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Chapter

Completing the Accounting Cycle


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Cycle????
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Learning Objectives
Prepare a worksheet and explain its usefulness Explain why temporary accounts are closed each period Describe and prepare closing entries Explain and prepare a post-closing trial balance
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Identify steps in the accounting cycle Explain and prepare a classified balance sheet Prepare reversing entries and explain their purpose

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Benefits of a Work Sheet


Aids the preparation of financial statements.
Assists in planning and organizing an audit.

Reduces possibility of errors.

Not a required report.

Helps in preparing interim financial statements.

Links accounts and their adjustments.


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Shows the effects of proposed transactions.


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FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER 2006


Unadjusted Trial Balance Dr. Cr. 3,950 9,720 2,400 26,000 6,200 3,000 30,000 600 5,800 300 1,400 1,000 230 45,300 Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr.

Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals

First, enter the unadjusted amounts to the worksheet.

45,300
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Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals

Trial Balance Dr. Cr. 3.950 9.720 2.400 26.000

FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER Unadjusted 2006
Adjustments Dr. 1.800 b a c e d 250 Cr.

Next, enter the adjustments. 1.050


100 375 210

Adjusted Trial Balance Dr. Cr.

6.200 3.000 30.000 600 5.800 300 1.400 1.000 230 45.300

d f c e a b 375 210 100 1.050 3.785

250 1.800

45.300

3.785

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Prepare adjusted trial balance.


Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals

FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER 2006


Unadjusted Trial Balance Dr. Cr. 3,950 9,720 2,400 26,000 Adjustments Dr. f 1,800 b a c e 250 600 d f c e a b 45,300 375 210 100 1,050 3,785 3,785 250 1,800 375 1,610 100 1,000 1,050 230 47,685 1,050 100 375 210 Cr. Adjusted Trial Balance Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 7,850 300

6,200 3,000 d 30,000 600 5,800 300 1,400 1,000 230 45,300

47,685

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FastForward Sort adjusted trial balance Work Sheet amounts to Ended financial statements. For Month December 31, 2004
Adjusted Trial Balance Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 600 7,850 300 375 1,610 100 1,000 1,050 230 47,685 375 1,610 100 1,000 1,050 230 4,365 7,850 300 Income Statement Dr. Cr. Balance Sheet & Statement of Equity Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 600

Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals

47,685

8,150

43,320

39,535

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FastForward Total statement columns, compute income or loss, and Work Sheet balance columns. For Month Ended December 31, 2004
Adjusted Trial Balance Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 600 7,850 300 375 1,610 100 1,000 1,050 230 47,685 375 1,610 100 1,000 1,050 230 4,365 3,785 8,150 7,850 300 600 Income Statement Dr. Cr. Balance Sheet & Statement of Equity Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000

Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals Profit for the period

47,685

8,150 8,150

43,320 43,320

39,535 3,785 43,320

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Prepare the Financial Statements


FASTFORWARD INCOME STATEMENT FOR THE MONTH ENDED 31 DECEMBER 2006 Revenues: Consulting revenue $7,850 Rental revenue 300 Total revenues 8,150 Less: Operating expenses: Depr. expense - Equip. 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Total expenses 4,365 Larson, Wild, Ropidah, Haslinda, Aryati, Liana Profit for Chiapetta, the period $3,785

Prepare the Income Statement.

A work sheet does not substitute for financial statements.


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FASTFORWARD INCOME STATEMENT FOR THE MONTH ENDED 31 DECEMBER 2006

Revenues Consulting revenue Rental revenue Total revenues Operating expenses Depr. expense - Equip. Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Profit for the period

$7,850 300 8,150

(375) (1,610) (100) (1,000) (1,050) (230) $3,785

Prepare the Statement of Changes in Owners Equity.


FASTFORWARD STATEMENT OF OWNER'S EQUITY FOR THE MONTH ENDED 31 DECEMBER 2006 $ $ 3,785 30,000 -0$33,785 $33,785 (600) $33,185

C. Taylor, Capital 1/12/06 Profit for the period Investment by owner Withdrawal by owner C. Taylor, Capital 31/12/06

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FASTFORWARD STATEMENT OF OWNER'S EQUITY FOR THE MONTH ENDED 31 DECEMBER 2006 C. Taylor, Capital 1/12/06 Add: Profit for the period Investment by owner Total Less: Withdrawal by owner C. Taylor, Capital 31/12/06 $ 3,785 30,000 -033,785 33,785 600 $33,185

Prepare the Balance Sheet.


