LECTURER: Ok, hello everyone.
Welcome again to the Accounting and Governance class.
Could anyone please tell me if the volume is ok?
Perfect. Ok, thank you. Thank you.
So, I hope you have had a very good week,
and I hope that you will do well in your first assessable homework
that is in the process of marking
by another lecturer, that is the person who will mark
all our assessment.
So just be a bit patient, during this week
we will release the results of the first assessable homework.
Now today we will continue with what we started last week.
Last week what you learnt was how to record transactions
using debits and credits and preparing the journal entries
and you know that for each journal entry
you need at least two entries, one debit entry and one credit entry.
it could be more than two,
but normally we have one debit and one credit
and of course the total debit and total credit should be the same,
the same amount in each journal entry.
So what we will go through today is
another type of entries which is adjusting entries.
I hope you have studied the material that is posted
on the course learning at Griffith, you have watched the videos
and looked at the PowerPoint too and have of course understanding of this.
But as usual I will explain everything you need to understand well,
how to deal with these different types of entries
that are the adjusting entries.
The purpose of this session is that you will end the session
with a clear understanding of that, adjusting entries and also closing entries
which is another type of entry.
The journal entries that you learnt last week
are entries that you prepare from transactions
that you have in the business so when the accountant records these transactions
the accountant receives information that is mainly through the cash received
and cash paid so they are very based on the cash.
Cash received and cash paid.
I will answer that Jade
They are mainly related to cash received and cash paid
but sometimes the accountant also receives information of invoices
that are sent to customers so they record an income or revenue and purchases
so they record the purchase as well.
So not all are cash journal entries but most of them I would say yes.
The first difference with adjusting entries is in adjusting entries,
we do not involve cash.
Cash is never involved in an adjusting entry.
So what are these adjusting entries?
And in this I will answer what Jade asked.
Why adjustments are not done each month as a normal activity
then it will not be such a big adjustment at the end,
and you are totally correct Jade
But that depends...
it depends on what is our accounting period.
It depends on the company.
The normal accounting period is one year.
If a company does not prepare financial statements every month
for example, or every quarter, well, it will happen what you said.
The adjusting entries are at the end of the year.
But what's happening there in the real world
companies prepare the financial statement
every quarter or even every month
and in that case if we define the accounting period as one month
that means at the end of the month we need to prepare the adjusting entries.
The concept of adjusting entries is that we prepare adjusting entries
at the end of the accounting period, ok?
That is the thing. At the end of the accounting period.
If the accounting period is one month we prepare adjusting entries
at the end of the month.
If the accounting period is the whole year we prepare the adjusting entries
at the end of the year, ok?
That is one concept that we need to have in relation to adjusting entries.
The other thing is what we are adjusting because the name is adjusting entries?
What we are adjusting with these entries.
We adjust revenues or income and expenses.
That is what we adjust to reflect in the financial statements,
all the income or revenue that has earned in the period,
and to reflect all the expenses that have been incurred during the period.
That is what we show with the adjustment entries.
That's why we cannot do adjustment entries in the middle of the month
or at the beginning of the month,
it's always at the end of the period because at the end of the period
we want to have in our financial statement
all the income earned in that period
and all the expenses incurred in that period.
So this is the most important concept
to start with adjusting entries.
Then as I said some expenses and revenue menu can be recorded exactly,
that's the things, others, some expenses revenues cannot be recorded
we need to adjust to have all the expenses incurred recorded
and the same for income or revenue.
To align with the business activity statement,
the business activity statement is a tax concept.
In many cases the tax period is the same as the accounting period
in that case a year but we need to be careful that we do not mix
with the tax concept when we are talking with accounting
because there may be some differences.
Ok, so we will start as usual today with the lecture
in which I will pose four multiple choice questions.
You will answer the questions, and this will be a good feedback
for you and for me about the understanding of some basic concepts
of this topic.
If I see that the distribution of your answer is not very good
which is a good feedback in the sense that that lets me explain
why this answer is correct or why it's not correct
for your own learning.
We will discuss that and I will use these questions to explain
probably some of the concepts if they are not clear.
So please feel free as usual to ask any question during the lecture
and then during the workshop.
Last week we talked for more than four and a half hours
in the whole thing because of the number of questions
but probably today we will be less than that because the topic is more specific
but I am happy to answer all the questions to explain well,
my main purpose is for you to understand these topics.
That is the main purpose because then you will be evaluated on this topic
The second assessable homework will be next week
after the topic four, module four.
So that assessable homework two includes this module,
module three, adjusting and closing entries
and also the module four.
That's why it's very important, if there is anything you do not understand
please ask, ok?
I hope no Jade (INAUDIBLE)
Jade I hope it will not be four and a half hours.
Ok, for me it's ok.
I have enough energy I think to beat four and a half hours.
I feel sorry for you sometimes but maybe you're very tired after that time
but we will do the best we can.
Ok, so we will start with the questions...
Here we have the first question, ok?
Have a look.
The question is when is the $1000 considered to be earned?
So it's about the day in which this is considered to be earned.
Look at all the dates that you have there and then define
and you can vote for your answer
When they are earned? Take your time.
Pima can't see properly, ok.
Pima, you can zoom, I will put a bit bigger.
Maybe that can be...
Ok, good.
Ok, what is the answer?
We have a distribution of answers in the poll
so it's good to explain a bit.
That is the feedback I need, so if there are
a whole distribution of your answers means, yeah.
I need to explain how can we determine when the $1000 are earned.
Most of you actually answered correctly but there are of course,
there are many other different answers.
So this question is about when revenue is earned, ok?
That is the question, we are using accrual accounting.
In accrual accounting revenue is recorded when it is earned
not when cash is received,
and expenses when they are incurred not when they are paid, ok?
So we need to identify from the dates when these $1000 are earned.
The dress manufacturer received a purchase order for 10 dresses
for a total price of $1000, 15th November.
On 15th November the manufacturer received the order, nothing happened,
so the revenue is not earned, ok?
The 10 dresses were delivered on 30th November.
Delivered means that revenue is earned.
When is revenue earned?
When the products are delivered to the customer.
They are passed from the company to the customer.
At that point, revenue is earned.
In the case of services, it's when services are provided.
When the service is provided, service revenue is earned.
So that is the correct answer, ok?
There is some echo, probably somebody has the microphone on.
So this is the correct answer, and the other dates,
the customer is sent an invoice on 5th December.
No, the producer already delivered it, doesn't matter that the invoice was sent
after the delivery of the products.
The payment, that means the check is received 10th December.
Again, it's not related with when we receive the payment
or when we bank the payment.
So, the correct answer is that. any questions?
What is the answer Adash?
I put here, can you see the blue...
I wrote in the screen, the blue circle.
It doesn't save.
30th November, that is the correct answer.
I'm not sure if... Can you see because I drew a blue circle in C
Can you see that?
Ah, it's not a line. Double is in the white space.
Ah, I didn't know that. Ok. Ok, interesting.
In my screen it's exactly in C but probably there are differences in this
Probably just zoom each, probably.
I move my zoom in and out and the circle is in C, it doesn't move.
Ok, we go to the next one.
If a resource has been consumed but an invoice has not been received
at the end of the accounting period, which of this is correct?
I will update... It doesn't move the page.
Ok, if you cannot follow this I can change to put...
Yes, I will reset the board.
Ok, so if a resource has been consumed but an invoice has not been received
at the end of the accounting period, what is the situation?
We have some different answers but most of you are correct.
The correct answer is B.
Ok, B, an adjusting entry should be recorded to recognize the expense.
Why is this? Because the resource has been consumed.
When expenses are incurred is when the resources are used or consumed.
That means that we need to record an expense, ok?
So in this case the only one, and adjusting entry should be recorded
to recognize the expense.
Any question on this?
Is it clear?
Ok, we will go to the next one, thank you Jade.
Number three,
if an entity fails to adjust the prepaid rent account
for rent that has expired,
what effect will this have on the monthly financial statement?
Here you need to think a bit more because it's what's happening,
the adjusting entry was not recorded, what would be the effect on that?
I will update the poll.
The previous answer was B.
It is prepaid rent failed to adjust for the month that was paid.
This is the prepaid rent that was recorded as a prepaid rent
but now in this month the rent has expired so it was used,
the office or the building that we are renting was used, yeah.
You see in my poll you still chose number one, is it correct?
Ah, yes, yes. I didn't change the numbers,
I just updated the poll solutions, but I didn't change the number.
This is for the question three, for each question I update the poll,
I do not change the number because that takes a bit more time
to change that number so I just update the answers
to lead them in zero, you come out again for each question.
Ok, so we have a distribution of answers and now there is a whole distribution
of the answers, so I think this is important to explain.
If an entity fails to adjust a prepaid rent account
that means we have a prepaid rent account
we pay in advance the rent of the office,
we'll assume that this is the rent of the office.
We pay in advance the rent of the office before we use the office, we pay.
How do we record that?
We record that as a prepayment which is an asset, we debit that,
and we credit cash.
So we debit prepayment, we credit cash.
That was the original entry.
Now at the end of this period, it says that the rent has expired
so we used the office for this period so that is what we need to adjust.
We need to credit the prepaid rent for the amount of the rent that expired
we need to credit prepaid rent and we need to debit the expense.
What happens if we do not do this?
I will write in the same paper what this means,
so we will...
when we do the adjustment we will increase, ok, the expenses,
we increase expenses, that is one of the entries,
we debit rent expense and we will decrease the prepaid rent,
the prepayment, ok?
I will just put prepayment, pre.
This is the prepaid rent which is an asset.
What effect will this have on the monthly financial statement
if we do not record this?
If we do not do this, what is the effect?
What happened with the expenses?
Expenses will be understated because we didn't record this.
What happens we will have in assets, assets will be overstated.
So to find the right answer here you need to look at all the answers.
What answers we had that assets are overstated? Only D and E.
In C, well... Sorry, C, D and E.
In A it doesn't say anything about assets
B, nothing about assets,
so only C, D and E assets will be overstated.
That is one thing because of this, because we didn't decrease the prepayment
which is an asset.
Assets will be all overstated.
How will we know which one is correct? C, D or E?
We need to look at those expenses will be understated,
but we don't have this, C, D and E talk about profits.
Then you need to relate profit with expenses.
If expenses are understated, what happens with profits?
Profit will be overstated, ok? Profit will be overstated.
That's why E will be incorrect answer.
Is that clear that, very well? Profit increases?
So we need to relate this, you can see now we are using
all the elements that you had planned before, ok?
Profit equals revenues plus expenses.
These expenses are understated, profit is overstated.
Any question? Ok.
Yes, (INAUDIBLE) I need to add one more thing.
Profit will be overstated and that is the answer for question D and E.
What is the difference between D and E?
Equity in D will be understated, in E equity will be overstated.
So now we need to relate the profit with equity.
So when profit is overstated, equity is overstated.
If profit is understated, Equity is understated.
So what is correct?
Asset overstated, profit and equity would be overstated.
Ok, that answer your question Jade? Good.
Ok, so we will go through the last one.
Here you have the last one
On 1st September Carlson Limited borrowed $10,000 from the bank for three months
at the annual interest rate of 9%. Annual interest rate 9%.
Principal and interest are payable to the bank on 1st December,
so this is for three months long.
If the company prepares monthly financial statements
the adjusting entry that the company should make for interest on 30th September
that means after one month would be which of these ones?
I will reupdate the poll.
Ok. So how we determine this,
we need to look at what is the interest for one month
because the expense incurred in this case the interest expense,
is the interest that...
that is the interest for only one month.
We are preparing the adjusting entry at 30th of September.
The loan started on 1st September so it's the interest for one month.
This will clarify the answer for if you calculate the interest for the year.
The annual interest rate is 9%, for one month it will be 9% divided by 12
that is the interest per month, and then you multiply by $10000
to calculate what is the interest per month which is $75.
So at the end of September we need to record,
debit interest expense $75, and credit interest payable
because it will not be paid until 1st December.
So we debit interest expense $75 we credit interest payable, $75,
the correct answer is D, ok?
Ok at that?
When we have a loan we need to pay interest.
What is that interest? It's an expense.
It's the expense incurred because we borrowed money.
