DART Configuration - Creating Custom Segments & Views

Completing the Accounting Cycle

What is Accounting Cycle?

The accounting cycle is often described as a process that includes the following steps: identifying, collecting and analyzing documents and transactions, recording the transactions in journals, posting the journalized amounts to accounts in the general and subsidiary ledgers, preparing an unadjusted trial balance, perhaps preparing a worksheet, determining and recording adjusting entries, preparing an adjusted trial balance, preparing the financial statements, recording and posting closing entries, preparing a post-closing trial balance, and perhaps recording reversing entries.

Cycle and steps seem to be a carryover from the days of manual bookkeeping and accounting when transactions were first written into journals. In a separate step the amounts in the journal were posted to accounts. At the end of each month, the remaining steps had to take place in order to get the monthly, manually-prepared financial statements.

Today, most companies use accounting software that processes many of these steps simultaneously. The speed and accuracy of the software reduces the accountant's need for a worksheet containing the unadjusted trial balance, adjusting entries, and the adjusted trial balance. The accountant can enter the adjusting entries into the software and can obtain the complete financial statements by simply selecting the reports from a menu. After reviewing the financial statements, the accountant can make additional adjustments and almost immediately obtain the revised reports. The software will also prepare, record, and post the closing entries.

What is a worksheet?

A worksheet is a multiple-column form used in the adjustment process and in preparing financial statements. As its name suggests, the worksheet is a working tool. Itis not a permanent accounting record; it is neither a journal nor a part of the general ledger. The worksheet is merely a device used in preparing adjusting entries and the fi nancial statements. Companies generally computerize worksheets using an electronic spreadsheet program such as Excel.

How to prepare a worksheet? What are the steps?

For this we will use the transactions which we used in previous chapter and prepare a worksheet. First of all Worksheet looks like the pic given below, The below pic even gives out what to be done in each part of worksheet. This whole work is normally one in a common database applications like Excel/SQL/other databases. For now we will stick to Excel as its the best and more commonly used and preferred database application.

STEP 1. PREPARE A TRIAL BALANCE ON THE WORKSHEET

Enter all ledger accounts with balances in the account titles space. Enter debit and credit amounts from the ledger in the trial balance columns. In previous chapter I gave the trail balance of the company we were working on and the same trial balance will be used here.

STEP 2. ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS

Turn over the first transparency when using a worksheet, enter all adjustments in the adjustments columns. In entering the adjustments, use applicable trial balance accounts. If additional accounts are needed, insert them on the lines immediately below the trial balance totals. A different letter identifies the debit and credit for each adjusting entry. The term used to describe this process is keying. Companies do not journalize the adjustments until after they complete the worksheet and prepare the financial statements. The adjustments for Pioneer Advertising Agency are the same as the adjustments shown in the previous chapter. They are keyed in the adjustments columns of the worksheet as follows.

(a) Pioneer debits an additional account, Supplies Expense, $1,500 for the cost of supplies used, and credits Supplies $1,500.

(b) Pioneer debits an additional account, Insurance Expense, $50 for the insurance that has expired, and credits Prepaid Insurance $50.

(c) The company needs two additional depreciation accounts. It debits Depreciation Expense $40 for the month’s depreciation, and credits Accumulated Depreciation—Equipment $40.

(d) Pioneer debits Unearned Service Revenue $400 for services provided, and credits Service Revenue $400.

(e) Pioneer debits an additional account, Accounts Receivable, $200 for services provided but not billed, and credits Service Revenue $200.

(f) The company needs two additional accounts relating to interest. It debits Interest Expense $50 for accrued interest,

and credits Interest Payable $50.

(g) Pioneer debits Salaries and Wages Expense $1,200 for accrued salaries, and credits an additional account, Salaries and Wages Payable, $1,200.

After Pioneer has entered all the adjustments, the adjustments columns are totaled to prove their equality.

STEP 3. ENTER ADJUSTED BALANCES IN THE ADJUSTED TRIAL BALANCE COLUMNS

Pioneer determines the adjusted balance of an account by combining the amounts entered in the first four columns of the worksheet for each account. For example, the Prepaid Insurance account in the trial balance columns has a $600 debit balance and a $50 credit in the adjustments columns. The result is a $550 debit balance recorded in the adjusted trial balance columns. For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries. The balances in these columns are the same as those in the adjusted trial balance in Illustration 3-25 (page 119). After Pioneer has entered all account balances in the adjusted trial balance columns, the columns are totaled to prove their equality. If the column totals do not agree, the financial statement columns will not balance and the financial statements will be incorrect.

STEP 4. EXTEND ADJUSTED TRIAL BALANCE AMOUNTS TO APPROPRIATE FINANCIAL STATEMENT COLUMNS

The fourth step is to extend adjusted trial balance amounts to the income statement and balance sheet columns of the worksheet. Pioneer enters balance sheet accounts in the appropriate balance sheet debit and credit columns. For instance, it enters Cash in the balance sheet debit column, and Notes Payable in the credit column. Pioneer extends Accumulated Depreciation—Equipment to the balance sheet credit column; the reason is that accumulated depreciation is a contra-asset account with a credit balance. Because the worksheet does not have columns for the owner’s equity statement, Pioneer extends the balance in owner’s capital to the balance sheet credit column. In addition, it extends the balance in owner’s drawings to the balance sheet debit column because it is an owner’s equity account with a debit balance.

