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Completing theCompleting theAccounting CycleAccounting CycleCompleting theCompleting the
Accounting CycleAccounting Cycle
Chapter 4
1
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Objective 1Objective 1Objective 1Objective 1
Explain the steps in the accounting cycle
2
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The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle
• Process of gathering financial information and preparing the financial statements
3
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Computerized Computerized Accounting CycleAccounting Cycle
Computerized Computerized Accounting CycleAccounting Cycle
1. Identify business transactions
2. Record transactions
3. Post journal entries to ledger and
Prepare the trial balance
4. Record and post Adjusting entries
5. Prepare theAdjusted trial balance
6. Prepare theFinancial statements
7. Record & post closing entries
8. Prepare post-closing trial balance
4
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Manual Accounting CycleManual Accounting CycleManual Accounting CycleManual Accounting Cycle
5
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Smart Touch Learning Adjusted Trial Balance
May 31, 2020 Debit Credit
Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000
Building 48,000 Accum. Deprec. Furniture 300
Accum. Depreciation:Building 200
Accounts Payable 18,200Salary Payable 900
Interest Payable 100Unearned Service Revenue 400
Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600
Rent expense 1,000 Salary expense 1,800
Supplies expense 100 Deprec. Expense: Furniture 300
Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900
6
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Smart Touch LearningIncome Statement
Month Ended May 31, 2010
Service Revenue $7,600 Expenses: Salary expense $1,800 Rent Expense 1,000 Utilities Expense 400 Deprec. Expense-Furniture 300 Deprec. Expense-Building 200 Interest Expense 100 Supplies Expense 100 Total expenses 3,900 Net income $3,700
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Smart Touch Learning Adjusted Trial Balance
May 31, 2020 Debit Credit
Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000
Building 48,000 Accum. Deprec. Furniture 300
Accum. Depreciation:Building 200 Accounts Payable 18,200Salary Payable 900
Interest Payable 100Unearned Service Revenue 400
Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600
Rent expense 1,000 Salary expense 1,800
Supplies expense 100 Deprec. Expense: Furniture 300
Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900
8
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Sheena Bright, capital, May 1, 2010 $ 33,200 Net income 3,700 $36,900Less withdrawals (1,000) Sheena Bright, Capital May 31, 2010 $35,900
Smart Touch LearningStatement of Owners Equity Month Ended May 31, 2010
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Smart Touch Learning Adjusted Trial Balance
May 31, 2020 Debit Credit
Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000
Building 48,000 Accum. Deprec. Furniture 300
Accum. Depreciation:Building 200
Accounts Payable 18,200Salary Payable 900
Interest Payable 100Unearned Service Revenue 400
Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600
Rent expense 1,000 Salary expense 1,800
Supplies expense 100 Deprec. Expense: Furniture 300
Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900
10
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LiquidityLiquidityLiquidityLiquidity
• 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
11
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Current AssetsCurrent AssetsCurrent AssetsCurrent Assets
• Cash, or assets that will be converted to cash, sold, or used up in one year or within normal business operating cycle
• Examples– Cash– Short-term receivables– Inventory– Prepaid expenses
12
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Assets Current Assets: Cash $4,800Accounts Receivable 2,600Supplies 600Prepaid rent 2,000 Total Current Assets $10,000
13
Smart Touch Learning Balance Sheet May 31, 2020
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Long-term AssetsLong-term AssetsLong-term AssetsLong-term Assets
• Plant Assets (Property, Plant, & Equipment)– Land– Building– Furniture– Equipment
14
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Smart Touch Learning Adjusted Trial Balance
May 31, 2020 Debit Credit
Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000
Building 48,000 Accum. Deprec. Furniture 300
Accum. Depreciation:Building 200
Accounts Payable 18,200Salary Payable 900
Interest Payable 100Unearned Service Revenue 400
Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600
Rent expense 1,000 Salary expense 1,800
Supplies expense 100 Deprec. Expense: Furniture 300
Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900
15
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Assets Current Assets: Cash $4,800Accounts Receivable 2,600Supplies 600Prepaid rent 2,000 Total Current Assets $10,000Plant Assets:Furniture $18,000 Less: Accum Dep. -300
