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Month &
Year-End
Processing
Slideshow 9
Contents



What is month-end/year-end processing? 3
Why do you need to make adjustments at period-end?
Adjustments at Period-End
-

Bank Reconciliation 5
Office/Store Supplies
6
Prepaid Insurance
7
Accrued Wages
8
Accrued Expenses
9
Inventory Adjustment
10
Accrued Interest
13
Amortization Adjustment
14
Month-End and Year-End Reports
15
- Trial Balance 16
- Income Statement
17
- Balance Sheet
18
- Journal Entries – ALL
20
Slideshow 9
4
What is month-end/yearend processing?
A good accounting system is
designed to produce periodic
reports, usually at the end of each
month. At the end of the fiscal
year, annual financial statements
are prepared. (GAAP: Time Period
Concept)
The annual reporting period
(referred to as a fiscal year) is not
always the same as the calendar
year ending December 31. A
company can adopt a fiscal year
consisting of any 12 consecutive
months.
The time periods covered by
financial reports are referred to as
accounting periods.
Month-end or year-end processing
refers to a thorough review of the
transactions during the accounting
period and making adjustments, if
necessary.
Click to continue.
Time Period Concept
The economic life of a business
can be divided into time periods.
Why do you need to make
adjustments at period-end?
During an accounting period,
financial transactions are entered
in the company records according
to source documents such as
cheques received and issued,
invoices received and issued,
credit/debit memos, etc. (GAAP:
Objectivity Principle) However,
some financial events may occur
that do not generate source
documents. At period-end, these
types of transactions should be
taken into account before
producing period-end reports.
(GAAP: Full Disclosure Principle)
Click and study examples of financial
events that do not generate source
documents and would require
adjustments.
Adjustments normally made during
period-end are discussed in the
slides that follow.
Click to continue.
Decrease in Office/Store Supplies
Supplies are recorded in an asset account at the time of
purchase. During the accounting period, they are
consumed, and therefore the asset account should be
adjusted at period-end to reflect the decrease in their
value.
Expiration of Insurance Protection
Insurance protection usually covers a specific period of
time in the future (e.g., for one or more years). It is
recorded as PREPAID INSURANCE when the premium is
paid in advance. At period-end, the value of used-up
amount for insurance protection should be calculated
and recorded.
Expiration of other Prepaid Assets
Other prepaid assets that may decrease in value are:
• Land/building leases.
• Subscriptions.
• Equipment leases.
• Professional or legal fees paid in advance.
Amortization of Equipment and other Assets
In time, equipment and other assets such as vehicles,
etc. may decrease in value. At the time of purchase, each
of these assets is recorded in a separate asset account.
At period-end, the value of these assets has to be
evaluated and adjustments must be made to reflect the
decrease in value.
Adjustments at Period-End:
Bank Reconciliation
Most adjustments are entered in
the General Journal.
The complete account (bank)
reconciliation process is discussed
in Slideshow 12. Step-by-step
instructions in using the
Reconciliation & Deposits Journal
are given in the text in Chapter 12.
For illustrative purposes, let us
assume that your estimated bank
charges for December is $33.00. It
is estimated because you had not
yet received the bank statement for
December. Since the expense is
incurred in December but not yet
documented, it needs to be
recorded as an estimated expense.
It should therefore be recorded
before year-end closing.
Bank (Account) Reconciliation
Company may need to
make adjustments in
the company records
due to:
• Bank charges/interest
charges
• Interest earned
Company may need to adjust
the calculation of the cash
balance on the bank
statement to account for:
• Outstanding cheques
• Deposits in transit
• Bank errors
• NSF cheques
• Company’s bookkeeping
errors
Click.
Study the appropriate General
Journal entry to record the
estimated bank charges expense.
Click to continue.
Company cash account = Adjusted bank balance
(Adjusted cash balance)
Adjustments at Period-End:
Prepaid Office/Store
Supplies
Following the GAAP: Matching
Principle, you need to adjust the
value of office/store supplies at
period-end.
Click. Review the Matching Principle and
the example at the right.
Using the example, Prepaid Office
Supplies should be adjusted by
$285.00 as an Office Supplies
Expense at month-end.
Matching Principle
Expenses are matched with
revenues in the period when
Original
Purchase
efforts
areJournal
made Entry
to generate
the revenue.
