Week 5:Closing Accounts Completing the Accounting Cycle

Learning Objective 1Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

Flow of Accounting InformationLO 1

End-of-Period Spreadsheet (Work Sheet)Unadjusted TBAccountsDrCrDrCrDrCrAdjustmentsAdjusted TBFlow of Accounting InformationAccount balances are listed in the Trial Balance column using the ending balances found in the general ledger.LO 1(continued)

End-of-Period Spreadsheet (Work Sheet)AccountsDrCrDrCrDrCrAdjustmentsAdjusted TBFlow of Accounting InformationAdjustments are entered here. 2 possibilities:Deferrals Existing balances are changedAccruals New information is enteredLO 1(continued)Unadjusted TB

AccountsDrCrDrCrDrCrAdjustmentsAdjusted TBEnd-of-Period Spreadsheet (Work Sheet)Flow of Accounting InformationAdjustments are combined with the trial balance amounts. Account balances are now adjusted.LO 1(continued)Unadjusted TB

Adjusted TBAccountsDrCrDrCrDrCrIncome State.Balance SheetEnd-of-Period Spreadsheet (Work Sheet)LO 1Flow of Accounting InformationRevenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.(continued)

Adjusted TBAccountsDrCrDrCrDrCrIncome State.Balance SheetEnd-of-Period Spreadsheet (Work Sheet)Flow of Accounting InformationAsset, liability, owners equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.LO 1(concluded)

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

LO 2

Preparing financial statements:Statement of Owners EquityThe 1st item presented on the statement of owners equity is the balance of the owners capital account at the beginning of the period.LO 2

Preparing financial statements:Balance SheetThe balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065.LO 2

Classified Balance SheetA classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; current liabilities; and long-term liabilities.LO 2

Current AssetsCash 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.CashAccounts ReceivableNotes ReceivableSuppliesLO 2

Notes ReceivableNotes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.LO 2

Fixed AssetsProperty, plant, and equipment (also called fixed assets or plant assets) include assets that depreciate over a period of time. Land is an exception, as it is not subject to depreciation.EquipmentMachineryBuildingsLandLO 2

Current LiabilitiesLiabilities 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 payableWages payableInterest payableUnearned feesLO 2

Long-Term LiabilitiesLiabilities not due for a long time (usually more than one year) are called long-term liabilities.Short-term notes payableMortgages payableBonds payableLO 2

Owners EquityOwners equity is the owners right to the assets of the business. Owners equity is added to the total liabilities, and this total must be equal to the total assets.LO 2

Preparing financial statements:Cash Flow StatementWill show the cash inflows and outflows for the accounting period.Focuses on where the cash comes from & how it is used.Divides cash movements into 3 activities:Operating activitiesInvesting activitiesFinancing activities

LO 2

Closing EntriesAccounts that are relatively permanent from year to year are called permanent accounts or real accounts. These accounts are carried forward from year to year.LO 3

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

LO 3

Closing EntriesTo report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period. To achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period.

LO 3

Closing EntriesThe balance of Income Summary (net income or net loss) is then transferred to the owners capital account. The balance of the owners drawing account is also transferred to the owners capital account. The entries that transfer these balances are called closing entries.

LO 3

Closing EntriesLO 3Income Summary is a temporary account that is only used during the closing process.At the end of the closing process, the Income Summary account will have a zero balance.Income Summary is sometimes called a clearing account.

*LO 3Journalizing and Posting Closing Entries

*LO 3Journalizing and Posting Closing Entries

*LO 3Journalizing and Posting Closing Entries

*LO 3Journalizing and Posting Closing Entries

*LO 3Closing Entries

Temporary Account BalancesAfter the closing entries are posted, all of the temporary accounts have zero balances.

LO 3

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

LO 3

Accounting CycleThe accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next periods transactions is called the accounting cycle. There are 10 steps in the accounting cycle.

LO 4

Accounting CycleTransactions are analyzed and recorded in the journal.Transactions are posted to the ledger.An unadjusted trial balance is prepared.Adjustment data are assembled and analyzed.An optional end-of-period spreadsheet (work sheet) is prepared.(continued)LO 4

Accounting CycleAdjusting entries are journalized and posted to the ledger.An adjusted trial balance is prepared.Financial statements are prepared.Closing entries are journalized and posted to the ledger.LO 4A post-closing trial balance is prepared.

Accounting CycleLO 5(continued)

Accounting CycleLO 5(continued)

*LO 5Accounting Cycle

LO 5Accounting Cycle

LO 5Unadjusted Trial Balance

*LO 5Adjusting Entries

*LO 5Adjusted Trial Balance

Accounting PeriodThe annual accounting period adopted by a business is known as its fiscal year.When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural business year.LO 6

Exercise

Music DepotThe adjusted trial balance for Music Depot, as at 31 July 2010 is as follows:

AccountsAdjusted Trial balanceDebitCreditCash12,780Accounts receivable4,750Supplies175Prepaid insurance2,475Office equipment5,000Accumulated depreciation office equipment60Accounts payable5,680Wages payable120Unearned revenue3,600Lee Chang, capital10,500Lee Chang, drawing1,700

AccountsAdjusted Trial balanceDebitCreditFees earned20,500Wages expense2,520Office rent expense2,750Equipment rent expense1,100Utilities expense860Music expense2,810Advertising expense1,600Supplies expense855Insurance expense225Depreciation expense60Miscellaneous expense80040,46040,460

Music DepotPrepare an end-of-period worksheet.