STEP 5. TOTAL THE STATEMENT COLUMNS, COMPUTE THE NET INCOME (OR NET LOSS), AND COMPLETE THE WORKSHEET

The company now must totaleach of the financial statement columns. The net income or loss for the period is the difference between the totals of the two income statement columns. If total credits exceed total debits, the result is net income. In such a case, as shown in the working smple below, the company inserts the words “Net Income” in the account titles space. It then enters the amount in the income statement debit column and the balance sheet credit column. The debit amount balances the income statement columns; the credit amount balances the balance sheet columns. In addition, the credit in the balance sheet column indicates the increase in owner’s equity resulting from net income. What if total debits in the income statement columns exceed total credits? In that case, the company has a net loss. It enters the amount of the net loss in the income statement credit column and the balance sheet debit column. After entering the net income or net loss, the company determines new column totals.

The totals shown in the debit and credit income statement columns will and must match. So will the totals shown in the debit and credit balance sheet columns. If either the income statement columns or the balance sheet columns are not equal after the net income or net loss has been entered, there is an error in the worksheet. The Sample below gives the complete worksheet done on Excel.  After doing all the steps in your worksheet, then compare it with the worksheet done by me to look out for errors in your worksheet. Download my worksheet as the frame in below is not enough to show the whole excel sheet and so the HTML framing automatically divided the excel sheet randomly which confuses anyone for sure. So, download it and then view it.

Using a worksheet, companies can prepare financial statements before they journalize and post adjusting entries. However, the completed worksheet is not a substitute for formal financial statements. The format of the data in the financial statement columns of the worksheet is not the same as the format of the financial statements. A worksheet is essentially a working tool of the accountant; companies do not distribute it to management and other parties.

What is 'Closing the Books' in Accounting?

At the end of the accounting period, the company makes the accounts ready for the next period. This is called closing the books. In closing the books, the company distinguishes between temporary and permanent accounts. Temporary accounts relate only to a given accounting period. They include all income statement accounts and the owner’s drawings account. The company closes all temporary accounts at the end of the period. In contrast, permanent accounts relate to one or more future accounting periods. They consist of all balance sheet accounts, including the owner’s capital account. Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period.

How to prepare closing entries??

At the end of the accounting period, the company transfers temporary account balances to the permanent owner’s equity account, Owner’s Capital, by means of 'closing entries'.Here 'Closing Entriess' is a procedure.

Closing Entries are simply the last transaction which are taken from temporary accounts into Owner's Capital Accounts in such a way that these entries/transaction in ledger will define that a period is closed and new period had started. As money in temporary accounts will be shifted as part of 'Closing Entries' it produces a Zero-Balance in temporary Accounts. Journalizing and posting these closing entries to ledger is a compulsory step for each accounting cycle to significantly identify the period-end. 'Closing Entries' are done only after financial statements are prepared.

Companies record closing entries in the general journal. A center caption, Closing Entries, inserted in the journal between the last adjusting entry and the first closing entry, identifies these entries. Then the company posts the closing entries to the ledger accounts.

What are the steps in Closing Entries?
Companies generally prepare closing entries directly from the adjusted balances in the ledger. They could prepare separate closing entries for each nominal account, but the following four entries accomplish the desired result more efficiently:

1. Debit each revenue account for its balance, and credit Income Summary for total revenues.

2. Debit Income Summary for total expenses, and credit each expense account for its balance.

3. Debit Income Summary and credit Owner’s Capital for the amount of net income.

4. Debit Owner’s Capital for the balance in the Owner’s Drawings account, andcredit Owner’s Drawings for the same amount.

Now the Journal for CLosing Entries will be as shown below, Lets consider that Pioneer Advertising Agency will do closing-entries for each mont unlike normally closing-entries will be done with a long-gap of atleast 6 months. Then, as per the transactions that are carried out upto now in Pioneer Advertising Agency, the closing-entries will be journalised as below,

In the same way as per the References as in each transaction of closing-entries in above journal entry, the transactions will be posted into ledger

What is Post-Closing trial balance? Prepare the Post-closing trial balance for Pioneer Advertising Agency as closing-entries is done in previous question?

After Pioneer has journalized and posted all closing entries as in previous question, it prepares another trial balance, called a post-closing trial balance, from the ledger. The postclosing trial balance lists permanent accounts and their balances after journalizing and posting of closing entries. The purpose of the post-closing trial balance is to prove the equality of the permanent account balances carried forward into the next accounting period. Since all temporary accounts will have zero balances, post-closing trial balance will contain only permanent—balance sheet— accounts.

The post-closing trial balance for Pioneer Advertising is shown below, check all the accounts carefully, this post-closing trial balance is only on permanent accounts only as temporary accounts are with zero-balance by the time this is prepared due to closing-entries.

Now, compare the above General Ledger with the steps of closing-entries (vs) journalized closing-entries (vs) post-trial balance shown above. The remaining accounts in the general ledger are temporary accounts After Pioneer correctly posts the closing entries, each temporary account has a zero balance. These accounts are double-ruled to finalize the closing

process as shown below.

What are the methods of error correction for falty transactions?

There are 2 methods of Error correction

1)CORRECTING ENTRY: Correcting Entry is the concept where a transaction is done between the wrong accounts. Lets just say on May 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full. So transactions look like which is actually an incorrect transaction.

In this perspective, on May 20, they discovered that Credit Account must be 'Accounts Receivable' but not the 'ervice Revenue'. In this scenario, to do a CORRECTING ENTRY they will make other transaction on MAy 20 whic looks like ,

2) REVERSING ENTRY: Reversing Entry is completely different to the above method. Here, the whole transaction is reversed meansfor each incorrect trasaction, they will make opposite transaction between the same accounts in the incorrect trasaction so that the amount goes back to the original account. And then they make the correct transacation. This will surely result in more entres and postings because, first of all the transaction must be reversed and if the transacion includes many accounts then many postings in ledger takes place and then the correct transaction must be journalized and posted into ledger. This might look awkward in broad sense but SAP FICO module follows this method of error correction.

