Ch04 wrd25e instructor

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Completing the

Completing the

Accounting Cycle

Accounting Cycle

Chapter 4Chapter 4

Learning ObjectivesLearning Objectives

1.1. Describe the flow of accounting information Describe the flow of accounting information from the unadjusted trial balance into the from the unadjusted trial balance into the adjusted trial balance and financial adjusted trial balance and financial statements.statements.

2.2. Prepare financial statements from adjusted Prepare financial statements from adjusted account balances.account balances.

3.3. Prepare closing entries.Prepare closing entries.

4.4. Describe the accounting cycle.Describe the accounting cycle.

5.5. Illustrate the accounting cycle for one period.Illustrate the accounting cycle for one period.

Learning ObjectivesLearning Objectives

6.6. Explain what is meant by the fiscal year and Explain what is meant by the fiscal year and the natural business the natural business

7.7. Describe and illustrate the use of working Describe and illustrate the use of working capital and the current ratio in evaluating a capital and the current ratio in evaluating a company’s financial condition. company’s financial condition.


Learning Objective

Learning ObjectiveDescribe the flow of accounting

Describe the flow of accounting

information from the unadjusted

information from the unadjusted

trial balance into the adjusted trial

trial balance into the adjusted trial

balance and financial statements.

balance and financial statements.

11

FLOW OF ACCOUNTING FLOW OF ACCOUNTING INFORMATIONINFORMATION

Flow of Accounting InformationFlow of Accounting Information

o Account balances are listed in the Unadjusted Trial Account balances are listed in the Unadjusted Trial Balance column using the ending balances found Balance column using the ending balances found in the general ledger.in the general ledger.

End-of-Period Spreadsheet (Work Sheet)End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

(continued)


o Adjustments are entered here. Two possibilities:Adjustments are entered here. Two possibilities: Deferrals – Existing balances are changedDeferrals – Existing balances are changed Accruals – New information is enteredAccruals – New information is entered




(continued)

Unadjusted TB


Adjustments are combined with the unadjusted trial Adjustments are combined with the unadjusted trial balance amounts. Account balances are now balance amounts. Account balances are now adjusted.adjusted.




(continued)

Unadjusted TB


o Revenue and expense balances in Revenue and expense balances in the Adjusted Trial Balance column are the Adjusted Trial Balance column are extended to the Income Statement column.extended to the Income Statement column.

Adjusted TB


Income State. Balance Sheet


(continued)


o Asset, liability, owner’s equity, and drawing Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.are extended to the Balance Sheet column.

Adjusted TB


Income State. Balance Sheet


(concluded)


Learning Objective

Learning ObjectivePrepare financial statements from

Prepare financial statements from

adjusted account balances.

adjusted account balances.

22

Income StatementIncome Statement

o The income statement is prepared directly The income statement is prepared directly from the Income Statement or Adjusted Trial from the Income Statement or Adjusted Trial Balance columns of the end-of-period Balance columns of the end-of-period spreadsheet (work sheet) beginning with fees spreadsheet (work sheet) beginning with fees earned of $16,840.earned of $16,840.

FINANCIAL STATEMENT FINANCIAL STATEMENT PREPARATION FROM PREPARATION FROM

END-OF-PERIOD END-OF-PERIOD SPREADSHEET – INCOME SPREADSHEET – INCOME

STATEMENTSTATEMENT

to statement of owner’s equity

Statement of Owner’s EquityStatement of Owner’s Equity

o The first item presented on the statement of The first item presented on the statement of owner’s equity is the balance of the owner’s owner’s equity is the balance of the owner’s capital account at the beginning of the period.capital account at the beginning of the period.

FINANCIAL STATEMENT FINANCIAL STATEMENT PREPARATION FROM END-PREPARATION FROM END-

OF-PERIODOF-PERIODSPREADSHEET – STATEMENT SPREADSHEET – STATEMENT

OF OWNER’S EQUITYOF OWNER’S EQUITY from the income statement

to the balance sheet

Balance SheetBalance Sheet

o The balance sheet is prepared directly from The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065.work sheet), beginning with Cash of $2,065.

