Completing the Accounting Cycle – Part I Chapter 4 1.
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Transcript of Completing the Accounting Cycle – Part I Chapter 4 1.
Completing the Accounting Cycle – Part I
Chapter 4
1
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
Objective 1
2
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End-of-Period Spreadsheet (Work Sheet)Exhibit 1
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Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Accounts are listed in the Trial Balance column using the ending balance found in the general ledger.
Flow of Accounting Information
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Flow of Accounting Information
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Adjustments are entered here. Two possibilities:1. Deferrals – Existing balances are changed.2. Accruals – New information is entered.
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Adjustments are combined with the trial balance. Account balances are now
adjusted.
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Flow of Accounting Information
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Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income
Statement column.
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Income State. Balance Sheet
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Flow of Accounting Information
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Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the
Balance Sheet column.
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Income State. Balance Sheet
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Flow of Accounting Information
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The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column.
1. Amber Bablock, Drawing2. Utilities Expense3. Accumulated Depreciation—
Equipment4. Unearned Rent
5. Fees Earned6. Accounts Payable7. Rent Revenue8. Supplies
Example Exercise 4-1
Flow of Accounts into Financial Statements
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1. Balance Sheet column2. Income Statement column3. Balance Sheet column4. Balance Sheet column5. Income Statement column6. Balance Sheet column7. Income Statement column8. Balance Sheet column
Example Exercise 4-1 (continued)
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Prepare financial statements from adjusted account balances.
Objective 2
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The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the spreadsheet (work sheet).
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Financial Statements Prepared from Work SheetExhibit 2
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In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for Dimple Consulting Co. for the current year, the Debit column total is $678,450, and the Credit column total is $599,750 before the amount of net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet (work sheet), what is the amount of net income or net loss?
Example Exercise 4-2
Determining the Net Income from End-of-Period Spreadsheet
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Example Exercise 4-2 (continued)
A net income of $78,700 ($678,450 – $599,750) would be reported. When the Debit column of the Balance Sheet columns is more than the Credit column, net income is reported. If the Credit column exceeds the Debit column, a net loss is reported.
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The first item presented on the statement of owner’s equity is the balance of the owner’s capital account at the beginning of the period.
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from the income statement
to the balance sheet
Exhibit 2
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The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the spreadsheet (or worksheet).
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A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.
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Cash and other assets that are expected to be converted into cash, sold or used up usually within a year or less, through the normal operations of the business, are called current assets.• Cash
• Accounts Receivable
• Supplies
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Property, plant, and equipment (also called fixed assets) include assets that depreciate over a period of time. Land is an exception as it is not subject to depreciation.• Equipment
• Machinery
• Buildings
• Land
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Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities.• Accounts payable
• Wages payable
• Interest payable
• Unearned fees
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Liabilities not due for a long time (usually more than one year) are long-term liabilities. • Notes payable
• Mortgage payable
• Bond payable
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Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and the total must be equal to the total assets.
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from the statement of owner’s equity
Financial Statements Prepared from Work Sheet (continued)Exhibit 2
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The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2009 balance sheet of Hindsight Consulting.
1. Jason Corbin, Capital 5. Cash2. Notes Receivable (due 6. Unearned Rent
in 6 months) 7. Accumulated Depr.—3. Notes Payable (due in Equipment
2011) 8. Accounts Payable4. Land
Example Exercise 4-4
Classified Balance Sheet
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Example Exercise 4-4 (continued)
1. Stockholders’ equity2. Current asset3. Long-term liability4. Property, plant, and
equipment
5. Current asset6. Current liability7. Property, plant, and
equipment8. Current liability
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Prepare closing entries.
Objective 3
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Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.
Closing Entries
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To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary.
Closing Entries
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The balance of Income Summary is then transferred to the owner’s capital account. The balance of the owner’s drawing account is also transferred to the owner’s capital account. The entries that transfer these balances are called closing entries.
Closing Entries
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The Closing ProcessExhibit 3
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Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.
Fees Earned
Bal.16,840
Rent Revenue
Bal.120
Income Summary 16,840
120
16,960
Flowchart of Closing Entries for NetSolutions Exhibit 4
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Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Bal.200
Miscellaneous Expense
Bal.455
Income Summary
Debit Income Summary for the total expenses and
credit each expense account for its balance.
16,960
Bal.4,525
Bal.1,600
Bal.50
Bal.985
Bal.2,040
9,855
455
200
2,040
985
50
1,600
4,525
Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4
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Chris Clark, Capital
Bal.25,000
Chris Clark, Drawing
Bal.4,000
Income Summary
16,9609,8557,105
7,105
Debit Income Summary for the amount of its balance (in this case, the net income) and
credit the capital account.
Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
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Chris Clark, Capital
Bal.25,0007,105
Chris Clark, Drawing
Bal.4,000 4,000
4,000 Debit the capital account for the balance
of the drawing account, and credit
drawing for the same amount.
Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
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Flowchart of Closing Entries for NetSolutions (summary)
Exhibit 4
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Closing Entries for NetSolutions
Step 2
Step 3
Step 1
Step 4
Exhibit 5
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After the closing entries are posted, all of the temporary accounts have zero balances.
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After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co.
Terry Lambert, Capital
$615,850Terry Lambert, Drawing
25,000Fees Earned
380,450Wages Expense
250,000Rent Expense
65,000Supplies Expense
18,250Miscellaneous Expense
6,200
Journalize the four entries required to close the accounts.
Example Exercise 4-5
Closing Entries
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Example Exercise 4-5 (continued)
July 31 Fees Earned…………………………….. 380,450Income Summary…………………. 380,450
31 Income Summary……………………… 339,450Wages Expense…………………… 250,000Rent Expense……………………… 65,000Supplies Expense………………… 18,250Miscellaneous Expense…………. 6,200
31 Income Summary………………………. 41,000Terry Lambert, Capital…………… 41,000
31 Terry Lambert, Capital………………… 25,000Terry Lambert, Drawing………….. 25,000
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A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.
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Post-Closing Trial BalanceExhibit 7
THE END
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