Accounting for business decision solutions

Chapter 4-1

Completing the Accounting Cycle

Financial Accounting

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Chapter Chapter 44




Chapter 4-2

1. Prepare a worksheet.2. Explain the process of closing the books.3. Describe the content and purpose of a post-closing

trial balance.4. State the required steps in the accounting cycle.5. Explain the approaches to preparing correcting

entries.6. Identify the sections of a classified balance sheet.

Study ObjectivesStudy Objectives

Chapter 4-3

Using a Using a WorksheetWorksheet

Steps in Steps in preparationpreparationPreparing Preparing financial financial statementsstatementsPreparing Preparing adjusting entriesadjusting entries

Closing the Closing the BooksBooks

Summary of Summary of Accounting Accounting

CycleCycle

Classified Classified Balance SheetBalance Sheet

Current assetsCurrent assetsLong-term Long-term investmentsinvestmentsProperty, plant, Property, plant, and equipmentand equipmentIntangible assetsIntangible assetsCurrent liabilitiesCurrent liabilitiesLong-term Long-term liabilitiesliabilitiesStockholders’ Stockholders’ equityequity

Reversing Reversing entries—An entries—An optional stepoptional stepCorrecting Correcting entries—An entries—An avoidable stepavoidable step

Completing the Accounting CycleCompleting the Accounting Cycle

Preparing Preparing closing entriesclosing entriesPosting closing Posting closing entriesentriesPreparing a Preparing a post-closing trial post-closing trial balancebalance

Chapter 4-4

A multiple-column form used in preparing financial statements. Not a permanent accounting record.Five step process.Use of worksheet is optional.

Using A WorksheetUsing A Worksheet

SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

WorksheetWorksheet

Chapter 4-5

Steps in Preparing a WorksheetSteps in Preparing a Worksheet


Illustration 4-1

Chapter 4-6

Illustration The trial balance for Undercover Roofing for the month ended March 31, 2008, is as follows.


Account Titles Dr. Cr.Cash 2,500$ Accounts Receivable 1,800 Roofing Supplies 1,100 Equipment 6,000 Accumulated Depreciation 1,200$ Accounts Payable 1,400 Unearned Revenue 300 Common stock 1,000 Retained earnings 6,000 Dividends 600 Service Revenue 3,000 Salaries Expense 700 Miscellaneous Expense 200

Totals 12,900$ 12,900$

Trial Balance Other data:1. Supplies on hand total

$140.2. Depreciation for March is

$200.3. Unearned revenue

amounted to $130 on March 31.

4. Accrued salaries are $350.

Instructionsa. Prepare and complete the

worksheet.SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

Chapter 4-7

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 2,500 Accounts Receivable 1,800 Roofing Supplies 1,100 Equipment 6,000 Accumulated Depreciation 1,200 Accounts Payable 1,400 Unearned Revenue 300 Common stock 1,000 Retained earnings 6,000 Dividends 600 Service Revenue 3,000 Salaries Expense 700 Miscellaneous Expense 200

Totals 12,900 12,900

Balance SheetAdjusted Income

Trial Balance Adjustments Trial Balance Statement


SO 1 Prepare a SO 1 Prepare a worksheet.worksheet.

Trial balance amounts come

directly from ledger accounts.

Include all accounts with

balances.

1. Prepare a Trial Balance on the Worksheet1. Prepare a Trial Balance on the Worksheet

Chapter 4-8

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 2,500 Accounts Receivable 1,800 Roofing Supplies 1,100 960 Equipment 6,000 Accumulated Depreciation 1,200 200 Accounts Payable 1,400 Unearned Revenue 300 170 Common stock 1,000 Retained earnings 6,000 Dividends 600 Service Revenue 3,000 170 Salaries Expense 700 350 Miscellaneous Expense 200

Totals 12,900 12,900 Supplies Expense 960 Depreciation Expense 200 Salaries Payable 350

Totals 1,680 1,680 Net Income

Totals





(a)

(a)

(b)

(b)

(d)

(d)

(c)

(c)

Enter adjustment amounts, total adjustments

columns,and check for equality.

Add additional accounts as

needed.

Adjustments Key:(a) Supplies used.(b) Depreciation expense.(c) Service revenue

earned.(d) Salaries accrued.