FASTFORWARD BALANCE SHEET 31 DECEMBER 2006

Non-current assets
Equipment Less: accum. depr. Current assets Cash Accounts receivable Supplies Prepaid insurance $ 26,000 375 $25,625 3,950 1,800 8,670 2,300 $42,345 $33,185

Total assets Equity


C. Taylor, Capital

Current liabilities
Accounts payable Salaries payable Unearned consulting revenues Total equity and liabilities Total liabilities and equity $ 6,200 210 2,750 $42,345 33,185

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Closing Process
Resets revenue, expense and withdrawal account balances to zero at the end of the period.
Identify accounts for closing.

Helps summarize a periods revenues and expenses in the Income Summary account.
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Record and post closing entries.

Prepare post-closing trial balance.


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Temporary and Permanent Accounts


Revenues
Withdrawals Expenses Liabilities

Assets Owners Capital

Temporary Accounts

Permanent Accounts

Income Summary

The closing process applies only to temporary accounts.


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Recording Closing Entries


Close Revenue accounts to Income Summary. Close Expense accounts to Income Summary. Close Income Summary account to Owners Capital. Close Withdrawals to Owners Capital.
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Lets see how the closing process works!

Closing Process
Expense Accounts 10,000

Revenue Accounts 25,000

10,000

25,000

Income Summary

Owner's Capital 30,000

Withdrawals Account 5,000

30,000

Balances before closing.

5,000

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Closing Process
Expense Accounts 10,000

Close Revenue accounts to Income Summary.


Income Summary 25,000

Revenue Accounts 25,000 25,000

10,000

Owner's Capital 30,000

25,000

Withdrawals Account 5,000

30,000

5,000

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Closing Process
Expense Accounts 10,000 10,000

Close Expense accounts to Income Summary.


Income Summary 10,000 25,000

Revenue Accounts 25,000 25,000

Owner's Capital 30,000

15,000

Withdrawals Account 5,000

30,000

The balance in Income Summary equals profit for the period

5,000

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The McGraw-Hill Companies, Inc., 2007

Closing Process
Expense Accounts 10,000 10,000

Close Income Summary to Owners Capital.


Income Summary 10,000 25,000 15,000

Revenue Accounts 25,000 25,000

Owner's Capital 30,000 15,000 45,000

Withdrawals Account 5,000

5,000

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Closing Process
Expense Accounts 10,000 10,000

Revenue Accounts 25,000 25,000

Income Summary 10,000 25,000 15,000


Owner's Capital 5,000 30,000 15,000 45,000 40,000

Withdrawals Account 5,000 5,000

Close Withdrawals account to Owners Capital.

5,000 -

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FASTFORWARD ADJUSTED TRIAL BALANCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 600 Consulting revenue Rental revenue 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
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

$375 6,200 210 2,750 30,000 7,850 300

Using the adjusted trial balance, lets prepare the closing entries for FastForward.

$47,685
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FASTFORWARD ADJUSTED TRIAL BALANCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 600 Consulting revenue Rental revenue 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
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$375 6,200 210 2,750 30,000 7,850 300

Close Revenue accounts to Income Summary.

$47,685
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Close Revenue Accounts to Income Summary


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

Now, lets look at the ledger accounts after posting this closing entry.

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Close Revenue Accounts to Income Summary


Consulting Revenue 7,850 7,850

Income Summary 7,850 300

Rental Revenue 300 300

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2007

FASTFORWARD ADJUSTED TRIAL BALNCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 600 Consulting revenue Rental revenue 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
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$375 6,200 210 2,750 30,000 7,850 300

Close Expense accounts to Income Summary.

$47,685
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Close Expense Accounts to Income Summary


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

Now, lets look at the ledger accounts after posting this closing entry.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2007

Close Expense Accounts toto Income Close Expense Accounts Income Summary Summary
Depreciation Expense- Eq. 375 375 -

Rent Expense 1,000 1,000 Income Summary 4,365 7,850 300 3,785

Salaries Expense 1,610 1,610 Insurance Expense 100 100 -

Supplies Expense 1,050 1,050 Utilities Expense 230 230 -

Profit for the period

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FASTFORWARD ADJUSTED TRIAL BALANCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 600 Consulting revenue Rental revenue 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
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$375 6,200 210 2,750 30000 7,850 300

Close Income Summary to Owners Capital.