And we can calculate based on the interest rate.
The interest rate is always given and always is given per annum
so what is the annual interest rate?
In this case it is 9%, you can see here.
9% is the interest rate, but this is the interest rate
for 12 months, ok?
So to calculate, very well Joshua, to calculate per month
we need to multiply the 9% by 112, or simply divide it by 12, ok?
And then you will have what is the interest per month
because between the 1st of September and 30th September
we need to prepare the adjusting entries, it's one month.
so the interest expense will be the interest for only one month, ok?
So very good. Good Adash and that is $75.
Ok, so we've finished the multiple choice questions,
do you have any questions about concept because now we will apply the concept
in exercises about adjusting entries,
so any question about concepts that you would like to ask at this point?
All good? Ok.
So, we will go... Excellent Ruby, thank you.
Yes, yeah, we will go through the practice questions now.
And I will start briefly with a very...
a very brief review of what you have learnt
about adjusting entries.
It is only three months, just another.
It's only three months long because it starts on 1st September
and is payable on 1st December.
The interest and the principal both.
So you pay back the $10000 on 1st December with all the interest of the three months.
Ok, now we will talk a bit about adjusting entries.
I will explain using this diagram that you have in your PowerPoint
and you have seen in your videos, I will not go into whole detail of course
but just with this... this is the big summary.
The big summary of adjusting entries.
We have two types of adjusting entries
or I would say four types if we combine revenues and expenses.
But we have the accruals and we have the prepayments, ok?
They are two different adjusting entries. What means accrual?
Accrual if we're talking about revenue means receivable, ok?
Accrued revenue it will be the same as to say revenue receivable.
Accrued expenses when you see this term, accrued expenses,
that means expenses payable, ok?
So accruals means receivable or payable
depending on whether it's revenues or expenses.
And then we have the prepayments.
Prepayments means payments in advance, ok?
We can receive a payment in advance and that is what we call
unearned revenue or revenue received in advance, ok?
That is the payment received in advance,
Or we can pay in advance and that is what we call prepayments.
So these adjustments, and these are all the adjustments,
there are no other adjustments for timing differences.
There are adjustments to correct errors, we will not go there,
we are talking about the timing difference
that means to record revenues when they are earned,
expenses when they are incurred.
All the purpose of adjusting entries is that,
to record the revenues in the accounting period
that are earned in that accounting period and to record expenses that are incurred
in that accounting period.
From the normal transactions that you learnt last week,
we may have many cases in which revenue was not recorded,
expenses was not recognized as well, and we need to adjust them
because the main purpose of the financial statements
in particular the income statement is to show the revenues
earned in that period, in the period of the income statement
and to show the expenses incurred in the same period.
So that is the purpose of adjusting entries,
to reflect revenues earned and expenses incurred in the accounting period.
So this is the big summary. Now how do we deal with this?
Well, in the case of prepayments
in the case of prepayments
we have different accounts that can be considered as a prepayment.
One is the prepaid expenses like
prepaid insurance, prepaid rent,
but there are others that we can give the same treatment of this prepayment
which is supplies or depreciations.
That means the payments that the company makes in advance
and therefore they are considered as prepayments.
So what are the terms involved in this prepaid expenses?
Well, we have an asset that has an unadjusted balance.
For example, we have prepaid insurance. That is an account of asset.
And we do not adjust this because we pay for that at the beginning of the t,
ok, 1st of January for example, and then on the 30th June we are halfway
of the total period provided by the policy.
The policy normally, the insurance policy covers 12 months.
So we are using the policy during 12 months.
But what's happening in June?
Well, we do not have the same amount in assets because we already consumed
half of the policy, six months, so half of the policy has been consumed.
Then we need to adjust the amount in assets.
Here you had the unadJusted balance of the asset,
that is the total amount of the policy, we need to adjust that.
How do we adjust that? We need to record an expense.
An expense for the six months use of the policy.
So we will record debit expense, that is the adjusting entry,
we debit the expense, and we decrease the asset
that means we credit the prepaid insurance.
So you can see here, this is your adjusting entry.
We have a debit entry, we have a credit entry.
We debit insurance expense, we credit prepaid insurance.
So this is one case.
And the same we will use for prepaid rent,
for supplies, for depreciation, ok?
Jade did the question.
Oh good, excellent Jade. That's my purpose,
just to explain in detail what it means, this thing.
Is there anybody that might have a question on this?
We will go through the four that are adjusting entries.
This is related to the prepaid expenses.
Ok, we go through the second one.
The second one is what we call the un-earned revenues.
So revenues received in advance, what is the concept?
Imagine that the company has a building,
and they are renting offices
from this building so they have a number of clients that rent offices.
And they ask the tenants to pay in advance
before they start using the building,
they have to pay for example three months in advance.
So the company received the cash for this,
but the tenant still is not using the office,
so how will we record this first entry?
This is the entry that you learnt last week,
this is a normal transaction.
The company receives cash so we will debit cash, ok?
And we will have this unearned revenue
or rent revenue received in advance
which is a liability for that amount.
Why is this a liability?
Because at this point the company has not provided yet
the office for the tenant to use, ok?
The tenant has not used the office yet, they pay in advance.
So we have a liability because we have an obligation to provide the office,
the tenant already paid.
Now, what happens after one month
if we are doing financial statements every month.
We need to prepare an adjusting entry because we already provided this service
to the tenant, we already provided the office,
the tenant used this resource already one month,
so we need to adjust our liability accounts.
So the liability account has an adjusted balance, ok?
When the tenant pays in advance, and now after one month
we need to reduce this for the month the office was already used.
So we will debit this liability that is part of the adjusting entry,
and we will credit revenue because now we earn this revenue,
that is the rent revenue.
We earn that because we already provided one month
the renting of the office to the tenant.
So here you have again, the adjusting entry.
We have one debit entry,
the rent revenue received in advance,
a debit entry, and we will have a credit entry
which is simply rent revenue.
Any question on this second one?
We will practice with many exercises today
for you to have a very, very clear understanding of the adjusting entries.
Ok, the last two.
The last two I would say they are simple adjusting entries.
We have accrued revenues. As I mentioned before,
accrued revenues means revenues receivable.
This is the case when the company sells products or provides services
but we still do not record that sale
and we have not received the cash yet,
but the service is provided or the products are delivered
so we need to record revenue.
If we have not recorded this in the normal journal entry
that you learnt last week, we will need to record the revenue.
Sales revenue or service revenue, so we credit this.
What will be the other accounting ball? It will be the receivable.
An accounts receivable which is an asset
so here you have debit the accounts receivable
credit service revenue or sales revenue,
depending on whether we are selling produce or providing services.
So that is the third adjusting entry
and the last adjusting entry is accrued expenses.
That means expenses payable.
So this is the case when we have an expense incurred
but we have not recorded that, the most typical case is employees
that work during the month. We have not paid their salaries yet
because we pay the first days of the following month,
so we didn't record the expense but they already worked,
so there is a resource that has been consumed
and therefore we need to record an expense.
We need to record an expense and so we debit salaries expense,
for example, but because we have not paid yet in this period,
we need to record a credit in this liability which is salaries payable.
So here we have our adjusting entry.
This is in a very brief summary what you have learnt about adjusting entries.
Any question at this point?
All good?
So we can now apply these two practical exercises
and we will work with many adjusting entries,
so you will have the opportunity, to practice now with this
so I will put that...
Can you see the exercise? I am not sure about the zoom,
if it is ok or not, but I hope it's ok.
Ok, excellent, excellent. Thank you Jade, thank you all of you.
Ok, so we will apply to this exercise and we will start the exercise
at the point that we left last week.
Do you remember what we did last week?
We prepared the normal journal entries that come from transactions
and then we post the journal entries into ledger accounts,
and then we prepare a trial balance.
And we call that the unadjusted trial balance
because it's a trial balance that is prepared before the adjusting entries.
Ok, so we will start with this, the unadjusted trial balance, ok?
at 30th June.
And as you remember the trial balance is simply the list of all the accounts,
here you can see cash, account receivable, prepaid insurance, supplies,
all the accounts of the company, ok?
With the ending balance at the end of the period
so you can see the trial balance, the unadjusted trial balance
is prepared at the end of the period is the first thing that we do
at the end of the period before preparing the adjusting entries, ok?
So we prepare the unadjusted trial balance
and we have the ending balance for each of these accounts.
The ending balance of cash, the ending balance of accounts receivable
and service revenue is sitting on the fence, yes.
It moves to the fence, it should be here.
It should be on the column of credit of course,
that is a typing thing.
Service revenue should be in the credit side of course,
76,600.
Salaries expense, rent expense, so you have all of these.
The characteristic of the trial balance is that total debit should equal total credit
and you can see total debit, 201200 and the same as total credit.
So this is our starting point for this exercise.
What means this?
All the normal journal entries are already recorded,
all of them are posted to the general ledger
and we prepare this unadjusted trial balance.
What is next? Well, here you have the exercise.
One thing before we go to the next page these are not the total,
all the accounts of the company.
There are accounts that they have zero balance,
and of course they are not in the unadjusted trial balance
but here you have them listed.
The accumulated depreciation is one account,
office equipment another, electricity payable, salaries payable,
and so on.
So there are a number of accounts that have zero balance,
and therefore they are not in this unadjusted trial balance,
but they are accounts.
So we will go through the exercise.
Here we have added data.
This added data refers to the adjusting entries
that we need to prepare.
They are related to revenues earned
or income earned and expenses incurred
so we need to prepare one adjusting entry for each of this additional data
and that is what is required, if you look at the question requirements,
prepare the adjusting entries for the month of June
so this is just for one month.
Prepare the adjusted trial balance
that is prepared after the adjusting entries
and we will calculate the profit for the month.
So we will go one by one to see how to prepare this.
And I will detail all of them in this first exercise
and then I will go a bit more quick in the second exercise,
or in the exercise of the workshop.
So the first, supplies on hand at 30th June total 7200.
What this tells you, supplies on hand total 7200.
Well, if this is the data we have that means somebody went to the...
To the place that we have the supplies, they count them,
they value them and at the end the conclusion is
we have 7200 supplies on hand. That means not used.
How much do we have in our unadjusted trial balance?
So we need to look at here, supplies. 13,300.
But it says that we have only 7200 so that means we need to make an adjustment.
We need to reduce this 13,600
and to record an expense, a supplies expense for the difference.
So 13600 less 7200 that we have,
that means we have consumed
or used 6400 of supplies,
and that is the adjusting entry.
We need to record the expense for this
so we will have a supplies expense of 6400
and we will credit supplies to reduce the supplies account.
So here you have the first journal entry, adjusting entry.
Supplies expense debit 6400, and supplies credit 6400.
When you do this and you credit supplies by 6400,
if you remember the ledger accounts when we credit one of the ledger accounts
that is supplies, that will decrease the balance of supplies account
which is 13600, so now the new balance of supplies
is 7200 which is the amount that we really have in supplies.
Any question on this?
So this is the first adjusting entry.
Yes Natalia, yes please tell me.
NATALIA: Hello Herman, yeah I see...
I print out this, I guess many of us do print out
this worksheet information
of the sample of the questions, and we have ended one,
and last lecture I was asking you to let us print full ones
because it's hard to follow up because our worksheet is empty at the moment,
it means we follow up on the computer but can't do notes straight on our papers.
Yeah, this will be great because...
HERMAN: Yeah, actually I remember that and at 10 am today,
I uploaded the solution for the lecture exercise and the workshop exercise.
I opened that for you and for everybody,
so you can print them and you can be with the solutions
and you can follow the solutions NATALIA: Ok, now yeah...
You do this adjusting notes much in advance
but is it, you can give us indication when you do apply the solution
on a regular basis because our paper is usually a couple days before
I print out, and have this, yeah.
HERMAN: I will do that because I agree with what you asked me last week.
I agree that it's good that you have the solution
to follow the lecture and the workshop with the solution so you can take notes
in the solution which will be easier.
That' s why I opened today at 10 am and I put an announcement on the blackboard
for all of you to know that they are ready for you to print,
and I think that is what we talked because the idea
is that you try to do this by yourself without the solutions,
and that is the main purpose,
that's why I put in the same day of the lecture and workshop.
