Completing the Accounting Cycle

1. Completing theAccounting Cycle Chapter 4

2. Objective 1 Prepare an accounting work sheet

3. The Accounting Cycle • Process by which accountants prepare financial statements for an entity for a specific period of time

4. Accounting Cycle

5. Objective 2 Use the work sheet

6. The Accounting Work Sheet • Used to help move data from the trial balance to the financial statements • An internal document – not financial statement

7. Step 1 Prepare Unadjusted Trial Balance Step 2 Plan Adjustments Step 4 Sort Adjusted Amounts to Statement Columns Step 3 Adjusted Trial Balance

8. Exercise 4-13

9. 3,500 3,700 400 1,700 34,100 2,000 100 2,300 800 700 1,600 1,900 5,100 500 10,000 26,000 7,400 7,400 100 2,300 800 700 1,600 3,500 3,700 400 1,700 34,100 2,000 a. 300 d. 800 e.1,600 b. 100 1,900 5,100 500 10,000 26,000 c. 500 a. 300 b. 100 c. 500 d. 800 e. 1,600 3,300 3,300 50,900 50,900 5,500 7,400 45,400 43,500 Net Income 1,900 1,900 7,400 7,400 45,400 45,400

10. Recording Adjusting Entries • Work sheet helps identify accounts that need adjustments • Actual adjustment of accounts requires journalizing and posting entries

11. Exercise 4-14 Nov 30 Accounts Receivable 300 Service Revenue 300 30 Depreciation Expense, Equipment 100 Accumulated Depreciation, Equipment 100

12. Exercise 4-14 Nov 30 Salary Expense 500 Salary Payable 500 30 Rent Expense 800 Prepaid Rent 800

13. Exercise 4-14 Nov 30 Supplies Expense 1,600 Supplies 1,600

14. Objective 3 Close the revenue, expense, and withdrawal accounts

15. Closing the Accounts • Prepares accounts for recording transactions during next period • Updates retained earnings account

16. Closing the Accounts • Permanent Accounts • Temporary Accounts

17. 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

18. Income Summary Revenues – Expenses = Net Income Four Closing Entries Revenue Expense 500 500 200 200 Bal 0 Bal 0 200 500 Bal 300

19. Four Closing Entries Entry 3: Close Income Summary to Retained Earnings Entry 4: Close Dividends to Retained Earnings

20. Four Closing Entries Income Summary Dividends 200 500 100 100 300 Bal 300 Bal 0 Bal 0 Retained Earnings 1,000 Beginning balance 100 300 1,200 Ending balance

21. Exercise 4-14 Nov 30 Service Revenue 7,400 Income Summary 7,400 To close revenue accounts

22. Exercise 4-14 Notice: Only income statement accounts are closed to income summary. Nov 30 Income Summary 5,500 Depreciation Expense 100 Salary Expense 2,300 Rent Expense 800 Utilities Expense 700 Supplies Expense 1,600 To close expense accounts

23. Exercise 4-14 Nov 30 Income Summary 1,900 Retained Earnings 1,900 To close income summary 30 Retained Earnings 2,000 Dividends 2,000 To close dividends

24. Exercise 4-15

25. Exercise 4-15

26. Income Summary Account • Debit balance = Net Loss • Credit balance = Net Income

27. Post-Closing Trial Balance • List of permanent accounts and their balances after posting closing entries • Total debits and credits must be equal

28. E4-16 Only Balance Sheet accounts remain on the Post-Closing Trial Balance. All other accounts have a -$0- balance.

29. Objective 4 Classify assets and liabilities as current or long-term

30. Liquidity • 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

31. Current Assets • Cash, or assets that will be converted to cash or used up, in one year or within normal business operating cycle • Examples • short-term receivables • inventory • prepaid expenses

32. Current Liabilities • Debts or obligations due within one year or within operating cycle • Examples • accounts and salary payables • short-term notes payable • unearned revenue

33. Long-term Assets and Liabilities • Long-term assets - all other assets • property, equipment • intangibles • Long-term liabilities - all other debts due in longer than one year or entity’s operating cycle

34. The Classified Balance Sheet Debit side Current assets Long-term assets Credit side Current liabilities Long-term liabilities

35. Current Assets Cash Receivables Prepaid expenses Long-term Assets Equipment Buildings Accumulated depreciation Current Liabilities Accounts payable Accrued liabilities Long-term liabilities None S4-9

36. Different Formats ofthe Balance Sheet • Account Format • Report Format

37. Objective 5 Use the current ratio and the debt ratio to evaluate a company

38. Comparative Financial Statements • Enhance user’s ability to analyze company’s past performance • Two common ratios used to measure liquidity • Current ratio • Debt ratio

39. Current Ratio • Measures ability of a business to pay its current liabilities with its current assets Current assets ÷ Current liabilities

40. Debt Ratio • Indicates the proportion of a business’s assets that are financed with debt • Measures business’s ability to pay both current and long-term debt Total liabilities ÷ Total assets

41. Current Assets: Cash $3,000 Accounts receivable 6,000 Prepaid rent 2,000 Supplies 1,000 Total $12,000 Current Liabilities: Accounts payable $4,000 Salary payable 2,000 Total $6,000 S4-11 Current Ratio: Current assets/ Current liabilities = $12,000 / $6,000 = 2

42. Total Assets: Cash $3,000 Accounts receivable 6,000 Prepaid rent 2,000 Supplies 1,000 Equipment 12,000 Total $24,000 Total Liabilities: Accounts payable $4,000 Salary payable 2,000 Note payable 9,000 Total $15,000 S4-11 Debt Ratio: Total liabilities/Total assets = $15,000 / $24,000 = .63

43. End of Chapter 4