What is Classical Balance Sheet?

The balance sheet presents a snapshot of a company’s financial position at a point in time. To improve users’ understanding of a company’s financial position, companies often use a classified balance sheet. A classified balance sheet groups together similar assets and similar liabilities, using a number of standard classifications and sections. Standard classifications and sections are the different types of assets n the company, different types of liabilities and owner's Equity.

What are Current Assets?

Current assets are assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. In Illustration 4-18, Franklin Company had current assets of $22,100. For most businesses the cutoff for classification as current assets is one year from the balance sheet date. For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use it up in operations within one year.

What are long-term investments?

Long-term investments are generally, (1) investments in stocks and bonds of other companies that are normally held for many years, and (2) long-term assets such as land or buildings that a company is not currently using in its operating activities.

What is Property, plant and Equipment?

Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business. This category (sometimes called fixed assets) includes land, buildings, machinery and equipment, delivery
equipment, and furniture.

Depreciation is the practice of allocating the cost of assets to a number of years. Companies do this by systematically assigning a portion of an asset’s cost as an expense each year (rather than creating an expense for the full purchase price in the year of purchase). The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation. The accumulated depreciation account shows the total amount of depreciation the company paid as expense thus far in the asset’s life.

What are Intangiable Assets?

Many companies have long-lived assets that do not have physical substance yet often are very valuable. We call these assets intangible assets. One common intangible asset is goodwill. Others include patents, copyrights, and trademarks or trade names that give the company exclusive right of use for a specifi ed period of time.

What are Current Liabilities?

In the liabilities and owners’ equity section of the balance sheet, the first grouping is current liabilities. Current liabilities are obligations that the company is to pay within the coming year or its operating cycle, whichever is longer. Common examples are accounts payable, wages payable, bank loans payable, interest payable, and taxes payable. Also included as current liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations.

Within the current liabilities section, companies usually list notes payable first, followed by accounts payable. Other items then follow in the order of their magnitude. In your homework, you should present notes payable fi rst, followed by accounts payable, and then other liabilities in order of magnitude.

What are Long-term Liabilities?

Long-term liabilities are obligations that a company expects to pay after one year. Liabilities in this category include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. Many companies report longterm debt maturing after one year as a single amount in the balance sheet and show the details of the debt in notes that accompany the financial statements.

Adjusting the Accounts

In this Unit, we need to understand and work on one of the basic financial equation

NET INCOME = REVNEUES - EXPENSES

And sometimes most companies will find it difficult to determine the time period of a transaction as some transactions will go on and on and some transactions will not happen at right time. This gives nightmare to value the transaction and at what time period to report the transaction. Due to this type of transactions, accountants must adjust some of important things like postings, trial balance etc. while preparing financial statements

WHAT ARE TIMING ISSUES?

Once, all the transactions are finished then it will be easy to prepare financial statements. But, in real scenario, transaction will not end and sometimes management wants monthly financial statements and also to file tax returns interim financial statements are required. For this complexity, accountants divide the economic life of business into artificial time periods. This is called as time period assumption.

For example, the airplanes purchased by Southwest Airlines five years ago are still in use today. We must determine the relevance of each business transaction to specific accounting periods. (How much of the cost of an airplane contributed to operations this year?)

HOW TIME PERIOD IS DIVIDED AND USED?

Both small and large companies prepare financial statements periodically in order to assess their financial condition and results of operations. Accounting time periods are generally a month, a quarter, or a year. Monthly and quarterly time periods are called interim periods. Most large companies must prepare both quarterly and annual financial statements. An accounting time period that is one year in length is a fiscal year. A fiscal year usually begins with the first day of a month and ends twelve months later on the last day of a month. Most businesses use the calendar year (January 1 to December 31) as their accounting period, some do not. In India, April to March is commonly followed along with many other countries.

WHAT IS DIFFERENCE IN ACCRUAL VS CASH BASIS ACCOUNTING?

Under the accrual basis, companies record transactions that change a company’s financial statements in the periods in which the events occur. For example, using the accrual basis to determine net income means companies recognize revenues when earned (rather than when they receive cash). It also means recognizing expenses when incurred (rather than when paid). So, in Accrual basis accounting companies update the transactions when they recognise expenses or revenues before when they receive or pay the actual cash.

An alternative to the accrual basis is the cash basis. Under cash-basis accounting, companies record revenue when they receive cash. They record an expense when they pay out cash. The cash basis seems appealing due to its simplicity, but it often produces misleading financial statements. It fails to record revenue that a company has earned but for which it has not received the cash. Also, it does not match expenses with earned revenues. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). It is mostly used in small enterprises.

HOW DO COMPANIES RECOGNISE THE VALUE OF SUCH REVENUES AND EXPENSES?

It can be difficult to determine the amount of revenues and expenses to report in a given accounting period when the transaction is not yet finalised. Two principles help in this task: the revenue recognition principle and the expense recognition principle.

REVENUE RECOGNITION PRINCIPLE

The revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is performed. To illustrate, assume that Dave’s Dry Cleaning cleans clothing on June 30 but customers do not claim and pay for their clothes until the first week of July. Under the revenue recognition principle, Dave’s earns revenue in June when it performed the service, rather than in July when it received the cash. At June 30, Dave’s would report a receivable on its balance sheet and revenue in its income statement for the service performed.

