ACC101- PRINCIPLE OF ACCOUNTING

Session 10-11
CHAPTER 4: COMPLETING THE
ACCOUNTING CYCLE

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 OBJECTIVES
WORKSHEET

P1 Prepare a work sheet and explain its usefulness

CLOSING PROCESS

C1 Explain why temporary accounts are closed each period.

P2 Describe and prepare closing entries.

P3 Explain and prepare a post-closing trial balance.

C2 Identify steps in the accounting cycle

CLASSIFIED BALANCE SHEET AND ANALYSIS

C3 Explain and prepare a classified balance sheet.

A1 Compute the current ratio and describe what it reveals about a company’s financial condition

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 1. Work Sheet As A Tool
P1 1.1. Benefits of a Work Sheet

Aids the preparation of Assists in planning and

financial statements. organizing an audit.

NOT A Helps in preparing

Reduces possibility of
REQUIRED interim financial
errors.
REPORT. statements.

Links accounts and Shows the effects of

their adjustments. proposed transactions.

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 1. Work Sheet As A Tool
P1 1.2. Use of a Work Sheet
FastForward Work
Unadjusted Adjusted Sheet
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
For Month Ended
Cash 4,350 December 31, 2009
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment
Accum. depr. - Equip.
26,000
-
1 Enter the
Accounts payable 6,200 unadjusted
Salaries payable -
Unearned consulting revenue 3,000
amounts to
C. Taylor, Capital 30,000 the worksheet.
C. Taylor, Withdrawals 200
Consulting revenue 5,800

Rental revenue 300

Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300 4
 1. Work Sheet As A Tool
P1 1.2. Use of a Work Sheet
Unadjusted Adjusted
FastForward Work
Trial Balance Adjustments Trial Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. For Month Ended
Cash 4,350 December 31, 2009
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000 2 Enter the
Accum. depr. - Equip. - c 375
Accounts payable 6,200 adjustments.
Salaries payable - e 210
Unearned consulting revenue 3,000 d 250
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals 45,300 45,300 3,785 3,785 5
 1. Work Sheet As A Tool
P1 1.2. Use of a Work Sheet
Unadjusted Adjusted
FastForward Work
Trial Balance Adjustments Trial Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. For Month Ended
Cash 4,350 4,350 December 31, 2009
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375 3 Prepare
Accounts payable 6,200 6,200 adjusted trial
Salaries payable - e 210 210
Unearned consulting revenue 3,000 d 250 2,750 balance.
C. Taylor, Capital 30,000 - 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685

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 1. Work Sheet As A Tool
P1 1.2. Use of a Work Sheet
Adjusted Income Balance Sheet &
Trial Balance Statement Statement of Equity
FastForward Work
Dr. Cr. Dr. Cr. Dr. Cr. Sheet
Cash 4,350 4,350 For Month Ended
Accounts receivable 1,800 1,800 December 31, 2009
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000 4 Sort adjusted
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200 trial balance
Salaries payable 210 210 amounts to
Unearned consulting revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000 financial
C. Taylor, Withdrawals 200 200
Consulting revenue 7,850 7,850
statements.
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535

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 1. Work Sheet As A Tool
P1 1.2. Use of a Work Sheet
Adjusted Income Balance Sheet &
FastForward Work
Trial Balance Statement Statement of Equity Sheet
Dr. Cr. Dr. Cr. Dr. Cr. For Month Ended
Cash 4,350 4,350 December 31, 2009
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance
Equipment
2,300
26,000
2,300
26,000
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Accum. depr. - Equip. 375 375 Total statement
Accounts payable 6,200 6,200
Salaries payable 210 210 columns, compute
Unearned consulting revenue 2,750 2,750 income or loss, and
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 200 200 balance columns.
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375 Financial statement
Salaries expense 1,610 1,610 columns yield pro forma
Insurance expense 100 100
Rent expense 1,000 1,000 financial statements
Supplies expense 1,050 1,050 because they show the
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
statements as if the
Net income 3,785 3,785 proposed transactions
8,150 8,150 43,320 43,320
occurred
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 1. Work Sheet As A Tool
P1 1.3. Work Sheet Applications and Analysis
FastForward 1 Prepare the Income
Income Statement Statement.
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 7,850
Rental revenue 300
Total revenues 8,150
Operating expenses: A work sheet does not
Depr. expense - Equip. $ 375 substitute for financial
Salaries expense 1,610 statements.
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Total expenses 4,365
Net income $ 3,785
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 1. Work Sheet As A Tool
P1 1.3. Work Sheet Applications and Analysis
FastForward 2 Prepare the Statement of
Income Statement Owner’s Equity.
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 7,850
Rental revenue 300
FastForward
Total revenues 8,150
Statement of Owner's Equity
Operating expenses:
Depr. expense - Equip. $ 375 For the Month Ended December 31, 2009
Salaries expense 1,610
Insurance expense 100 C. Taylor, Capital 12/1/09 $ -0-
Rent expense 1,000 Investment by owner 30,000
Supplies expense 1,050 Add: Net income $ 3,785 33,785
Utilities expense 230 Total 33,785
Total expenses 4,365 Less: Withdrawal by owner 200
Net income $ 3,785 C. Taylor, Capital 12/31/09 $ 33,585

