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AccountingAccounting
PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition
Prepared by:
Carole Bowman, Sheridan College
Weygandt · Kieso · Kimmel ·Trenholm
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COMPLETION OF THECOMPLETION OF THE
ACCOUNTING CYCLEACCOUNTING CYCLE
CHAPTERCHAPTER
44
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A work sheet is a multiple-column form that
may be used in the adjustment process and in
preparing financial statements.
It is a working tool or a supplementary device
for the accountant and not a permanent
accounting record.
Use of a work sheet should makethe preparation of adjusting entries
and financial statements easier.
WORK SHEETWORK SHEET
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ILLUSTRATIONILLUSTRATION 4-14-1
WORK SHEETWORK SHEET
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Balance SheetTrial Balance Adjustments Adjusted Trial Balance Income Statement
1. Prepare
trial ala!"e
#! t$e
%#r&'$eet.
(. E!ter
a)*+'t,e!t
)ata.
. E!ter
a)*+'te)
ala!"e'
4. Ete!) a)*+'te)
ala!"e t# appr#priate
"#l+,!'.
/. Cal"+late i!"#,e0l#''
a!) "#,plete t$e
%#r&'$eet.
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PURPOSE OF CLOSING ENTRIESPURPOSE OF CLOSING ENTRIES
1. Updates the owner’s capital account
in the ledger by transferring net
income loss! and owner’s drawings
to owner’s capital.
". #repares the temporary accounts
revenue$ e%pense$ drawings! for the
ne%t period’s postings by reducing
their balances to &ero.
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ILLUSTRATIONILLUSTRATION 4-(4-(
TEMPORARY ERSUSTEMPORARY ERSUS
PERMANENT ACCOUNTSPERMANENT ACCOUNTS'()#*+A+, *)IA! #(+)A(' +(A!
'hese accounts areclosed 'hese accounts are not closed
All revenue accounts All asset accounts
All e%pense accounts All liability accounts
*wner’s drawings *wner’s capital account
/alance 0heet Accounts!Income 0tatement 2rawings Accounts!
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ILLUSTRATION 4-
2IAGRAM OF CLOSING PROCESS
3IN2I1I2UAL4
RE1ENUES
1
1 2ebit each revenue account for its balance$ and credit the owner’scapital account for total revenues.
" 2ebit the owner’s capital account for total e%penses$ and crediteach e%pense account for its balance.
1 2ebit each revenue account for its balance$ and credit the owner’scapital account for total revenues.
" 2ebit the owner’s capital account for total e%penses$ and crediteach e%pense account for its balance.
3IN2II2UALE5PENSES
N#r,al 2r.
6ala!"e
N#r,al Cr.
6ala!"eCr. t# "l#'e 2r. t# "l#'e
- 7 - - 7 -
OWNER8SCAPITAL
Epe!'e' Re9e!+e'
Ope!i!: 6ala!"e
(
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ILLUSTRATION 4-
2IAGRAM OF CLOSING PROCESS
3 2ebit owner’s capital for the balance in the owner’s drawings
account and credit owner’s drawings for the same amount.
3 2ebit owner’s capital for the balance in the owner’s drawings
account and credit owner’s drawings for the same amount.
OWNER8S
2RAWINGS
N#r,al 2r.
6ala!"e Cr. t# "l#'e
- 7 -
OWNER8SCAPITAL
Epe!'e'
Re9e!+e'
Ope!i!: 6ala!"e
2ra%i!:'
E!)i!: 6ala!"e
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CLOSING ENTRIESCLOSING ENTRIES
0'*# A2 45(46
1. 2oes the balance in your
*wner’s 4apital accounte7ual the ending capital
balance reported in the
/alance 0heet and
0tatement of *wner’s
(7uity8
". Are all of your temporary
account balances &ero8
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POST-CLOSING TRIAL 6ALANCEPOST-CLOSING TRIAL 6ALANCE
After all closing entries have been
journali&ed and posted$ a post-closing trial
balance is prepared.
