Chapter 4Completing the Accounting CycleAccounting, 21st EditionWarren Reeve FessPowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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1.Review the seven basic steps of the accounting cycle.2.Prepare a work sheet.3.Prepare financial statements from a work sheet.4.Prepare adjusting and closing entries from a work sheet.5.Explain what is meant by the fiscal year and the natural business year.6.Analyze and interpret the financial solvency of a business by computing working capital and the current ratio.ObjectivesAfter studying this chapter, you should be able to:

Seven Basic Steps of the Accounting Cycle1.Transactions are analyzed and recorded in the journal.2.Transactions are posted to the ledger.3.A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed.4.Financial statements are prepared.5.Adjusting entries are journalized and posted.6.Closing entries are journalized and posted.7.A post-closing trial balance is prepared.

Assets are commonly divided into classes and that two of these classes are current assets and property, plant, and equipment.

Thats correct. Cash and other assets that are expected to be converted into cash, sold, or used up usually in less than a year are current assets.

For example?Well besides cash, theres notes receivable, accounts receivable, supplies, and other prepaid items.

So, assets that have a life over a year are listed under property, plant, and equipment.There are some exceptions, but thats basically correct. Assets such as office equipment, machinery, buildings, and land would appear under that heading.

Liabilities due usually within one year or less and that are to be paid out of current assets are called current liabilities.Accounts payableWages payableInterest payableUnearned fees

Liabilities not due for more than a year usually are long-term liabilities. Mortgage note payableMortgage payableBond payable

The work sheet is a useful device for understanding the flow of accounting data from the unadjusted trial balance to the financial statements.

The Work SheetTrial Balance

AccountsDrCrDrCrDrCrAdjustmentsAdjusted TB

Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, owners equity, revenues, and expenses.

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Adjustments are entered here. Two possibilities:

1. Deferrals Existing balances are changed.2. Accruals New information is entered.

Trial Balance

AccountsDrCrDrCrDrCrAdjustmentsAdjusted TBThe Work Sheet

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The Work SheetAdjustments are combined with the trial balance. Account balances are now adjusted.

Trial Balance

AccountsDrCrDrCrDrCrAdjustmentsAdjusted TB

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Cash2,065Accounts Receivable2,220Supplies2,000Prepaid Insurance2,400Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340Wages Expense4,275Rent Expense1,600Utilities Expense985Supplies Expense800Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 2005The Unadjusted Trial Balance12345678910111213141516171819202122

(a) The Supplies account has a debit of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used during the two-month period.

Cash2,065Accounts Receivable2,220Supplies2,000Prepaid Insurance2,400Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340Wages Expense4,275Rent Expense1,600Utilities Expense985Supplies Expense800Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 200512345678910111213141516171819202122(a) 1,240(a) 1,240

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(b)The Prepaid Insurance account has a debit balance of $2,400, which represents prepayment of insurance for 24 months beginning December 1. Thus, the insurance expense for this month is $100 ($2,400 24).

Cash2,065Accounts Receivable2,220Supplies2,000(a) 1,240Prepaid Insurance2,400Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340Wages Expense4,275Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 200512345678910111213141516171819202122 Insurance Expense(b) 100 (b) 100

(c) The Unearned Rent account has a credit balance of $360, which represents the receipt of three-months rent beginning with December 1. Thus, the rent revenue for December is $120.

Cash2,065Accounts Receivable2,220Supplies2,000(a) 1,240Prepaid Insurance2,400(b) 100Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340Wages Expense4,275Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 200512345678910111213141516171819202122 Insurance Expense(b) 100 (c) 120 Rent Revenue(c) 120

(d) Wages accrued but not paid at the end of December total $250.

Cash2,065Accounts Receivable2,220Supplies2,000(a) 1,240Prepaid Insurance2,400(b) 100Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360(c) 120Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340Wages Expense4,275Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 200512345678910111213141516171819202122 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 (d) 250

(e) Fees accrued at the end of December, but not recorded, total $500.

Cash2,065Accounts Receivable2,220Supplies2,000(a) 1,240Prepaid Insurance2,400(b) 100Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360(c) 120Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340Wages Expense4,275(d) 250Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 200512345678910111213141516171819202122 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 (e) 500 (e) 500

(f) Depreciation of the office equipment is $50 for December.