I will release these only for you to print out and to take that today,
later in workshop.
NATALIA: Ok, and how many it means they're empty for purpose,
we have a chance to try, and field solution is gonna be
in the very last day before lecture, for future use.
HERMAN: Yes, I will do that in that way all the time.
So I actually did the two purposes.
One purpose is for you to try without solutions,
just with your learning from the videos and PowerPoints,
and second, to have the solutions before the lecture and workshop
so you can go through them as well.
Ok, good. Excellent Natalia, thank you.
Now we can go to the second one.
The second says an electricity bill for 1200 has not been recorded
and will not be paid until next month, so what does this description mean?
If the company receives an electricity bill for 1200,
it means that they used, they consumed electricity for this amount.
It is already consumed therefore it is an expense,
but has not been recorded.
So the only thing, this is a simple adjusting entry,
the only thing that we need to do is to record the expense,
so we will have electricity expense, 1200, but because it was not paid this month,
next month will be paid, so we will credit a liability
which is electricity payable, and that is what you have here.
So in this adjusting entry we will record
debit electricity expense 1200,
credit electricity payable 1200. Yes Natalia?
Stella, Stella. I need to put you as a caption here...
Stella.
Give me a second because I need to put the caption here of Stella
but I don't find you in the list, we have a big list of students.
Near the top, ok?
Ah, there it is. T Ok, thank you Stella
Ok, yes Jade. You have a question?
JADE: I do, yes.
I put there instead of electricity payable I put accounts payable.
would that be okay or is that a problem?
HERMAN: It is ok.
If we are very strict in that
which is not the case because accounts payable is reasonable to use this.
When we talk about accounts payable, It's the accounts payable to suppliers,
so we always link accounts payable for the amount that we owe to suppliers.
That's why it's better, I would not consider it wrong
but it's better to put this explicitly electricity payable because this is...
These are utilities that the company received,
so electricity or water or that type of thing.
So I would prefer to put separated from accounts payable
just because the concept of accounts payable is linked to suppliers of produce.
Ok? But it's not wrong.
Ok, any other question for the second...
for the second adjusting entry?
So we'll go through the third adjusting entry.
Insurance policy, here you can see one statement that didn't say anything,
and you cannot do anything unless you go to the data
that is in the unadjusted trial balance.
The statement says the insurance policy is for a year commencing 1st May 2019.
Well, this is all what you need to prepare the adjusting entries,
because you have the unadjusted trial balance.
The only information here is that the insurance policy is for one year,
12 months, and starts on 1st May 2019,
so we will see what is the information we have in the unadjusted trial balance.
First, this company started on 1st May 2019
which is the same day of the insurance policy, ok?
Insurance policy is added 1st May 2019.
And the trial balance is at June 30.
What is the prepaid insurance? 9600.
9600, this is for 12 months, so how much is per month?
It is 800, so this is equal, ok,
800. 800 per month.
Sorry for my numbers, I'm not very good.
So 800 is the insurance expense that how much we use
or consume of this policy per month. 800 per month.
Now how many months between 1st May until 30th June?
Two months, exactly. Two months.
So what will be the expense that we have to recognize
or to record on the 30th of June?
The expense for two months, that means 1600.
That should be a debit in insurance expense,
and a credit to prepaid insurance to reduce this 9600
because we already consumed 1600 of insurance.
So the journal entry, the adjusting entry for this will be
debit insurance expense 1600, credit prepaid insurance 1600.
Ok, any question on this?
Ok, so we can have a look at the... Thank you Jade.
We can have a look at the next one. Salaries, sorry, not salaries.
That is the next one.
Number four, services were performed during the period
in relation to $3000 of revenue in advance.
What does this description tell us?
First the description is telling us that we received revenue in advance,
that mean we received a payment in advance
and now in this period we provide services for 3000 of that payment.
We need to link this with how much we have in revenue received in advance
in the unadjusted trial balance so we will have a look.
The unadjusted trial balance, state this revenue received in advance, 4800.
Debit because we received this amount and we didn't provide the services
so we have an obligation to provide them and therefore it is a liability, ok?
Now we provide services for 3000 of this 4800,
so we need to record a decrease in service revenue received in advance,
that means we debit 3000 in this account and we will have the current balance
of all these accounts,
so we debit 3000 in service revenue received in advance
and we will have a credit in service
because we earned already this revenue.
We provided the service. Yes Jade?
JADE: Is this classified as an adjustment or is it just as a mistransaction?
HERMAN: It's an adjustment because the original transaction
that we already recorded, it is here in the unadjusted trial balance.
What was the original transaction?
When this happens, the service revenue received in advance I will write here, ok?
We have debit cash because we received the payment, ok?
That was in the previous period.
We record cash for 4800. Sorry for the numbers.
So 4800. We debit cash, and we credit, ok?
This revenue received in advance, I will put it just like that.
Revenue received in advance we credit 4800.
This is the normal journal entry. This is the normal transaction
that we recorded in the last period, and that's why when you look at this entry
and we post the accounts in the ledger, this is what we have there, ok?
That is the original transaction.
What happens now is that we just provide services.
Of course we didn't receive more money because already we were paid in advance
but we provide the service so we need to decrease this
obligation or liability for the 3000 already provided.
Well, George, it says because the concept of revenue received in advance,
the concept of that account is that we received cash in advance.
That is what we received in advance, cash, the payment,
so if you look at the description,
services were performed during the period
in relation to. In relation to what?
To revenue received in advance.
If you look at this description, revenue received in advance,
what it means is that the company received cash in advance
to provide the services.
The customer paid before we provide the service to the customer.
Ok, so cash was involved in the original transaction
and that is the transaction that I showed you that I prepared,
so how was it recorded the cash received?
We debit cash and we credit revenue received in advance from 4800,
that was the original transaction, it's not for this period,
that was before the 30th of June and that's why we have in the balance,
on 30th June we have that amount.
Now in this period the adjusting entry at the end of the period,
we need to include how much we provide of services.
And we provide 3000 of this 4800.
So because we provide services, now we can record the service revenue,
it's a credit service revenue, and we decrease the obligation.
To put the things in context, here we are in the month of June.
So in June the unadjusted trial balance is for June.
I will go through the depreciation but do not change them...
I will go through them, but here... Ok.
This is the unadjusted...
I am clear now, excellent Ann.
This is the unadjusted trial balance at 30th June.
Here means that before 30th June we received the cash.
Now in the adjusting entry it means that also during this period before 30th June
we provide 3000 of this 4800, services provided, ok?
Does this answer your question George?
Ok, excellent, good. So we can go through the next one.
I am here...
The next one is quite simple because salaries, 6400 are owed on 30th June.
What does this mean? Salaries owed means that
the employees worked, so we already consumed these results.
The work of our employees and therefore we should record a salaries expense.
But they are owed, that means we have not paid them,
and that's why we did not record this as a transaction like you learned last week.
We need to prepare the adjusting entry, so we need to record the pays,
salaries expense 6400 debit, and a salaries payable
because it's owed at the end of the month so it will be salaries expense
and salaries payable.
Here you have debit salaries expense 6400
credits salaries payable 6400, ok?
That I think is simple.
Then we have the number six.
Office equipment has a five year life with no resale value,
and is being depreciated at $1440 per month for 60 months.
In this description they are telling you how much is the expense, ok?
But if it is not, if it is only they said the office equipment has a five year life
with no resale value depreciated using the straight line method,
you will learn this in another lecture the depreciation for 60 months.
If we do not have the amounts, you can just go to the unadjusted trial balance
look at the office equipment account, 86400.
If you divide this by 60,
you will have exactly 1440 per month, ok?
So that is the depreciation expense.
Yes, a couple of work, I will not go in deep in this topic
because there is a whole topic about depreciation.
Yeah, I will go why credit and...
Ok, you let me finish this part and I will answer the question
of the previous one.
So we had this depreciation,
what does depreciation mean?
When we purchase an equipment like this, office equipment,
and we pay a big amount of money, in this case how much we paid
for this office equipment, it was 86400, ok?
Do you think we can put as an expense 86400 in the first month?
Well, of course not because we will use this equipment during 60 months,
and remember an expense is when we use
or consume resources.
This resource that is 86400,
it will be consumed or used during 60 months
so we need to calculate how much of this we use in one month,
or in two months in this case.
In two months because it's from 1st of May till 30th June.
How much we use of this in two months, ok? Two months.
So we divide this by 60, we multiply by two,
and that will be 2880
because per month is 1440 when you divide by 60,
you multiply by two because it's two months
and now we can record the expense.
The name of this expense is depreciation expense,
so we record debit depreciation expense. What is the other account?
Well the other account will be to decrease this account,
office equipment,
so you can say well, we credit office equipment.
That would be the case that we are doing in all of these accounts,
but in the case of non-current assets
we use what we call a contra asset account
that means we keep separated the decrease of this account
and the name of that account is accumulated depreciation.
The effect is the same as you reduce directly office equipment,
you credit office equipment but in non-current assets like this,
this is a topic that we will explore in detail,
we use another account and the name is the accumulated depreciation.
It's an asset account but with a credit entry.
So the adjusting entry for this
will be depreciation expense debit 2880
and we credit accumulated depreciation office equipment, ok, 2880.
Any question on this?
Ok, the last one.
The last one is number seven, invoices representing
Ah, Tablynn...
Ah, ok. Before we go to the seven
there is a question about the salaries
who asked me that question about the salaries?
Omar who did, in the adjusted trial, ok.
I will try to answer the two questions.
First, Trina has a question, why to credit 6400 in the transaction five?
Why to credit? Isn't it debit when they pay 6400?
Well, remember Trina that we, in any journal entry and also adjusting entry,
we have a debit side and a credit side.
The total debit should be always equal to total credit.
So what is the debit and what is the credit in the 6400 that you have here
in transaction five?
Salaries of 6400 are owed at that time, 30th June.
So we have an expense, and the expense is a debit entry, ok?
The salaries expense it will be debit.
And we have a salaries payable because they were not paid,
they are owed at 30th June.
So the salaries payable, the liability will be the credit entry.
So your question is why credit? Well, we credit the liability account,
that means salaries payable, but we debit the salaries.
What happens when we pay them in the next period?
When we pay the salaries we will debit the salaries payable,
so we decrease this liability, and we will credit cash, ok?
That is what happened in the following period,
not in this one. And Tablynn...
Tablynn you asked a question about the depreciation?
Yes, depreciation, well,
this is the concept that we will have in detail,
there is a whole lecture about depreciation
with different methods of depreciation but for now,
we only need to think in the concept of depreciation, the general concept.
When we purchase an equipment that lasts more than one accounting period
we cannot record as an expense the cost of the equipment
because we will use the equipment for a number of periods,
so we need to divide the cost of the equipment
into the number of periods.
So we will have just one part of the cost in each period,
and the easier way is just divide the cost by the number of periods.
So in this case the total amount divided by 60 months that we will use
this equipment, office equipment, means that we will have an expense
of 1440 per month, and we call that, that expense,
we call that depreciation expense, ok?
That is the name of this account, depreciation expense.
What does that mean?
It means that that is the part of the equipment
that has been used or consumed in one period.
And that's why we record that as a debit for each month,
but here we have two months, ok? Because from 1st May until 30th June
which is the time for this exercise, two months,
it will be two multiplied by 1440, which is 2880.
So we will record depreciation expense, debit 2880.
What is the other account?
I mentioned that there is another account but the name is accumulated depreciation,
so we will record a credit in that account.
Ok, I'd asked how much would you deduct from depreciation expense
in the adjusted... Excellent Tablynn, thank you.
How much would you deduct in the adjusted trial balance?
I will go through that Adash because we started with
the unadjusted trial balance.
We are doing the adjustments, and then I will explain how we will adjust these
to the adjusted trial balance.
How we transform the unadjusted to the adjusted trial balance.
Ok, yes Trina.
TRINA: Hello, with the salaries,
we already had 6400, it means that expense increased,
that's why expense is debit 6400, but with the liabilities,
it means that we decrease the liabilities, is that right?
HERMAN: Yes when (INAUDIBLE)
TRINA: So if we decrease the... (CROSSTALK)
Sorry, if we decrease the liabilities, it means it debits liabilities,
is that right?
