End of Year Accounts

Reversing entries, balance day adjustments, trade account, profit

& loss account…closing journal entries

The Typical Format of an Accounting Question

- Check the dates

- In the additional information there maybe other prepayments (rent is a common one)

Extracts of Last Years Accounts• these are the opening balances for your ledger

accounts

• in particular you need to take note of any accrued prepayments (prepaid expenses) or received in advance (unearned income)balances. Examples can be– rent received in advance

– interest receivables

– accrued utilities

– any prepayments

1st Step --- Reverse the Accrued/Prepayments

• Unearned Income Reversal

– for example interest receivableDR Interest revenue

CR Interest receivable

• Prepaid Expense Reversal

– for example prepaid rentDR Rent expense

CR Prepaid Rent

The Next Step – Balance Day Journal Adjustments

• The information for these journal entries will be found in the additional information and extracts from the current year

– you may have to do the general ledger for some accounts BEFORE you can do the balance day journal entries

• for example – the Accounts Receivable general ledger will need to have been completed BEFORE you can make the Provision/Allowance for Doubtful Debt Journal Entry

Balance Day Journal Entries

• The entries will usually be

– Revenues received (interest, service, dividends)

– Depreciation (land, buildings, equipment)

– Prepayments (rent for example)

these adjustments bring the general ledgers up to date

Problematic Balance Day Journal Entries

• Provision/Allowance for Doubtful Debts

– you need to look at the balance in last years account extract

– look in the additional information

• current bad debts expense (Dr Bad Debt Cr: Accounts Receivable)

• a percentage of Accounts receivable will be indicated somewhere in the additional information

Provision/Allowance for Doubtful Debts continued

• Workings for this Ledger:

– work out what the balance should be (normal balance is DEBIT)

– NOTE: you have to work out the closing balance of the Accounts Receivable for the current financial year.

Account Receivable Ledger

Opening balance xxxx Sales discounts xxxx

Sales (credit sales) xxxx Sales returns xxxx

Bank (debtors payments) xxxx

Bad debts (current year) xxxx

BALANCE C/D XXXX

DR CR

% of this balance

From last years account extract

Provision/Allowance for Doubtful Debts continued

• Check to make sure that you have taken the current years bad debt expense from the Accounts receivable general ledger (otherwise your final figure will be wrong)

• Work out what the % of Accounts Receivable should be

• Check what the balance is in the last years extract (You are looking for provision/allowance for doubtful debt)

• Make the adjustment so that it equals the % you worked out.

Example of Provision/Allowance for Doubtful Debts

• Provision for Doubtful Debts is 4% of Accounts Receivable (the closing balance for the current year =

$200,000) - $200,000 * 4% = $8,000

• Last years extract says Provision/Allowance was $6,000

(Bad debt expense has been entered into Accounts Receivable Ledger)

• thus the Balance Day Journal Entry will be– DR: Doubtful Debts Expense $2000

CR: Provision/Allowance for Doubtful Debts $2000

($6000+ $2000 = $8000)

This is what should be in the account at the current year end

Problematic Balance Day Journal Entries

• Depreciation– the additional information will give the opening balance of

the asset to be depreciated

• this is the balance that you use to work out the current years depreciation expense

• for example – depreciation on a building is 2%– extract says building = $500,000

– current year depreciation = $500,000 * 2% = $10,000

Make sure you add the current year’s depreciation into the Accumulated Depreciation on Building General Ledger

DR: Depreciation on Building

CR: Accumulated Depreciation on Building

Closing Journal Entries

• Trade Account (this is the matching of the sold

goods/services with the cost of goods sold so that we can

work out the gross profit/loss of the financial year)

• Profit and Loss Account (this shows the financial

performance of the business of the financial year)

1st Step: Trade Account

• The accounts you will send to the Trade Account are

– sales, sales returns, opening and closing inventory, purchases, purchases returns, transport costs for purchases (carriage inwards)

– these are the accounts that you would use to work out the Cost of Goods sold

Trade Account Cont’d

Sales Sales Return

Inventory (opening stock) Inventory (Opening Stock)

Purchase Returns Purchases

Transport Costs

DR CR

The Journal Entries will be:

Dr SalesCr Trade Account

Dr Inventory Opening StockCr Trade Account

Dr Purchase ReturnsCr Trade Account

The Journal Entries will be:

Dr Trade AccountCr Inventory (Opening Stock)

Dr Trade AccountCr Purchases

Dr Trade AccountCr Transport Costs

Closing Entry for Trade Account

• You will send the balance carried down (ie. this is the Gross Profit/Loss) to the Profit and Loss Account (Gross Profit)

• ie. if it is a Gross Profit – Trade Account will be a DEBIT entry

• – if it is Gross LOSS – Trade Account will be a CREDIT entry

2nd Step: Profit &Loss Account

• All the other indirect expenses and revenues (that are NOT shown in the Trade Account) are shown in the Profit/Loss Account

• these accounts can be

– all other expenses: doubtful debts, bad debts, depreciation (building, land, vehicles etc), Transport costs (outwards), salaries, rent, maintenance, Other expenses, sales discounts, utilities…..etc

– all other revenues: interest, purchases discounts,,etc.

Profit/Loss Account (Expenses) Cont’dDepreciation (for current year)

Salaries/Wages

Rent

Maintenance

Transport Costs (inwards)

Bad Debts

Utilities

Profit/Loss Account

DR CR

The Journal Entry will be:DR: Profit & Loss Account

CR: DepreciationSalaries/WagesRentMaintenanceetc …all the other expenses

Profit/Loss Account (Revenues) Cont’d

Interest Revenue Profit and Loss Account

Purchase Discounts

The Journal Entries will be

DR Interest RevenueCR Profit and Loss Account

ETC …ETC

Final Journal Entry

• Send the Profit and Loss Account to Retained Earnings– DR Profit and Loss Account

• CR Retained Earnings

Remember Retained Earnings is an EQUITY account and is normally has a CREDIT balance (so Profit means an increase of Retained Earnings while Loss means an decrease !!!)

General Ledger Accounts for Year Ended

• You will have a Ledger Account for EVERY line entry in the extracts– yes this means that you will have to be fast if you

are in a test/exam …..cause there is at least 30 odd ledgers usually

– remember that last year’s extract is the opening balances for the ledger accounts

– so open all the accounts (you need to know the NORMAL balance of each ledger)

General Ledger Accounts for Year Ended ….cont’d

• Ledger Accounts that will usually require some adjustments– accounts receivable– accounts payable– bank– purchases– Interest received– Service revenue– Prepaid rent– Accrued Utilities– Depreciation (land, building, equipment)– Accumulated Depreciation– etc..etc…

Remember some are stock accounts (carried over to next year) but others are flow accounts (you have closed these off to Trade Account or Profit and Loss Account ..so you will have Trade Account

or Profit and Loss as an entry in the ledger ) …examplePurchases Returns:

Dr: Trade Account….Cr. Accounts Payable

Final General Ledger Accounts

• These will be

– Contributed Equity

– Retained Earnings Account (this one you will definitely be adjusting

Phew …You Made It

The End&

Thank you