EXPENSE RECOGNITION PRINCIPLE

Accountants follow a simple rule in recognizing expenses: “Let the expenses follow the revenues.” Thus, expense recognition is tied to revenue recognition. In the dry cleaning example let us consider salaries are paid daily, this means that Dave’s should report the salary expense incurred in performing the June 30 cleaning service in the same period in which it recognizes the service revenue. The critical issue in expense recognition is when the expense makes its contribution to revenue. This may or may not be the same period in which the expense is paid. If Dave’s does not pay the salary incurred on June 30 until July, it would report salaries payable on its June 30 balance sheet.

WHY IS THE NEED FOR ADJUSTING ENTRIES?

The need for adjusting entries is high and depends on the way expense or revenue is being recognised. To make trial balance up to date, adjusting entries must be done for various reasons like below,

1. Some events are not recorded daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees.

1. Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples are charges related to the use of buildings and equipment, rent, and insurance.

1. Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period.

WHAT ARE THE TYPES OF ADJUSTING ENTRIES?

Adjusting entries are classified as either deferrals or accruals. each of these classes has two subcategories.

Deferrals:

1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned revenues: Cash received and recorded as liabilities before revenue is earned.

Accruals:

1. Accrued revenues: Revenues earned but not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

HOW ADJUSTING IS DOINE FOR DEFERRALS?

To defer means to postpone or delay. Deferrals are costs or revenues that are recognized at a date later than the point when cash was originally exchanged. Companies make adjusting entries for deferrals to record the portion of the deferred item that was incurred as an expense or earned as revenue during the current accounting period. The two types of deferrals are prepaid expenses and unearned revenues.

Before going into any more inner details let us consider we are using company named PIONEER ADVERTISING COMPANY (PAA) for now.

PREPAID EXPENSES:

Companies record payments of expenses that will benefit more than one accounting period as assets called prepaid expenses or prepayments. When expenses are prepaid, an asset account is increased (debited) to show the service or benefit that the company will receive in the future. Examples of common prepayments are insurance, supplies, advertising, and rent. In addition, companies make prepayments when they purchase buildings and equipment. But as time goes on, the prepaid amount will expire just like monthly rent where at start of each month the previous rent expires. There is no need to write down the expiry of the prepaid amount as an entry unless required.

The Basic rule for adjusting an entry for prepaid expenses results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account.

SUPPLIES::

The purchase of supplies, such as paper and envelopes, results in an increase (a debit) to an asset account. During the accounting period, the company uses supplies. Rather than record supplies expense as the supplies are used, companies recognize supplies expense at the end of the accounting period. At the end of the accounting period, the company counts the remaining supplies. The difference between the unadjusted balance in the Supplies (asset) account and the actual cost of supplies on hand represents the supplies used (an expense) for that period.

On our Example of PAA company, We can see that company purchased supplies costing $2,500 on October 5. Pioneer recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory account at the close of business on October 31 reveals that $1,000 of supplies are still on hand. Thus, the cost of supplies used is $1,500 ($2,500 - $1,000). This use of supplies decreases an asset, Supplies. It also decreases owner’s equity by increasing an expense account, Supplies Expense. This is shown below,

After the adjustment posting the asset account Supplies shows a balance of $1,000, which is equal to the cost of supplies on hand at the statement date. In addition, Supplies Expense shows a balance of $1,500, which equals the cost of supplies used in October. If Pioneer does not make the adjusting entry, October expenses will be understated and net income overstated by $1,500. Moreover, both assets and owner’s equity will be overstated by $1,500 on the October 31 balance sheet.

INSURANCE:

Companies purchase insurance to protect themselves from losses due to fire, theft, and unforeseen events. Insurance must be paid in advance, often for more than one year. The cost of insurance (premiums) paid in advance is recorded as an increase (debit) in the asset account prepaid insurance. At the financial statement date, companies increase (debit) Insurance expense and decrease (credit) Prepaid insurance for the cost of insurance that has expired during the period.

In our Example of PAA as per the main trial balance shown, Company paid insurance of $600 for an year, if calculated for each month its $50 ($600/12). By the end of each month prepaid insurance decreases by $50 and Insurance expense increases by $50. By the end of year, Insurance Expense covers full amount $600.

DEPRECIATION:

There will be lot of assets in the company and every asset will depreciate. When any tangible object like building, computers, cars, etc are acquired, they are recorded as assets on the acquiring date. Being assets, they will be used until their useful life. By the end of asset's useful life, the value of asset must become zero. This reduction of asset's value periodically is called DEPRECIATION.

The acquisition of long-lived assets is essentially a long-term prepayment for the use of an asset. An adjusting entry for depreciation is needed to recognize the cost that has been used (an expense) during the period and to report the unused cost (an asset) at the end of the period. One very important point to understand: Depreciation is an allocation concept, not a valuation concept. That is, depreciation allocates an asset’s cost to the periods in which it is used. Depreciation does not attempt to report the actual change in the value of the asset. So, an Asset's useful life is normally extended by re-investment and this changes its valuations again. This is why, there is a need for adjustment postings for every asset's depreciation and change in valuation. REMEMBER: CONTRA-ASSET ACCOUNTS ARE TYPE OF ASSET ACCOUNTS BUT IT MUST SHOW THE REDUCTION IN VALUE OF AN ASSET, THIS IS WHY THE ADJUSTMENTS ARE POSTED ON CREDIT SIDE.