FINANCIAL STATEMENT FINANCIAL STATEMENT PREPARATION FROM PREPARATION FROM

END-OF-PERIOD END-OF-PERIOD SPREADSHEET – BALANCE SPREADSHEET – BALANCE

SHEETSHEET from the statement of owner’s equity

Classified Balance SheetClassified Balance Sheet

o A A classified balance sheetclassified balance sheet is a balance sheet is a balance sheet that was expanded by adding subsections for that was expanded by adding subsections for (1) current assets, (2) property, plant, and (1) current assets, (2) property, plant, and equipment, (3) current liabilities, and (4) long-equipment, (3) current liabilities, and (4) long-term liabilities.term liabilities.

CURRENT ASSETSCURRENT ASSETS

Cash and other assets Cash and other assets that are expected to be that are expected to be converted into cash, converted into cash, sold, or used up usually sold, or used up usually within a year or less, within a year or less, through the normal through the normal operations of the operations of the business, are called business, are called currentcurrent assetsassets..

CashCash

Accounts Accounts ReceivableReceivable

Notes ReceivableNotes Receivable

SuppliesSupplies

Notes ReceivableNotes Receivable

o Notes receivable Notes receivable are written promises by the are written promises by the customer to pay the amount of the note and customer to pay the amount of the note and possibly interest at an agreed rate.possibly interest at an agreed rate.

FIXED ASSETSFIXED ASSETS

Property,Property, plant, andplant, and equipmentequipment (also called (also called fixed assetsfixed assets or or plant plant assetsassets) include assets that ) include assets that depreciate over a period depreciate over a period of time. Land is an of time. Land is an exception, since it is not exception, since it is not subject to depreciation.subject to depreciation.

EquipmentEquipment

MachineryMachinery

BuildingsBuildings

LandLand

CURRENT LIABILITIESCURRENT LIABILITIES

Liabilities that will be Liabilities that will be due within a short time due within a short time (usually one year or (usually one year or less) and that are to be less) and that are to be paid out of current paid out of current assets are called assets are called current liabilitiescurrent liabilities..

Accounts payableAccounts payable

Wages payableWages payable

Interest payableInterest payable

Unearned feesUnearned fees

LONG-TERM LIABILITIESLONG-TERM LIABILITIES

Liabilities not due for a Liabilities not due for a long time (usually more long time (usually more than one year) are than one year) are called called long-term long-term liabilitiesliabilities..

Long-term notes Long-term notes payablepayable

Mortgage Mortgage payablepayable

Bond payableBond payable

Owner’s EquityOwner’s Equity

o Owner’s equityOwner’s equity is the owner’s right to the is the owner’s right to the assets of the business. Owner’s equity is assets of the business. Owner’s equity is added to the total liabilities, and this added to the total liabilities, and this combined total must be equal to the total combined total must be equal to the total assets.assets.


Learning Objective

Learning ObjectivePrepare closing entries.

Prepare closing entries.

33

Closing EntriesClosing Entries

o Accounts that are relatively permanent from Accounts that are relatively permanent from year to year are called year to year are called permanent accounts permanent accounts or or real accountsreal accounts. These accounts are carried . These accounts are carried forward from year to year.forward from year to year.


o Accounts that report amounts for only one Accounts that report amounts for only one period are called period are called temporary accounts temporary accounts or or nominal accountsnominal accounts. Temporary accounts are not . Temporary accounts are not carried forward because they relate to only carried forward because they relate to only one period. one period.


o To report amounts for only one period, To report amounts for only one period, temporary accounts should have zero temporary accounts should have zero balances at the beginning of the next period. balances at the beginning of the next period.

o To achieve this, the revenue and expense To achieve this, the revenue and expense account balances are transferred to Income account balances are transferred to Income Summary at the end of the period.Summary at the end of the period.


o The balance of Income Summary (net income The balance of Income Summary (net income or net loss) is then transferred to the owner’s or net loss) is then transferred to the owner’s capital account. capital account.

o The balance of the owner’s drawing account is The balance of the owner’s drawing account is also transferred to the owner’s capital account. also transferred to the owner’s capital account.

o The entries that transfer these balances are The entries that transfer these balances are called called closing entriesclosing entries..

