fees Revenue 200
C. Assuming that reversing entries are made to facilitate the record-keeping process, prepare the appropriate reversing entry, if any, and the receipt of GST Collections 20
cash on 12 and 13 February. Receipt of service fees and GST

Note: No GST recorded until tax invoice issued.

General Journal

A. Dec. 31 Service Fees Receivable $4 350

Answering Service Fees Revenue $4 350
Accruals of revenue. No tax invoice issued.

B. Feb. 12 Cash at Bank 330

Service Fees Receivable 200
Answering Service Fees Revenue 100
GST Collections 30
Receipt of service fees and GST following tax invoice

Feb. 13 Cash at Bank 220

Service Fee Receivable 100
Answering Service Fees Revenue 100
GST Collections 20
Receipt of service fees and GST following tax invoice

C. Jan. 1 Answering Service Fees Revenue 4 350

Service Fees Receivable 4 350

Critical Thinking Accountability of aid organisations

Required:
A. Consider carefully the types of information that you would need to provide to management in order to satisfy their needs for accountability in relation to
the activities of the organisation.
B. What advantages (if any) would be provided by the use of worksheets in the preparation of this information?

As a guide to discussion, consideration of the following points is suggested:

A. Since World Vision is a not-for-profit organisation, profit motives are not important. Nevertheless, management is accountable for its actions.
Control over cash resources (and other assets) is extremely important. In order to carry out its functions, management would need to know:
the amounts of money donated/raised for each special program and campaign, as well as for general funds;
the amounts of money which have been spent on each special program and project;
the amount of funds spent on advertising for such projects and campaigns;
the amounts spent on wages to staff as well as other expenses, such as rental of buildings, and machinery, and emergency supplies of food and
equipment;
the amount of money potentially wasted through spending on superfluous activities;
the amount spent on training/education programs in order to help develop skilled workforces in assisted countries;
the amounts received from government to assist each program, and how the government assistance was spent;
details of pledges in order to follow up on monies promised to the organisation;
billing mechanism in order to send out accounts to those who have undertaken to assist in the child sponsorship program;
the current state of repair of all non-current assets used by World Vision;
control over levels of inventory of emergency supplies in cases of relief work;
cash flow budgets for each program would help in controlling expenditure.

B. Monthly worksheets (or spreadsheets), as illustrated in this chapter, would be of limited usefulness in that monthly profit levels do not need to be
calculated. A detailed monthly statement of cash flows would be of more use to management. Nevertheless, if World Vision (and similar
organisations) use a form of accrual accounting, worksheets will be of more use in helping to analyse cash flow for the organisation. Reporting of
cash flows would assist in providing information about gross inflows and outflows.