Chapter 4: Adjustments, Financial

Statements, and the Closing Process

Know the purpose of adjustments & analyze the adjustments
necessary at the end of the period to update revenues & expenses
and related balance sheet accounts

Tutorial 5
Introduction to Financial Accounting- FAC 102
Rupak Thapa & Sonal Chaudhary
27/09/2023
Recap : Types of Account to know for entries of Debit & Credit

Personal Account
These accounts types are related to persons. These persons may be natural
persons like Raj’s account, Rajesh’s account, Ramesh’s account, Suresh’s
account, etc. These persons can also be artificial persons like firms,
companies, an association of persons, representative of person or companies ,
etc.
Real Account: These account types are related to assets or properties.
Tangible Real Accounts: These include assets that have a physical existence
and can be touched. For example – Building A/c, cash A/c, stationery A/c,
inventory A/c, etc.
Intangible Real Accounts: These assets do not have any physical existence
and cannot be touched. However, these can be measured in terms of money
and have value. For Example – Goodwill, Patent, Copyright, Trademark, etc.
Nominal Account
These accounts types are related to income or gains and expenses or losses.
For example: – Rent A/c, commission received A/c, salary A/c, wages A/c,
conveyance A/c, etc.
Recap: Rules of Debit & Credit ( Golden Rule of Accounting)
Recap: Rules of Debit & Credit
Recap: Each account is set up as a “T” with the following structure:

Increases in asset accounts are on the left because assets are on the left side of
the accounting equation (A = L + SE).
Increases in liability and stockholders’ equity accounts are on the right
because they are on the right side of the accounting equation (A = L + SE)
The term debit (dr for short) always refers to the left side of the T.
The term credit (cr for short) always refers to the right side of the T.
Recap: Segregate into A, L, SE, Income or Expenses and
then into Debit and Credit
Income Tax Expense Patents
Accounts payable Operating Expenses
Long-term investments Dividend
Travel expense Treasury Stock
Accounts receivable
Long-term notes payable
Additional paid-in capital
Rent expense
Cash
Retained earnings
Common stock ($0.10 par value)
Consulting fee revenue
Wages expense
Interest revenue
Unearned revenue
Utilities expense
Recap: Prepare Journal Entries
The following transactions for April 2023 are provided for your review
a. Received contributions of $60,000 in cash from five investors ($12,000 each), a barn
valued at $100,000, land valued at $90,000, and supplies valued at $12,000. Each
investor received 3,000 shares of stock with a par value of $0.01 per share.
b. Built a small barn for $62,000. The company paid half the amount in cash on April 1,
2023, and signed a three-year note payable for the balance.
c. Provided $35,260 in animal care services for customers, all on credit.
d. Rented stables to customers who cared for their own animals; received cash of
$13,200.
e. Received from a customer $2,400 to board her horse in May, June, and July (record
as unearned revenue).
f. Purchased hay and feed supplies on account for $3,810 to be used in the summer.
g. Paid $1,240 in cash for water utilities incurred in the month.
h. Paid $2,700 on accounts payable for previous purchases.
i. Received $10,000 from customers on accounts receivable.
j. Paid $6,000 in wages to employees who worked during the month.
k. At the end of the month, purchased a two-year insurance policy for $3,600.
l. Received an electric utility bill for $1,800 for usage in April; the bill will be paid next
month.
m. Paid $100 cash dividend to each of the five investors at the end of the month.
AP4-1: Prepare Trial Balance
Papa John’s International Inc. operates and franchises pizza delivery and carryout
restaurants worldwide. The following is an alphabetical list of accounts and amounts
reported in a recent year’s set of financial statements. The accounts have normal debit
or credit balances and the dollars are rounded to the nearest million.
Accounts payable 32 Interest expense 11
Accounts receivable 65 Interest revenue 1
Accrued expenses payable 68 Inventories 31
Accumulated depreciation 406 Land 34
Additional paid-in capital 184 Lease right-of-use assets 158
Advertising expense 72 Long-term debt 470
Buildings& leasehold improvements 228 Long-term lease liabilities 133
Cash 22 Long-term notes receivable 16
Common stock 1 Loss on impairment of assets 2
Cost of sales 1,059 Other assets 48
Current lease liabilities 25 Other long-term liabilities 73
Depreciation expense 44 Prepaid expenses& other current assets 45
Equipment 379 Rent and utilities expense 62
General & administrative expenses 78 Restaurant and franchise sales revenue 1,784
Income tax expense 34 Retained earnings ?
Income tax receivable 4 Salaries and benefits expense 240
Income taxes payable 11 Short-term notes receivable 4
Intangible assets 87 Treasury stock 597
Unearned revenue 6
Particulars Debit Credit
Accounts receivable 65
Cash 22
Short-term notes receivable 4
Inventories 31
Income tax receivable 4
Prepaid expenses and other current assets 45
Land 34
Buildings and leasehold improvements 228
Equipment 379
Lease right-of-use assets 158
Long-term notes receivable 16
Intangible assets 87
Other assets 48
Accounts payable 32
Accrued expenses payable 68
Accumulated depreciation 406
Current lease liabilities 25
Income taxes payable 11
Long-term debt 470
Long-term lease liabilities 133
Other long-term liabilities 73
Unearned revenue 6
Common stock 1
Additional paid-in capital 184
Treasury stock 597
Retained earnings 126
Restaurant and franchise sales revenue 1,784
Cost of sales 1,059
Salaries and benefits expense 240
Rent and utilities expense 62
Advertising expense 72
General and administrative expenses 78
Depreciation expense 44
Loss on impairment of assets 2
Interest revenue 1
Interest expense 11
Income tax expense 34

3320 3320
P4-2: Recording Adjusting Entries: Zimmerman Company
The company’s annual accounting year ends on December 31.
Segregation of deferred revenue, deferred expense, accrued revenue, or
accrued expense.