For Pioneer Advertising, assume that depreciation on the equipment is $480 a year, or $40 per month. As shown in Illustration 3-7 below, rather than decrease (credit) the asset account directly, Pioneer instead credits Accumulated Depreciation— Equipment. Accumulated Depreciation is called a contra asset account. Such an account is offset against an asset account on the balance sheet. Thus, the Accumulated Depreciation—Equipment account offsets the asset Equipment. This account keeps track of the total amount of depreciation expense taken over the life of the asset. To keep the accounting equation in balance, Pioneer decreases owner’s equity by increasing an expense account, Depreciation Expense.

There are different type of contra asset accounts for each type of asset as shown below are some examples:

• For Asset: Plant and equipment
• Contra-asset: Accumulated depreciation (depreciation expense goes to income statement)
• Contra-asset: Accumulated impairment losses (impairment losses go to income statement)
• For Asset: Accounts receivables
• Contra-asset: Allowance for doubtful accounts (bad debts expense goes to income statement)
• For Asset: Inventory
• Contra-asset: Allowance for obsolescence (obsolescence expense goes to income statement directly or via COGS)
• For Asset: Intangible assets (e.g. patents)
• Contra-asset: Accumulated amortisation (amortisation expense goes to income statement)

Accumulated Depreciation—Equipment is a contra asset account. It is offset against Equipment on the balance sheet. The normal balance of a contra asset account is a credit. A theoretical alternative to using a contra asset account would be to decrease (credit) the asset account by the amount of depreciation each period. But using the contra account is preferable for a simple reason: It discloses both the original cost of the equipment and the total cost that has expired to date. Thus, in the balance sheet, Pioneer deducts Accumulated Depreciation—Equipment from the related asset account, as shown below

In the above illustration $4,960 is called Book Value which is giving the value still left on the asset as per our books. Coming to Valuations, there are 2 types Book Value and Fair Value. We will discuss them later.

UNEARNED REVENUES:

Companies record cash received before revenue is earned by increasing (crediting) a liability account called unearned revenues. Items like rent, magazine subscriptions, and customer deposits for future service may result in unearned revenues. Airlines such as United, American, and Delta, for instance, treat receipts from the sale of tickets as unearned revenue until the flight service is provided. Unearned revenues are the opposite of prepaid expenses. Indeed, unearned revenue on the books of one company is likely to be a prepaid expense on the books of the company that has made the advance payment. For example, if identical accounting periods are assumed, a landlord will have unearned rent revenue when a tenant has prepaid rent. When a company receives payment for services to be provided in a future accounting period, it increases (credits) an unearned revenue (a liability) account to recognize the liability that exists. But, subsequently the company earns revenue by providing the service.

Company will post this payment as Unearned Revenue(liability) in credit section to increase the liability. This liability is the obligation of service the company must give. Once the service is given, the expenses are calculated and remaining amount is transferred to Earned Revenue Account. But, posting daily revenues is not the professional way of Accounting as it will create a mess of account entries daily. In adjustment process, the present value of Liability will be calculated by dividing whole liability as per activity, stage-of-service or time-period. Once liability is calculated up to the present accounting period then posting is done. Posting is done at the end of present accounting period so that it makes easy to do a group of transactions rather than a single transaction daily.

So, directly even though the unearned revenue is turned to revenue in this accounting period, the posting is delayed to end of this accounting period. Typically, prior to adjustment, liabilities are overstated and revenues are understated. The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.

Pioneer Advertising received $1,200 on October 2 from R. Knox for advertising services expected to be completed by December 31. Pioneer credited the payment to Unearned Service Revenue, and this liability account shows a balance of $1,200 in the October 31 trial balance. From an evaluation of the service Pioneer performed for Knox during October, the company determines that it has earned $400 in October. The liability (Unearned Service Revenue) is therefore decreased, and owner’s equity (Service Revenue) is increased.

At the same time, Service Revenue shows total revenue earned in October of $10,400. Without this adjustment, revenues and net income are understated by $400 in the income statement. Moreover, liabilities are overstated and owner’s equity is understated by $400 on the October 31 balance sheet.

ACCOUNTING ENTRIES FOR ACCRUALS:

The meaning of 'accrue' word is to sum up the money. The second category of adjusting entries is accruals. Prior to an accrual adjustment, the revenue account (and the related asset account) or the expense account (and the related liability account) are understated. Thus, the adjusting entry for accruals will increase both a balance sheet and an income statement account. Talking about Accruals there are Accrued Revenues and Accrued Expenses.

Accrued Revenues:

Revenues earned but not yet recorded at the statement date are accrued revenues. Accrued revenues may accumulate (accrue) with the passing of time, as similar to interest revenue. These are unrecorded because the earning of interest does not involve daily transactions. Companies do not record interest revenue on a daily basis because it is often impractical to do so. Accrued revenues also may result from services that have been performed but not yet billed nor collected, as in the case of commissions and fees. These may be unrecorded because only a portion of the total service has been provided and the clients won’t be billed until the service has been completed. An adjusting entry records the receivable that exists at the balance sheet date and the revenue earned during the period. Prior to adjustment, both assets and revenues are understated. An adjusting entry for accrued revenues results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.

In October, Pioneer Advertising earned $200 for advertising services that were not billed to clients on or before October 31. Because these services are not billed, they are not recorded. The accrual of unrecorded service revenue increases an asset account, Accounts Receivable. It also increases owner’s equity by increasing a revenue account, Service Revenue, as shown below

The asset Accounts Receivable shows that clients owe Pioneer $200 at the balance sheet date. The balance of $10,600 in Service Revenue represents the total revenue Pioneer earned during the month ($10,000 1 $400 1 $200). Without the adjusting entry, assets and owner’s equity on the balance sheet and revenues and net income on the income statement are understated.