'he purpose of this trial balance is to prove
the e7uality of the permanent balance
sheet! account balances that are carried
forward into the ne%t accounting period.
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Debit Credit
Cash 15,200$ Accounts Receiable 200
Adertisin! Su""lies 1,000
#re"aid Insurance 550
%%ice &'ui"ment 5,000
Accumulated Amorti(ation )*$
+otes #aable 5,000 Accounts #aable 2,500
-nearned Reenue )00
Salaries #aable 1,200
Interest #aable 25
C.R. Brd, Ca"ital 12,*/2
21,50$ 21,50$
A%ter Adjustment
#ioneer Adertisin! A!enc
#ostClosin! Trial Balance
ctober *1, 2002
ILLUSTRATIONILLUSTRATION 4-;4-;
POST-CLOSING TRIAL 6ALANCEPOST-CLOSING TRIAL 6ALANCE
'he post-closing trialbalance is prepared
from the permanent
accounts in the ledger.
'he post-closing trialbalance is prepared
from the permanent
accounts in the ledger.
'he post-closing trialbalance provides evidence
that the journali&ing and
posting of closing entries
has been properly
completed.
'he post-closing trialbalance provides evidence
that the journali&ing and
posting of closing entries
has been properly
completed.
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1. Anal,se
transactions 2. ournali(e the
transactions
*. #ost to led!eraccounts
/. #re"are a
trial balance
5. ournali(e
and "ost
adjustin!
entries3. #re"are
adjusted trial
balance
4. #re"are
%inancial
statements
). ournali(e
and "ost
closin! entries
0. #re"are
"ostclosin!
trial balance
STEPS IN THE ACCOUNTING CYCLESTEPS IN THE ACCOUNTING CYCLE
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A reversing entry is made at the beginning
of the ne%t accounting period.
A reversing entry reverses certain adjustingentries made in the previous period.
*pening balances can then be ignored
when preparing year-end adjusting entries.'his topic is illustrated in Appendi% 9A.
REERSING ENTRIESREERSING ENTRIES
3OPTIONAL STEP3OPTIONAL STEP
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CORRECTING ENTRIESCORRECTING ENTRIES
(rrors that occur in recording transactions
should be corrected as soon as they are
discovered by preparing correcting entries.4orrecting entries are unnecessary if the
records are free of errors: they can be
journali&ed and posted whenever an erroris discovered.
'hey involve any combination of balance
sheet and income statement accounts.
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ILLUSTRATIONILLUSTRATION 4-174-17
STAN2AR2 6ALANCE SHEETSTAN2AR2 6ALANCE SHEET
CLASSIFICATIONSCLASSIFICATIONS
A''et' Liailitie' a!) E
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4urrent assets are cash and other resources
that are reasonably e%pected to be reali&ed in
cash or sold or consumed in the business
within one year of the balance sheet date orthe company’s operating cycle$ whichever is
longer.
isted in the order of li7uidity.
(%amples of current assets are cash$
temporary investments$ accounts receivable$
inventory$ and prepaids.
CURRENT ASSETSCURRENT ASSETS
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177 5Y> '$are'
LONG-TERMLONG-TERM
INESTMENTSINESTMENTS
ong-term investments are resources that can
be reali&ed in cash$ but the conversion into
cash is not e%pected within one year or theoperating cycle$ whichever is longer.
(%amples include investments in shares or
bonds of another company or investment in
land held for resale.
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CAPITAL ASSETSCAPITAL ASSETS
'angible resources of a relatively permanent nature thatare used in the business and not intended for sale areclassified as 1! property$ plant$ and e7uipment and "! natural resources.
1! (%amples of property$ plant$ and e7uipment include land$buildings$ and machinery.
"! (%amples of natural resources include tracts of timber$ oil andgas reserves$ and mineral deposits.
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Intangible assets are noncurrent resources that
do not have physical substance.
(%amples include patents$ copyrights$trademarks$ or trade names that give the
holder e%clusive right of use for a
specified period of time.
