[Future-CPA]

Hello,

For the life of me, I can not comprehend journal entries,adjusting entries, reversing entries, closing, accruals, and deferrals. What is weird is I understand the concepts, I understand debits and credits, and the theory behind them. However, whenever I see a problem with different dates, accruals , prepaid expenses or unearned revenues, and they ask to prepare the reversing entries or adjusting journals or closings, I am completely lost and don’t know what accounts should be used to prepare those entries. I am not an Accountant and have never worked in the closing process so I do not know if that is a factor, but please can someone explain this to me or tell me what I should do to get it once and for all. I feel like I will never understand this section!!!!!!

Thanks,

Future-CPA

[mla1169]

Thats a pretty tall order! Do you understand clearly the concept of accrual accounting?

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Future-CPA]

Yes I believe I do, I understand when revenues and expenses need to be recognized if that's what you are referring to.

Thanks!

[musicamor]

@Future-CPA…what exactly do you not understand? If you understand the concepts, then why wouldn't you understand journal entries, closing, etc?

When we speak of accruals, you typically are accruing expense; therefore, you debit expense and credit accrued liabilities.

When we speak of deferrals, you typically are deferring expense as prepaid (think magazine subscriptions); therefore your debit a prepaid (current) asset and credit cash

We speak of closing, I believe you mean closing out to retained earnings, income/(loss) realized in the period. Therefore, if you have income, you debit the P&L and credit retained earnings. If you have a loss, you credit the P&L and debit retained earnings.

A reversing entry is simply an entry that addresses the timing of certain expenditures. For example, if the accounts payable department is unable to post the utility bill for the year–let's say 12/31/12–acconting would book a reversing accrual that will reverse in the subsequent period (1/1/13) and offset with the invoice posted by accounts payable (“A/P”). On 12/31/12, we debit utility expense and credit accrued liabilities; on 1/1/13, we automatically generate a contra entry–credit utility expense and debit accrued liabilities–assuming that A/P has posted the invoice. Make sense?

Texas CPA - licensed in 2012!!!

[Roma]

During the financial close process, a number of journal entries are made to ensure that the income statement and balance sheet comply with GAAP, with particular emphasis on ensuring: 1) revenues / expenses are in the proper period, and 2) items on the balance sheet are properly valued. Often, these journal entries relate to ensuring the GL is maintained on an accrual basis, and not cash basis.

Accruals = adjustments where recognition in the GL precedes cash disbursement/receipt. Expenses / revenues should be recognized in the period the underlying activity occurs. For example, a consultant provides services in December but no invoice is received – an accrual journal entry is made to debit expense and credit A/P.

Deferrals = adjustments where cash received first and recognition is at a later period. An example would be that a company receives a customer deposit in December, but the services will not be performed until January. The receipt of cash would thus debit cash and credit deferred (or unearned) income.

Reversing Entries = occurs when an accrual is made to a period, but literally is reversed out in the subsequent period (usually thru GL system), as a GL entry will be recorded via a normal transaction (often AP or AR). In the accrual example above, the expense entry would be accrued in December, but reverse out in January. The vendor invoice will come thru the A/P system in January which will again debit expense and credit A/P. So ….. the net effect to expense in January will be $0.

Adjusting Entries = relate to period end adjustments in the GL, in particular to valuation accounts (assets) or on provisions (liabilities). Examples would include: 1) changes in A/R allowance for bad debts, 2) changes for warranty or legal provisions.

When you are looking at problems with prepaid assets / unearned revenues, the first step is to determine what balance SHOULD remain in these balance sheet accounts at the end of the period. Look at the INFO in the problem and calculate the proper balance. The difference between the proper balance and what is ACTUALLY in the account becomes the amount of your journal entry. For example, if you determine that $500 SHOULD BE in your prepaid taxes account compared to the ACTUAL $1,000 account balance, then you would make an adjusting journal entry debiting property tax expense for $500 and crediting prepaid taxes for $500.

Sorry if I confused you even more. Good luck!

Using Wiley
FAR = 94 Feb 2012
BEC = 92 April 2012
AUD = 95 July 2012
REG = 91 Nov 2012

[Future-CPA]

Hello Musicamor,

Thank you for explaining those, but see I understand all of those concepts. However, when faced with a problem I do not know how to apply them, I know it might sound weird, but that is the truth. Let me give you an example. When I read the problem below, I feel so overwhelmed that I don't know where to start and what to do to arrive at the final answer….

