5.Completeing the accounting cycle.doc

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Rotman Commerce
Stojanovic Dragan

Chapter 6 Completing the Accounting Cycle for a Service Business Worksheets A worksheet is used to assist the Accountant in the preparation of the financial statement. It is used to organize the data for the financial statements. The worksheet provides the overall picture of the accounting process and so helps to eliminate errors. It is not a formal statement but it’s the Accountants working papers or rough copy. The six column worksheet has the column, Account titles, Trial Balance, Incomes Statement, Balance Sheet – page 168 Adjustments The matching principal states that the revenue of a specific time period should be matched against expenses incurred in that same time period. Due to this, we have to adjust our records so that our balances for that time period are correct as well as our financial statements. Prepaid Expenses Expense payments made ahead of time are called prepaid expenses and are classified as current assets, e.g. rent, insurance, supplies. When they are used up, the asset account will decrease and will now become an expense. The balance sheet is adjusted and the income statement will show the expense. This is called an adjusting entry. e.g. 1. Dr. Insurance Exp. 100 Prepaid Insurance 100 2. Dr. Supplies Exp. 600 Supplies 600 Depreciation Each year most fixed assets except for land tend to lose a portion of their value. The value that is lost should be allocated to an expense account for that year or accounting period. The costs or expense is shown in the income statement for that year. The using up of this fixed asset is called depreciation or amortization. The cost of the fixed asset is allocated over the useful life of the asset as the value of the asset decreases; the value is debited to the depreciation expense account which is in the income statement.Accumulated depreciation is deducted from the asset to give the new balance of the asset for the next accounting period. Depreciation is the method used in accounting to spread the cost of the fixed asset over the useful life of the asset. This cost is converted into expense over the time that the asset is used in the business. The asset account has the original cost of the asset. The accumulated depreciation account holds the total amount of depreciation recorded over the years. It records any deduction made from the related asset. It therefore reduces the value of the asset on the balance sheet each accounting period and so is called a contra account or valuation account. Valuation or Contra Account: Accumulated depreciation is used to arrive at the present value of the asset and so it’s called a Valuation account. It is called a contra asset account because it carries a credit balance rather than the normal debit balance of an asset. It subtracts from the cost of an asset so as to get to the correct net book value e.g. Equipment 20000 Less: Acc. Depre. 4000 16,000 The 16,000 does not mean that this is the new value of the asset or that it can be sold for this amount. It just means that 16,000 remains to be depreciated, the $16,000 is the book value at the end of the accounting period Methods of Calculating Depreciation 1. Straight line method – the same amount is deducted each fiscal period for depreciation until the life of the asset has expired. Ex- Cost= $10 000; e
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