On November 10, Pioneer receives cash of $200 for the services performed in October and makes the following entry.

The company records the collection of the receivables by a debit (increase) to Cash and a credit (decrease) to Accounts Receivable.

ACCRUED EXPENSES:

Expenses incurred but not yet paid or recorded at the statement date are called accrued expenses. Interest, taxes, and salaries are common examples of accrued expenses. Companies make adjustments for accrued expenses to record the obligations that exist at the balance sheet date and to recognize the expenses that apply to the current accounting period. Prior to adjustment, both liabilities and expenses are understated. Therefore, as Illustration 3-16 shows, an adjusting entry for accrued expenses results in an increase (a debit) to an expense account and an increase (a credit) to a liability account.

Let's look at different types of Accrued Expenses

Accrued Interest:

Pioneer Advertising signed a three-month note payable in the amount of $5,000 on October 1. The note requires Pioneer to pay interest at an annual rate of 12%. The amount of the interest recorded is determined by three factors: (1) the face value of the note; (2) the interest rate, which is always expressed as an annual rate; and (3) the length of time the note is outstanding. For Pioneer, the total interest due on the $5,000 note at its maturity date three months in the future is $150 ($5,000 X 12% X 3/12—), or $50 for one month.

the accrual of interest at October 31 increases a liability account, Interest Payable. It also decreases owner’s equity by increasing an expense account, Interest Expense. Interest Expense shows the interest charges for the month of October. Interest Payable shows the amount of interest the company owes at the statement date. Pioneer will not pay the interest until the note comes due at the end of three months. Companies use the Interest Payable account, instead of crediting Notes Payable, to disclose the two different types of obligations—interest and principal—in the accounts and statements. Without this adjusting entry, liabilities and interest expense are understated, and net income and owner’s equity are overstated.

Accrued Salaries and Wage:

Companies pay for some types of expenses, such as employee salaries and wages, after the services have been performed. Pioneer paid salaries and wages on October 26 for its employees’ first two weeks of work; the next payment of salaries will not occur until November 9. As shown below,

three working days remain in October (October 29–31). At October 31, the salaries and wages for these three days represent an accrued expense and a related liability to Pioneer. The employees receive total salaries and wages of $2,000 for a five-day work week, or $400 per day. Thus, accrued salaries and wages at October 31 are $1,200 ($400 X 3). This accrual increases a liability, Salaries and Wages Payable. It also decreases owner’s equity by increasing an expense account, Salaries and Wages Expense, as shown below;

Pioneer Advertising pays salaries and wages every two weeks. Consequently, the next payday is November 9, when the company will again pay total salaries and wages of $4,000. The payment consists of $1,200 of salaries and wages payable at October 31 plus $2,800 of salaries and wages expense for November (7 working days, as shown in the November calendar X $400). Therefore, Pioneer makes the following entry on November 9.

This entry eliminates the liability for Salaries and Wages Payable that Pioneer recorded in the October 31 adjusting entry, and it records the proper amount of Salaries and Wages Expense for the period between November 1 and November 9.

WHAT IS THE USE OF ACCRUAL ACCOUNTING?

It gives a clear and simple picture to know/forecast the revenues and expenses before they are paid/received. The Chinese government, like most governments, uses cash accounting. It was therefore interesting when it was recently reported that for about $38 billion of expenditures in a recent budget projection, the Chinese government decided to use accrual accounting versus cash accounting. It decided to expense the amount in the year in which it was originally allocated rather than when the payments would be made. Why did it do this? It enabled the government to keep its projected budget deficit below a 3% threshold. While it was able to keep its projected shortfall below 3%, China did suffer some criticism for its inconsistent accounting. Critics charge that this inconsistent treatment reduces the transparency of China’s accounting information. That is, it is not easy for outsiders to accurately evaluate what is really going on. Budget Deficit is a macro-economic subject which connects all the money, markets, and regulations under a single boundary.

WHAT ARE THE RELATIONSHIPS IN ADJUSTING ENTRIES?

Each adjusting entry affects one balance sheet account and one income statement account.

WHAT ARE THE ADJUSTMENT ENTRIES MADE UP TO OCTOBER 31 IN PAA COMPANY?

Once, the trial balance is finalised after the adjustments then adjusted financial statements are produced using trial balance sheet. The Debit and Credit adjustments of the trial balance is shown below,

ARE THERE ANY ALTERNATIVE TREATMENT FOR UNEARNED REVENUES AND PREPAID EXPENSES??

In the case of prepaid expenses, the company debited the prepayment to an asset account. In the case of unearned revenue, the company credited a liability account to record the cash received. Some companies use an alternative treatment: (1) When a company prepays an expense, it debits that amount to an expense account. (2) When it receives payment for future services, it credits the amount to a revenue account.

Prepaid Expenses

Prepaid expenses become expired costs either through the passage of time (e.g., insurance) or through consumption (e.g., advertising supplies). If, at the time of purchase, the company expects to consume the supplies before the next financial statement date, it may choose to debit (increase) an expense account rather than an asset account. This alternative treatment is simply more convenient.