17,700
Building 48,000Accumulated
depreciation -200 47,800 Total Plant Assets $65,500 Total Assets
$75,500
16
Smart Touch Learning Balance Sheet May 31, 2020
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Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities
• Debts or obligations that must be paid or extinguished within one year or operating cycle, whichever is shorter
• Examples– Accounts and salary payables– Short-term notes payable– Unearned revenue
17
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Smart Touch Learning Adjusted Trial Balance
May 31, 2020 Debit Credit
Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000
Building 48,000 Accum. Deprec. Furniture 300
Accum. Depreciation:Building 200
Accounts Payable 18,200Salary Payable 900
Interest Payable 100Unearned Service Revenue 400
Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600
Rent expense 1,000 Salary expense 1,800
Supplies expense 100 Deprec. Expense: Furniture 300
Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900
18
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Assets Current Assets: Cash $4,800Accounts Receivable 2,600Supplies 600Prepaid rent 2,000 Total Current Assets $10,000Plant Assets:Furniture $18,000 Less: Accum Dep. -300
17,700
Building 48,000Accumulated
depreciation -200 47,800 Total Plant Assets $65,500 Total Assets
$75,500
LiabilitiesCurrent Liabilities:
Accounts Payable$18,200
Salary Payable900
Interest Payable 100
Unearned Serv. Rev. 400 Total Current Liabilities $19,600
19
Smart Touch Learning Balance Sheet May 31, 2020
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Long-term LiabilitiesLong-term Liabilities Long-term LiabilitiesLong-term Liabilities
• Long-term liabilities - all other debts due in longer than one year or entity’s operating cycle– Long-term notes payable– Mortgage payable
20
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Smart Touch Learning Adjusted Trial Balance
May 31, 2020 Debit Credit
Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000
Building 48,000 Accum. Deprec. Furniture 300
Accum. Depreciation:Building 200 Accounts Payable 18,200Salary Payable 900
Interest Payable 100Unearned Service Revenue 400
Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600
Rent expense 1,000 Salary expense 1,800
Supplies expense 100 Deprec. Expense: Furniture 300
Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900
21
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Assets Current Assets: Cash $4,800Accounts Receivable 2,600Supplies 600Prepaid rent 2,000 Total Current Assets $10,000Plant Assets:Furniture $18,000 Less: Accum Dep. -300
17,700
Building 48,000Accumulated
depreciation -200 47,800 Total Plant Assets $65,500 Total Assets
$75,500
LiabilitiesCurrent Liabilities:
Accounts Payable $18,200Salary Payable 900Interest Payable 100Unearned Serv. Rev. 400 Total Current Liabilities $19,600
Long-Term Liabilities 20,000
Total Liabilities $39,600 Owner’s Equity
Sheens Bright, Capital 35,900 Total Liabilities &
Owner’s Equity $75,500
22
Smart Touch Learning Balance Sheet May 31, 2020
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Objective 4Objective 4Objective 4Objective 4
Close the revenue, expense, and withdrawals accounts
23
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Closing the AccountsClosing the AccountsClosing the AccountsClosing the Accounts
• Prepares accounts for recording transactions during next period
• Updates owner’s capital account
24
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Closing the AccountsClosing the AccountsClosing the AccountsClosing the Accounts
• Permanent Accounts• Temporary Accounts
25
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Four Closing EntriesFour Closing Entries Four Closing EntriesFour 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
26
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Smart Touch Learning Adjusted Trial Balance
May 31, 2020 Debit Credit
Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000
Building 48,000 Accum. Deprec. Furniture 300
Accum. Depreciation:Building 200
Accounts Payable 18,200Salary Payable 900
Interest Payable 100Unearned Service Revenue 400
Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600
Rent expense 1,000 Salary expense 1,800
Supplies expense 100 Deprec. Expense: Furniture 300
Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900
27
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Rent ExpenseBal.
1,000Supplies Expense
Bal. 100Salary Expense
Bal.1,800
Dep. Exp.: FurnitureBal.
300Dep. Exp. Building
Interest ExpenseBal.
200
100
Utilites Expense 400
Service Revenue
Bal.7,600
Income Summary
Sheena Bright, Capital
Bal.33,200
Sheena Bright, Withdrawals
Bal.1,000
The Closing ProcessThe Closing Process
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
May31 Service Revenue 7,600
Income Summary 7,600
To close revenue accounts
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Rent ExpenseBal.
