Financial Accounting Study Guide: Adjusting Entries, Trial Balances, Closing Entries, and Bank Reconciliation

Adjusting Entries and Adjusted Trial Balance

Purpose and Process of Adjusting Entries

Adjusting entries are made at the end of an accounting period to update account balances before preparing financial statements. These entries ensure that revenues and expenses are recognized in the period in which they are incurred, following the accrual basis of accounting.

• Prepaid Expenses: Expenses paid in advance must be adjusted to reflect the portion used during the period. Example: Insurance coverage for July through December is $4,350. The adjusting entry is:$ \text{Insurance Expense} \quad 4,350 \text{Prepaid Insurance} \quad 4,350$

• Depreciation: Allocates the cost of tangible assets over their useful lives. Example: Annual depreciation expense is $8,150.$ \text{Depreciation Expense} \quad 8,150 \text{Accumulated Depreciation} \quad 8,150$

• Supplies: Adjust for supplies used during the period. Example: Supplies expense is $52,900.$ \text{Supplies Expense} \quad 52,900 \text{Supplies} \quad 52,900$

• Accrued Revenues: Revenues earned but not yet received. Example: Interest revenue accrued is $260.$ \text{Interest Receivable} \quad 260 \text{Interest Revenue} \quad 260$

• Unearned Revenue: Revenue received in advance must be recognized as earned. Example: Service revenue earned from deferred revenue is $5,600.$ \text{Deferred Revenue} \quad 5,600 \text{Service Revenue} \quad 5,600$

• Accounts Receivable: Revenue earned but not yet billed. Example: Service revenue earned but not yet billed is $2,000.$ \text{Accounts Receivable} \quad 2,000 \text{Service Revenue} \quad 2,000$

Adjusted Trial Balance

An adjusted trial balance is prepared after all adjusting entries have been posted. It lists all account balances and is used to prepare financial statements.

Account	Debit	Credit
Cash	$68,900
Accounts Receivable	$118,300
Interest Receivable	$1,560
Supplies	$85,700
Prepaid Insurance	$4,350
Notes Receivable (short-term)	$50,000
Equipment	$277,800
Accumulated Depreciation		$72,650
Accounts Payable		$104,100
Salaries and Wages Payable		$21,600
Deferred Revenue		$3,600
Notes Payable (long-term)		$87,400
Common Stock		$216,100
Retained Earnings		$143,500
Service Revenue		$48,100
Interest Revenue		$22,160
Supplies Expense	$52,900
Repairs and Maintenance Expense	$26,400
Rent Expense	$17,800
Depreciation Expense	$8,150
Insurance Expense	$4,350
Salaries and Wages Expense	$3,000

Closing Entries and Post-Closing Trial Balance

Purpose of Closing Entries

Closing entries are made at the end of the accounting period to transfer the balances of temporary accounts (revenues, expenses, dividends) to permanent accounts (retained earnings). This process resets the temporary accounts for the next period.

• Step 1: Close revenue accounts to Income Summary. $\text{Service Revenue} \quad 36,000$ $\text{Income Summary} \quad 36,000$

• Step 2: Close expense accounts to Income Summary. $\text{Income Summary} \quad 16,000$ $\text{Salaries and Wages Expense} \quad 8,000$ $\text{Rent Expense} \quad 4,000$ $\text{Depreciation Expense} \quad 2,000$ $\text{Income Tax Expense} \quad 2,000$

• Step 3: Close Income Summary to Retained Earnings. $\text{Income Summary} \quad 20,000$ $\text{Retained Earnings} \quad 20,000$

• Step 4: Close Dividends to Retained Earnings. $\text{Retained Earnings} \quad 2,000$ $\text{Dividends} \quad 2,000$

Post-Closing Trial Balance

The post-closing trial balance lists only permanent accounts (assets, liabilities, and equity) after closing entries have been made.