HERMAN: Yes, when we pay that is another transaction,
it's not the adjusting entry.
When we pay for the liability, we will credit the liability
so we decrease the liability, and we will debit cash.
So we decrease cash because we are paying for that liability.
But that is another (CROSSTALK)
TRINA: yeah, I'm a bit confused because we decrease the liabilities,
but well you put it credit 6400.
HERMAN: Yeah, well, that is the point. Trina it's good that you asked
because we should not confuse two different journal entries, ok?
The journal entry that we're talking in number five here,
is an adjusting entry.
We have not paid anything in this journal entry.
In this transaction, we only recognize that the employees worked
during the months, how much we owe them for this work, 6400.
We didn't pay anything.
In the transaction here it doesn't say that we paid for that.
We owe this amount at 30th June. So what do we record?
We record the expense, that means debit salaries expense, 6400,
and we record the liability because we owe them this amount,
so we credit salaries payable, 6400 and that's all.
That's all the adjusting entries.
Now in another day, next month, we will pay for that.
In the payment that is another journal entry, not this one,
when we pay for that what will we do?
We will debit the liability, so we decrease the liability.
We will debit 6400, and we will pay, that means we will credit cash.
When we credit cash we decrease the cash account
because we are paying that amount and that is another journal entry
for the next period.
Does this clarify the point Trina? Good, excellent.
Ok, we are in the number seven, the last one.
Invoices representing $8000 of services performed during the month
have not been recorded as of 30th June, so what does this mean?
We have provided services because it says invoices representing
$8000 of services performed during that, so we performed this service,
and we provided the services for $8000
but they have not been recorded so we need to record them.
So we need to record an accounts receivable
because it doesn't say anything there that we received the money,
therefore it is an account receivable, we will debit...
(CLEARS THROAT) Sorry.
We will debit the account receivable for $8000,
and we will credit the service revenue
because we earned from that service,
we already provided the service, so we will credit service revenue.
So what we will have...
I will do that.
What we will have is the last adjusting entry.
$8000 account receivable debit, and credit $8000 service revenue.
So we've completed all the adjusting entries.
Before we go to how we prepare the adjusted trial balance,
any questions about the adjusting entries?
All good? Ok.
Excellent Jade, very good. That's my purpose.
How we prepare the adjusted trial balance?
Before we prepare that, remember these are journal entries,
so the name is adjusted journal entries, they are journal entries,
so after you prepare the adjusting entries what is the next step?
You need to post these entries to the ledger.
The same as we did last week, exactly Joshua,
we need to post them to the ledger, all of them to adjust the balance
of each of these accounts.
We will not do that, ok? You already learnt last week
how to post transactions from the journal to the ledger,
and it's a very repetitive process and it's the same in this case
so we will not go again through that part we will assume that we already did that,
Ok, we post all of these to the ledger accounts,
so the ledger accounts are updated.
But I will show you how to prepare the adjusted trial balance,
using the worksheet, ok?
Using a worksheet, it has the advantage that you can see
what is the unadjusted trial balance, you can see the adjustments
and how to prepare the adjusted trial balance,
how you can explain the difference between the adjusted
and the unadjusted trial balance.
So here you have this worksheet.
In the worksheet what we do is you copy here in this part, ok?
You copy the unadjusted trial balance.
Of course, total debit should be equal to total credit.
You just copy that and then you go through all the adjusting entries
and you put in the adjustment column, this, I will do just the first two, ok?
Only the first two.
So in the first one, what do we have here?
We debit 6400 in the supplies expense account
and we credit 6400 in the supplies account,
so we look at this supplies expense account.
This is the supplies expense account, we debit 6400, so we just copy there
And the we go to the supplies account this is the supplies account,
you debit this account, ok?
You just copy here in these two columns
what you have done in the adjusting entries.
The second, we will do just the first two. The second, what do we have?
1200 debit in electricity expense account
1200 credit electricity payable account.
So you copy that electricity expense account,
1200 debit, you copy there and then you look for electricity payable.
Electricity payable credit 1200, and you continue with all of this.
The only thing that you need to be careful is that sometimes,
one account appears more than one time in the adjusting entries.
So if you look at the adjusting entries, there is one account
that appears two times, so service revenue.
You have here service revenue, credit 3000,
and then you have here service revenue, 8000.
So the total amount that we will add to service revenue is 11000.
That's why here service revenue in the credit is 11000,
so its the sum of 3000+8000.
That you need to be careful because we need to add the total amounts,
that increase the credit of this account.
Ok, so we complete these, the adjustments.
We just copy all the adjusting entries, debit or credit
in the corresponding accounts.
Well, it's a really (INAUDIBLE)
because very few accounts you will have more than one entry.
In this case we have only service revenue but you know the to not make a mistake
and I did that in the next exercise, is this things.
Do not make a mistake, I will give you a clue to not make a mistake.
Instead I've put here the total.
Every time you have an amount there just put how much,
so you put here the 3000, I will put in thousands
and then you simply add 8, so every time you put the number there.
Then you know that it's 11000.
In this way you will not skip anything.
Ok, that is just a way to do to not make that mistake.
How we prepare now the adjusted trial balance.
The adjusted trial balance is the same as the unadjusted trial balance
with all the adjustments.
So you can see for the cash accounts, there are no adjustments.
Ok, no adjustments, so the adjusted trial balance is the same
as the unadjusted trial balance.
Accounts receivable, the unadjusted is 23 and 40.
The ajustment is debit 8000 so it directly increases the debit
so the adjusted will be the sum of all of them.
Prepaid insurance we have a debit, 9600.
The adjustment is a credit of 1600, a credit decreases a debit,
it's the opposite, ok? So it will be the difference
and there we adjusted this 8000.
The same for supplies, we have 13600,
the adjustment is a credit, therefore the credit decreases debit,
that will be 7200, ok?
And so on.
Office equipment there is no adjustment accumulated depreciation
of office equipment, there is nothing here,
because this is an account that was in zero but we have an adjustment
2880, so the adjusted trial balance will be a credit 2880.
So you can see to prepare the adjusted trial balance is simple.
If we're working with the worksheet, we just add or subtract the adjustment
depending on whether they are on the same side or the opposite side.
If they are on the same side, a debit increases a debit,
a credit increases a credit, but in the opposite side
a credit will decrease a debit or a debit will decrease a credit.
Any question?
So once you have this worksheet... Excellent Joshua,
Once you have the worksheet, the adjusted trial balance
you can just copy. You have the list of...
You have the list of all this, ok? The list of the accounts,
you have the balance, the debit balance or the credit balance
of all of these accounts, and you can just copy them
to have the adjusted trial balance so if this is the adjusted trial balance
the list of the accounts, what accounts have a debit balance
after the adjustments, or credit balance, all of these accounts.
That's the complete exercise and the adjusted trial balance.
Any question?
I think maybe we will use again the four hours
because we still do not finish the lecture,
we have the second exercise of the lecture
and then we have the exercise of the workshop
so definitely we are using the consultation time of the
four hours to complete, but at this point,
we are already one hour 40 minutes.
It's good for you to have a break so you can just prepare your coffee.
No Natalia, I will answer that. You prepare your coffee,
you're soft drink, take a rest, and we will meet in 10 minutes.
Before I go I will just answer the question to Natalia.
Still accountants do this step manually? No, Natalia, no.
I will talk about this when we come back after 10 minutes
because I will talk about the assignment. That will answer your question.
And Tablynn, can you explain profit thing?
Yes I will do that in the next exercise, need more exercise,
we will do four Abdul, today.
If we aren't late, pm, no problem for me,
but if you have the strength to still be there,
we'll be good...
We will... We will do many exercises today,
but for now take a rest, relax. I need to grab my coffee as well,
and 10 minutes, so it's 2.40. At 2.50 we continue.
I will disconnect the microphone, 2.50 we continue, ok?
Ok, here we are again, more relaxed
and ready for another one and a half hours.
Before starting with the next exercise
I will just give you some information
about your first assignment.
The assignment that you will have is a very practical assignment
and this will address one of the questions about Natalia,
Natalia asked, still accountant do these steps manually?
Well, accountants do not do this manually but of course the need to understand
what the system does because if not, the possibility of errors
could be very big.
When you enter a journal entry you need to understand
what continues after that, even the system is doing that
but you need to know how your ledger is updated,
how the trial balance is prepared, it's very important to do that.
That's why you learn to do this manually even though then
the system will do this for you.
OK, but you need to be able to check whether the system is doing well or not.
In this course you will have the opportunity to deal with
one of the most commonly used Accounting software,
it's a cloud accounting because everything is in the cloud
and not in the computer of the organization,
and that is Xero.
Xero is used by many small and medium companies.
Not the very big ones because they have their own systems,
but many small and medium companies use Xero.
Accounting Pod is an organization that facilitates
the learning of this software.
Griffith University has an arrangement with Accounting Pod
to provide this facilitation, for learning Xero,
and we have set up the assignment that you will have in this,
using this software.
So next Monday, 3rd August, the module,
the practice module of Accounting Pod will be open for you.
And it will be open practically the whole month of August,
until the 27th of August, that will be closed at 5.00 pm.
So what is the idea is that you do this. You follow step by step
all the processes and you will learn how to use this software,
so you will do what accountants do in the practice, ok?
And this assessment, the assignment we have two parts,
we have the practice module that it's called,
that will be open next Monday,
and then after it is closed, that means the 27th of August.
On the 1st of September we will open the second part of this assessment
which is the Xero assessment.
That will be opened on the 1st of September,
and it will be closed on the 23rd of September, 5.00 pm,
so at that point you need to finish the second part.
Your marks will be based on what you do in this task.
The marks are allocated...
The marks are allocated to the task that you are doing.
Now, in the question by Jade, what learning modules
will the practice on Xero cover?
What you need to know is just the basics of the accounting cycle,
so to understand what is a journal entry, what are the ledger accounts.
But the training that you will do, you will see it's very...
Totally different to what we are doing in the accounting period,
because you will do tasks related to a software.
I will explain in a bit of detail but next week, on Tuesday of next week,
I will dedicate more time to explain to you in more detail
what you have to do because at that point you will have this already open, ok?
Now it's not there, you cannot see this software yet.
There are three modules in each assessment task,
the practice and the assessment.
Your marks for the assignment will be the average of all these,
ok, the practice and the assessment.
You will have a rubric for this so you will know exactly how
your marks will be allocated.
The system marks you, so it's not that I will mark this.
For each task completed, the system will mark you,
and you will have the marks according to the task.
I will give you some guidelines next week on that.
But in the first part, the practice set, there are three modules, actually four,
but the important models are modules two and three.
The module one is just a welcome for you to have a welcome to the system,
there are no marks allocated there.
Module two is the basics, and there are 20 marks allocated there.
There are very simple tasks that will tell you how to work in Xero.
One of the tasks is for example to set up an authentication in door,
so it's not related to accounting at all, but is related to working with this...
with the system.
My suggestion would be to always look at the question that you have
for each task and the possible answer, and then look at the content.
Try to not answer the question immediately but go through the content.
You will learn through the content, not just answering the questions.
Try not to do what is... You look at the question, possible answer,
and then you try to find the answer in the content,
because you will not learn a lot.
The idea is that you learn how to use Xero, this system, ok?
And to learn that it's good that you go through the content
trying to learn what is this about?
And the next module, the module three that is Xero,
in that module you will work in Xero.
So module two is just to prepare, you will be prepared to work with Xero
but it's not yet the working withing Xero.
Module three yes, you will have a number of tasks
following the instructions that Accounting Pod will give you
to complete this task and provide the answers.
So then the module four is just to wrap up a couple of questions,
but not really important.
Module two and three are the most important.
Now when you finish one module, then you will have access to the next one
and so on, so you need to go step by step.
In this sense, this is, even though you need some knowledge
in accounting that you already have, you don't need more than that
because it's different to learn how to work with a software in accounting
than how to do accounting, that is what you are doing now.
Then the assessment part is just the application of all what you have learned
in the practice part, and in a different case scenario.
So that is in general what you will from next week,
there is time, don't wait till the last two days.
For example, it opens 2nd August, it will be closed 27th of August,
do not wait until the 25th of August for all the task,
because you need time for that.