CAPITAL ASSETSCAPITAL ASSETS
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4urrent liabilities are obligations that are
reasonably e%pected to be paid from
e%isting current assets or through the
creation of other current liabilities within
one year or the operating cycle$ whichever
is longer.
(%amples include accounts payable$unearned revenue$ interest payable$ and
current maturities of long-term debt.
CURRENT LIA6ILITIESCURRENT LIA6ILITIES
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*bligations e%pected to be paid after one
year are classified as long-term liabilities.
(%amples include long-term notes payable$
bonds payable$ mortgages payable$ and
lease liabilities.
LONG-TERM LIA6ILITIESLONG-TERM LIA6ILITIES
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'he content of the e7uity section varies with theform of business organi&ation.
In a proprietorship$ there is a single owner’se7uity account called *wner’s ame!$ 4apital.
In a partnership$ there are separate capitalaccounts for each partner.
;or a corporation$ owners’ e7uity is calledshareholders’ e7uity$ and it consists of twoaccounts< 0hare 4apital and +etained (arnings.
E?UITYE?UITY
ILLUSTRATIONILLUSTRATION 4 1@4 1@
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Current Assets
Cash 15,200$
Accounts Receiable 200
Adertisin! Su""lies 1,000
#re"aid Insurance 550
Total Current Assets 13,50
Ca"ital Assets
%%ice &'ui"ment 5,000$ess6 Accumulated Amorti(ation )* /,14
Total Assets 21,)34$
Current iabilities
+otes #aable 1,000$
Accounts #aable 2,500
-nearned Reenue )00 Salaries #aable 1,200
Interest #aable 25
Total Current iabilities 5,525
on!term iabilties
+otes #aable /,000
Total iabilities ,525
7ner8s &'uit
C.R. Brd, Ca"ital 12,*/2 Total iabilities and 7ner8s &'uit 21,)34$
#ioneer Adertisin! A!enc
Balance Sheet
iabilities and 7ner8s &'uit
ctober *1, 2002 Assets
ILLUSTRATIONILLUSTRATION 4-1@4-1@ CLASSIFIE2 6ALANCE SHEET IN REPORT FORMCLASSIFIE2 6ALANCE SHEET IN REPORT FORM
A classified balance
sheet helps thefinancial statementuser determine<= 'he availability ofassets to meet debts asthey come due$ and•'he claims of short-and long-term creditorson total assets.
A classified balance
sheet helps thefinancial statementuser determine<= 'he availability ofassets to meet debts asthey come due$ and•'he claims of short-and long-term creditorson total assets.
'he balance sheet is
most often presented in
the report form$ with
the assets shown above
the liabilities and
owner’s e7uity.
'he balance sheet is
most often presented in
the report form$ with
the assets shown above
the liabilities and
owner’s e7uity.
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LI?UI2ITYLI?UI2ITY
i7uidity measures ability to pay short-
term obligations when they come due.
>orking capital is one important measureof li7uidity.
WORKING CAPITAL CURRENT ASSETS - CURRENT LIA6ILITIES
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CURRENT RATIOCURRENT RATIO
'he current ratio working capital ratio! is awidely used measure for evaluating a company’s
li7uidity and short-term debt-paying ability. It is
calculated by dividing current assets by current
liabilities and is a more dependable indicator of
li7uidity than working capital.
CURRENT ASSETS
CURRENT RATIO
BBBBBBBBBBB
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COPYRIGHTCOPYRIGHT
Copyright © 2002 John Wiley Sons Canada! "td# All rightsreser$ed# %eproduction or translation o& this 'or( )eyond
that permitted )y CA*C+P, -Canadian %eprographyCollecti$e. is unla'&ul# %e/uest &or &urther in&ormationshould )e addressed to the Permissions epartment! JohnWiley Sons Canada! "td# The purchaser may ma(e )ac(1upcopies &or his her o'n use only and not &or distri)ution orresale# The author and the pu)lisher assume no responsi)ility
&or errors! omissions! or damages! caused )y the use o& these& th & th i & ti t i d h i
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