Post on 29-Dec-2015
Chapter 4
Completing the Accounting Cycle
Benefits of a Work SheetAids the
preparation of financial
statements.
Aids the preparation of
financial statements.
Reduces possibility of
errors.
Reduces possibility of
errors.
Links accounts and their
adjustments.
Links accounts and their
adjustments.
Assists in planning and organizing an
audit.
Assists in planning and organizing an
audit.
Helps in preparing
interim financial statements.
Helps in preparing
interim financial statements.
Shows the effects of proposed
transactions.
Shows the effects of proposed
transactions.
Not a required report.
P1
FastForwardWork Sheet
For Month Ended December 31, 2007
First, enter the
unadjusted amounts to
the worksheet.
First, enter the
unadjusted amounts to
the worksheet.
P1
Next, enter the adjustments.
Next, enter the adjustments.
FastForwardWork Sheet
For Month Ended December 31, 2007P1
Prepare adjusted trial
balance.
Prepare adjusted trial
balance.
FastForwardWork Sheet
For Month Ended December 31, 2007P1
FastForwardWork Sheet
For Month Ended December 31, 2007
Sort adjusted trial balance amounts to financial statements.
Sort adjusted trial balance amounts to financial statements.P1
FastForwardWork Sheet
For Month Ended December 31, 2007
Total statement columns, compute income or loss, and balance columns.
Total statement columns, compute income or loss, and balance columns.P1
Prepare the IncomeStatement.
Prepare the Financial Statements
A work sheet does not
substitute for financial
statements.
A work sheet does not
substitute for financial
statements.
P1
Prepare the Statement of Owner’s Equity.
P1
FastForwardBalance Sheet
December 31, 2007
AssetsCash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,745$
LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$
Owner's EquityC.Taylor, Capital 33,585 Total liabilities and equity 42,745$
FastForwardBalance Sheet
December 31, 2007
AssetsCash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,745$
LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$
Owner's EquityC.Taylor, Capital 33,585 Total liabilities and equity 42,745$
Prepare the Balance Sheet.
Resets revenue, expense and withdrawal account balances to zero at the end of the period.
Helps summarize a period’s revenues and expenses in the Income Summary account.
Identify accounts for closing.
Record and post closing entries.
Prepare post-closing trial balance.
Closing ProcessC1
1
2
3
Temporary Accounts
Revenues
Income Summary
Exp
ense
s
With
draw
als
Permanent Accounts
Assets
Lia
bili
ties
Ow
ner’s
Cap
ital
The closing process applies only to
temporary accounts.
The closing process applies only to
temporary accounts.
Temporary and Permanent Accounts
C1
Let’s see how the closing process
works!
Recording Closing Entries Close Revenue
accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Owner’s Capital.
Close Withdrawals to Owner’s Capital.
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Owner’s Capital.
Close Withdrawals to Owner’s Capital.
P2
Balances before closing.
Income Summary
Owner's Capital30,000
30,000
Revenue Accounts25,000
25,000
Withdrawals Account5,000
5,000
Expense Accounts10,000
10,000
Closing ProcessP2
Income Summary25,000
25,000
Close Revenue accounts to Income
Summary.
Owner's Capital30,000
30,000
Revenue Accounts25,000 25,000
-
Withdrawals Account5,000
5,000
Expense Accounts10,000
10,000
Closing ProcessP2
Income Summary10,000 25,000
15,000 Owner's Capital30,000
30,000
Revenue Accounts25,000 25,000
-
Withdrawals Account5,000
5,000
Close Expense accounts to Income
Summary.
Expense Accounts10,000 10,000
-
Closing Process
The balance in Income Summary equals net
income.
The balance in Income Summary equals net
income.
P2
Owner's Capital30,000 15,000
45,000
Owner's Capital30,000 15,000
45,000
Withdrawals Account5,000
5,000
Withdrawals Account5,000
5,000
Close Income Summary to
Owner’s Capital.
Revenue Accounts25,000 25,000
-
Expense Accounts10,000 10,000
-
Income Summary10,000 25,000 15,000
-
Closing ProcessP2
Owner's Capital30,000 15,000
45,000
Owner's Capital5,000 30,000
15,000
40,000
Withdrawals Account5,000
5,000
Withdrawals Account5,000 5,000
-
Revenue Accounts25,000 25,000
-
Expense Accounts10,000 10,000
-
Income Summary10,000 25,000 15,000
-
Closing Process
Close Withdrawals account to Owner’s
Capital.
P2
Using the adjusted trial balance, let’s prepare the
closing entries for
FastForward.
P2
Close Revenue accounts to
Income Summary.