Interest Receivable at 1/1/2010 is $1,000. Cash collected for interest on notes receivable during 2010 was $4,500. The 2010 income statement correctly reports Interest Revenue in the amount of $5,200. What adjusting entry must have been made on December 31, 2010?

A. Debit Interest Revenue and credit Interest Receivable, $700.

B. Debit Unearned Interest Revenue and credit Interest Revenue, $700.

C. Debit Interest Revenue and credit Interest Receivable $4,200.

D. Debit Interest Receivable and credit Interest Revenue, $1,700.

[Future-CPA]

Roma,

Thank you so much, that actually clarified some of the questions I had as to how to solve problems. Because that is my main issue, I understand what accruals are, what deferrals are, etc. But I am unable to solve problems as I don't know what steps to take to arrive to the answer.

The paragraph below was particularly helpful, thanks a lot.

“When you are looking at problems with prepaid assets / unearned revenues, the first step is to determine what balance SHOULD remain in these balance sheet accounts at the end of the period. Look at the INFO in the problem and calculate the proper balance. The difference between the proper balance and what is ACTUALLY in the account becomes the amount of your journal entry. For example, if you determine that $500 SHOULD BE in your prepaid taxes account compared to the ACTUAL $1,000 account balance, then you would make an adjusting journal entry debiting property tax expense for $500 and crediting prepaid taxes for $500.”

[musicamor]

@Future-CPA…has anyone showed you the “BASE” formula?

Beginning balance

Add: something

Subtract: somthing

Ending balance:

The question above gives us parts of the formula above, so all we need to do is “solve for ‘X.'”

Try solving the problem using that formula and see if you come up with the correct answer. You are given the beginning balance, so plug that in. Next, we're talking interest receivable so interest income would be a debit (add) to interest receivable, so you have that piece. Cash received for interest would be a credit (subtract). Then you're left with determining the ending balance.

Texas CPA - licensed in 2012!!!

[Anonymous]

Future CPA,why dont you try taking an accounting basic class in some college,that would really help you.

[Future-CPA]

Musicamor,

No, I never heard of this base formula. Beginning Balance of what? Just going out on a loop, my thoughts from your base formula is Beg Bal:1,000+$4,500 of cash collected= Ending Bal of $5500? Now if I understand well, Interest Revenue Earned during the period was $5200, so there is an excess of $300 that probably needs to be adjusted…. But how? ( am I on the right track or did i totally miss it 🙂 )

[Future-CPA]

10YRS, That's actually what I am doing, my background is in Finance and I need 7 more accounting classes to be able to sit for the CPA. I am currently taking a class called Financial Reporting 1 online, however they expect you to know all of these and do not review them, I haven't done any accounting since college ( graduated in 2004), so I am not familiar with these concepts, and the class I am currently taking doesn't offer alot of information, so I am trying to learn these on my own 🙁 I am pretty sure it might be very basic to you Accountants, but I am having a hard time grasping them…

[Anonymous]

How comfortable are you with T-accounts?

[Future-CPA]

From the few times, I have used them, I seemed to understand them 🙂

[spongfunk]

The 1,000 is just distractor information in this problem. Therefore since Revenue is a temporary account closed out to Retained Earnings every year, your beginning balance on 1/1 is 0. So it would work like this:

Your revenue is 0 at the benning of the year. All cash collections will have been recorded as revenue, but since that is only $4,500 and your Revenue is correctly stated as 5,200 that means there is 700 unaccounted for in the Revenue account. Now you have it narrowed down to 2 answers and you know it's B because you have to INCREASE Revenue which is a credit to the account.

Unearned Revenue is a liability account so you would be decreasing unearned revenue and increasing earned revenue. This would happen after you have substantially earned the revenue and therefore would need to recognize it.

FAR: 85
AUD: 80
REG: 78
BEC: 82

[Future-CPA]

spongfunk, believe it or not, that was my answer to this question but it is false according to the exam I took.

[spongfunk]

What did it say the correct answer was?

FAR: 85
AUD: 80
REG: 78
BEC: 82

[Author]

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