Assume that Pioneer Advertising expects that it will use before the end of the month all of the supplies purchased on October 5. A debit of $2,500 to Supplies Expense (rather than to the asset account Supplies) on October 5 will eliminate the need for an adjusting entry on October 31. At October 31, the Supplies Expense account will show a balance of $2,500, which is the cost of supplies used between October 5 and October 31. But what if the company does not use all the supplies? For example, what if an inventory of $1,000 of advertising supplies remains on October 31? Obviously, the company would need to make an adjusting entry. Prior to adjustment, the expense account Supplies Expense is overstated $1,000, and the asset account Supplies is understated $1,000. Thus, Pioneer makes the following adjusting entry.

After adjustment, the asset account Supplies shows a balance of $1,000, which is equal to the cost of supplies on hand at October 31. In addition, Supplies Expense shows a balance of $1,500. This is equal to the cost of supplies used between October 5 and October 31.

UNEARNED REVENUE:

Unearned revenues become earned either through the passage of time (e.g., unearned rent revenue) or through providing the service (e.g., unearned service revenue). Similar to the case for prepaid expenses, companies may credit (increase) a revenue account when they receive cash for future services. To illustrate, assume that Pioneer Advertising received $1,200 for future services on October 2. Pioneer expects to perform the services before October 31.1 In such a case, the company credits Service Revenue. If it in fact earns the revenue before October 31, no adjustment is needed.

However, if at the statement date Pioneer has not performed $800 of the services, it would make an adjusting entry. Without the entry, the revenue account Service Revenue is overstated $800, and the liability account Unearned Service Revenue is understated $800. Thus, Pioneer makes the following adjusting entry.

And After posting the entry, the accounts looks like,

So, the complete way of entering Adjustment entries are

UNIT-5 (FICO) LSMW

In this Unit, we will look in to LSMW as theory and practise. Theory will be given by slides while Practise will be given by screenshots.

THEORY: 



PRACTISE:

This post is from a famous SAP Consultant, Ravi Shankar Venna. He described whole LSMW process in a very detailed view in one of SCN blog. I just copied it because, no one can give LSMW in any more detailed way. THANKS TO RAVI SHANKAR VENNA for this information.
Legacy System Migration Workbench (LSMW) is handy tool for data uploads. In most of the big projects there is a separate development / data migration team is available. However, at times, it would be responsibility of the functional consultant to load the data such as vendor master, customer master and asset master etc. It would be real handy for a functional consultant to know LSMW (at least recording method) and it would help them to successfully complete the task. Hope this document would help many of our functional consultants, as I am seeing number of questions around LSMW. The simple rule is: Follow this document and practice is for number of times possible, then you will become master.
Go to Transaction Code "LSMW" and follow the following steps:

Give some Unique name for Project, Subproject and Object. Click Create (Shift+F1). Now execute or press CTRL+F8.

Give the description for Project, Sub Project and Object and say OK. Now execute or press CTRL+F8.

Select Maintain Object Attributes and Execute (CTRL+F8)

Click Display / Change (it will make you to change). Select the Radio Button Batch Input Recording. Now click on  “Goto” –
Recordings Overview. Click on Create Recording (Ctrl+F1).

Click OK

Give Required Transaction Code (In this case it is FK01)

Create Vendor or Make changes for Entering Withholding tax details in the Vendor.

Press Enter
C
Press Enter

Click on Save Button.

Recording is saved now. Click on “Default All” Button.

Click
Ctrl+Y, a + will come. With this, you can drag and copy whatever you want.  In case if any field is appearing twice you
need to change the field name by double clicking on that. Otherwise, your uploading will get failed.
Copy
the fileds to an excel file. 

Remove the Blank Rows.

Now the field name and descriptions are in one Column. I.e., “A”. You need to
segregate that. To do that, select Column “A” and Select in Excel “Data” – Text
to Column as shown in the following graph.

Now Select the fixed with and say “Next”.

Select Fixed Width and click next.

Keep columns wherever you want by clicking.
Now say Next and then again say “Finish”. Now all fields and texts are divided into two Columns.

Now copy the fields and texts as shown in the Sheet1 (Ctrl+C)

Go
to Sheet2
Keep
the cursor in the Sheet 2 (A1) and then
Edit,
Paste
Special
Check
in Transpose as shown below and say OK.

Now all your rows will become your columns as shown in the blow Screen.

Now
fill the required details exactly as shown below. You should note that you have
to enter ‘0001 for payment method instead of 0001, since if you straight enter
0001 it will become 1, therefore you must ensure whenever it is starting with
“0” should be preceded with ‘.

Now
select the whole sheet2.
Remove
all grids.
No colors should be there in the sheet.
No letter should be typed in different colors. All are in normal color only.
Keep the columns to “LEFT” Margin.
Now,
Format
=> Cells => Number => General as shown in the following screenshot.

Now say OK.
Now copy the whole Sheet2 and paste it in the Sheet3. Then
delete the header rows as shown below:

Save
this file to your Hard Disk with a simple name. In this case I saved as Vendor.
Now
go to “SAVE AS” in Excel, and
Save
as Text (Tab Delimited) as shown in the above screen shot.

Click on OK button as shown below.

Click on "YES" button as shown below.

Now, Click on "NO" button as shown below.

Press F3 or Click on Back Button.

Now, Click on "YES" to save.

You will reach the below screen.
Again, press F3 or click on back Button.

Click
F4 in the Recording Button, your structure will be populated. In this case it
is “VENDRECO”.
Now click on Save on Ctrl+S to save your recording.
After saving your recording click Back button or press Ctrl+F3 to go back.

Now you will observe that few steps have been disappeared. Only few steps are left
out. This is because of the recording mode that you have been selected. Ideally
there should not be any Idoc related steps should be visible.
Now Step1 is being completed and the system automatically takes you to second step.
Now press CTRL+F8 or Executed.