P2
Close Revenue Accounts to Income Summary
Dr. Cr.Dec. 31 Consulting revenue 7,850
Rental revenue 300 Income summary 8,150
Dr. Cr.Dec. 31 Consulting revenue 7,850
Rental revenue 300 Income summary 8,150
Now, let’s look at the ledger accounts after posting this closing entry.
P2
Close Revenue Accounts to Income Summary
Consulting Revenue7,850 7,850
-
Rental Revenue300 300
-
Income Summary8,150
P2
Close Expense accounts to
Income Summary.
P2
Now, let’s look at the ledger accounts after posting this closing entry.
Close Expense Accounts to Income Summary
Dr. Cr. Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230
P2
Income Summary4,365 8,150
3,785
Utilities Expense230 230
-
Rent Expense1,000 1,000
-
Net Income
Close Expense Accounts to Income Summary
Close Expense Accounts to Income Summary Close Expense Accounts to Income Summary
Supplies Expense1,050 1,050
-
Depreciation Expense- Eq.
375 375 -
Salaries Expense1,610 1,610
-
Insurance Expense100 100
-
P2
Close Income Summary to
Owner’s Capital.
P2
Now, let’s look at the ledger accounts after posting this closing entry.
Close Income Summary to Owner’s Capital
Dr. Cr. Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785
P2
C. Taylor, Capital30,000 3,785
33,785
Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital
Income Summary4,365 8,150 3,785
-
P2
Close Withdrawals to
Owner’s Capital.
P2
Now, let’s look at the ledger accounts after posting this closing entry.
Close Withdrawals to Owner’s Capital
Dr. Cr. Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200
P2
C. Taylor, Capital200 30,000
3,785
33,585
C. Taylor, Withdrawals
200 200
-
Close Withdrawals to Owner’s Capital
Close Withdrawals to Owner’s Capital
P2
Let’s look at FastForward’s
post-closing trial balance.
Post-Closing Trial Balance
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.
P3
Post-Closing Trial BalanceP3
Summary of the Accounting Cycle
1. Analyze business transactions1. Analyze business transactions
2. Journalize the transactions 2. Journalize the transactions
6. Prepare an adjusted trial balance
6. Prepare an adjusted trial balance
7. Prepare financial statements
7. Prepare financial statements
8. Journalize and post closing entries
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
9. Prepare a post-closing trial balance
4. Prepare an unadjusted trial balance
4. Prepare an unadjusted trial balance
3. Post to ledger accounts3. Post to ledger accounts
5. Journalize and post adjusting entries
5. Journalize and post adjusting entries
Summary of theAccounting Cycle
• Is the time span from when cash is used to acquire goods and services until cash is received from sale of goods and services.
• “Operating” refers to company operations
• “Cycle” refers to the circular flow of cash used for company inputs and then cash received from its outputs.
C3
The Operating Cycle
Let’s discuss the
components of a classified
balance sheet.
C3
Categories of a Classified Balance SheetAssets Liabilities and Equity
Current assets Current liabilitiesNoncurrent assets Noncurrent liabilities
Long-term investments CapitalPlant assetsIntangible assets
Current items are those expected to come due (both collected and owed) within the longer of one year or
the company’s normal operating cycle.
Classified Balance SheetC3
Snowboarding ComponentsBalance Sheet (Partial)
January 31, 2008
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Current assets are expected to be sold, collected, or used within one year or the company’s operating
cycle.
C3
Snowboarding ComponentsBalance Sheet (Partial)
January 31, 2008
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Long-term investments are expected to be held for more than one year or the operating cycle.
C3
Snowboarding ComponentsBalance Sheet (Partial)
January 31, 2008
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Plant assets are tangible long-lived assets used to produce or sell
products and services.
C3
Snowboarding ComponentsBalance Sheet (Partial)
January 31, 2008
Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$
ASSETS
Intangible assets are long-term resources used to produce or sell
products and services and that lack physical form.
C3
Current liabilities are obligations due within the longer of one year or the
company’s operating cycle.
Snowboarding ComponentsBalance Sheet (Partial)
January 31, 2008
Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$
T. Hawk, Capital 164,800 Total liabilities and equity 343,800$
LIABILITIES
EQUITY
C3
Long-term liabilities are obligations not due within the longer of one year
or the company’s operating cycle.
Snowboarding ComponentsBalance Sheet (Partial)
January 31, 2008
Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$
T. Hawk, Capital 164,800 Total liabilities and equity 343,800$
LIABILITIES
EQUITY
C3
Equity is the owner’s claim on the assets.
Snowboarding ComponentsBalance Sheet (Partial)
January 31, 2008
Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$
T. Hawk, Capital 164,800 Total liabilities and equity 343,800$
LIABILITIES
EQUITY
C3
Current Ratio
Helps assess the company’s ability to pay its debts in the near future
A1
End of Chapter 4