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 1. Work Sheet As A Tool
P1 1.3. Work Sheet Applications and Analysis
2 Prepare the Statement of
FastForward Owner’s Equity.
Statement of Owner's Equity
For the Month Ended December 31, 2009 FastForward
Balance Sheet
C. Taylor, Capital 12/1/09 $ -0- December 31, 2009
Investment by owner 30,000 Assets
Add: Net income $ 3,785 33,785 Cash $ 4,350
Total 33,785 Accounts receivable 1,800
Less: Withdrawal by owner 200 Supplies 8,670
C. Taylor, Capital 12/31/09 $ 33,585 Prepaid insurance 2,300
Equipment $ 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,745
Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned consulting revenues 2,750
Total liabilities $ 9,160
Owner's Equity
NEED-TO-KNOW 4-1, pg. 181 C.Taylor, Capital 33,585
Total liabilities and equity $ 42,745 11
 2. Closing Process
C1 2.1. Temporary and Permanent Accounts
▪ Resets revenue, expense and
withdrawal account balances to Identify accounts
zero at the end of the period.
for closing.
▪ Helps summarize a period’s
revenues and expenses in the
Income Summary account. Record and post
closing entries.

Prepare post-closing
trial balance.
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 2. Closing Process
C1 2.1. Temporary and Permanent Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

The closing process
applies only to
temporary accounts.
Income
Summary
Temporary (nominal) accounts Permanent (or real) accounts
accumulate data related to one report on activities related to one or
accounting period. more future accounting periods
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 2. Closing Process
P2 2.2. Recording Closing Entries
Close Revenue accounts to Income
Summary. (Closing credit balances)
Closing entries are necessary at the end of
each period after financial statements are
prepared because:
➢ Revenue, expense, and withdrawals

Close Expense accounts to Income
Summary. (Closing debit balances)
Close Income Summary account to
Owner’s Capital.
accounts must begin each period with
zero balances.
➢ Owner’s capital must reflect prior periods’
revenues, expenses, and withdrawals.

Close Withdrawals to Owner’s

Capital.
 2. Closing Process
P2 2.2. Recording Closing Entries
FastForward Using the adjusted trial
Adjusted Trial Balance balance, let’s prepare the
December 31, 2009
Cash $ 4,350 closing entries for FastForward.
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 1 Close Revenue accounts to
Accounts payable 6,200
Salaries payable 210
Income Summary.
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 2. Closing Process
P2 2.2. Recording Closing Entries
Consulting Revenue
7,850 7,850
1 Close Revenue accounts to
Income Summary.
-

Dr. Cr. Income Summary

8,150
Dec. 31 Consulting revenue 7,850
Rental Revenue
Rental revenue 300 300 300
Income summary 8,150

- First closing entry transfers credit balances in revenue -

(and gain) accounts to the Income Summary account

Ledger accounts after posting this closing
- Second bring revenue accounts with credit balances entry.
to zero by debiting them.
 2. Closing Process
P2 2.2. Recording Closing Entries
FastForward
Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300 2 Close Expense accounts
Equipment 26,000
Accumulated depreciation-Equip. $ 375
to Income Summary.
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 2. Closing Process
P2 2.2. Recording Closing Entries

2 Close Expense accounts to Income Summary.

Dr. Cr.
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

- First closing entry transfers debit balances in expense (and loss) accounts to the
Income Summary account
- Second bring expenses accounts with debit balances to zero by crediting them.
 2. Closing Process
P2 2.2. Recording Closing Entries
Depreciation 2 Close Expense accounts
Rent Expense to Income Summary.
Expense- Eq.
1,000 1,000
375 375
-
-

Income Summary
Salaries Expense Supplies Expense
4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
 2. Closing Process
P2 2.2. Recording Closing Entries
FastForward
Adjusted Trial Balance 3 Close Income Summary
December 31, 2009 to Owner’s Capital.
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 2. Closing Process
P2 2.2. Recording Closing Entries
3 Close Income Summary to Owner’s Capital.