1,000Supplies Expense
Bal. 100Salary Expense
Bal.1,800
Dep. Exp.: FurnitureBal.
300Dep. Exp. Building
Interest ExpenseBal.
200
100
Utilites Expense 400
Service Revenue
Bal.7,600
7,6007,600Income Summary
7,6007,600
Sheena Bright, Capital Close RevenuesClose Revenues
Bal.33,200
Sheena Bright, Withdrawals
Bal.1,000
TotalRevenues
The Closing ProcessThe Closing Process
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Dep. expense: Build 200
Interest expense 100
Utilities expense 400
Utilities expense 400
May31 Income Summary 3,900
Rent expense 1,000
Supplies expense 100
Salary expense 1,800
Dep. expense: Furniture 300
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Rent ExpenseBal.
1,000Supplies Expense
Bal. 100Salary Expense
Bal.1,800
Dep. Exp.: FurnitureBal.
300Dep. Exp. Building
Interest ExpenseBal.
200
100
Utilites Expense 400
Service Revenue
Bal.7,600
7,6007,600Income Summary
7,6007,600
Sheena Bright, Capital Close RevenuesClose Revenues
Bal.33,200
Sheena Bright, Withdrawals
Bal.1,000
TotalRevenues
The Closing ProcessThe Closing Process
1,0001,000
100100
1,8001,800
300300
200200
100100
400400
Close ExpensesClose Expenses
3,9003,900
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Four Closing EntriesFour Closing Entries Four Closing EntriesFour Closing Entries
• Entry 3: Close Income Summary to Capital
• Entry 4: Close Withdrawals to Capital
33
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
May31 Income Summary 3,700
Sheena Bright, Capital 3,700
To close income summary
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Rent ExpenseBal.
1,000Supplies Expense
Bal. 100Salary Expense
Bal.1,800
Dep. Exp.: FurnitureBal.
300Dep. Exp. Building
Interest ExpenseBal.
200
100
Utilites Expense 400
Service Revenue
Bal.7,600
7,6007,600Income Summary
7,6007,600
Sheena Bright, Capital Close RevenuesClose Revenues
Bal.33,200
Sheena Bright, Withdrawals
Bal.1,000
The Closing ProcessThe Closing Process
1,0001,000
100100
1,8001,800
300300
200200
100100
400400
Close ExpensesClose Expenses
3,9003,900
Close Income SummaryClose Income Summary
3,7003,700
3,7003,700Net IncomeNet Income
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
May31 Income Summary 3,700
Sheena Bright, Capital 3,700
To close income summary
30 Sheena Bright, Capital 1,000
Sheena Bright, Withdrawals 1,000
To close withdrawals
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Rent ExpenseBal.
1,000Supplies Expense
Bal. 100Salary Expense
Bal.1,800
Dep. Exp.: FurnitureBal.
300Dep. Exp. Building
Interest ExpenseBal.
200
100
Utilites Expense 400
Service Revenue
Bal.7,600
7,6007,600Income Summary
7,6007,600
Sheena Bright, Capital Close RevenuesClose Revenues
Bal.33,200
Sheena Bright, Withdrawals
Bal.1,000
The Closing ProcessThe Closing Process
1,0001,000
100100
1,8001,800
300300
200200
100100
400400
Close ExpensesClose Expenses
3,9003,900
Close Income SummaryClose Income Summary
3,7003,700
3,7003,700
Net IncomeNet Income
Close WithdrawalsClose Withdrawals
1,0001,000
WithdrawalWithdrawal
1,0001,000
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Rent Expense
Supplies Expense
Salary Expense
Dep. Exp.: Furniture
Dep. Exp. Building
Interest Expense
Service Revenue
Income Summary
Sheena Bright, Capital Close RevenuesClose Revenues
Bal.33,200
Sheena Bright, Withdrawals
The Closing ProcessThe Closing Process
Close ExpensesClose Expenses
Close Income SummaryClose Income Summary
3,7003,700
35,90035,900 Close WithdrawalsClose Withdrawals
1,0001,000
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Smart Touch LearningPost-Closing Trial Balance
May 31, 2008
Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Accum. Depreciation:Furn 300 Building 48,000 Accum. Depreciation:Build 200 Accounts Payable 18,200 Salary Payable 900
Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 35,900 76,000 76,000
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Work SheetWork SheetWork SheetWork Sheet
• Internal summary device• NOT:
– A journal– A ledger– A financial statement
• Computerized spreadsheets work well
40
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Accounts Debit Credit Debit Credit Debit Credit Debit Credit Debit CreditTrial Balance Adjustments Adj. Trial Balance Income Statement Balance Sheet
COMPANY NAMEAccounting Work Sheet
May 31, 2010
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Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps• Enter account titles
and their unadjusted balances in the Trial Balance columns
• Total the amounts
41Copyright (c) 2009. Prentice Hall. All rights reserved.