DR Prepaid Office Supplies
600.00
CR Accounts Payable
PrepaidExample:
Office Supplies
600.00
Office Supplies Expense
Click.
Dec 1
600.00
Dec 31 285.00
DecFaye
31 Anderson,
285.00
An accounting
consultant,
bought
Study the original purchase journal
entry (purchase of office supplies on
credit) and the month-end
adjustment to record used office
supplies.
Balance
$600.00 worth of paper and printing supplies in
315.00
Click again.
Study the effect of the entries on the
Office Supplies asset and expense
accounts at period-end.
Click to continue.
December.
She collected $2,800.00 consulting fees
Month-End
Adjustment
from her clients that month.
Faye
entered $600.00
for paper and
printing supplies
DR Office
Supplies
Expense
285.00
as prepaid asset.
CR Prepaid Office Supplies
285.00
At the end of the month, she calculated that she used
up $285.00 worth of the supplies she purchased
earlier. When Faye prepares her monthly financial
statement for December, she should report the
$2,800.00 revenue and her expenses to earn the
revenue, including $285.00 (not $600.00) for supplies.
Adjustments at Period-End:
Prepaid Insurance
A company would usually pay for
insurance protection for one or more
years. Insurance at the date of
subscription is entered as Prepaid
Insurance. As each day goes by,
some of the insurance protection
expires. The value of the expired
insurance coverage becomes an
expense.
For example, the company pays for
insurance on December 1 for one
year. Study the entry at right.
At the end of December, Prepaid
Insurance is reduced by $50.00
($600/12mos.). This principle also
applies to extended warranties on
equipment or vehicles.
Click.
Original Payment of Insurance Coverage
DR Prepaid Insurance
CR Cash in Bank
DR Insurance Expense
CR Prepaid Insurance
Prepaid Insurance
Dec 1
600.00
Click again .
Balance
550.00
Click to continue.
600.00
Month-End Adjustment
Study the month-end adjustment.
Study the effect of the entries on the
Insurance asset and expense
accounts.
600.00
Dec 31
50.00
50.00
Insurance Expense
50.00
Dec 31
50.00
Adjustments at Period-End:
Accrued Wages
You learned about accrued wages
in Chapter 7. The principle in
recording accrued wages is the
same as prepaid expenses. (GAAP:
Matching Principle)
Payday
For example, the company pays for
wages every other Monday. In this
example, the wages payable on
December 1, 2014 include wages
payable for November 25 to 30
(see right). The corresponding
accrued wages have to be entered
as an expense in November.
Click.
Study the appropriate journal entry
on November 31, assuming the
accrued wages amount to
$3,600.00.
Click to continue.
Accrued Wages
DR Wages Expense
CR Wages Payable
3, 600.00
3,600.00
Adjustments at Period-End:
Accrued Expenses
A good example of accrued expenses
is utility bills. Utility companies send
bills covering a certain period; e.g.,
from 15th of one month to the 14th of
the next month (see underlined dates
at right).
Assuming that the utility bill averages
$500.00, to find the daily consumption
rate: $500 /30 days (notice
underscored dates for Nov. and Dec.)
= $16.13 per day. To find utility
expense for December, 2014:
$16.67*16 days in November =
$266.67.
$266.67 is then charged to Utility
Expense for November 2014 and
($233.33 for December 2014).
Click.
Study the journal entry for the utility
expense in November 2014.
It is credited to Accrued Liabilities
because the expense is a payable
amount at this time. Accrued Liabilities
will be explained further in the next
slideshow.
Click to continue.
Utility Expense in November 2014 Journal Entry
DR Utility Expense
CR Accrued Liabilities
266.67
266.67
Adjustments at Period-End:
Periodic Inventory
You learned in Slideshow 8B how to
make INVENTORY adjustments in a
Perpetual system. You would
perform the same procedure for
month-end and/or year-end after a
physical count of Inventory.
To review the Inventory Adjustment in
Slideshow 8B, you would start on the
Inventory & Services screen by
clicking Adjust Inventory.
Click.
You would fill in the Inventory
Adjustments Journal according to the
physical count of Inventory,
compared to the current levels on
record.
Click.
When posted, the Inventory
Adjustments Journal Entry would
reflect increases or decreases of
Inventory according to the Inventory
Adjustments Journal.
Click to continue.
Adjustments at Period-End:
Accrued Interest
Processing accrued interest is
very similar to accrued expenses.