Click on Display / Change Button or press Ctrl+F1

Now create a Structure by clicking “Create Structure” or Ctrl+F4.

Give Source Structure Name and Description

Your Source Structure Name and Description is shown. Click on Save button

Now Press F3 or Click back button to go back.
Now the second step is completed and system automatically takes you to third step.
Click CTRL+F8 or Press Execute Button, which will take to maintain source fields.

Click on Display / change as shown above OR press Ctrl+F1.

Now press on Table Maintenance as shown above by keeping your cursor on the Source
Structure (in blue color in the above screen shot).

Copy those Fields from Sheet1 and copy it here. (from your excel file)

In case if your fields are came twice in recording, none of the field should be
similar. As already advised that change the field names to different field
names. Whatever, field names that you have changed in the structure should also
appear here. Meaning that in case these fields does not map with your changed
fields in your Structure, uploading will fail.

Enter the Field Type as “C” – Characteristic and Length as 60. If you know the length
enter the exact length. If you do not enter the maximum length 60. You should
not enter the length less than the actual length of the field.
Say “Save”.

Press "Enter". Save the results and Press
F3 or Click on back button to go back.

Now Click Save in this screen and again press F3 to go back.

Now system will automatically takes you to fourth screen.
Click CTRL+F8 or Click on Execute Button.

Select the Structure and click on Display / change button or press Ctrl+F1

Click on Relationship (Ctrl+F4)

Though
it is customary step, you should go to this step. And say OK for the message
that the system has issued. “A source structure is already assigned to target
structure VENDRECO”.
Now press Save and PressF3 or Click on back button to go back.
It will take you to the next screen automatically.

Press CTRL+F8 or Click on Execute Button.

In the above screen, select the structure and then click display / change or (Ctrl+F1).
Again Select the Structure,

Go select the auto filed mapping as showing above in the above screen shot.

Say “OK” with this 50 number screen. Do not make any changes.

Keep on Pressing “Accept Proposal” for all the proposal as shown above.

Your entire field mapping should appear as above. Each field should have four rows as above.
Once it is being completed the system issues a statement that “Auto Field Mapping is completed”

Click Save (Ctrl+S) and go back (F3).

Nothing to do with “Maintain Field Values, Transactions, User Defined Routines”

Now Go to “Specify Files” Screen Manually and press “Ctrl+F8” or Execute Button.

Select the first row and click on Display / change Button.

Now Click on Add Entry “Ctrl+F2” as shown above.

Select the “TEXT (Tab Delimited)” file that you have already created and say Open.

Your file has come and Enter some relevant “Name”
Select “Tabulator” Radio Button and say OK.

Now Save (Ctrl+S) and press F3 or Back Button to go back.

Now the system will take you to next step i.e., “Assign Files”. Press Ctrl+F8 or
press Execute Button.

Select Source Structure (as shown in blue colour above) and press Display / Change
Button (Ctrl+F1).

Click on Assignment  (Ctrl+F2)
Though it is a customary step, you need to visit this step compulsory. The system will
issue a message stating that “A file has already been assigned to source
structure “VENDOR_RECORDING”. Say Ok.
Click on Save (Ctrl+S) and Press F3 or click on back button.

The system will take you to next step i.e., “Read Data”. Click on Execute or Press Ctrl+F8.

Remove the Checks for
Value
Fields -> 1234.56
Date
Value -> YYYYMMDD as shown above. There should not be any check in the above
two check boxes.
Now
Click on Execute (F8)

The system will tell that total 8 records are being read.
Now Click on Back Button or press F3 TWICE, which will take you to initial screen.

Now the system takes you to next step “Display Read Data”
Click on Execute or Press Ctrl+F8.

Here you give the number of lines in your text file and say OK.

Click on Any one row and see whether the fields in SAP and columns in your Text File
are matching.

Once you are satisfied that everything is matching and going fine, press F3 or Click
on Back button TWICE, which will take you to initial screen.

Now you are automatically in “Convert Data” Screen.
PressCtrl+F8 or Click on Execute Button.

Just press F8 or Execute Button.

The following screen will appear. See the screen and press Back Button (F3) twice,
which will take you to initial screen.

Now the system will automatically takes you to “Display Converted Data”.
Press Ctrl+F8 or Click on Execute Button.

Enter the number of lines From 1 to 8 in this case, to see how it is showing in
Converted Data and Say Ok. (Click on Rite Tick).

Click on any one of the converted data line and see how the data is going.

If you are satisfied that everything is going fine, then Click on Go back button
(F3) TWICE, which will take you to initial screen.

You will be automatically taken to “Create Batch Input Session”.
Click Ctrl+F8 or press “Execute” Button.

Select "Keep Batch input Folder(s)?
Just Click on Execute Button (F8).

One Batch input session will be created. The system will state that “1 batch input
folder with 8 transactions created” will be issued. Say OK. (Click Right),
which will take you to initial screen.

Click Ctrl+F8 or Press on Execute Button.

Now you are in SM35 Screen. Select the line that is being created to upload and
press Execute (F8) button as shown above.

Select “Background” Radio Button.
Check in:
Extended log
Expert Mode
Dynpro Standard Size
As shown above and the click on “Process” button.

See the log and click on Line, if there are any problems in your log.
Click on back button (F3) to come out of the session FOUR TIME, which will take you
to Easy Access Screen.

Go to Report
“S_ALR_87012086”
Now You are Viewing the vendor records that you are uploaded. You can also follow
the same steps for Change also.

Please let me know if you have any doubts.