Cash2,065Accounts Receivable2,220(e) 500Supplies2,000(a) 1,240Prepaid Insurance2,400(b) 100Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360(c) 120Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340(e) 500Wages Expense4,275(d) 250Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 200512345678910111213141516171819202122 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250Depreciation Expense(f) 50Accum. Depreciation(f) 50

Cash2,065Accounts Receivable2,220(e) 500Supplies2,000(a) 1,240Prepaid Insurance2,400(b) 100Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360(c) 120Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340(e) 500Wages Expense4,275(d) 250Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial BalanceNetSolutionsWork SheetFor the Two Months Ended December 31, 200512345678910111213141516171819202122 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 50To make more space, lets remove the heading.

Cash2,065Accounts Receivable2,220(e) 500Supplies2,000(a) 1,240Prepaid Insurance2,400(b) 100Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360(c) 120Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340(e) 500Wages Expense4,275(d) 250Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance12345678910111213141516171819202122232425 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 502,2602,260Summed and ruled31

Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine the amounts displayed in the Adjusted Trial Balance.

Cash2,065Accounts Receivable2,220(e) 500Supplies2,000(a) 1,240Prepaid Insurance2,400(b) 100Land20,000Office Equipment1,800Accounts Payable900Unearned Rent360(c) 120Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,340(e) 500Wages Expense4,275(d) 250Rent Expense1,600Utilities Expense985Supplies Expense800(a) 1,240Miscellaneous Expense45542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance12345678910111213141516171819202122232425 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 502,2602,26033

Cash2,0652,065Accounts Receivable2,220(e) 5002,720Supplies2,000(a) 1,240760Prepaid Insurance2,400(b) 1002,300Land20,00020,000Office Equipment1,8001,800Accounts Payable900900Unearned Rent360(c) 120240Chris Clark, Capital25,00025,000Chris Clark, Drawing4,0004,000Fees Earned16,340(e) 50016,840Wages Expense4,275(d) 2504,525Rent Expense1,6001,600Utilities Expense985985Supplies Expense800(a) 1,2402,040Miscellaneous Expense45545542,60042,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance12345678910111213141516171819202122232425 Insurance Expense(b) 100 100 Rent Revenue (c) 120120 Wages Payable(d) 250250 Depreciation Expense(f) 5050 Accum. Depreciation(f) 50502,2602,26043,40043,40034

Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.

Adjusted TB

AccountsDrCrDrCrDrCrIncome State.Balance SheetThe Work Sheet

Asset, liability, owners equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

Adjusted TB

AccountsDrCrDrCrDrCrIncome State.Balance SheetThe Work Sheet

To make room on the slides for the Income statement and Balance Sheet columns, the Trial Balance and Adjustments columns have been removed.

Cash2,065Accounts Receivable2,720Supplies760Prepaid Insurance2,300Land20,000Office Equipment1,800Accounts Payable900Unearned Rent240Chris Clark, Capital25,000Chris Clark, Drawing4,000Fees Earned16,840Wages Expense4,525Rent Expense1,600Utilities Expense985Supplies Expense2,040Miscellaneous Expense455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet12345678910111213141516171819202122232425 Insurance Expense100 Rent Revenue 120 Wages Payable250 Depreciation Expense50 Accum. Depreciation5043,40043,40038

Now, lets extend the balances from the Adjusted Trial Balance column.

Cash2,0652,065Accounts Receivable2,7202,720Supplies760760Prepaid Insurance2,3002,300Land20,00020,000Office Equipment1,8001,800Accounts Payable900900Unearned Rent240240Chris Clark, Capital25,00025,000Chris Clark, Drawing4,0004,000Fees Earned16,84016,840Wages Expense4,5254,525Rent Expense1,6001,600Utilities Expense985985Supplies Expense2,0402,040Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet12345678910111213141516171819202122232425 Insurance Expense100100 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation505043,40043,40040

These four columns are summed.