Accrued revenue represents revenue that you have earned and for
which you are yet to receive payment.

Deferred Revenue, also referred as Unearned revenue, refers to

payments you have received for services you are yet to render.

Accrued expenses are incurred, but have yet to be paid.

Deferred expenses are expenses that are paid, but have yet to
incur expense (such as pre-paid accounts).
P4-2, Req 1: Indicate whether each transaction relates to a deferred revenue,
deferred expense, accrued revenue, or accrued expense.

a. Deferred revenue e. Deferred expense

b. Accrued expense f. Accrued revenue

c. Deferred expense g. Accrued expense

d. Deferred revenue h. Accrued expense

P4-2, Req 2: Give the adjusting entry required for each transaction at
December 31 of the current year.
P4-3 Recording Adjusting Entries: Mellor Towing Company
The following transactions for December 31, are provided for your review

a. On January 1 of the current year, the company purchased a new hauling

van at a cash cost of $38,000. Depreciation estimated at $3,800 for the year
has not been recorded for the current year.
b. During the current year, office supplies amounting to $1,000 were
purchased for cash and debited in full to Supplies. At the end of last year, the
count of supplies remaining on hand was $400. The inventory of supplies
counted on hand at the end of the current year was $180.
c. On December 31 of the current year, Lanie’s Garage completed repairs on
one of Mellor Towing’s trucks at a cost of $2,600; the amount is not yet
recorded by Mellor Towing and by agreement will be paid during January of
next year.
d. On December 31 of the current year, property taxes on land owned during
the current year were estimated at $1,900. The taxes have not been recorded
and will be paid in the next year when billed.
e. On December 31 of the current year, the company completed towing service
for an out-of state company for $4,000 payable by the customer within 30
days. No cash has been collected, and no journal entry has been made for this
transaction.
f. On July 1 of the current year, a three-year insurance premium on equipment
in the amount of $900 was paid and debited in full to Prepaid Insurance on that
date. Coverage began on July 1 of the current year.

g. On October 1 of the current year, the company borrowed $25,000 from the
local bank on a two-year, 10 percent note payable. The principal plus interest
is payable at the end of 24 months.

The income before any of the adjustments or income taxes was $30,000.
The company’s income tax rate is 21 percent. (Hint: Compute adjusted
pre-tax income based on (a) through (g) to determine income tax
expense.) Round the income tax computation to the
nearest dollar.

Required:
1. Indicate whether each transaction relates to a deferred revenue, deferred
expense, accrued revenue, or accrued expense.
2. Prepare the adjusting entry required for each transaction at December 31 of
the current year.
Requirement 1: Answers: Mellor Towing Company

a. Deferred expense e. Accrued revenue

b. Deferred expense f. Deferred expense

c. Accrued expense g. Accrued expense

d. Accrued expense h. Accrued expense

Requirement 2: Answers: Mellor Towing Company
Requirement 3: Answers: Mellor Towing Company: Adjusting Income
Statement

To accrue income tax expense incurred but not paid:

Income before adjustments (given) $30,000
Effect of adjustments (a) through (g) (6,295)
(= – $3,800 – $1,220– $2,600
Income before income taxes 23,705
(– $1,900 + $4,000 – $150 – $625)
Income tax rate x 21%
Income tax expense $ 4,978
P4-7 Recording Adjusting & Closing Entries and Preparing a Balance Sheet
and
Income Statement
Data not yet recorded at December 31 included
a. The supplies count on December 31 reflected $300 in remaining
supplies on hand to be used in the next year.
b. Insurance expired during the current year, $800.
c. Depreciation expense for the current year, $3,700.
d. Wages earned by employees not yet paid on December 31, $640.
e. Three months of interest expense (for the note payable borrowed on
October 1 of the current year) was incurred in the current year.
f. Income tax expense, $5,540.
Required:
1. Record the adjusting entries.
2. Prepare an income statement (with Operating Income and Other
Items sections) and a classified balance sheet that include the effects
of the preceding six transactions.
3. Record the closing entry.
P4-7: Requirement 1: Record the adjusting entries.
Prepare an income statement (with Operating Income & Other Items sections)
and a classified balance sheet that include the effects of preceding six
transactions.
Classified balance sheet
Closing Entries: Made at the end of the accounting period to transfer
balances in temporary(income statement) accounts to Retained Earnings and
to establish a zero balance in each of the temporary accounts for beginning
the next accounting period

There are two ways to close a temporary account. It can directly be closed in
the retained earnings account or it can be done through a longer process. The
longer process requires temporary accounts to be closed in an intermediate
income summary account first and then that account is zeroed out to the
retained earnings. The result in both cases is the same and depends on the
bookkeeper’s preference or company’s policy on it.

There are four closing entries; closing revenues to income summary, closing
expenses to income summary, closing income summary to retained earnings,
and close dividends to retained earnings.

Permanent accounts are never closed. This is because the balances of these
accounts are transferred to the owner’s equity section of the balance sheet.
Permanent accounts are those that keep track of the long-term assets,
liabilities, and equity of a business. The balance sheet accounts that carry their
ending balances into the next accounting period.
P4-7: Requirement 3: Record the closing entry.

December 31 Closing Entry:

Service revenue (R, SE) 61,360

Supplies expense (E, +SE) 600
Insurance expense (E, +SE) 800
Depreciation expense (E, +SE) 3,700
Wages expense (E, +SE) 16,840
Remaining expenses (not detailed) (E, +SE) 17,160
Interest expense (E, +SE) 425
Income tax expense (E, +SE) 5,540
Retained earnings (+SE) 16,295
Thank You