CLOSING CLOSING ENTRIESENTRIES


o Income Summary Income Summary is a temporary account that is a temporary account that is only used during the closing process.is only used during the closing process.

o At the end of the At the end of the closing processclosing process, the Income , the Income Summary account will have a zero balance.Summary account will have a zero balance.

o Income Summary is sometimes called a Income Summary is sometimes called a clearing accountclearing account..

JOURNALIZING JOURNALIZING AND POSTING AND POSTING

CLOSING ENTRIESCLOSING ENTRIES


Step 1

Step 2

Step 3

Step 4

Temporary Account BalancesTemporary Account Balances

o After the closing entries are posted, all of the After the closing entries are posted, all of the temporary accounts have zero balances.temporary accounts have zero balances.

(continued)

LEDGERLEDGER

LEDGERLEDGER

(continued)

(continued)

LEDGERLEDGER

LEDGERLEDGER

(concluded)

LEDGERLEDGER

Post-Closing Trial BalancePost-Closing Trial Balance

o A post-closing trial balance is prepared after A post-closing trial balance is prepared after the closing entries have been posted. The the closing entries have been posted. The purpose of the post-closing (after closing) purpose of the post-closing (after closing) trial balance is to verify that the ledger is in trial balance is to verify that the ledger is in balance at the beginning of the next period.balance at the beginning of the next period.

POST-CLOSING POST-CLOSING TRIAL BALANCETRIAL BALANCE


Learning Objective

Learning ObjectiveDescribe the accounting cycle.

Describe the accounting cycle.

44

Accounting CycleAccounting Cycle

o The accounting process that begins with The accounting process that begins with analyzing and journalizing transactions and analyzing and journalizing transactions and ends with preparing the accounting records ends with preparing the accounting records for the next period’s transactions is called the for the next period’s transactions is called the accounting cycleaccounting cycle. There are ten steps in the . There are ten steps in the accounting cycle.accounting cycle.


1.1. Transactions are analyzed and recorded in Transactions are analyzed and recorded in the journal.the journal.

2.2. Transactions are posted to the ledger.Transactions are posted to the ledger.

3.3. An unadjusted trial balance is prepared.An unadjusted trial balance is prepared.

4.4. Adjustment data are assembled and Adjustment data are assembled and analyzed.analyzed.

5.5. An optional end-of-period spreadsheet An optional end-of-period spreadsheet (work sheet) is prepared.(work sheet) is prepared.

(continued)


6.6. Adjusting entries are journalized and posted Adjusting entries are journalized and posted to the ledger.to the ledger.

7.7. An adjusted trial balance is prepared.An adjusted trial balance is prepared.

8.8. Financial statements are prepared.Financial statements are prepared.

9.9. Closing entries are journalized and posted to Closing entries are journalized and posted to the ledger.the ledger.

10.10. A post-closing trial balance is prepared.A post-closing trial balance is prepared.

to the financial

statements

ACCOUNTING ACCOUNTING CYCLECYCLE

From the adjusted trial balance



Learning Objective

Learning ObjectiveIllustrate the accounting cycle for

Illustrate the accounting cycle for one period.one period.

55


(continued)


(concluded)

UNADJUSTED UNADJUSTED TRIAL BALANCETRIAL BALANCE

END-OF-PERIOD END-OF-PERIOD SPREADSHEETSPREADSHEET

ADJUSTING ADJUSTING ENTRIESENTRIES

ADJUSTED TRIAL ADJUSTED TRIAL BALANCEBALANCE

INCOME INCOME STATEMENTSTATEMENT

(continued)

STATEMENT OF STATEMENT OF OWNER’S EQUITYOWNER’S EQUITY

(continued)

BALANCE SHEETBALANCE SHEET

(concluded)

POST-CLOSING POST-CLOSING TRIAL BALANCETRIAL BALANCE

(continued)

LEDGERLEDGER

(continued)

(continued)

LEDGERLEDGER

(concluded)

LEDGERLEDGER


Learning Objective

Learning ObjectiveExplain what is meant by the fiscal

Explain what is meant by the fiscal

year and the natural business year.

year and the natural business year.