2. Enter the Adjustments in the Adjustments 2. Enter the Adjustments in the Adjustments ColumnsColumns

Chapter 4-9

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 2,500 2,500 Accounts Receivable 1,800 1,800 Roofing Supplies 1,100 960 140 Equipment 6,000 6,000 Accumulated Depreciation 1,200 200 1,400 Accounts Payable 1,400 1,400 Unearned Revenue 300 170 130 Common stock 1,000 1,000 Retained earnings 6,000 6,000 Dividends 600 600 Service Revenue 3,000 170 3,170 Salaries Expense 700 350 1,050 Miscellaneous Expense 200 200

Totals 12,900 12,900 Supplies Expense 960 960 Depreciation Expense 200 200 Salaries Payable 350 350

Totals 1,680 1,680 13,450 13,450 Net Income

Totals





(a)

(a)

(b)

(b)

(d)

(d)

(c)

(c)

Total the adjusted trial balance columns

and check for equality.

3. Complete the Adjusted Trial Balance 3. Complete the Adjusted Trial Balance ColumnsColumns

Chapter 4-10

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 2,500 2,500 Accounts Receivable 1,800 1,800 Roofing Supplies 1,100 960 140 Equipment 6,000 6,000 Accumulated Depreciation 1,200 200 1,400 Accounts Payable 1,400 1,400 Unearned Revenue 300 170 130 Common stock 1,000 1,000 Retained earnings 6,000 6,000 Dividends 600 600 Service Revenue 3,000 170 3,170 3,170 Salaries Expense 700 350 1,050 1,050 Miscellaneous Expense 200 200 200

Totals 12,900 12,900 Supplies Expense 960 960 960 Depreciation Expense 200 200 200 Salaries Payable 350 350

Totals 1,680 1,680 13,450 13,450 2,410 3,170 Net Income

Totals





(a)

(a)

(b)

(b)

(d)

(d)

(c)

(c)

Extend all revenue and expense account balances to

the income statement columns.

4. Extend Amounts to Financial Statement 4. Extend Amounts to Financial Statement ColumnsColumns

Chapter 4-11

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 2,500 2,500 2,500 Accounts Receivable 1,800 1,800 1,800 Roofing Supplies 1,100 960 140 140 Equipment 6,000 6,000 6,000 Accumulated Depreciation 1,200 200 1,400 1,400 Accounts Payable 1,400 1,400 1,400 Unearned Revenue 300 170 130 130 Common stock 1,000 1,000 1,000 Retained earnings 6,000 6,000 6,000 Dividends 600 600 600 Service Revenue 3,000 170 3,170 3,170 Salaries Expense 700 350 1,050 1,050 Miscellaneous Expense 200 200 200

Totals 12,900 12,900 Supplies Expense 960 960 960 Depreciation Expense 200 200 200 Salaries Payable 350 350 350

Totals 1,680 1,680 13,450 13,450 2,410 3,170 11,040 10,280 Net Income

Totals





(a)

(a)

(b)

(b)

(d)

(d)

(c)

(c)

Extend all asset, liability, and equity account balances to the balance sheet columns.

4. Extend Amounts to Financial Statement 4. Extend Amounts to Financial Statement ColumnsColumns

Chapter 4-12

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 2,500 2,500 2,500 Accounts Receivable 1,800 1,800 1,800 Roofing Supplies 1,100 960 140 140 Equipment 6,000 6,000 6,000 Accumulated Depreciation 1,200 200 1,400 1,400 Accounts Payable 1,400 1,400 1,400 Unearned Revenue 300 170 130 130 Common stock 1,000 1,000 1,000 Retained earnings 6,000 6,000 6,000 Dividends 600 600 600 Service Revenue 3,000 170 3,170 3,170 Salaries Expense 700 350 1,050 1,050 Miscellaneous Expense 200 200 200

Totals 12,900 12,900 Supplies Expense 960 960 960 Depreciation Expense 200 200 200 Salaries Payable 350 350 350

Totals 1,680 1,680 13,450 13,450 2,410 3,170 11,040 10,280 Net Income 760 760

Totals 3,170 3,170 11,040 11,040





5. Total Columns, Compute Net Income 5. Total Columns, Compute Net Income (Loss)(Loss)

Compute Net income or Net loss.

(a)

(a)

(b)

(b)

(d)

(d)

(c)

(c)

Chapter 4-13

Net income is shown on a work sheet in the:a. income statement debit column only.b. balance sheet debit column only.c. income statement credit column and

balance sheet debit column.d. income statement debit column and

balance sheet credit column.

Review QuestionReview Question



Chapter 4-14

Income statement is prepared from the income statement columns. Balance sheet and retained earnings statement are prepared from the balance sheet columns.