AccountsAdjd TBIncome StatementBalance SheetDebitCreditDebitCreditDebitCreditCash12,78012,780Accounts receivable4,7504,750Supplies175175Prepaid insurance2,4752,475Office equipment5,0005,000Accumulated depreciation office equipment6060Accounts payable5,6805,680Wages payable120120Unearned revenue3,6003,600Lee Chang, capital10,50010,500Lee Chang, drawing1,7001,700

AccountsAdjd TBIncome StatementBalance SheetDebitCreditDebitCreditDebitCreditFees earned20,50020,500Wages expense2,5202,520Office rent expense2,7502,750Equipment rent expense1,1001,100Utilities expense860860Music expense2,8102,810Advertising expense1,6001,600Supplies expense855855Insurance expense225225Depreciation expense6060Miscellaneous expense80080040,46040,46020,50020,50026,88026,880

Music DepotPrepare an:income statementstatement of owners equitybalance sheetNote: Lee Chang made investments in Music Depot on 1 June & 1 July 2010.

Income Statement for the 2 months ended 31 July 2010Fees earned ................................................................................. $20,500 Expenses: Music expense ............................................................$2,810 Office rent expense ..................................................... 2,750 Wages expense ........................................................... 2,520 Advertising expense .................................................... 1,600 Equipment rent expense ............................................. 1,100 Utilities expense ...............................................................860 Supplies expense ........................................................... 855 Insurance expense ...................................................... ..225 Depreciation expense ................................................. 60 Miscellaneous expense .............................................. ..800 Total expenses ...............................................................................13,580 Net income ................................................................................... $ 6,920

Statement of Owners Equity2 months ended 31 July 2010Lee Chang, capital, June 1, 2010 ...................................... $ 0 Additional investments during the period ....................... 10,500 Total ................................................................................... $10,500 Net income for the period ...................................$6,920 Less withdrawals ...................................................(1,700)Increase in owners equity ................................................ 5,220 Lee Chang, capital, July 31, 2010 .................................. $15,720

Balance Sheet31 July 2010

AssetsLiabilitiesCurrent assets:Current liabilities:Cash12,780Accounts payable5,680Accounts receivable4,750Wages payable120Supplies175Unearned revenue3,600Prepaid insurance2,475Total liabilities9,400Total current assets20,180Property, plant & equipment:Owners equityOffice equipment5,000Lee Chang, capital15,720Less: Acc. Depreciation(60)4,940Total assets25,120Total liabilities & owners equity25,120

Music DepotJournalise the closing entries.

Closing entries

DebitCredit1.31 JulFees earned20,500Income summary20,5002.31 JulIncome summary13,580Wages expense2,520Office rent expense2,750Equipment rent expense1,100Utilities expense860Music expense2,810Advertising expense1,600Supplies expense855Insurance expense225Depreciation expense60Miscellaneous expense800

Closing entries

DebitCredit3.31 JulIncome summary6,920Lee Chang, capital6,9204.31 JulLee Chang, capital1,700Lee Chang, drawing1,700

Music DepotPost the closing entries to the relevant ledger accounts.

Posting closing entries to ledger accounts

Lee Chang, capitalDebitCredit31 JulBalance10,500Closing (Ref 3)6,920Closing (Ref 4)1,700Balance c/f15,720

Lee Chang, drawing31 JulBalance 1,700Closing (Ref 4)1,700Balance c/f0

Posting closing entries to ledger accounts

Income SummaryDebitCredit31 JulClosing (Ref 1)20,500Closing (Ref 2)13,580Closing (Ref 3)6,920Balance c/f0

Posting closing entries to ledger accounts

Fees earnedDebitCredit31 JulAdjusted balance20,500Closing (Ref 1)20,500Balance c/f0

Wages expense31 JulAdjusted balance2,520Closing (Ref 2)2,520Balance c/f0

Office rent expense31 JulAdjusted balance2,750Closing (Ref 2)2,750Balance c/f0

Posting closing entries to ledger accounts

DebitCreditEquipment rent expense31 JulAdjusted balance1,100Closing (Ref 2)1,100Balance c/f0

Utilities expense31 JulAdjusted balance860Closing (Ref 2)860Balance c/f0

Music expense31 JulAdjusted balance2,810Closing (Ref 2)2,810Balance c/f0

Posting closing entries to ledger accounts

DebitCreditAdvertising expense31 JulAdjusted balance1,600Closing (Ref 2)1,600Balance c/f0

Supplies expense31 JulAdjusted balance855Closing (Ref 2)855Balance c/f0

Insurance expense31 JulAdjusted balance225Closing (Ref 2)225Balance c/f0

Posting closing entries to ledger accounts

DebitCreditDepreciation expense31 JulAdjusted balance60Closing (Ref 2)60Balance c/f0

Miscellaneous expense31 JulAdjusted balance800Closing (Ref 2)800Balance c/f0

Music DepotPrepare a post-closing trial balance.

AccountsPost closing TBDebitCreditCash12,780Accounts receivable4,750Supplies175Prepaid insurance2,475Office equipment5,000Accumulated depreciation office equipment60Accounts payable5,680Wages payable120Unearned revenue3,600Lee Chang, capital15,72025,18025,180