66

Accounting PeriodAccounting Period

o The annual accounting period adopted by a The annual accounting period adopted by a business is known as its business is known as its fiscal yearfiscal year..

o When a business adopts a fiscal year that ends When a business adopts a fiscal year that ends when business activities have reached the when business activities have reached the lowest point in its annual operation, such a lowest point in its annual operation, such a fiscal year is also called the fiscal year is also called the natural business natural business yearyear..

ACCOUNTING ACCOUNTING PERIODPERIOD

FINANCIAL FINANCIAL HISTORY OF A HISTORY OF A

BUSINESSBUSINESS


Learning Objective

Learning ObjectiveDescribe and illustrate the use of

Describe and illustrate the use of

working capital and the current

working capital and the current

ratio in evaluating a company’s

ratio in evaluating a company’s financial condition.

financial condition.

77

Working Capital and Current RatioWorking Capital and Current Ratio

o The ability to convert assets into cash is called The ability to convert assets into cash is called liquidityliquidity..


o The ability of a business to pay its debts is The ability of a business to pay its debts is called called solvencysolvency..


o Working capital Working capital is the excess of the current is the excess of the current assets of a business over its current liabilities.assets of a business over its current liabilities.


o NetSolutions’ working capital at the end of NetSolutions’ working capital at the end of 2013 is $6,355 as computed below. This amount 2013 is $6,355 as computed below. This amount of working capital implies that NetSolutions is of working capital implies that NetSolutions is able to pay its current liabilities.able to pay its current liabilities.

Working Capital = Current Assets – Current liabilities

= $7,745 – $1,390

= $6,355


o The The current ratio current ratio is another means of is another means of expressing the relationship between current expressing the relationship between current assets and current liabilities. The current ratio assets and current liabilities. The current ratio is computed by dividing current assets by is computed by dividing current assets by current liabilities.current liabilities.

Current Ratio = Current Assets

Current Liabilities

= $7,745

$1,390

= 5.6 (Rounded)


o The current ratio for NetSolutions at the end of The current ratio for NetSolutions at the end of 2013 is 5.6, computed as follows:2013 is 5.6, computed as follows:


Appendix:Appendix:

End-of-Period

End-of-Period

SpreadsheetSpreadsheet

81

Account Title Debit Credit Debit Credit Debit Credit

12345678910111213141516171819202122232425

Unadjusted Trial Balance Adjustments Trial Balance

Adjusted

Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accumulated Depr.Accounts Payable 900Wages PayableUnearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Rent RevenueWages Expense 4,275Rent Expense 1,600Depreciation ExpenseUtilities Expense 985Supplies Expense 800Insurance ExpenseMiscellaneous Exp. 455

42,600 42,600

The The unadjusted unadjusted trial balance trial balance is checked is checked

for equalityfor equality..

82


12345678910111213141516171819202122232425

Trial Balance Adjustments Trial Balance

Adjusted

Supplies Supplies needs needs adjusting adjusting


42,600 42,600

Unadjusted

83


12345678910111213141516171819202122232425


Adjusted


42,600 42,600

(a) Cost of supplies on hand at December 31 is $760.

Unadjusted

(a) 1,240

(a) 1,240

84


12345678910111213141516171819202122232425


Adjusted

(a) 1,240


42,600 42,600

(a) 1,240

(b) The insurance expense for December is $200 ($2,400 ÷ 12).

Unadjusted

(b) 200

(b) 200

85


12345678910111213141516171819202122232425

(c) 120

(c) 120


Adjusted

(b) 200(a) 1,240

(b) 200


42,600 42,600

(a) 1,240

(c) Rent revenue earned during December was $120 ($360 ÷ 3).

Unadjusted

86


12345678910111213141516171819202122232425


Adjusted

(b) 200(a) 1,240

(b) 200

(c) 120

(c) 120

(d) 500

(d) 500


42,600 42,600

(a) 1,240

(d) Fees accrued at the end of December, but not recorded, totaled $500.

Unadjusted

87


12345678910111213141516171819202122232425

(e) 250


Adjusted

(b) 200(a) 1,240

(d) 500

(b) 200

(c) 120

(c) 120


42,600 42,600

(d) 500

(e) 250

(a) 1,240

((e) Wages accrued, but not paid, at the end of December totaled $250.

