Chapter 4 Completing the Accounting Cycle Accounting 211 Instructor: Professor John Ahmad.
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Transcript of Chapter 4 Completing the Accounting Cycle Accounting 211 Instructor: Professor John Ahmad.
Chapter 4Chapter 4
Completing the Accounting Cycle
Accounting 211
Instructor: Professor John Ahmad
1 Prepare a work sheet
2 Explain the process of closing the books
3 Describe the content and purpose of a post-closing trial balance
4 State the required steps in the accounting cycle
5 Explain the approaches to preparing correcting entries
6 Identify the sections of a classified balance sheet
In Chapter 4, we will:
multiple-column form used for the adjustment process and preparing financial statements
working tool for the accountant
not a permanent accounting record
Eases preparation of adjusting entries and financial statements
What is a Worksheet?
Example of a Work Sheet
A work sheet is not a permanent accounting record
When it is used: financial statements are prepared from
the work sheet adjustments are journalized and posted
from the work sheet after financial statements, so management can receive the financial statements more quickly
Remember:
To Prepare A Work Sheet:
1 Prepare the trial balance
2 Enter adjustments in the adjustments columns
3 Enter adjusted balances in adjusted trial balance columns
4 Extend adjusted trial balance amounts to the appropriate financial statement columns
5 Total the statement columns, compute net income (loss), and complete the work sheet
Now, let’s see how this works!
FastForwardWork Sheet
For Month Ended December 31, 2004
First, enter the
unadjusted trial balance amounts to
the worksheet!
First, enter the
unadjusted trial balance amounts to
the worksheet!
Here are our adjusting entries for December.
a) Insurance expense 100
Prepaid insurance 100
b) Supplies expense 1050
Supplies 1050
c) Depreciation expense 375
Accum. Depr. – Equip. 375
Here Are More Adjusting Entries for December.
d) Unearned revenue 250
Consulting Revenue 250
e) Salaries Expense 210
Salaries Payable 210
f) Accounts Receivable 1,800
Consulting Revenue 1,800
Next, enter the adjustments!
Next, enter the adjustments!
FastForwardWork Sheet
For Month Ended December 31, 2004
Prepare the adjusted trial
balance!
Prepare the adjusted trial
balance!
FastForwardWork Sheet
For Month Ended December 31, 2004
FastForwardWork Sheet
For Month Ended December 31, 2004
Then, extend the adjusted trial balance amounts to the financial statements!
Then, extend the adjusted trial balance amounts to the financial statements!
FastForwardWork Sheet
For Month Ended December 31, 2004
Total statement columns, compute income or loss, and balance columns.
Total statement columns, compute income or loss, and balance columns.
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.
Prepare the Statement of Changes in Owner’s Equity.
FastForwardBalance Sheet
December 31, 2004
AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,345$
LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$
Owner's EquityC.Taylor, Capital 33,185 Total liabilities and equity 42,345$
FastForwardBalance Sheet
December 31, 2004
AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,345$
LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$
Owner's EquityC.Taylor, Capital 33,185 Total liabilities and equity 42,345$
Prepare the Balance Sheet.
Which of these characteristics are true about a work sheet?
a permanent accounting record an optional device used by accountants a part of the general ledger a part of the journal
Answer!
permanent accounting record optional device used by accountants part of the general ledger part of the journal
Although it’s optional, the work sheet is a very useful tool!
TEMPORARY VS. PERMANENT ACCOUNTS
TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawing Owner’s capital account
Now, let’s talk about closing entries and income summary!
CLOSING ENTRIES
Closing entries Transfer net income (loss) and owner’s drawings
to owner’s capital Journalizing and posting is a required step in the
accounting cycle
Income Summary A temporary account Used in closing revenue and expense accounts Minimizes the details in the permanent owner’s
capital account
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 Process
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
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.
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 Process
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 Process
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.
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 Process
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.
Using the adjusted trial balance, let’s prepare the
closing entries for
FastForward.
Close Revenue accounts to
Income Summary.