Preparing Financial Statements from a Preparing Financial Statements from a WorksheetWorksheet


WorksheetWorksheet

Chapter 4-15



Revenues 3,170$ Service revenues

ExpensesSalaries expense 1,050$ Supplies expense 960 Depreciation expense 200 Miscellaneous expense 200

Total expenses 2,410 Net income 760$

Undercover RoofingIncome Statement

For the Month Ended March 31, 2008

b. Prepare an income statement for the month ended March 31, 2008.

Chapter 4-16



b. Prepare a statement of retained earnings for the month ended March 31, 2008.

Retained earnings, beginning 6,000$ Add: Net income 760 Less: Dividends (600) Retained earnings, ending 6,160$

Undercover RoofingRetained Earnings Statement

For the Month Ended March 31, 2008

Chapter 4-17



b. Prepare a balance sheet as of March 31, 2008.

Current assetsCash 2,500$ Accounts receivable 1,800 Roofing supplies 140

Total current assets 4,440 Property, plant, and equipment

Equipment 6,000 Less: Accumulated depreciation 1,400 4,600

Total assets 9,040$

Current liabilitiesAccounts payable 1,400$ Salaries payable 350 Unearned revenue 130

Total current liabilities 1,880 Stockholders' equity

Common stock 1,000 Retained earnings 6,160

Total liabilities and stockholder's equity 9,040$

Liabilities and Stockholders' Equity

Assets

Undercover Roofing

Balance Sheet

March 31, 2008

Chapter 4-18

The adjusting entries are prepared from the adjustments columns of the worksheet.Journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used.

Preparing Adjusting Entries from a Preparing Adjusting Entries from a WorksheetWorksheet


Adjusting EntriesAdjusting Entries

Chapter 4-19



c. Journalize the adjusting entries from the adjustments columns of the worksheet.

Account Title Ref. Debit CreditMar. 31 Supplies expense 960

Roofing supplies 960

Depreciation expense 200 Accumulated depreciation 200

Unearned revenue 170 Service revenue 170

Salaries expense 350 Salaries payable 350

Date

Chapter 4-20

At the end of the accounting period, the company makes the accounts ready for the next period.

Closing the BooksClosing the Books

SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.

Illustration 4-5

Chapter 4-21

Closing entriesClosing entries formally recognize, in the general ledger, the transfer of

net income (or net loss) and dividends to retained earnings at the end of the accounting period.



Chapter 4-22



Illustration 4-6

Retained Earnings is a permanent account;

all other accounts are temporary accounts.

Dividends are closed directly to Retained Earnings and not to Income Summary because Dividends are not an expense.

Note:

Chapter 4-23

Service revenue 3,170Income summary 3,170

Income summary 2,410Salary expense 1,050Supplies expense 960Depreciation expense 200

Income summary 760Retained earnings 760

Retained earnings 600Dividends 600

Miscellaneous expense 200

d. Journalize the closing entries from the financial statement columns of the worksheet.



Closing Entries need to be

Posted

Chapter 4-24

Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.

Preparing a Post-Closing Trial Preparing a Post-Closing Trial BalanceBalance

SO 3 Describe the content and purpose of a post-closing trial SO 3 Describe the content and purpose of a post-closing trial balance.balance.

Account Titles Dr. Cr.Cash 2,500$ Accounts Receivable 1,800 Roofing Supplies 140 Equipment 6,000 Accumulated Depreciation 1,400$ Accounts Payable 1,400 Salaries payable 350 Unearned Revenue 130 Common Stock 1,000 Retained Earnings 6,160

Totals 10,440$ 10,440$

Trial BalancePost-Closing

All temporary accounts will have zero balances.

Chapter 4-25

Summary of the Accounting CycleSummary of the Accounting Cycle

1. Analyze business transactions

2. Journalize the transactions

6. Prepare an adjusted trial balance

7. Prepare financial statements

8. Journalize and post closing entries

9. Prepare a post-closing trial balance

4. Prepare a trial balance

3. Post to ledger accounts

5. Journalize and post adjusting entries

Illustration 4-12

SO 4 State the required steps in the accounting cycle.SO 4 State the required steps in the accounting cycle.

Chapter 4-26

Correcting entriesCorrecting entries are unnecessary if the records are error-free.are made whenever an error is discovered.must be posted before closing entries.

Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry.