Unadjusted

88


12345678910111213141516171819202122232425


Adjusted

(b) 200(a) 1,240

(d) 500

(c) 120

(c) 120(d) 500

(f) 50

(f) 50

(b) 200


42,600 42,600

(e) 250

(a) 1,240

(e) 250

(f) Depreciation of office equipment is $50 for December.

Unadjusted

89


12345678910111213141516171819202122232425

2,360 2,360


Adjusted

(b) 200(a) 1,240

(d) 500

(c) 120

(c) 120

(f) 50

(b) 200(a) 1,240

(e) 250

(e) 250

(d) 500


42,600 42,600 Summed and ruled

(f) 50

Unadjusted

Add / Subtract AdjustmentsAdd / Subtract Adjustments

o The next step is to add or subtract the The next step is to add or subtract the adjustments to (or from) the amounts found in adjustments to (or from) the amounts found in the Unadjusted Trial Balance columns and the Unadjusted Trial Balance columns and enter the results in the Adjusted Trial Balance enter the results in the Adjusted Trial Balance columns.columns.

91



12345678910111213141516171819202122232425

Adjusted

2,360 2,360

(b) 200(a) 1,240

(d) 500

(c) 120

(c) 120(d) 500

(f) 50

(b) 200(a) 1,240

(e) 250

Cash 2,065 2,065Accounts Receivable 2,220 2,720Supplies 2,000 760Prepaid Insurance 2,400 2,200Land 20,000 20,000Office Equipment 1,800 1,800Accumulated Depr. 50Accounts Payable 900 900Wages Payable 250Unearned Rent 360 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,340 16,840Rent Revenue 120Wages Expense 4,275 4,525Rent Expense 1,600 1,600Depreciation Expense 50Utilities Expense 985 985Supplies Expense 800 2,040Insurance Expense 200Miscellaneous Exp. 455 455

42,600 42,600 43,400 43,400

(f) 50

Unadjusted

(e) 250

SpreadsheetSpreadsheet

o Preparing the work sheet as a spreadsheet Preparing the work sheet as a spreadsheet allows the computer to assist you in the allows the computer to assist you in the process. The spreadsheet illustrated in Exhibit process. The spreadsheet illustrated in Exhibit 1 has been reproduced on the next slide. 1 has been reproduced on the next slide.

Extending Amounts to Statement ColumnsExtending Amounts to Statement Columns

o The next step is to extend amounts in the The next step is to extend amounts in the Adjusted Trial Balance columns to the Income Adjusted Trial Balance columns to the Income Statement and Balance Sheet columns. Because Statement and Balance Sheet columns. Because of space limitations, the unadjusted trial of space limitations, the unadjusted trial balance and the adjustments columns have balance and the adjustments columns have been removed for the remainder of this slide been removed for the remainder of this slide presentation.presentation.

95


Trial Balance Income Statement Balance Sheet

12345678910111213141516171819202122232425

Adjusted

Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,200 2,200Land 20,000 20,000Office Equipment 1,800 1,800Accumulated Depr. 50 50Accounts Payable 900 900Wages Payable 250 250Unearned Rent 240 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Rent Revenue 120 120Wages Expense 4,525 4,525Rent Expense 1,600 1,600Depreciation Expense 50 50Utilities Expense 985 985Supplies Expense 2,040 2,040Insurance Expense 200 200Miscellaneous Exp. 455 455

43,400 43,400

96



12345678910111213141516171819202122232425

Adjusted

The four columns are summed.


43,400 43,400 9,855 16,960 33,545 26,440

Determining Net Income (Net Loss)Determining Net Income (Net Loss)

o The difference between the Income Statement The difference between the Income Statement column totals and Balance Sheet column totals is column totals and Balance Sheet column totals is net income (or net loss) for the period.net income (or net loss) for the period.

9,855 16,960 33,545 26,4407,105 7,105

16,960 16,960 33,545 33,545

Income Statement Balance Sheet

Net IncomeNet Income

98



12345678910111213141516171819202122232425

Adjusted


43,400 43,400 9,855 16,960 33,545 26,440Net income 7,105 7,105

16,960 16,960 33,545 33,545


Completing the

Completing the

Accounting Cycle

Accounting Cycle

The EndThe End

Ch04 wrd25e instructor

Education

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