You need time to reflect on what you're learning,
you need time to properly do the task and go just a little bit
during the time this will be open.
It will not take a long time, ok? it will not take a very long time,
probably you can do this in three or four days, if you dedicate full time,
but that is not the best way to learn.
Yes, you will have marks Cecilia in the practice part
and actually the total marks that you will have is the average
weighted average of the practice part and the assessment part.
I also considered to give marks for the practice part
because in the practice part, it will be easier for you,
but the intention is that you learn how to use the software
and how to use this software is in the practice part.
In the assessment part you will apply all of this,
so there are marks allocated in the practice part as well, yeah.
So this is just some information that I want to give you in advance
and next week with this open, I will show you the screens
and I can share screens for you to do this.
Cecilia, is there any way we can practice using the system without getting marks?
Yes, because you don't need to submit
but now you will see it's very straightforward,
the system will tell you exactly what to do,
so if you do well, you don't need to do it again,
but try to do well.
Now there is some not in the practice part but in the assessment part
there is feedback that you can receive and also you can ask questions.
Now the specific question of the software please do not ask me that way
but to the system, there is a box that you will see next week,
that says 'leave us a message'.
You leave all the questions there and they will answer you immediately.
If you have a problem with this, of course you contact me
and I will deal with them, but they answer quite quick all your questions.
Ok, now I have another message,
and this is another caption.
Who sent me a message about captioning? They'll need the captioning.
Cassandra is that you? Ok, I've added you.
Ok, so now we can continue with the next exercise.
And we are still in the lecture so definitely will end a bit late
but I prefer to clarify anything you need it's important for you.
Ok, so...
I guess we don't need to put this... Ok.
Here you have the next question. This is...
I do not know if you can see well in your screen
because this uses the whole one in my screen.
Can you see we're on this table?
Yes, ok, excellent. Excellent, thank you.
So this exercise starts as well from the unadjusted trial balance,
the same as this one.
And they open for business on 1st of April 2019
and the trial balance is on 30th of June, so how many months do we have?
This is important because we will need this to calculate the adjusting entries,
how many months since we started? Three months.
So remember that from 1st of April until the date,
very good Natalia, three months,
until the date of these financial statements, three months,
that is what we will consider.
So what we have here in this, this is the worksheet.
You can see we add more columns.
What we have at the beginning is the unadjusted trial balance,
that I am showing you there, unadjusted trial balance.
Then we put in the adjustments, all the adjusting entries,
we will do that in this exercise as well, and from this we prepare what is called
the adjusted trial balance.
But now we will add the last part for today which is the closing entries
so you can see we have now three types of entries.
Just the general entries, or journal entries that come from transactions
that we did last week.
We have the adjusting entries that we prepared in the first part,
and we have the closing entries and we will see what are the closing entries.
After the closing entries we prepare another trial balance
which is the post-closing trial balance.
And with this we complete, almost complete the accounting cycle.
After this we only need to prepare the financial statements.
So we have the list of accounts, here you have all the list of accounts
that we will use in this and we have the ending balance of each of these accounts
in the unadjusted trial balance, that means before adjustment,
these are the balances of all of these accounts, ok?
Here we continue with different types of accounts,
we will go in detail with all of them.
And of course, the unadjusted trial balance
the total debits should be equal to total credit.
That's in all the trial balances, total debit equals total credit.
So here we have the additional data.
The additional data as you already know is the data that we need
to prepare the adjusting entries, so we will go through these six entries,
six additional data to prepare the adjusting entries.
We will journalize the adjusting entries so we will record them,
what is the debit, what is the credit of each of this adjusting entries.
And then with this adjusting entries,
we will complete the adjusted trial balance in the worksheet.
Then from the adjusted trial balance in the worksheet,
we will prepare the closing entries.
And using the information of the closing entries,
we will prepare the post-closing entries trial balance.
So this is a very complete exercise,
the starting with the unadjusted trial balance
until the post-closing entries trial balance.
So we will start with the adjusting entries.
The first one, insurance expires at a rate of $900 per month
and is an annual premium commencing 1st April 2019.
So what might this description be telling us?
It says that three months, so it's already calculated the total policy divided by 12,
it should be 900 per month, that is the insurance expense per month
when this started on 1st of April, at the beginning of this period
and we have already three months if you remember.
So in three months by $900 is 2700.
We need to record the debit, the insurance expense clearly,
then prepaid insurance.
So we look at our journal entries, insurance expense, and prepaid insurance.
Here you have debit 2700 insurance expense,
credit 2700 prepaid insurance, and that is the first one, ok?
I will go a bit quicker in this but please stop me at any time
and ask me if there is something that you would like to clarify.
Of course I will explain well but because we've gone through this already
they are similar.
If it is clear just.. Just (INAUDIBLE).
Ok, sorry. What was the question?
Here is it prepaid insurance? Yes it is prepaid insurance.
Ok, ok. So to answer that question we need to look at from where comes this.
Insurance expires at the rate of $900 per month.
From where does this come? This comes from a prepaid insurance
so that means the company paid in advance it's a prepayment,
the insurance for the next 12 months on 1st April.
1st April the company paid the whole year, that means 12 months insurance.
What amount?
To know that you need to look at the account prepaid insurance,
here you have, ok, prepaid insurance debit 10800.
If you divide this by 12 it's 900.
That means every month you need to record an insurance expense
because you will consume this policy in 12 months.
So every month you need to record an insurance expense of 900 every month
and we have three months so it will be the total of 2700 as insurance expense
and we decrease the prepaid insurance, very good, excellent.
Ok, the second one, an inventory of supplies shows 7200
of unused supplies on 30th June.
So we still have 7200 supplies in the inventory.
How much do we have in the unadjusted trial balance?
Supplies, 11400, and we have 7200 at the end of June
so we have use the difference.
What is the difference between 11400 and 7200? It's 4200.
So we have a supplies expense debit 4200 and we credit this account supplies
to reduce 4200 from here.
So the journal entry, the adjusting entry, it will be supplies expense 4200 debit
and we credit supplies 4200. With this we decrease the supplies account
and now we will have the balance that we calculate here.
That we count, we count the items, we value the items
and what we have at the end of June is 7200, ok?
So that is the second adjustment. The third one.
The depreciation for the year ended 30 is 5400 on the building
and 4500 on furniture.
Here you have two items.
The two of them are what we call the non-current assets,
so they're assets that last for more than one accounting period.
We have buildings and furniture and this description is telling us
that depreciation expense for the year 30th June 2019,
that is the ending...
That is the date of the unadjusted trial balance.
The deprecieation expense is 5400 on the building, 4500 on furniture.
No we need to think in the accounts.
Depreciation expense is one account so it doesn't matter how many items
we are depreciating
we need to add them and we will have the depreciation expense,
the total depreciation expense.
If you add these two amounts, 5400 and 4500 it will be 9900
so we will have a debit of depreciation expense, 9900.
What is the other account?
The other account is accumulated depreciation
but we have one accumulated depreciation account for each item
of the non-current asset.
How many items do we have here? Two.
So we have building, we have furniture.
So two different accounts, one account will be accumulated depreciation,
building, the other account will be accumulated depreciation furniture
We need to distinguish them and to record them separately.
So we will have a depreciation expense 9900, one account,
and then we will have accumulated depreciation of building, 5400.
Accumulated depreciation of furniture, 4500.
and the journal entry, the adjusting entry will be this one.
Here you can see 9900 depreciation expense, one account.
All the depreciation expense together.
But then we have two different accounts,
so accumulated depreciation of the building, 5400,
accumulated depreciation of furniture, 4500.
The sum of course is 9900 so...
it would be okay Jade that if you separated depreciation expense
but we need to think that depreciation expense is just one account.
It will not cause any problem because at the end we will have two.
It's like we separate these in two adjusting entries.
It is possible, it's ok, it's not wrong,
but because we have one depreciation expense,
we record them together.
Now this is a journal entry for adjusting entries in which you have three entries.
Ok, I mentioned to you that most of the you have two entries,
one debit, one credit, there could be more.
this is the case.
In this case you have one debit and you have two credits.
The important thing is any journal entry or adjusting entry,
the total debit should be equal to total credits which is the case here.
Ok, next one.
The mortgage interest rate is 6%.
The mortgage was taken out on 1st April.
This is the only data that is given in the additional data for adjusting entries,
so we need to look at the data in the unadjusted trial balance to calculate this
so here we know 6% is the interest rate.
Always when it's given like this, it's annual interest rate, ok?
Annual interest rate. Always this is the annual,
that is the normal period for the interest rate of a mortgage.
So we will need to see what is the total of the mortgage
so we go to our...
And here you have mortgage payable.
This is the unadjusted trial balance, mortgage payable 210000.
210000.
If you multiply 210000 by 6% how much is that?
12600, very well Jade, 12600.
That is the interest for the year, ok?
But we need the interest for three months so we divide this by 12
and we will have the interest per month.
We multiply by 3, ok,
and that is the interest for the three months
and for the three months we will multiply that by three, Jade,
monthly it will be 3150, ok?
So 3150 is the interest expense that we need to record here.
Good Jade.
Ok, so interest expense 3150.
Interest expense for the three months and we have an interest payable
because we have not paid that.
So interest payable, 3150. This is the adjusting entry.
Next one.
9000 of rent revenue paid in advance pertains to June.
The remainder pertains to July, so what does this mean?
The tenant paid in advance
for the rent until July,
but until June the tenant already used $9000 of this payment
because they used the office or the rent.
George, the previous one, sorry, you're talking about the mortgage?
The mortgage interest?
It's that one? Ok.
Ok, yeah, I will go through that George as soon as I finish this that I started
so here we have the revenue received in advance.
9000, that pertains to June, that means the tenant already used this.
We have provided this credit to the tenant until June for 9000.
So we need to record this income because this is revenue
and we will credit rent revenue for 9000 and we will debit
the rent revenue received in advance which is a liability
when the tenant pays in advance the amount.
So this will be...
Debit rent revenue received in advance we decrease the liability
because the tenant already used this building until 30th June
and we record now the rent revenue, ok?
So that is the number five. I will go with the interest,
the interest of the number four. I will go again with this.
The mortgage interest rate is 6%.
Please remember, always the interest is per year,
so we need to know how much is the interest per month.
How do we calculate that?
Well, 6% of what?
That is the thing that we need to calculate.
6% of the total mortgage interest... Sorry.
6% of the total mortgage that we have for this loan that we have
so here you have, this is our trial balance.
Remember this is our unadjusted trial balance.
If we go down through the accounts we will have this mortgage payable.
Credit because it's a loan, it's a loan payable, it's a liability.
This is the total amount we borrow, 210000.
How much is the interest per year? 6% of this.
If you calculate your 6% of 210000, then that is 12600,
but that is per year.
How many months is the period of time here from 1st April to 30th June?
It's three months.
So 210000 divided by 12, sorry.
210000 multiplied by 6% is 12600.
12600 divided by 12, that will be per month
and then we multiply by three, that will be three months.
The amount is 3150.
So we record that interest expense, 3150 because it's an interest already accrued
in this specific time, until 30th June, three months.
And the interest payable because we had not paid that
is the same amount, 3150.
We have this liability for the interest payable
and we have the interest expense, that clarified the point George?
Ok, excellent.
Now the last adjusting entry is salaries.
This is a simple one.
Salaries of 1800 are unpaid at 30th June. So what does this mean?
That means that the employees already work for this amount,
1800 but the company didn't pay them.
So we owe that salary, so we will record the expense,
salaries expense 1800, and we have to record the liability
because we owe the salaries, that means salaries payable,
that is the liability.
So debit salaries expense, 1800 credit salaries payable, ok?
1800. So there you have the last adjusting entry.
So we've finished the adjusting entries,
and now we can put all of these adjusting entries
to the spreadsheet.
So if we put them to the spreadsheet,
you have here all the adjustments.
There is a number that you can see in this column after adjustment,
this is just a column that can help you to know
which are the transactions that the...
the adjustment that we are recording in the adjustment.
I will look at that, I will go through the first one
just for you to have the reference because we did this already.
We don't need to go through all of them.
In the first, this is the number one, the first adjusting entry.