Cash2,0652,065Accounts Receivable2,7202,720Supplies760760Prepaid Insurance2,3002,300Land20,00020,000Office Equipment1,8001,800Accounts Payable900900Unearned Rent240240Chris Clark, Capital25,00025,000Chris Clark, Drawing4,0004,000Fees Earned16,84016,840Wages Expense4,5254,525Rent Expense1,6001,600Utilities Expense985985Supplies Expense2,0402,040Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet12345678910111213141516171819202122232425 Insurance Expense100100 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation505043,40043,4009,75516,96033,64526,44042

The difference between the Income Statement column totals is the net income (or net loss) for the period.

The difference between the Balance Sheet column totals is also the income (or net loss) for the period.

9,75516,96033,64526,4407,2057,20516,96016,96033,64533,645Income Statement Balance Sheet

NetSolutionsIncome StatementFor Two Months Ended December 31, 2005Fees earned$16,840Rent revenue120Total revenues$16,960Expenses:Wages expense$ 4,525Supplies expense2,040Rent expense1,600Utilities expense985Insurance expense100Depreciation expense50Miscellaneous expense455Total expenses 9,755Net income $ 7,205Every amount on this income statement was taken from the Income Statement column of the work sheet.

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NetSolutionsStatement of Owners EquityFor the Two Months Ended December 31, 2005Chris Clark, Capital, November 1, 2005$ 0Investment on November 1, 2005$25,000Net income for November and December 7,205$32,205Less withdrawals 4,000Increase in owners equity28,205Chris Clark, Capital, December 31, 2005$28,205Either from the income statement or the work sheet.From the Balance Sheet debit column of the work sheet.

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NetSolutionsBalance SheetDecember 31, 2005 Assets LiabilitiesCurrent assets: Current liabilities:Cash$ 2,065Accounts payable$900Accounts receivable2,720Wages payable250Supplies 760Unearned rent240Prepaid insurance 2,300Total liabilities$ 1,390 Total current assets$ 7,845Property, plant, and equipment:Land$20,000Office equip.$1,800Less accum. depreciation 50 1,750 Owners Equity Total property, plant Chris Clark, Capital 28,205 and equipment 21,750Total liabilities andTotal assets$29,595owners equity$29,595From the Statement of Owners Equity

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Adjusting and Closing EntriesAdjusting entries are recorded in the journal at the end of the accounting period.

Adjusting and Closing EntriesIf a work sheet has been prepared, the data for these entries are in the Adjustments columns.

OWNERS CAPITAL

The Closing ProcessIncome Summary

OWNERS CAPITAL

Income Summary

The Income Summary account does not appear on the financial statements.Adjusting and Closing Entries

Rent RevenueBal.120

Income SummaryNote: The balances shown are adjusted balances before closing. The following sequence demonstrates the closing process.The Closing Process

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Rent RevenueBal.120

Income SummaryDebit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.16,84012016,960The Closing Process

Income SummaryDebit Income Summary for the total expenses and credit each expense account for its balance.16,9609,775The Closing Process

Income SummaryDebit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account.16,9609,7757,2057,205

The Closing Process

Income SummaryDebit the capital account for the balance of the drawing account, and credit drawing for the same amount.16,9609,7757,2057,2054,0004,000

The Closing Process

Income Summary16,9609,7757,2057,2054,0004,000 Close Revenues Close Expenses Close Income Summary Close Drawing 9,775 7,205 7,205 4,000 4,000Review of the Closing Process

After the closing entries are posted, all of the temporary accounts have zero balances.

Post-closing Trial Balance

NetSolutionsPost-Closing Trial BalanceDecember 31, 2005Cash2 065 00Accounts Receivable2 720 00Supplies760 00Prepaid Insurance2 300 00Land20 000 00Office Equipment1 800 00Accumulated Depreciation50 00Accounts Payable900 00Wages Payable250 00Unearned Rent240 00Chris Clark, Capital28 205 0029 645 0029 645 00

Financial Analysis for NetSolutions

Financial Analysis for NetSolutions

Financial Analysis for NetSolutionsThis ratio implies that NetSolutions is able to pay its current liabilities.

Financial Analysis for NetSolutions

Financial Analysis for NetSolutionsNetSolutions can use the current ratio to make comparisons across companies and with industry averages.

The EndChapter 4

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