For example, the company has a
bank loan balance of $30,000 @
8% interest per year; the monthly
interest cost is $200.
Click.
Like accrued expenses, Interest
Expense is debited and Accrued
Liabilities is credited.
Note: Do not confuse recording
accrued bank loan interest and
journalizing a bank payment.
When you are recording accrued
interest expense, you are
accounting for the interest
expense applicable to the period
ending (GAAP: Matching
Principle); therefore, you would
record only the interest.
If you are journalizing a loan
payment with interest, you need
to record both the principal
amount of loan paid off and the
interest applicable.
Click to continue.
Accrued Interest Expense in
December 2014 Journal Entry
DR Interest Expense
CR Accrued Liabilities
200.00
200.00
Adjustments at Period-End:
Depreciation
At the time of purchase, an asset is
recorded in the company files according
to the purchase price (GAAP: Cost
Principle). As time goes by, capital
assets such as equipment, building,
machinery, vehicles, etc. depreciate
(lessen) in value. A depreciation
adjustment is usually done monthly,
quarterly or yearly.
There are various ways of calculating
depreciation. The Canada Income Tax
Act guidelines may be helpful. First,
study related terminology.
Click.
For example, a computer equipment
(see right for definitions) :
Cost = $3,000
Salvage Value = $100
Estimated Life = 5 years
3000 – 100 = $580 yearly
5
Cost
Purchase price of the asset.
Salvage Value
Estimated value at the end of the estimated life of the
asset.
Estimated Life
The estimated number of years that the company is
expected to enjoy benefits from the asset. The Canada
Income Tax Act provides guidelines for estimated life for
each class of assets, among others.
Depreciation
Had been referred to as amortization. It is the value by
which an asset is reduced at a specified period of time.
Depreciation Adjustment at Year-End
depreciation
Click.
Study the journal entry for the
depreciation adjustment.
Click to continue.
DR Deprec. Expense – Computer Equip. 580.00
CR Deprec. Amort. – Computer Equip.
580.00
Month-End Reports
To complete your audit trail files,
you must print month-end reports
(see right). This is a sound practice
in order to preserve your reports in
case of data loss due to computer
glitches.
Financial reports give you an
overview of your company’s health
and cash flow, and can help
identify problems in your
company’s performance. They give
you a snapshot of your assets,
liabilities, and equity, showing
income, expenses, and net profit or
loss over time.
Click.
An easy way to find the financial
report that could help you is
through the Report Centre. Study
the reports available in the
COMPANY Home Report Centre.
Click to continue.
Month-End Reports
1.
Trial Balance
2.
Balance Sheet
3.
Income Statement
4.
Journal Entries – ALL
5.
General Ledger Listing - Detail
Month-End Reports:
Trial Balance
You can find the balance of each
G/L account on the Trial Balance.
Click.
Debits are always equal to Credits.
Click.
For every prepaid asset, there is a
corresponding expense account.
Click.
For every capital asset that can
depreciate, there is a corresponding
depreciation account. They are
called accumulated because the
amount represents the total of the
reduction of the value of the asset
from the time of purchase.
Click.
Depreciation Expense – All is the
total of amortization of all capital
assets during the current accounting
period.
Click to continue.
Month-End Reports:
Income Statement
The Income Statement is an itemized
list of revenues and expenses. It tells
you whether you made a profit (Net
Income) or had a loss (Net Loss).
This detailed information is important
for business analysis and decision
making.
Click to continue.
Month-End Reports:
Balance Sheet
The Balance Sheet, also referred to as the Statement of Financial Position, provides information that helps
users understand a company’s financial status at a given date.
TOTAL ASSETS are equal to LIABILITIES and EQUITY, which is why it is called a Balance Sheet.
Click to continue.
Assets
=
Liabilities
+
Equity
Month-End Reports:
Balance Sheet
(continued)
NET INCOME from the Income Statement is carried over to the Equity section of the Balance Sheet via
CURRENT EARNINGS.
After this is done, the Balance Sheet reflects changes in the Owner’s Equity’s position at the end of the period.
Click to continue.
Income Statement
Balance Sheet
Month-End Reports:
ALL General Ledger Report
and Journal Entries - ALL
It is good practice to print and file
all General Ledger Report and
Journal Entries – ALL for the
audit trail.
Review the type of information you
will find in General Ledger Report.
Click again.
Review a sample Journal Entries –
ALL report.
Click to continue.
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