We record debit 2700 insurance expense, credit 2700 prepaid insurance.
So prepaid insurance is a credit... there you have the number one
for you to have as a reference.
This is the adjusting one. Credit 2700
and we have a debit in insurance expense,
insurance expense a debit, 2700
and here you can see the number one again as a reference.
So all of them have a reference to what transaction it is.
So we can complete this table
just copying all the adjustments,
the debit and the credit in the corresponding account
and we will complete the adjustment.
Then we can prepare the adjusted trial balance
the same as I explained in the previous exercise.
Cash for example, 15000 debit, there are no adjustments,
so the adjusted trial balance is 15000 debit cash.
Prepaid insurance we have it there 10800 in the unadjusted balance,
the adjustment is credit,
so credit decreases the debit we need to strike this,
so the adjusted trial balance is debit 8100.
And we continue with all the adjustments until we have really
the adjusted trial balance.
So we can copy all the amounts here, in the adjusted trial balance
and this is our adjusted trial balance.
So in the first exercise we finished in this part,
but now we will continue with the second part
which is the closing entries.
What are closing entries, what are the closing entries?
So now I will explain a bit conceptually what are closing entries
and then we will apply them in this exercise.
I mentioned last week that there are permanent accounts
from all the accounts of the company.
There are permanent accounts and there are temporary accounts.
What is the difference between the permanent accounts
and the temporary accounts?
The permanent accounts are accounts that the ending balance of any period
is the beginning balance of the following period.
So we carry forward the balance of the accounts to the following period
and we continue for all the life of the company with this.
Ending balance becomes the opening balance of the following period.
If you remember when we balanced the accounts last week
we ended each of the ledger accounts with what is the opening balance
for the following period which was ending balance for the current period.
So these are the permanent accounts. But we have also temporary accounts.
What are temporary accounts?
Temporary accounts are accounts that must be closed
at the end of the accounting period.
Why do we have to close them?
Because we want to start the following period
with zero balance in each of these accounts, zero balance.
So we need to keep these accounts with zero balance.
How can we do this?
Well, we need to transfer the balance of these accounts
to a permanent account.
Then we can leave the account in zero balance.
This is very important for, very good Joshua, to retain earnings.
This is very important particularly for all the accounts of the income statement
because we want to start each accounting period
with zero balances in the income statement accounts,
that means all the revenues and expenses account
should be zero, why?
Because we want to menasure the profit for the period.
If we do not start from a zero balance we will not have the profit of the period
we will have a mix of profit of the periods and the current period, ok?
So to know the profit of the period we have to start with zero balance
in all of these accounts.
So what are the temporary accounts? All the income statement accounts.
That means all the revenues accounts or any other income
and all the expenses accounts.
All of them are temporary accounts.
In addition there is one account that we add retained earnings
or the equity account which is dividends.
Dividends is also very good Tamara, dividends is also a temporary account
and we need to close dividends at the end of the accounting period.
So how do we close them?
Well, to know that, we can start from here,
the adjusted trial balance.
Now what type of account do we have here? And we always put these in this order.
First we have the asset account, so you have cash here, ok?
Prepaid insurance, supplies, land, building,
accumulated depreciation is an asset account even though it's a credit,
but I already explained that and we will go in more detail with this account
in another topic. That is an asset account,
same to accumulated depreciation of credit.
All of these are asset accounts.
After the asset account we record the liabilities account.
So here you have accounts payable, rent revenue received in advance,
salaries payable, interest payable, mortgage payable, ok?
All of these are liabilities accounts.
After the liabilities accounts we have the equity accounts,
so we have check capital and rent revenue.
These two are the equity accounts, sorry, only check capital,
and retained earnings.
Check capital and retained earnings, that's what I mean.
Check capital and retained earnings are equity accounts.
In this case in this company we don't have retained earnings.
Why don't we have retained earnings? Because this company just started, ok?
It started on 1st April, so this is the first period,
30th June 2017.
And because it's the first period we don't have yet retained earnings account.
So check capital and retained earnings are equity accounts.
Then we have the income statement accounts.
The first account that we have all the revenues.
Rent revenue in this case, it may be service revenue,
it may be sales revenue, fees revenue, interest revenues,
all the revenues accounts, they will be in this part.
And then all the expenses accounts,
so we have advertisement expense, depreciation expense,
electricity expense, insurance, interest, salaries, supplies expenses,
all the expense accounts.
So this is the adjusted trial balance.
What are the accounts that we need to close?
In this case we don not have dividends, we have revenue, rent revenue,
and we have all of these expenses.
These are the accounts that we need to bring.
How will we close this?
There are two steps to close the accounts.
The first step we will close all the expenses and then the revenues
to another temporary account that we will create
that the name is the income summary account.
Income summary account is the name of another temporary account
and the purpose is to close all the expenses
and the revenues to this account.
So how do we close the expense? here you have advertisement expenses,
(INAUDIBLE) 3000, depreciation expense the balance
is debit 9900 so we have a number of expenses.
We add all of them and we will debit the income summary accounts for the sum
and we will credit each of them one by one
we cannot credit the total of them,
we need to close each account one by one so we need to credit advertisement expense
credit 3000, depreciation expense credit 9900.
Electricity expense we credit 6000 and so on
because if you credit advertisement expense by 3000,
what is the balance of advertising expense after that? Zero.
If you credit depreciation expense by 9900 what is the balance after that? Zero.
We're leaving each account at zero that's why we need to do one by one.
But for the sum of all of this credit we will have one debit which is
the income summary account, or profit and loss summary account.
It could be any of these.
With revenue we do the same.
So to close these revenue accounts, what we should do?
We need to debit by 64200.
We debit rent revenue by 64200, what is the balance after this? Zero.
And what we credit? Income summary account again.
So income summary account will be the same account that we use for expenses
but in this case we credit the income summary account.
So you can see what we have done at this point is to transfer
the amount of all the expenses and revenues to this temporary account
which is income summary account.
Here you have the closing entries.
We credit all of the expense accounts, remember the normal balance is a debit
so to close them we credit. This is a journal entry.
You can see this is a journal entry in which we debit income summary,
the sum of all the expenses.
We debit income summary and we credit each of these accounts.
How many entries has this journal entry?
You can see it has eight entries.
We have one debit, and seven credits.
So this is one journal entry, with this journal entry we close
all the expense accounts.
That means these are closing entries.
We transfer the expenses to the income summary accounts.
For debt revenue, the same.
In this case we need to debit the revenue account
because the balance is credit so when we credit,
we leave this account in zero, and we debit the rent revenue
and we credit the income summary account.
This is another journal entry, a closing entry.
What is next?
Then we need to close the income summary account.
What is the balance of the income summary account?
The income summary account is the difference
between the credit and the debit .
what is higher?
Well, we have 64200 credit and 48750 debit.
so that difference is 15450 credit, ok?
That is the balance of the income summary account at this point.
To close that, we need to debit, it is the third closing entry.
We debit 15450 from the income summary account
and we credit retained earnings. This is a permanent account.
So we transfer this balance to the retained earnings account.
Now the income summary account is closed.
You can verify this if you were at all debit,
48750 + 15450 will be equal to 64200.
Income summary account is closed the ending balance in this case is zero
and all the balance is transferred to retained profit.
You can see what we have done is to transfer the profit
of the accounting period through the journal entries
that are the closing entries.
We transfer the profit to the retained earnings
an that is what we do every period at the end of each period we do this.
So what is retained earnings?
It's the accumulation of all profits and all losses since the company started
because we do this at the end of this period.
So we are accumulating the profits in this written profit account.
What about dividends?
Dividends is another temporary account we will see another exercise
in which dividends is included in the workshop exercise
in which dividends is also closed to retained earnings,
so retained earnings are decreased by dividends.
Now, one last word in relation to closing entries.
Closing entries you can see is very simple.
It's just to close each of the expense and revenues accounts
and also dividends,
and leaving the accounts with zero balance.
The normal mistake that the students do in this part even is simple
is the confusion between the debit or the credit to close the account.
So because students know that expenses are debit,
they close all expense accounts with the debit here.
Put the debit and put the income summary account as the credit.
But that, what is the effect of that?
With that, the effect that will be will be that you double
the balance of each account.
If you debit advertisement expenses by 3000 and you have a balance of 3000
what is the ending balance of the advertisement expenses? 6000.
Ok, you double the balance on the account you are not closing the account.
To close the account should be the opposite side,
it should be you credit 3000 because the account has a balance of debit, 3000.
So be careful with that, I have seen so many times the same mistake.
Remember that taking out on these so do not make this type of mistake.
Any question about closing entries?
The whole point Natalia, or the last part?
The last part? Excellent, yes.
Ok, excellent.
For one second I thought it was the whole point.
Excellent. Thank you Natalia.
A common mistake, what is the common mistake?
Here we are closing the account to ...
Remember two things, to close has a meaning.
What is the meaning to close?
To close means leave with zero balance that is the meaning, ok.
Close means leave this account with zero balance.
So if we close advertisement expense it means leave this with zero balance
at the end of the period.
After closing entries we want advertising expense equals zero balance
so that means we transfer the balance to another account.
We're transferring here to income summary in this first step.
So what about if we have instead of, I will write over here,
instead of credit 3000, we put 3000 here, we debit.
And we do the same with all the other accounts.
That means that this, the income summary will not be a debit of 48000
but will be a credit of 48750, ok?
So what will be the effect of this?
And we put here the 9900, the 6000, the 2000...
All of them in debit.
What is the balance of all of these accounts if you do that?
What is the balance after closing entries if you debit this account?
What will be the balance of advertisement expense?
It will be 6000 because the balance before closing entries is debit 3000.
If you debit in the closing entry by 3000 the debit increases the debit
so a debit of 3000 will be added to the debit of 3000,
that means now the balance is 6000.
You're not closing the account, you double the balance of the account.
So that's why you need to be very careful that the closing entry
should be the opposite side of the accounts that we are closing.
All the expense accounts, they have a debit balance.
What is the opposite side? Credit.
So we need to credit all the expense accounts.
The revenues accounts, what is the normal balance? Credit.
To close we need to debit, the opposite side.
That is the important thing so be careful with that,
so do not make a mistake on this.
Ok, Yes, Zijing, only need to close the temporary account.
The permanent account we will carry forward the balance.
The ending balance at the end of the period
will be the beginning balance of the next period.
We do not start with a zero balance.
We start with the ending balance of the previous period
so we only close temporary accounts. What are the temporary accounts?
All the income statement accounts plus dividends, ok?
So we finish with this and here you have all the closing entries
and that's the last part of this exercise I think, yes.
Yes, that was the last question to prepare the closing entries.
So we finish, just we finish the lecture,
and it is time to (INAUDIBLE)
We need still to go through the workshop.
Yes I did here profit and loss, there are different names for this,
and over time the name has changed in the accounting standards,
but when we talk about income statements it's the same as profit and loss statement
it's the same. And we talk, there is another name,
it's not very used now, but you can see in some books
that there's the statement of financial performance.
That is also called the income statement.
And the balance sheet has another name, it's the statement of financial position.
But for the names that we're using is normally income statement
or statement of profit or loss.
And then we have,
retained profit will always credit, right?
Good question Ezekiel.
Retained profit normally should be and has to be in the credit side
except if the company has a lot of loss and then retained profit
will go to the other side, we'll have a debit balance.
That is a company that has accumulated losses,
and they don't have profit. it's not the normal situation
and it will be very bad for the company. Normally it should be on the credit side.
It is possible the debit side, but not usual, and not good.
Ok, so now we can go through the workshop.
So we need to plan a bit at this point because 3.50.
The normal time from 1.00-4.00 is the workshop and the lecture,
and then 4.00-5.00 I have the consultation
but what I am doing is just to answer all the questions
while I am explaining the exercise, so I go through the questions immediately.
That I think is better because we don't need to go back
but we solve anything that you have, any question you have immediately.
But because we have not gone through the workshop,
I will use the consultation time for the workshop.
Now I understand if any of you cannot stay for the workshop,
for the consultation which is 4.00-5.00,
it's ok, so feel free to go, no problem.
Remember the lecture and the workshop will be recorded
and will be uploaded on the ECOS 360 tab,
so you will have the complete record, yes and there's no problem.