Accounts Debit CreditCash 4,800 Accounts receivable 2,200 Supplies 700 Furniture 18,000 Accum. depr. 1,000 Accounts payable 7,200 Salaries payableUnearned revenue 600 J osie Smith, Capital 13,200 J osie Smith, W/D 1,000 Service revenue 6,000
Salary expense 900 Supplies expenseDepreciation exp.Utilities expense 400
28,000 28,000
Trial Balance
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Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps
• Enter the adjusting entries in the Adjustments columns
• Total the amounts
42
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Accounts Debit CreditCashAccounts receivable c 300 Supplies a 500 FurnitureAccum. depr. b 1,000 Accounts payableSalaries payable d 100 Unearned revenue e 200 J osie Smith, CapitalJ osie Smith, W/DService revenue c 300
d 200 Salary expense d 100 Supplies expense a 500 Depreciation exp. b 1,000 Utilities expense
2,100 2,100
Adjustments
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Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps
• Compute each account’s adjusted balance by combining the trial balance and adjustment figures
• Enter each account’s adjusted amount in the Adjusted trial balance columns
• See following slide
43
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44
Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps
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Accounts Debit Credit Debit Credit Debit Credit
Cash 4,800 4,800
Accounts receivable 2,200 c 300 2,500
Supplies 700 a 500 200
Furniture 18,000 18,000
Accum. depr. 1,000 b 1,000 2,000
Accounts payable 7,200 7,200
Salaries payable d 100 100
Unearned revenue 600 e 200 400
J osie Smith, Capital 13,200 13,200
J osie Smith, W/D 1,000 1,000
Service revenue 6,000 c 300 6,500
d 200
Salary expense 900 d 100 1,000
Supplies expense a 500 500
Depreciation exp. b 1,000 1,000
Utilities expense 400 400
28,000 28,000 2,100 2,100 29,400 29,400
Trial Balance Adjustments Adj. Trial Balance
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Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps• Draw an imaginary
line above the first revenue account
• Every account above goes to the Balance sheet columns
• Every account below goes to the Income Statement columns
45Copyright (c) 2009. Prentice Hall. All rights reserved.
Accounts Debit CreditCash 4,800 Accounts receivable 2,500 Supplies 200 Furniture 18,000 Accum. depr. 2,000 Accounts payable 7,200 Salaries payable 100 Unearned revenue 400 J osie Smith, Capital 13,200 J osie Smith, W/D 1,000 Service revenue 6,500
Salary expense 1,000 Supplies expense 500 Depreciation exp. 1,000 Utilities expense 400
29,400 29,400
Adj. Trial Balance
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46Copyright (c) 2009. Prentice Hall. All rights reserved.
Accounts Debit Credit Debit Credit Debit CreditCash 4,800 4,800 Accounts receivable 2,500 2,500 Supplies 200 200 Furniture 18,000 18,000 Accum. depr. 2,000 2,000 Accounts payable 7,200 7,200 Salaries payable 100 100 Unearned revenue 400 400 J osie Smith, Capital 13,200 13,200 J osie Smith, W/D 1,000 1,000 Service revenue 6,500 6,500
Salary expense 1,000 1,000 Supplies expense 500 500 Depreciation exp. 1,000 1,000 Utilities expense 400 400
29,400 29,400 2,900 6,500 26,500 22,900
COMPANY NAMEAccounting Work Sheet
May 31, 2010Adj. Trial BalanceIncome statement Balance sheet
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Work Sheet Work Sheet StepsSteps
Work Sheet Work Sheet StepsSteps
• On the income statement, compute net income– Revenues minus
expenses
• Enter net income as the balancing amount
47Copyright (c) 2009. Prentice Hall. All rights reserved.
