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1
ACCT 201WEEK 4
Completing theAccounting Cycle
Chapter 4
2
Prepare an accounting work sheet
3
The Accounting Work Sheet
Used to help move data from the trial balance to the financial statements
An internal document – not financial statement
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Accounting Cycle: Process by which accountants prepare financial statements for an entity for a specific period of time
Journalize Transaction
Post to Accounts
Adjust Accounts
Close Accounts
Prepare Financial Statements
5
The Accounting Cycle
For a new business, begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.
6
Accounts Receivable 1,350
Accounts Receivable 1,700 Service Revenue 1,700
Accounts Receivable 1,350 1,700 3,050
Accounts Receivable 1,350 1,700
The Accounting Cycle
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Work Sheet
CashAccountsreceivable
12,100
3,050
BalanceSheet
IncomeStatement
The Accounting Cycle
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Postclosing Trial Balance
CashAccountsreceivable
12,100
3,050
Adjusting entries Closing entries
Cash Accounts Receivable12,100 3,050
The Accounting Cycle
9
Use the work sheetto complete the
accounting cycle.
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The work sheethelps identifythe accounts
that needadjustments.
Actual adjustmentof the accounts
requiresjournalizingand postingthe entries.
Recording the Adjusting Entries
11
Recording the Adjusting Entries
The adjusting entries may be recorded in the journal when they are entered on the work sheet.
Many accountants journalize and post the adjusting entries just before they make the closing entries.
12
The Accounting Work Sheet
What is the work sheet?A work sheet is a multi-columned
document used by accountants to help move data from the trial balance to the financial statements.
It is an internal document.
Adjusted Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
12,1001,350
25015,500
1,000
12,000
42,200
7,5001,2001,1001,5007,200
23,700
42,200
The Accounting Work Sheet
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 9
14
The Accounting Work Sheet
a The company has earned revenue of $1,700 which will be collected next month.
b Inventory of supplies at month end totaled $150.
c Depreciation for the period was calculated as $200.
Adjusted Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
12,1001,350
25015,500
1,000
12,000
42,200
7,5001,2001,1001,5007,200
23,700
42,200
a) 1,700
b) 100c) 200
2,000
b) 100
c) 200
a) 1,700
2,000
12,1003,050
15015,500
1,000
12,000100200
44,100
7,7001,2001,1001,5007,200
25,400
44,100
The Accounting Work Sheet
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 11
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Close the revenue,expense, and
withdrawal accounts.
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Closing the Accounts
Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.
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Closing Entries
RevenuesincreaseOwner’s Equity.
Expenses and
WithdrawalsdecreaseOwner’s Equity.
Closing the Accounts
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Closing the Accounts
Revenues and Expense accounts are closed to Income Summary.
Income Summary is closed to Capital.
Withdrawals are closed to Capital.In a corporation, Dividends are
closed to Retained Earnings.
20
Income Summary
A credit balance
represents net income.
A debit balance
represents net loss.
Closing the Accounts
RevenueIncome
Summary12,000
7,5009,000
Salary Exp3,300
28,500
1,5001,800
4,450 28,500
Rent Exp800 800
Supplies Exp350 350
24,050
24,050
(Close Revenue Account)
(Close ExpenseAccounts)
(Close IncomeSummary)
Withdrawals2,500 2,500
2,500
CapitalAccount
(CloseWithdrawalsAccount)
Closing the Accounts
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 23
22
Postclosing Trial Balance
The accounting cycle ends with the postclosing trial balance.
The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.
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Permanent Accounts
What accounts never close?– Assets– Liabilities– Owner’s equityBalances of permanent accounts
carry over to the next period.
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Classify assets and liabilitiesas current or long-term.
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Liquidity
This is a measure of how quickly an item can be converted into cash.
On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their relative liquidity.
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Current Assets
Current assets are cash, or will be converted to cash, in one year or within the normal business operating cycle.