You will have the complete record of the lecture and the workshop.
So I will explain this as part of the consultation,
the exercise of the workshop, ok?
And then if you have more questions yes, please feel free to ask
any question you may have.
Ok, so we go through the second one.
The workshop, the scheme that we have used is similar to the lecture,
we start with four multiple choice questions to revise some concepts
and then we go through the exercise.
And in the exercise we will do the same, we will practice with adjusting entries,
we will practice with closing entries and that is the topic for today,
so a lot of practice in this.
So we will start with this.
I will have a look at the first question which is similar to the first question
of the lecture.
Ok, have a look at this, I will update the poll.
Ok, so furniture factory employees work overtime to finish an order
that was sold on 28th February.
The office sent a statement to the customer in early March
and the payment is received by mid March.
The overtime expenses should be expressed in which period?
Ok, good practically most of you have the right answer,
in February. Why in February?
Because they said that when it's sold this order?
On 28th February, so it's February,
the month is February and the employees work during February.
So the resource, that means the work of the employees
was used on February, that means the right answer is that one,
February, A.
A is the right answer, ok?
Number two, have a look, I will update the poll.
The company purchased office supplies costing $4000 and debit office supplies
for the full amount. At the end of the accounting period,
a critical count of supplies reveal 1600 is still on hand.
What is the appropriate journal entry?
We have done already two weeks aside for this,
so if you understood well, please apply the same as we have done
in the first two exercises.
Ok, most of you correct, what is the...
The right answer is C. Ok, why?
if the company purchases office supplies costing 4000, debit all these supplies,
so what is the balance of these accounts?
The unadjusted balance is office supplies or simply supplies, debit $4000,
that is the unadjusted balance but at the end of the accounting period
the physical count revealed 1600.
So that is what we have in the supplies account.
The rest were consumed, what's due,
so we need to record a debit supplies expense
by the difference, 2400,
that is the difference between 4000 and 1600.
And we credit office supplies so we reduced the balance of office supplies
by 2400 and now what is the balance after adjustment? 1600, ok?
This is the normal way that you will see always what happened
with the supplies account, but there is another way
that I will explain, I will explain it now.
What about if this company purchased office supplies that cost 4000 dollars,
but debit the supplies expense, the office supplies expense.
So we debit, ok?
And that is the journal entry that they record
because they thought that they would consume all of this
in this accounting period.
So they debit supplies 4000.
They debit supplies 4000, and then credit.
If they paid cash, 4000. That is the original entry, ok?
Supplies expense.
So they debit an expense account. Why do they do this?
Because they think that they will consume all of these supplies in the month.
But at the end of the month they realize that they still have 1600 on hand.
What will be the adjusting entry in this case?
Think a bit.
And think what would be the adjusting entry in this case
because we need to adjust this, the expense was not 4000.
It was less than 4000 because we still have 1600.
We need to adjust that.
What will be the adjusting entry in this case if we record everything?
Debit office supplies, and credit supplies expenses, very good.
For what amount? For 1600.
So we will debit office supplies 1600
so now we have this, ok?
1600 debit, now we have the balance, and we need to credit the expense
because the expense was not 4000.
The expense was the difference, so we will credit the expense by 1600.
This is a different way to look at the supplies expenses account.
It is possible, it's not frequent but it is possible that this is what may happen.
A full reversal if it is... if it is given.
It's not a reversal actually, it depends on how the data is presented.
For example if the data is presented as I did in this exercise
or all the previous ones, you only need to adjust as we have done
but if the data is presented in this way that all the expenses,
all the supplies purchased are recorded as an expense,
then the other adjustment should be reversed.
What will give you the clue is how we record the purchase of this.
We record as supplies, or we record as supplies expense.
That will make the difference.
Ok, it's good to clarify this, because I have seen an exercise
in which they use the other way.
We have two possibilities and I will put this in here.
First, all purchases are recorded as supplies.
Ok, all purchases are recorded as supplies.
Now this you want....
All purchases are recorded as supplies.
What we should do when all purchases are recorded as supplies,
we do what you have learnt in the two previous exercises
in the lecture and in this...
in this multiple choice question.
We adjust the ending balance of supplies, ok?
But what about all purchases are recorded as expenses?
That is the other situation, all purchases are recorded as supplies
first situation we have worked with that, the second situation,
all purchases are recorded as expenses and we purchased $4000 of supplies
and because we think that we will use all of them in this accounting period
we record the 4000 as supplies expense when we purchase them.
At the end of the month we have 1600 on hand,
so we didn't spend all of them. We still have supplies
and we need to prepare an adjusting entry to reflect this.
So how we will reflect in this case, we will record in this case a debit supplies
1600, ok? We record 1600 supplies
and we credit supplies expense, 1600.
That will be the adjusting entry. What do we do with this adjusting entry?
We put in supplies which is an asset account,
we put the amount that we have on hand at the end of the period, 1600.
And we reduce the supplies expense by 1600
because we didn't consume all of them, ok?
This is the situation when purchases are recorded as expenses.
It's another situation, it's not the most common situation
but it's good that you know that adjustment is to reflect
what we have at the end of the period, ok?
It's clear now?
What are the questions?
Ok, Tablynn, Tablynn please clarify the point.
We go to the next one, number 3.
I will update the poll, thank you Tablynn.
Ok, this company purchased a computer for 3000 on 1st December.
It is estimated the annual depreciation of the computer is $600,
the annual depreciation.
A financial statement had to be prepared on 31st December.
The company should make the following adjustment.
So it's not very difficult, what is the adjusting entry in this case?
Have a look at the alternatives and choose one of them.
Ok, are you ready?
We have most of you answered correctly but we have a distribution
in the answer as well.
The correct answer is B.
What is the, I would not say tricky,
but what is the thing that you need to be careful of
with the data provided?
It is important and this is a good practice for you for the final exam
because in the final exam you will have multiple choice questions
and you will have exercises.
And the multiple choice questions what is essential?
In the multiple question it is to read carefully everything in the question
before you choose one of the answers because here I can see
why there are some errors.
It says this is the amount of the computer, $3000.
It is estimated annual depreciation is $600, annual depreciation.
Financial statements are to be prepared on 31st December.
What is the period of time for this accounting period?
It's from the 1st of December to the 31st of December,
that's one month.
So were talking about an accounting period of one month, exactly Joshua.
One month, and here we have the depreciation of a whole year,
so to calculate the depreciation for one month
you need to divide this by 12.
If you divide by 12 it's 50
so that immediately leaves out A and E and also the answer,
so we're not only between B and C, ok?
Now to record the depreciation expense debit always,
always debit depreciation expense always it's a debit,
and credit the accumulated depreciation.
That's why this is the right answer, ok?
So this is a good opportunity I can use to explain to you how to avoid
some common errors when you do this in an exam,
and only, maybe you know the answer,
but because you didn't read very carefully the data
then you can make a mistake.
So be careful with these types of things when you answer these questions.
Ok, now the last multiple choice question,
is this one, I will update the poll.
An entity failed to adjust the revenue received in advance account
for rent that has been earned.
What effect will this have on the financial statements?
(COUGHS)
Ok, most of you again are correct,
but there are different answers as well.
But the right answer is E, ok? That is the right answer.
I will explain how to solve this type of questions,
because there are many similar questions, but the question is,
what is the effect on the financial statement
if an adjustment entry is not prepared?
Ok, so how we answer this type of question?
The best way is to go step by step.
It says the entity failed to adjust revenue received in advance account
for rent that has bee earned.
So what happens when we have a revenue received in advance?
Yes, it is a liability.
Revenue received in advance is a liability account,
and what happens when we earn the rent and we do not adjust this liability?
The adjustment means a decrease of the liability.
If we do not decrease the liability, revenue received in advance,
these liabilities will be overstated.
How many of the answers, and that is the way that you can see
when you are answering this type of question in an exam,
how many of the answers have that, that the liabilities will be overstated?
Well, we have D and E only, only two,
so you can discard already three.
So you are going step by step answering the question,
and even you don't know the second part but now your choice is only between two
so a better probability to have the correct answer.
These are just some tricks that you can apply when you answer
these types of questions, ok?
So first, liabilities will be overstated and what else?
The difference is in revenue.
What happens in revenue if we do not record this?
If we do not record this it means we do not record revenue already earned,
so the revenue account will be understated because we miss to record this revenue.
So this will be the second part, understated,
and that's why the right answer is E.
Any questions? Any conceptual questions?
Because with these four questions we finished up the conceptual part.
Excellent Jade, we finished all the conceptual part about adjusting entries
but now we will apply them again in a couple of exercises.
So we go through the first exercise which is this.
This company began operations 1st February 2019
and the trial balance is at 30th June.
So how many months is this accounting period?
The accounting period is five months, very good.
We need to keep that in mind, five months is the accounting period
to calculate the revenues, expenses or anything that we will need.
What we have here is the trial balance again,
the unadjusted trial balance.
We have all the debit accounts, all the credit accounts.
They are not all the accounts because there are other accounts here,
you can see other accounts that have zero balance at this moment
but they are accounts of the company that we will use.
And then we have the transactions, not transactions, sorry.
Not transactions, the data for the adjustments.
The first again we have supplies, so these are similar,
so I will go a bit quick,
but please stop me if there's anything that you don't follow well.
So supplies on hand, 490,
how much we have in the unadjusted trial balance?
supplies, 2350, so 2350 less 490
that will be 1860.
Less 490 that will be 1860,
so we record supplies expense and supplies.
We'll record expense for the supplies consumed
and we decrease the balance of the supplies accounts.
Ok, second, electricity bill 110 has not been recorded,
and will not be paid until next month.
Quite similar to what we have done, we need to record the expense,
electricity expense debit 110,
and electricity payable credit 110.
So here you have electricity expense 110, electricity payable 110.
The insurance policy is for the year commencing 1st February 2019.
This is the day that the company started for the year,
so we need to see here how much is...
prepaid insurance in total for a year is 2520,
so if we divide this by 12 and we have five months in this period
we will need to multiply by 5, so dividing this by 12, multiplied by five
the insurance expense will be 1050
so we have insurance expense debit 1050
credit prepaid insurance will decrease the amount that we have
in prepaid insurance, 1050.
Services were performed during the period in relation to 800 of revenue
received in advance.
So we have a revenue received in advance and we need to decrease that 800
to record the service revenue.
We will debit revenue received in advance by 800,
we will credit service revenue by the same amount.
So we debit the service revenue received in advance, 800
and we credit service revenue.
Next one.
Ok, yes. Yeah, that's good.
Services were perfomed during the period
in relation to 800 of revenue received in advance
What does that mean?
That means that previously we have received cash
for services that we have not provided, we received in advance,
so we record this as a liability.
The liability, the name of the account is service revenue received in advance
and we can confirm this in the trial balance.
The liability here you can see service revenue received in advance.
We have received cash for 1500 for services we have not provided, ok?
Now in this data it says services were performed during the period
for 800 of this 1500 that we received cash we provide service for 800,
so we will have this revenue credit and we need to decrease
the liability that we have by the same amount, by 800.
Ok, so the journal entry will be service revenue received in advance we credit
so we decrease that 1500 that we have
we decrease for the services already performed.
And we record the service revenue credit.
Now it's better George?
Shouldn't we be deducting?
(INAUDIBLE)
Actually we are deducting 800 from the 1500 we have with this
in the debit entry because we debit.
We are reducing the balance of service revenue received in advance
that has a credit balance of 1500.
We debit 800 because we performed services for 800,
so we deduct that.
With the debit entry we are reducing an account that has a credit balance.
Excellent, very good.
You're welcome.
Ok, so the next one, salaries.
Salaries of 770 are owed at 30th June,
we have done something similar.
So what are the accounts to record the expense, salaries expense 770
and because we have not paid these salaries,
they will be liability salaries payable, 770.
Here you have salaries expense 770 debit,
salaries payable liability 770.
The next one, office equipment has a five year life with no resale value
and is being depreciated at $375 per month for 60 months.
Ok, this is the amount per month, depreciation expense per month.
But how many months do we have? Five months.