Dr. Cr.
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785

- After steps 1 and 2, the balance of Income Summary

C. Taylor, Capital Income Summary
is equal to December’s net income of $3,785 ($8,150 4,365 8,150
30,000
credit less $4,365 debit). 3,785 3,785
- Transfers the balance of the Income Summary -
account to the capital account. → Income Summary 33,785
account has a zero balance
Ledger accounts after posting this closing entry.
 2. Closing Process
P2 2.2. Recording Closing Entries
FastForward
Adjusted Trial Balance 4 Close Withdrawals to
December 31, 2009 Owner’s Capital.
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 2. Closing Process
P2 2.2. Recording Closing Entries

4 Close Withdrawals to Owner’s Capital. C. Taylor,

Withdrawals C. Taylor, Capital
200 200 200 30,000
Dr. Cr.
3,785
Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200
- 33,585
- Transfers any debit balance in the withdrawals account
to the owner’s capital account
→ Withdrawals account a zero balance
Ledger accounts after posting this closing entry.
 2. Closing Process
P2 2.2. Recording Closing Entries
 2. Closing Process
P3 2.3. Post-Closing Trial Balance
FastForward
Post-Closing Trial Balance
List of permanent accounts and their December 31, 2009
balances after posting closing entries. Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Total debits and credits must be equal.
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C.Taylor, Capital 33,585
Totals $ 43,120 $ 43,120
 2. Closing Process
C2 2.4. Steps in the Accounting Cycle

• Steps 4, 6, and 9 can be done on a work sheet. A work sheet is useful in planning adjustments,
• But adjustments (step 5) must always be journalized and posted.
• Steps 3, 4, 6, and 9 are automatic with a computerized system.
 3. Classified Balance Sheet
C3 3.1. Classification Structure
▪ A classified balance sheet organizes assets and liabilities into important subgroups that provide
more information to decision makers.
▪ Operating cycle is the time span from when cash is used to acquire goods and services
until cash is received from the sale of goods and services.

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.
 3. Classified Balance Sheet
C3 3.1. Classification Structure
Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
ASSETS
Current assets
Cash $ 6,500 Current assets are expected to
Short-term investments 2,100 be sold, collected, or used
Accounts receivable 4,400
Merchandise inventory 27,500 within one year or the
Prepaid expenses 2,400 company’s operating cycle.
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
Equipment $ 33,200
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800
 3. Classified Balance Sheet
C3 3.1. Classification Structure
Snowboarding Components
Balance Sheet (Partial)
January 31, 2009 Long-term investments are
ASSETS
Current assets
expected to be held for more than one
Cash $ 6,500 year or the operating cycle.
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400 Plant assets are tangible long-lived
Total current assets $ 42,900 assets used to produce or sell
Long-term investments
Notes receivable 1,500 products and services.
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Plant assets
Intangible assets are long-term
Equipment $ 33,200 resources used to produce or sell
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
products and services and that lack
Land 73,200 physical form.
Intangible assets 10,000
Total assets $ 343,800
 3. Classified Balance Sheet
C3 3.1. Classification Structure

Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
LIABILITIES
Current liabilities Current liabilities are
Accounts payable $ 15,300 obligations due within the longer
Wages payable 3,200 of one year or the company’s
Notes payable 3,000 operating cycle.
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
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800
 3. Classified Balance Sheet
C3
3.1. Classification Structure
Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300 Long-term liabilities are
Wages payable 3,200 obligations not due within the
Notes payable 3,000 longer of one year or the
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
company’s operating cycle.
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800
 3. Classified Balance Sheet
C3
3.1. Classification Structure

Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300 Equity is the owner’s claim on
Wages payable 3,200 the assets.
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
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800
 Current Ratio
A1

Ind. Assignment- Helps assess the company’s ability to pay its debts in
read Analysis pg.
191
the near future
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
Current Ratio =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
Limited Brands, Inc.

$ in millions 2007 2006 2005 2004

Current assets $ 2,771 $ 2,784 $ 2,684 $ 4,433
More research: Liquidity ratios (Acid-test)
Current liabilities 1,709 1,561 1,451 1,388

Current ratio 1.6 1.8 1.8 3.2

Industry current ratlo 2.3 2.4 2.5 2.7

Homework

HOMEWORK:
QS 4-8, pg. 200
E4-7, pg. 202, 4-10 pg. 203, 4-11 pg. 204, 4-15 pg.205
Problem 4-1A, page 206; Problem 4-4A, page 209 (Wild 22nd ed)

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