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At the end of March, 1/12 of $ 2,400 premium or $ 200 has expired or been used up during the year. March 31, Insurance Expense 200 Prepaid Insurance 200 To record apportion this month’s premium $200.
nominal accounts
ห้องสมุดไป่ตู้
These accounts (revenues, expenses, and dividends) are temporary; they are really just subcategories of Income Summary and are reduced to a zero balance through the closing process at the end of each accounting period.
Revenues may be earned during the current period, but not yet billed to customers or recorded in the accounting records.
On December 31, assume that JB Service Company has completed a half of service work. The total amount to be received when the work is completed will be $5,000.
2,000
Advances on Service Revenue 2,000 To record receive the revenue $2,000 in advance.
On December 31, 2009, JB Service Company had already realized that half of service revenue; December 31, Advances on Service Revenue 1,000 Service Revenue 1,000 To record realized half revenue $1,000.
2. Cash Basis and Accrual Basis of Accounting
In accrual-basis accounting, an accountant recognizes the impact of a business transaction as it occurs. In cash-basis accounting, however, the accountant does not record a transaction until cash is received or paid.
5.3 Closing the accounts
1 .Real and nominal accounts Real accounts (assets, liabilities, and owners' equity) are permanent; they are not closed to a zero balance at the end of each accounting period.
The generally accepted accounting principles (GAAP) require that a business use the accrual basis.
For example, in its first year of operations, Harris Co. earned $ 39,000 in revenues and received $ 33,000 cash from customers. The company incurred expenses of $ 22,500, but had not paid for $ 2,250 of them at year end. In addition, Harris prepaid $ 3,750 for expenses that would be incurred the next year.
◆ Prepaid expenses
Payments that a company makes in advance for items normally charged to expense are known as prepaid expense. An example would be the payment of an insurance premium for 12 months.
2. Purpose of closing entries
At the end of an accounting period, an income statement is prepared. The revenue and expense accounts have served their purpose in determining the period's net income.
◆ Unrecorded liabilities
Adjusting entries are required at the end of an accounting period to recognize any unrecorded liabilities in the proper period and to record the corresponding expenses.
UNIT 5 ADJUSTING ENTRY AND CLOSING PROCEDURES
5.1 Basis of Accounting
1. Periodic Reporting In order to provide timely accounting information, the time-period concept divides the life of an enterprise into distinct and relatively short accounting periods.
Assume that the employees' salaries in JB Service Company were paid up to December 29, the salaries of two days (December 30 and 31) were not paid to the employees.
Assume that JB Service Company paid $ 2,400 premium on March 1 for one year's property insurance in advance. March 1, Prepaid Insurance 2,400 Cash 2,400 To record pay a year’s premium $2,400 in advance.
December 31: Salaries Expense 3,000 Salaries Payable 3,000 To record accrued salaries expense $3,000 at the end of the period.
◆ Unrecorded receivables
3. Preparing the closing entries
In short, the processes of closing the accounts include the following four steps: (1) Close revenues (credit balances) to income summary; (2) Close expenses (debit balances) to income summary;
Accrual basis: Revenues Expenses Net income
$39,000 22,500 $16,500
Under the two basis of accounting, net income is different.
5.2 Adjusting Entries Types of Adjusting Entries : 1. Prepaid expenses 2. Unearned revenues 3. Unrecorded liabilities 4. Unrecorded receivables
Calculate the first year’s net income under a cash basis and under an accrual basis. Cash basis: Revenues (cash receipts) $33,000 Expenses (cash payments) (22,500-2,250+3,750) 24,000 Net income $9,000
December 31, Accounts Receivable 2,500 Service Revenue 5,000 To record not receive the revenue $2, 500.
3 .Characteristics of adjusting entries
◆ Every adjusting entry involves the recognition of either revenue or expenses. ◆ Adjusting entries are based on the concepts of accrual accounting, not upon monthly bills or month-end transactions.