Close Revenue Accounts to Income Summary
Dec. 31 Consulting revenue 7,850 Rental revenue 300
Income summary 8,150
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.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Expense Accounts to Income Summary
Dec. 31 Income summary 4,365Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230
Income Summary4,365 7,850
300 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
-
Close Income Summary to
Owner’s Capital.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Income Summary to Owner’s Capital
Dec. 31 Income summary 3,785C. Taylor, Capital 3,785
C. Taylor, Capital30,000 3,785
33,785
Close Income Summary to Owner’s Capital
Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital
Income Summary4,365 7,850 3,785 300
-
Close Withdrawals to
Owner’s Capital.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Withdrawals to Owner’s Capital
Dec. 31 C. Taylor, Capital 600C. Taylor, Withdrawals 600
C. Taylor, Capital600 30,000
3,785
33,185
C. Taylor, Withdrawals
600 600
-
Close Withdrawals to Owner’s Capital
Close Withdrawals to Owner’s Capital
ABOUT CLOSING ENTRIES
Be Careful!
Avoid doubling revenue and expense balances – watch debits and credits
Remember: owner’s drawing does not move to the Income Summary account. Owner’s drawing is not an expense and it is not a factor in determining net income.
RESULTS OF POSTING CLOSING ENTRIES
Temporary accounts All temporary accounts will have zero balances
after posting the closing entries Temporary accounts (revenues and expenses)
are totaled, balanced and double ruledOwner’s capital Total equity of the owner at the end of the
accounting period No entries are journalized and posted to
owner’s capital during the yearPermanent accounts (assets, liabilities, and owner’s capital) are not closed
POST-CLOSING TRIAL BALANCE
After all closing entries have been journalized the post-closing trial balance is prepared from the ledger.
The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.
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.
Post-Closing Trial Balance
Post-closing Trial BalancePost-closing Trial Balance
1 Analyze business transactions
2 Journalize the transactions
3 Post to ledger accounts
4 Prepare a trial balance
5 Journalize and post adjusting entries
Summary of Steps in the Accounting Cycle
6 Prepare an adjusted trial balance7 Prepare financial statements:
Income Statement, Owner’s Equity Statement, Balance Sheet
8 Journalize and post closing entries
9 Prepare a post-closing trial balance
STEPS IN THE ACCOUNTING CYCLE
1. Correcting Entries
Correcting Entries errors should be corrected as soon as discovered
correcting entries are unnecessary if records are
free of errors
can be journalized and posted whenever an error is discovered
involve any combination of balance sheet and income statement accounts
Illustrative Example Of Correcting Entry
Cash 50 Service Revenue 50
Cash 50 Accounts Receivable 50
Service Revenue 50 Accounts Receivable 50
Another Illustrative Example Of Correcting Entry
Incorrect Entry May 18
(To record purchase of equipment on account)
Correct Entry 18
(To record purchase of equipment on account)
Correcting Entry June 3
(To correct entry of May 18)
Delivery Equipment 45 Accounts Payable 45
Office Equipment 450 Accounts Payable 450
Office Equipment 450 Delivery Equipment 45 Accounts Payable 405
Question: The closing entry process consists of closing:
all asset and liability accounts out the owner's capital account all permanent accounts all temporary accounts
Which answer is correct?
The closing entry process consists of closing
all asset and liability accounts out the owner's capital account all permanent accounts all temporary accounts
Standard Balance Sheet Classifications
Financial statements become more useful when the elements are classified into significant subgroups.
A classified balance sheet generally has the following standard classifications (see
next slide):
Categories of a Classified Balance SheetAssets Liabilities and Equity
Current Assets Current LiabilitiesNoncurrent Assets Noncurrent Liabilities
Long-Term Investments EquityPlant 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 Sheet
Snowboarding ComponentsBalance Sheet
January 31, 2005
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.
Snowboarding ComponentsBalance Sheet
January 31, 2005
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 the longer of one year or the operating cycle.
Snowboarding ComponentsBalance Sheet
January 31, 2005
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.
Snowboarding ComponentsBalance Sheet
January 31, 2005
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.
Current liabilities are obligations due within the longer of one year or the
company’s operating cycle.
Snowboarding ComponentsBalance Sheet
January 31, 2005
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
Long-term liabilities are obligations not due within the longer of one year
or the company’s operating cycle.
Snowboarding ComponentsBalance Sheet
January 31, 2005
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
Equity is the owner’s claim on the assets.
Snowboarding ComponentsBalance Sheet
January 31, 2005
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
Reversing entry Made at the beginning of the next
accounting period Purpose is to simplify the recording of a
subsequent transaction related to an adjusting entry
Most often used to reverse two types of adjusting entries: accrued revenues and accrued expenses
REVERSING ENTRIES
ILLUSTRATIVE EXAMPLE OF REVERSING ENTRY
Questions?
Homework for Chapter 4
Have a great weekend!