Correcting Entries—An Avoidable Correcting Entries—An Avoidable StepStep

SO 5 Explain the approaches to preparing correcting entries.SO 5 Explain the approaches to preparing correcting entries.

Chapter 4-27

BE4-9BE4-9 At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries.1. A collection on account from a customer was recorded as a debit to Cash and a credit to Service Revenue for $780.



Cash 780Incorrect entry Service revenue

780Cash 780Correct entry Accounts receivable

780Service revenue 780Correcting Correcting entryentry Accounts receivable

780

Chapter 4-28

BE4-9BE4-9 At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries.2. The purchase of supplies on account for $1,570 was recorded as a debit to Supplies and a credit to Accounts Payable $1,750.



Supplies 1,750Incorrect entry Accounts payable

1,750Supplies 1,570Correct entry Accounts payable

1,570Accounts payable 180Correcting Correcting entryentry Supplies

180

Chapter 4-29

The Classified Balance SheetThe Classified Balance Sheet

SO 6 Identify the sections of a classified balance sheet.SO 6 Identify the sections of a classified balance sheet.

Presents a snapshot at a point in time.To improve understanding, companies group similar assets and similar liabilities together.

Assets Liabilities and Owner’s EquityCurrent assets Current liabilitiesLong-term investments Long-term liabilitiesProperty, plant, and equipment Stockholders’ equityIntangible assets

Illustration 4-17Standard Standard ClassificationsClassifications

Chapter 4-30



Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer.Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers.

Current AssetsCurrent Assets

Chapter 4-31



Companies usually list current asset accounts in the order they expect to convert them into cash.

Illustration 4-19

Current AssetsCurrent Assets

Chapter 4-32

Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called:

a. Current assets.b. Intangible assets.c. Long-term investments.d. Property, plant, and equipment.




Chapter 4-33



Investments in stocks and bonds of other companies. Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities.

Long-Term InvestmentsLong-Term Investments

Illustration 4-20

Chapter 4-34



Long useful lives.Currently used in operations.Depreciation - allocating the cost of assets to a number of years.Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life.

Property, Plant, and Property, Plant, and EquipmentEquipment

Chapter 4-35



Illustration 4-21

Property, Plant, and Property, Plant, and EquipmentEquipment

Chapter 4-36



Assets that do not have physical substance.Intangible AssetsIntangible Assets

Illustration 4-22

Chapter 4-37

Patents and copyrights area. Current assets.b. Intangible assets.c. Long-term investments.d. Property, plant, and equipment.




Chapter 4-38



Obligations the company is to pay within the coming year.Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude.Liquidity - ability to pay obligations expected to be due within the next year.

Current LiabilitiesCurrent Liabilities

Chapter 4-39



Illustration 4-23

Current LiabilitiesCurrent Liabilities

Chapter 4-40



Obligations a company expects to pay after one year.

Long-Term LiabilitiesLong-Term Liabilities

Illustration 4-24

Chapter 4-41

Which of the following is not a long-term liability?

a. Bonds payableb. Current maturities of long-term

obligationsc. Long-term notes payabled. Mortgages payable




Chapter 4-42



Proprietorship - one capital account. Partnership - capital account for each partner. Corporation - Capital Stock and Retained Earnings.

Stockholders’ (Owners’) Stockholders’ (Owners’) EquityEquity

Illustration 4-25

Chapter 4-43

What are your personal assets?What are your personal liabilities?

Some Facts:48% of Americans think they know how much wealth they have.2005 was the first year since the Depression when Americans spent more money than they made.

All About YouAll About You

Your Personal Balance Your Personal Balance SheetSheet Net

Worth=

Chapter 4-44

Some Facts: The total net worth of U.S. households hit a record $51.09 trillion during 2005.Economists note that a rise in house prices actually results in a fall in individual savings.When asked about very important wealth-building strategies for all Americans, 16% said “win the lottery.”


Your Personal Balance Your Personal Balance SheetSheet

Chapter 4-45

In a recent study, individuals were asked whether they could save 20% of their household income.


Inconsistent

thinking?

Should you prepare a personal balance sheet?

Chapter 4-46

What Do You What Do You Think?Think?Should you prepare a personal balance sheet?


YES: In order to attain your desired financial objectives, you need to set goals early.

NO: Your financial situation right now bears very little resemblance to what it will look like after you graduate. At that point, you will have a better job,and you won’t have to pay tuition. Right now, you’re just “bleeding cash.”

Chapter 4-47

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Accounting for business decision solutions