What are some other examples?– short-term receivables– inventory– prepaid expenses
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Current Liabilities
Current liabilities are debts or obligations due within one year or within the operating cycle.
What are some examples?– accounts and salary payables– short-term notes payable– unearned revenue
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Long-term Assets and Liabilities
Long-term assets include all other assets.
– property, equipment, and intangibles
Long-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.
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Debit sideCurrent assets
Long-term assets
Credit sideCurrent liabilities
Long-term liabilities
Listed in the orderof decreasing
liquidity
Listed in the orderof how soon they
must be paid
The Classified Balance Sheet
30
Assets LiabilitiesCurrent assets: Current liabilities:Cash 12,100 Accounts payable 1,200Accounts receivable 3,050 Salary payable 1,100Supplies 150 Unearned revenue 1,500 Total current assets 15,300 Total liabilities 3,800Plant assets Owner’s equity Equipment 15,500 Capital 19,300 Less Accum. deprec. 7,700 7,800 Total liabilities and
Total assets 23,100 owner’s equity 23,100
XYZ ServicesJanuary 31, 20XX
The Classified Balance Sheet
31
Report Format
AssetsLiabilities
Owner’s Equity
Account Format
Assets = Liabilities + Owner’s Equity
Different Formats of Balance Sheet
32
Use the current ratio and the debtratio to evaluate a company.
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Comparative Financial Statements
They enhance the user’s ability to analyze a company’s past performance.
What are two common ratios used to measure liquidity?
1 Current ratio2 Debt ratio
34
Current ratio = Current assets ÷ Current liabilities
Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.
35
Total liabilities ÷ Total assets
Debt Ratio
It indicates the proportion of a business’s assets that are financed with debt.
It measures their ability to pay both current and long-term debt.
36
Trend Analysis
Decision makers compare various ratios over a period of time.
37
Closing the Accounts
Prepares accounts for recording transactions during next period
Updates retained earnings account
Permanent AccountsTemporary Accounts
38
Four Closing Entries
Close all income statement accounts to Income Summary
Entry 1: Close revenue accounts to Income Summary
Entry 2: Close expense accounts to Income Summary
39
Four Closing Entries
500
Revenue500
Bal 0
200
Expense200
Bal 0
200
Income Summary
500
Bal 300
Revenues – Expenses = Net Income
40
Four Closing Entries
Entry 3: Close Income Summary to Retained Earnings
Entry 4: Close Dividends to Retained Earnings
41
Four Closing Entries
200
Income Summary500
Bal 300
100
Dividends100
Bal 0
100
Retained Earnings
3001,000 Beginning balance
300
1,200 Ending balance
Bal 0
42
Income Summary Account
Debit balance = Net LossCredit balance = Net Income
43
Post-Closing Trial Balance
List of permanent accounts and their balances after posting closing entries
Total debits and credits must be equal
44
Current Assets Cash Receivables Prepaid expenses
Long-term Assets Equipment Buildings Accumulated depreciation
Current Liabilities Accounts payable Accrued liabilities
Long-term liabilities None
45
EXAMPLE
Current Assets:
Cash$3,000
Accounts receivable6,000
Prepaid rent2,000
Supplies1,000
Total$12,000
Current Liabilities:
Accounts payable $4,000
Salary payable 2,000
Total $6,000
Current Ratio: Current assets/ Current liabilities =$12,000 / $6,000 = 2
46
EXAMPLE
Total Assets:Cash$3,000Accounts receivable6,000Prepaid rent2,000Supplies1,000Equipment12,000 Total$24,000
Total Liabilities:Accounts payable $4,000Salary payable 2,000Note payable 9,000 Total $15,000
Debt Ratio: Total liabilities/Total assets =$15,000 / $24,000 = 0.63
47
REVISION QUESTIONS
48
The worksheet helps accountants with all of the following except:
Post to the accounts Prepare financial statements Close the accounts Make adjusting entries
49
Answer: 1
The worksheet is a tool that helps accountants organize the end-of-year activities – preparing adjusting and closing entries and the financial statements.