Net Income
Accounts DebitDebit CreditCash
Accounts receivable
Supplies
Furniture
Accum. depr.
Accounts payable
Salaries payable
Unearned revenue
J osie Smith, Capital
J osie Smith, W/D
Service revenue 6,500
Salary expense 1,000 Supplies expense 500 Depreciation exp. 1,000 Utilities expense 400
2,900 6,500 3,600
Accounting Work Sheet May 31, 2010
Income Statement
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Work Sheet Work Sheet StepsSteps
Work Sheet Work Sheet StepsSteps
• Also enter net income as a balancing amount on the balance sheet
48Copyright (c) 2009. Prentice Hall. All rights reserved.
Net Income
Accounts Debit CreditCash 4,800 Accounts receivable 2,500 Supplies 200 Furniture 18,000 Accum. depr. 2,000 Accounts payable 7,200 Salaries payable 100 Unearned revenue 400 J osie Smith, Capital 13,200 J osie Smith, W/D 1,000 Service revenue
Salary expense
Supplies expense
Depreciation exp.
Utilities expense26,500 22,900
3,600 26,500 26,500
COMPANY NAMEAccounting Work Sheet
May 31, 2010Balance Sheet
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49Copyright (c) 2009. Prentice Hall. All rights reserved.
Accounts Debit Credit Debit Credit Debit Credit Debit Credit Debit CreditCash 4,800 4,800 4,800 Accounts receivable 2,200 c 300 2,500 2,500 Supplies 700 a 500 200 200 Furniture 18,000 18,000 18,000 Accum. depr. 1,000 b 1,000 2,000 2,000 Accounts payable 7,200 7,200 7,200 Salaries payable d 100 100 100 Unearned revenue 600 e 200 400 400 J osie Smith, Capital 13,200 13,200 13,200 J osie Smith, W/D 1,000 1,000 1,000 Service revenue 6,000 c 300 6,500 6,500
d 200
Salary expense 900 d 100 1,000 1,000 Supplies expense a 500 500 500 Depreciation exp. b 1,000 1,000 1,000 Utilities expense 400 400 400
28,000 28,000 2,100 2,100 29,400 29,400 2,900 6,500 26,500 22,900 Net income 3,600 3,600
6,500 6,500 26,500 26,500
COMPANY NAMEAccounting Work Sheet
May 31, 2010Trial Balance Adjustments Adj. Trial BalanceIncome Statement Balance Sheet
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Use the current ratio and the debt ratio to evaluate a company
50
Learning Objective 6Learning Objective 6Learning Objective 6Learning Objective 6
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51
Current RatioCurrent RatioCurrent RatioCurrent Ratio
Current assets Current liabilities
• Measures a company’s ability to pay its current liabilities
• Rule of thumb– Strong current ratio is 1.5
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Copyright © 2007 Prentice-Hall. All rights reserved
• Indicates the proportion of a business’s assets that are financed with debt
• Measures business’s ability to pay its debts• Rule of thumb:
– Below 60% is considered safe
52
Debt RatioDebt RatioDebt RatioDebt Ratio
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Copyright © 2007 Prentice-Hall. All rights reserved
• Indicates the proportion of a business’s assets that are financed with debt
• Measures business’s ability to pay its debts• Rule of thumb:
– Below 60% is considered safe
53
Debt RatioDebt RatioDebt RatioDebt Ratio
Total liabilities Total assets
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Single Step Income Single Step Income StatementStatement
Single Step Income Single Step Income StatementStatement
• A single-step income statement is one of two commonly used formats for the income statement or profit and loss statement. The single-step format uses only one subtraction to arrive at net income.
• Net Income = (Revenues + Gains) – (Expenses + Losses)
54
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Single Step Income Single Step Income Statement: ExampleStatement: ExampleSingle Step Income Single Step Income
Statement: ExampleStatement: Example
55
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Multiple Step Income Multiple Step Income StatementStatement
Multiple Step Income Multiple Step Income StatementStatement
• The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold).
56
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Multiple Step Income Statement: Multiple Step Income Statement: ExampleExample
Multiple Step Income Statement: Multiple Step Income Statement: ExampleExample
57