Embed Size (px)
Citation preview
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin1
Completing the Accounting CycleChapter
44
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin2
Learning objectiveLearning objective
Prepare a work sheet and explain its usefulness.
Explain why temporary accounts are closed each period.
Describe and prepare closing entries. Explain and prepare a post-closing trial
balance.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin3
Learning objectiveLearning objective
Prepare a work sheet and explain its usefulness.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin4
Benefits of a Work SheetBenefits of a Work Sheet
Aids the preparation of
financial statements.
Aids the preparation of
financial statements.
Reduces possibility of
errors.
Reduces possibility of
errors.
Assists in planning and organizing an
audit.
Assists in planning and organizing an
audit.
Helps in preparing
interim financial
statements.
Helps in preparing
interim financial
statements.
Shows the effects of proposed
transactions.
Shows the effects of proposed
transactions.
Not a required report.
Links accounts and their
adjustments.
Links accounts and their
adjustments.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin5
FastForwardWork Sheet
For Month Ended December 31, 2004
First, enter the
unadjusted amounts to
the worksheet.
First, enter the
unadjusted amounts to
the worksheet.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin6
Next, enter the adjustments.
Next, enter the adjustments.
FastForwardWork Sheet
For Month Ended December 31, 2004
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin7
Prepare adjusted trial
balance.
Prepare adjusted trial
balance.
FastForwardWork Sheet
For Month Ended December 31, 2004
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin8
FastForwardWork Sheet
For Month Ended December 31, 2004
Sort adjusted trial balance amounts to financial statements.
Sort adjusted trial balance amounts to financial statements.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin9
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.
Total revenue
Total expenses
Profit
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin10
Prepare the IncomeStatement.
Prepare the Financial StatementsPrepare the Financial Statements
A work sheet does not
substitute for financial
statements.
A work sheet does not
substitute for financial
statements.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin11
Prepare the Statement of Changes in Owner’s Equity.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin12
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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin13
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 ProcessClosing Process
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin14
Learning objectiveLearning objective
Explain why temporary accounts are closed each period.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin15
Temporary and Permanent AccountsTemporary and Permanent Accounts
Temporary accounts accumulate data related to one accounting period.
Permanent accounts report on activities related to one or more future accounting periods.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin16
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 AccountsTemporary and Permanent Accounts
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin17
Learning objectiveLearning objective
Describe and prepare closing entries.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin18
Let’s see how the closing process
works!
Recording Closing EntriesRecording 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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin19
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 ProcessClosing Process
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin20
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 ProcessClosing Process
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin21
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 ProcessClosing Process
The balance in Income Summary equals net
income.
The balance in Income Summary equals net
income.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin22
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 ProcessClosing Process
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin23
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 ProcessClosing Process
Close Withdrawals account to Owner’s
Capital.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin24
Using the adjusted trial balance, let’s prepare the
closing entries for
FastForward.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin25
Close Revenue accounts to
Income Summary.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin26
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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin27
Close Revenue Accounts to Income Summary Close Revenue Accounts to Income Summary
Consulting Revenue7,850 7,850
-
Rental Revenue300 300
-
Income Summary7,850
300
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin28
Close Expense accounts to
Income Summary.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin29
Now, let’s look at the ledger accounts after posting this closing entry.
Close Expense Accounts to Income Summary 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
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin30
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
-
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin31
Close Income Summary to
Owner’s Capital.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin32
Now, let’s look at the ledger accounts after posting this closing entry.
Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital
Dec. 31 Income summary 3,785C. Taylor, Capital 3,785
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin33
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
-
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin34
Close Withdrawals to
Owner’s Capital.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin35
Now, let’s look at the ledger accounts after posting this closing entry.
Close Withdrawals to Owner’s Capital Close Withdrawals to Owner’s Capital
Dec. 31 C. Taylor, Capital 600C. Taylor, Withdrawals 600
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin36
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
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin37
Learning objectiveLearning objective
Explain and prepare a post-closing trial balance.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin38
Let’s look at FastForward’s
post-closing trial balance.
Post-Closing Trial BalancePost-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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin39
Post-Closing Trial BalancePost-Closing Trial Balance
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin40
Accounting cycleAccounting cycle
1. Analyze transactions
2. Journalize
3. Post
4. Prepare unadjusted Trial balance
5. Adjust 6. Prepare adjusted Trial balance
7. Prepare statements
8. Close
9. Prepare Post-closing Trial balance
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin41
Let’s discuss the
components of a classified
balance sheet.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin42
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 SheetClassified Balance Sheet
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin43
Classified Balance SheetClassified Balance Sheet
Operating cycle is the time span from when cash is used to acquire goods and services until cash is received from the sale of those goods and services.
Operating cycle of supermarket (a few weeks) vs. operating cycle of a construction company (several years).
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin44
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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin45
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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin46
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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin47
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.
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin48
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
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin49
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
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin50
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
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin51
Current RatioCurrent Ratio
Helps assess the company’s ability to pay its debts in the near future
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin52
Homework for chapter 4 Homework for chapter 4
Ex 4-3, 4-4, 4-7 Problem 4-2A, 4-4A Due on June 19, 2006 Monday
© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin53
End of Chapter 4End of Chapter 4