50
On the work sheet, in the balance sheet columns, if the total credits are $600 and total debits are $200, then
An error has been made Net loss is $400 Total assets are $400 Net income is $400
51
Answer: 2The difference between the debit and credit columns is the amount of net income or loss, which is used to balance the columns. In this case, $400 is needed in the debit column to balance them. A debit indicates that capital is decreasing.
52
Granite Company had revenues of $600 and expenses of $200 during the year. The owner’s beginning capital balance was $1,000, and the owner made no additional investments during the year. What is the balance in the capital account on Granite Company’s worksheet?
53
Answer: $1,000
The capital balance on the worksheet is the amount in the account before closing entries. If the beginning balance was $1,000 and there were no additional investments, $1,000 would appear in the worksheet.
54
The purpose of closing entries is to
Get the accounts ready for the next period Verify that the balances in the accounts are
correct Ensure that debits equal credits Bring the accounts up to date so that
financial statements can be prepared
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Answer: 1
Closing entries zero out the temporary accounts and transfers their balances to the owner’s capital account. The temporary accounts are now ready to begin measuring activity for the next accounting period.
56
Which of the following accounts would not be closed?
Utilities Expense Accumulated Depreciation Service Revenue Withdrawals
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Answer: 2
Accumulated depreciation is a permanent account and is reported on the balance sheet. Permanent account balances carry forward into the next period.
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Which of the following is a permanent account?
Fees earned Unearned revenue Depreciation expense Income summary
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Answer: 2
Unearned revenue is a liability. It’s balance carries forward into the next accounting period.
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Revenues for an accounting period are $900 and expenses are $500. The balance in the income summary account before closing it to capital would be
$500 debit $900 credit $400 credit $400 debit
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Answer: 3
Revenues are closed by debiting revenues and crediting income summary. Expenses are closed by debiting income summary and crediting expenses.
Income Summary900500
400 Bal
62
Which account would not appear in the postclosing trial balance?
Cash Prepaid Insurance Fees earned E. Morgan, Capital
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Answer: 3
Fees earned is a temporary account and would have been closed before the postclosing trial balance was prepared.
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In what order are assets listed on a classified balance sheet? In the order of their liquidity Alphabetically In ascending dollar amounts In descending dollars amounts
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Answer: 1
66
Mica Company has the following assets:Land $600Building 800
Inventory 300 Accumulated depreciation, Building200
Prepaid rent 400 Cash 100 How much are total current assets?
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Answer: $800
Current assets:
Cash $100
Prepaid rent 400
Inventory 300
$800
68
Mica Company has the following assets:Land…………………………….
$600Building………………………… 800
Inventory……………………….. 300
Accumulated depreciation, building…………………………. 200
Prepaid rent……………………. 400
Cash……………………………. 100
How much are total plant assets?
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Answer: $1,200
Current assets:
Land $600
Building 800
Less Accumulated depreciation (200) 600
$1,200
70
At the end of the accounting period, Quartz Company has a note payable of $82,000. Quartz Company pays $1,000 per month on the principal amount of the note. The company also has $3,000 in accounts payable.How much are total current liabilities?
71
Answer: $15,000
Current liabilities:
Accounts payable $3,000
Currently maturing portionof long-term note 12,000
$15,000
72
A 2:1 current ratio indicates that
Current assets are two times greater than current liabilities
Total assets are two times greater than total liabilities
Current liabilities are two times greater than current assets
Total liabilities are two times greater than total assets
73
Answer: 1
The current ratio is current assets ÷ current liabilities.
74
A high debt ratio is
Safer than a low debt ratioRiskier than a low debt ratioIndicates high profitabilityIndicates that total assets are
considerably higher than total liabilities
75
Answer: 2The debt ratio is computed by dividing total liabilities by total assets. The debt ratio indicates the proportion of a company’s assets that are financed with debt. A low debt ratio is safer than a high debt ratio.
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