So we need to multiply 375 by five, that is 1875
so we record depreciation expense here is the adjusting entry,
depreciation expense 1875 debit
and we credit the accumulated depreciation office equipment 1875.
And the last.
Invoices representing 1500 of services performed during the month
have not been recorded.
So we provide services, we send the invoice but we have not recorded
so we need to record, simply record that we have not received cash
so we record a debit to accounts receivable
and a credit to service revenue.
And here you have 1500 debit account receivable,
credit service revenue.
So we went a bit more faster through the adjusting entry
because you have seen they're very similar,
so if you become accustomed with this you will do well in any adjusting entries
that you may face in any exercise.
They're similar once you become accustomed to how to record adjusting entries,
it will be easier for you to do this.
Invoices... sorry, what was the question reading?
Invoices we did combine them.
You mean in the last transaction the number seven?
The number seven when it says invoices representing 1500 of services,
yes, it could be one, it could be two, it could be more than one,
but here we put all together
because all of them are for the same period
so we can add them and in total it's 1500.
We do not record invoice by invoice unless they're from different dates
and we're preparing
each day by day as we did last week, that is day by day,
in that case we need to record each time but we're preparing adjusting entries.
Adjusting entries is for the whole month
so we need to include all the invoices of the month, ok?
Because the one point in time that we're doing this
is the last day of the accounting period
so we add all the invoices for the month.
Just because we have only one service revenue account,
we have one service revenue account and therefore we add them.
If you remember the ledger last week, we have one service revenue account
or sales revenue account.
Now if we have two different accounts for example
we have invoices for services that we provided
and we have invoices for products that we delivered
and we have one service account and we have one sales revenue account,
two different accounts, one for services one for products,
in that case we need to add all the services invoices
and to put them in the service revenue account
and all the sales of products and we put them in the other account
in that case we need to keep them separated.
But if it is only one account that we are using
this is the adjusting entry, we add all of them.
Ok, accounts receivable debit and services performed credit
for the seventh transaction.
Ok, well yes.
The seventh transaction we have a number of invoices
but the total is 1500.
Services performed.
Invoices for services performed means service revenue,
we've earned this revenue because we provided the services
so we have a credit in the account of service revenue, 1500.
But we have not received the cash for this.
It doesn't say here that we buy services for cash
so therefore it is an account receivable.
We need to debit the accounts receivable
Ok, so once we have this, all the adjusting entries recorded
we can go to our worksheet
and here in the worksheet, the same as we have done,
we have the unadjusted trial balance.
We copy all the adjtustments here and we prepare the adjusted trial balance.
Ok, I will not repeat this part because it's very simple.
You know for example if you have account receivable
this is the unadjusted trial balance 3150, ok, in here.
Debit and in the adjustment you have another debit.
You need to add the two of them to have the adjusted trial balance.
If you have the prepaid insurance debit and the adjustment is a credit,
you need to subtract this and to calculate the adjusted trial balance.
So it's exactly the same as we have done before.
The important thing, all of them, the unadjusted trial balance,
total debit equals total credit.
The adjustment, this is the sum of all the adjusting entries,
total debit again equals total credit.
The adjusted trial balance again, total debit again equals total credit.
So always in the trial balance, total debit equals total credit.
The same as any journal entry. Total debit equals total credit.
So from that worksheet we can prepare what is the adjusted trial balance
at 30th June after all the adjustments
and here you have the adjustment trial balance.
It's just a copy of what we have in the worksheet.
The last problem for today is this one.
Here we will start with the adjusted trial balance.
If you remember the previous problem, we had started the problem
with the unadjusted trial balance and we prepared all the adjustments
and at the end we end with the adjusted trial balance.
In this problem we will start with the adjusted trial balance.
So here you have the trial balance after all adjustments.
All adjustments we have the trial balance.
In this exercise which is a different exercise of course from the previous one
you can see trial balance have the same structure.
We have first all the asset accounts, cash, accounts receivable,
office supplies, equipment, accumulated depreciation equipment
which is an asset account but is credit balance, ok?
Then we have the liabilities, accounts payable, salaries payable,
interest payable, rent revenue received in advance
bank loans, all of these are liabilities accounts.
Then we have check capital and retained earnings.
These are equity accounts.
Here we have one temporary account, part of equity dividends.
Why is dividends on the debit side?
Because dividends decrease retained earning, ok?
But this is a temporary account that we need to close
to retained earnings account,
and then we have the income statements account.
Revenues, we have two revenues accounts, sales revenue and rent revenue,
and we have all of these expenses accounts.
And the total of course should be equal. Total debit equals total credit.
So the question or the exercise, start with the adjusted trial balance.
What is required in this question?
Prepare the closing entries and prepare a post closing entries trial balance,
just that.
Prepare closing entries and prepare post closing entries trial balance
starting with the adjusted trial balance.
So we will return to the adjusted trial balance.
How will we prepare the closing entries?
We will start with the expenses.
Here you have all the expense accounts.
How do we close these expenses? All the expenses accounts?
Well, the balance of these accounts is debit,
so to close them, to leave them with zero balance
we need to credit for the same amount.
That is the part that I mentioned before, don't make a mistake.
To close these we need to credit, not to debit.
If you debit you will double the balance of these accounts.
So we need to credit by the same amounts.
It's very simple, the journal entry.
The income summary debit and expenses credit, exactly George.
That is the point.
So the journal entry will be credit salaries expense 11340,
credit rent expense 6000, credit depreciation expense,
equipment 1750.
Credit supplies expense 900, credit electricity expense 750.
Credit interest expense 500.
So you can see, you have to go one by one closing each of these accounts
with a credit entry of the same amount that we have in the balance.
Then you add all of these and you will record a debit entry
in the income summary account for the sum of all of that.
In this case if you add this it's 20990
so you record your first closing entry which is this one.
Profit and loss summary or income summary accounts, 20990,
and the credit in all the expense accounts, ok?
Salaries expense, rent expense, depreciation expense.
After this, the balance of all of this expense accounts will be zero, ok?
Because we have the same amount debits and credits so the balance is zero.
Then we close the revenues accounts and we have two.
So we have sales revenue, and we have rent revenue.
Credit balance, so to close this, we need to debit for the same amount.
We need to debit sales revenue, 18600.
We need to debit rent revenue 12000, one by one again.
And then we will credit the income summary account
for the total.
How much is the total? 30600, the sum of these two,
and we have the second closing entry which is this.
Here we have debit, the sales revenue, the rent revenue, now the balance is zero
and we credit the profit and loss summary or income summary account,
you can put the name profit and loss summary
or income summary accounts, correct.
You credit by that amount.
So we closed all the expenses and revenue accounts.
But we have opened this temporary account
that is the profit and loss summary account.
We need to close that because it's also a temporary account.
What is the balance of this account after all of these closing entries?
The balance is the difference between 30600 credit
and 20990 debit,
so the difference will be a credit because this is higher,
will be a credit of 9610. That is the next closing entry.
Because it will be a credit balance we need to debit this account
by 9610.
Now this account is zero, ok?
The profit and loss summary account, the balance is zero,
we've closed that with this debit entry?
What is the credit entry?
Retained earnings account which is a permanent account.
So we close all the income statement accounts
and the profit and loss summary accounts and we only need to close now
one additional account that we have in the adjusted trial balance.
Yes Josh?
JOSHUA: Could you explain the second last, the (INAUDIBLE)
HERMAN: Sorry, I couldn't hear very well, can you repeat please?
JOSHUA: Yeah, could you explain the second last transaction
which was about the retained earnings?
The income summary to retained earnings.
HERMAN: Yes, sure, sure.
Here you have the... How many closing entries do we have?
The first closing entry we close all the expenses as I said here.
All the expenses are closed to profit and loss summary account.
The second entry we close the revenues.
So all the revenues are closed to profit and loss summary account.
Now we need to close the profit and loss summary account.
How much is the balance of profit and loss summary accounts
after the first two closing entries?
In the first closing entry we have a debit of 20990.
In the second closing entry we have a credit of 30600.
It's the same account, ok?
So we have a credit of 30600, we have a debit of 20900,
what is the balance?
The balance will be a credit because this is higher, ok?
We have more credit than debit.
We subtract this from the credit that we have,
and the difference will be a credit of 9610.
That is after the second closing entry.
We have a debit balance in this temporary account 9610.
Now we want to close that. How do we close it?
Because we have a debit balance, we need to credit,
so we credit by that amount 9610
and with that the balance of the profit and loss summary account is zero now.
But in this third closing entry, the other entry is retained earnings.
So in retained earnings, we credit retained earnings by this amount.
You can see that this is the way that you transfer the profits
to retained earnings because the profit is revenues less expenses.
That difference is included in the profit and loss summary account.
We've closed the revenue, we've closed expenses
to profit and loss summary account so we have a profit of 9610
and we close that to retained earnings.
And we have one more account.
That is dividends. Here you can see dividends.
They will balance 600.
Dividends we know is a temporary account that decrease retained earnings,
dividends are paid from retained earnings.
We need to close this. How do we close this?
We close to retained earnings account.
So to close this which has a debit balance we need to credit this account
and we will debit retained earnings.
You can see we've done a debit to retained earnings,
decreased retained earnings.
So that last closing entry
in which we debit the retained earnings account.
600 and we credit dividends by 600.
What is the balance of dividends after this closing entry? Zero
And retained earnings are decreased by this amount.
If you think about what we've learnt in the first or the second module,
how the retained earnings account changed
from the beginning of the period until the end of the period,
well we start with the beginning balance of the retained earnings.
We add the profits, we subtract the dividends
and then we have the ending balance of retained earnings.
Now you can see how we do this through journal entries,
actually closing entries.
It is exactly the same thing.
So now we have the closing entries.
We can prepare the post closing entries trial balance.
To prepare the post closing entries trial balance is very simple
and I will show you exactly how to do this
from the adjusted trial balance.
This is the adjusted trial balance, we start with this.
What do we have in the adjusted trial balance?
Asset accounts, liabilities accounts, equity accounts
and then we have the revenues, expenses and dividends accounts
that are all temporary.
The post closing entry trial balance, the main difference
with the adjusted trial balance is that in the post closing entry trial balance
you only have permanent accounts.
Is there any change between the adjusted trial balance
and the post closing entry trial balance in the asset accounts? No.
Because we didn't close any of them.
In the liabilities accounts? No. Because we didn't close any of them.
What about equity? Well, in share capital no,
but retained earnings yes.
That is the only account that will be different
in the post closing entry trial balance, compared with the adjusted trial balance.
Of course the post closing entry trial balance,
they do not have any income statement accounts or dividend accounts.
We can see easily how we calculate that going from the retained earnings
that you have here, ok?
Look at here, 1500.
What is that 1500 that we have...
That we have in the adjusted trial balance? Retained earnings.
This retained earnings balance is the beginning balance of retained earnings
not the ending balance.
This is not the balance at 30th June.
This is the beginning balance of retained earnings.
Why is it the beginning balance?
Because in this statement which is the adjusted trial balance
you have all revenues, you have all the expenses,
you have the dividends, so all the accounts that affect
the ending balance of retained earnings are here,
and because they are here, this is the beginning balance.
How we transform this to the ending balance of retained earnings?
First we need to add the profit. What is the profit?
We calculate the profit through the profit and loss summary account.
This is the profit 9610
so we will need to add 1500 plus 9610
and we need to deduct the dividends 600.
That's why in the post closing entries trial balance,
all the accounts are the same as the adjusting trial balance
after adjustment but retained earnings is 10510.
How do we calculate this?
This is the ending balance of retained earnings.
Here you have the explanation.
Beginning balance 1500 that we have in the adjusted trial balance
plus the profit 9610
which is the result of the profit and loss summary account
less the dividends, 600.
If you calculate this you get,
you will get the ending balance of retained earnings
And this will be the total.
Total debit, total credit, that should be the same
Any question?
All good? Excellent.
Excellent, we've finished.
At least we finished earlier than last week.
Last week was a marathon that we did
but today we finished earlier than last week.
But if you have any last questions of course I will be happy to answer you.
Anything that you would like to ask or discuss?
Yeah last week was a lot, yes.
Okay, thank you very much.
Have a great evening and a great week.
Ok, see you next week.
Bye, thank you all of you. Thank you.