$47,685
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Close Income Summary to Owners Capital


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

Now, lets look at the ledger accounts after posting this closing entry.

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Close Income Summary to to Owners Close Income Summary Owners Capital Capital

C. Taylor, Capital 30,000 3,785 33,785

Income Summary 4,365 7,850 3,785 300 -

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FASTFORWARD ADJUSTED TRIAL BALANCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 600 Consulting revenue Rental revenue 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
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$375 6,200 210 2,750 30,000 7,850 300

Close Withdrawals to Owners Capital.

$47,685
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Close Withdrawals to Owners Capital

Dec.

31 C. Taylor, Capital 600 C. Taylor, Withdrawals

600

Now, lets look at the ledger accounts after posting this closing entry.

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Close Withdrawals to Owners Capital


C. Taylor, Withdrawals 600 600

C. Taylor, Capital 600 30,000 3,785 33,185

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Post-Closing Trial Balance


Lets look at FastForwards post-closing trial balance.

List of permanent accounts and their balances after posting closing entries. Total debits and credits must be equal.

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Post-Closing Trial Balance


FASTFORWARD POST-CLOSING TRIAL BALANCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equipment Accounts payable Salaries payable Unearned consulting revenue C.Taylor, Capital Totals $42,720
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$375 6,200 210 2,750 33,185 $42,720

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Lets discuss the components of a classified balance sheet.

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Classified Balance Sheet


Categories of a Classified Balance Sheet Assets Liabilities and Equity Current Assets Current Liabilities Noncurrent Assets Noncurrent Liabilities Long-Term Investments Equity Fixed Assets Intangible Assets

Current items are those expected to come due (both collected and owed) within the longer of one year or the companys normal operating cycle.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2007

SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $ Long-term investments Notes receivable Investments in stocks and bonds Land held for future expansion Total investments Intangible assets Total non-current assets Current Assets Cash Short-term investments Accounts receivable Merchandise inventory Prepaid expenses
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223.400

Current assets are expected to be 1.500 18.000 sold, collected, or used within one 48.000 year or the companys operating 67.500 10.000 cycle. $ 300.900
$6,500 2,100 4,400 27,500 2,400 $42,900
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SNOWBOARDING COMPONENTS BALANCE SHEET 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $223,400 Long-term investments Notes receivable Investments in stocks and bonds Land held for future expansion Total investments Intangible assets Total assets 1,500 18,000 48,000 67,500 10.000 $300.900

Long-term investments are expected to be held for the longer Current Assets Cash 6.500 of one year or the operating cycle. Short-term investments 2.100
Accounts receivable Merchandise inventory
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4,400 27,500
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SNOWBOARDING COMPONENTS BALANCE SHEET 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $223,400 Long-term investments Fixed assets are tangible long-lived Notes receivable 1.500 Investments in stocks and bonds 18.000 assets used to produce or sell Land held for future expansion 48.000 products and services. 67.500 Total investments Intangible assets Current assets Cash Short-term investments Accounts receivable 10.000 $300,900 $6,500 2,100 4,400

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SNOWBOARDING COMPONENTS BALANCE SHEET 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $223,400 Long-term investments Notes receivable Investments in stocks and bonds Land held for future expansion Intangible assets $1,500 18,000 48,000 $67,500 10.000 $300.900

Intangible assets are long-term resources used to produce or sell Current Assets Cash 6.500 that products and services and lack physical form.
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SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006 Current liabilities Accounts payable $ 15.300 Wages payable 3.200 Notes payable 3.000 Current portion of long-term liabilities 7.500 Total current liabilities $29,000

Current liabilities are obligations due within the longer of one year or the companys operating cycle.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2007

SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006

Equity and liabilities T.Hawk, Capital Non-current liabilities Notes payable (net of current portion) Current liabilities

$164,800

$150,000

Long-term liabilities are obligations not due within the longer of one year or the companys operating cycle.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2007

SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006

Equity and liabilities T.Hawk, Capital Non-current liabilities Notes payable (net of current portion) Current liabilities

$164,800

$150,000

Equity is the owners claim on the assets.


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End of Chapter 4

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