Account Name	Debits	Credits
Cash	$10,000
Accounts Receivable	$16,000
Equipment	$18,000
Accumulated Depreciation		$6,000
Accounts Payable		$6,000
Income Tax Payable		$2,000
Deferred Revenue		$2,000
Common Stock		$4,000
Retained Earnings		$24,000

Classified Balance Sheet

A classified balance sheet organizes assets and liabilities into current and long-term categories, providing a clear financial position at a specific date.

Asset	Amount	Liabilities & Stockholders' Equity	Amount
Current Assets:		Current Liabilities:
Cash	$10,000	Accounts Payable	$6,000
Accounts Receivable	$16,000	Deferred Revenue	$2,000
Total Current Assets	$26,000	Income Tax Payable	$2,000
Equipment	$18,000	Total Liabilities	$10,000
Accumulated Depreciation	($6,000)	Stockholders' Equity:
Equipment, Net	$12,000	Common Stock	$4,000
		Retained Earnings	$24,000
Total Assets	$38,000	Total Liabilities & Stockholders' Equity	$38,000

Bank Reconciliation

Purpose and Steps

Bank reconciliation is the process of matching the balances in an entity's accounting records for a cash account to the corresponding information on a bank statement. The goal is to identify differences and make necessary adjustments.

• Additions to Bank Statement: Deposits in transit are added to the bank balance.

• Deductions from Bank Statement: Outstanding checks are subtracted from the bank balance.

• Additions to Company's Books: EFTs received and error corrections are added to the book balance.

• Deductions from Company's Books: NSF checks and bank service charges are subtracted from the book balance.

Updates to Bank Statement	Updates to Company's Books
Ending Cash Balance per Bank Statement: $29,279	Ending Cash Balance per Books: $27,202
Additions: Deposit in Transit $1,675	Additions: EFT Received $770, Error Correction $90
Deductions: Outstanding Checks #3030 $1,525, #3556 $1,459	Deductions: NSF Check $67, Bank Service Charges $25
Up-to-date ending cash balance: $27,970	Up-to-date ending cash balance: $27,970

Journal Entries for Petty Cash Fund

Establishing a Petty Cash Fund

A petty cash fund is a small amount of cash kept on hand to pay for minor expenses. The fund is established by making a journal entry to transfer cash from the main account to the petty cash account.

• Journal Entry to Establish Petty Cash: $\text{Petty Cash} \quad 1,000$ $\text{Cash} \quad 1,000$

Multiple Choice and Short Problems

Key Concepts Tested

• Perpetual Inventory System: Inventory and cost of goods sold are updated continuously.

• Net Sales Calculation: Net sales = Sales - Sales Returns and Allowances - Sales Discounts.

• Gross Profit Percentage: Gross profit percentage is used to estimate cost of goods sold. Formula: $\text{Gross Profit Percentage} = \frac{\text{Gross Profit}}{\text{Net Sales}}$

• Income from Operations: Calculated as gross profit minus operating expenses.

Example Calculation: Cost of Goods Sold

• If Net Sales = $850,000 and Gross Profit Percentage = 20%, then:$\text{Gross Profit} = 0.20 \times 850,000 = 170,000\text{Cost of Goods Sold} = 850,000 - 170,000 = 680,000$

Example Calculation: Income from Operations

• Given Sales Revenue, Sales Returns & Allowances, and various expenses, calculate income from operations: $\text{Income from Operations} = \text{Net Sales} - \text{Operating Expenses}$

Summary Table: Key Financial Accounting Terms

Term	Definition
Adjusted Trial Balance	List of all accounts and their balances after adjusting entries are made.
Closing Entries	Entries made to transfer temporary account balances to permanent accounts.
Bank Reconciliation	Process of matching company cash records to bank statement.
Petty Cash Fund	Small cash reserve for minor expenses.
Gross Profit Percentage	Ratio of gross profit to net sales.
Net Sales	Sales minus returns, allowances, and discounts.

Additional info: Some entries and balances were inferred from context and standard accounting practice to ensure completeness and clarity.