Completing the Accounting Cycle Chapter 4

Objective 1 Prepare an accounting work sheet.

The Accounting Cycle

The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.

The Accounting Cycle

For a new business, begin by setting up ledger accounts. For an established business, begin with account balances carried over from the previous period.

The Accounting Cycle

Accounts Receivable 1,350 Accounts Receivable 1,700 Service Revenue 1,700

Accounts Receivable 1,350 1,700

Accounts Receivable 1,350 1,700 3,050

The Accounting Cycle

Work Sheet 12,100 3,050

Cash Accounts receivable

Balance Sheet

Income Statement

The Accounting Cycle

Adjusting entries Cash 12,100 Closing entries Accounts Receivable 3,050

Postclosing Trial Balance Cash 12,100 Accounts receivable 3,050

The Accounting Work Sheet

What is the work sheet? A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements. It is an internal document.

The Accounting Work Sheet

Account Title Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 42,200 42,200
2002 Prentice Hall, Inc. Business Publishing

Trial Balance Dr. Cr. 12,100 1,350 250 15,500 7,500 1,200 1,100 1,500 7,200 1,000 23,700 12,000

Adjustments Dr. Cr.

Adjusted Trial Balance Dr. Cr.

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The Accounting Work Sheet

a The company has earned revenue of $1,700 which will be collected next month. b Inventory of supplies at month end totaled $150. c Depreciation for the period was calculated as $200.

The Accounting Work Sheet

Trial Balance Adjustments Account Title Dr. Cr. Dr. Cr. Cash 12,100 Accounts receivable a) 1,700 1,350 Supplies 250 b) 100 Equipment 15,500 Accum. depreciation c) 200 7,500 Accounts payable 1,200 Salary payable 1,100 Unearned revenue 1,500 Capital 7,200 Withdrawals 1,000 Revenue 23,700 a) 1,700 Salary expense 12,000 Supplies expense b) 100 Depreciation expense c) 200 Totals 2,000 42,200 42,200 2,000
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E

Adjusted Trial Balance Dr. Cr. 12,100 3,050 150 15,500 7,700 1,200 1,100 1,500 7,200 1,000 25,400 12,000 100 200 44,100 44,100
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The Accounting Work Sheet

Account Title Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals
2002 Prentice Hall, Inc.

Adjusted Trial Balance Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 25,400 1,000

Income Statement Dr. Cr.

Balance Sheet Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 1,000 18,700

12,00 0 44,100 100 200 Business44,10 Publishing Accounting, 5/E 0

Horngren/Harrison/Bamber

31,80 0

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The Accounting Work Sheet

Account Title Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals
2002 Prentice Hall, Inc.

Adjusted Trial Balance Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 25,400 1,000

Income Statement Dr. Cr.

Balance Sheet Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 1,000

25,400 12,000 100 200 12,300

12,00 0 44,100 25,400 18,700 100 200 31,80 Business44,10 Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 13 0 0

The Accounting Work Sheet

Account Title Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals Net income
2002 Prentice Hall, Inc.

Adjusted Trial Balance Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 25,400 1,000

Income Statement Dr. Cr.

Balance Sheet Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 1,000

25,400 12,000 100 200 12,300 13,100 25,400

12,00 0 44,100 25,400 18,700 100 13,100 200 25,400 31,80 31,800 Business44,10 Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 14 0 0

Objective 2 Use the work sheet to complete the accounting cycle.

Recording the Adjusting Entries

The work sheet helps identify the accounts that need adjustments. Actual adjustment of the accounts requires journalizing and posting the entries.

Recording the Adjusting Entries

The adjusting entries may be recorded in the journal when they are entered on the work sheet. Many accountants journalize and post the adjusting entries just before they make the closing entries.

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

Closing the Accounts

Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.

Closing the Accounts

Closing Entries Expenses and Withdrawals decrease Owners Equity.

Revenues increase Owners Equity.

Closing the Accounts

Revenues and Expense accounts are closed to Income Summary. Income Summary is closed to Capital. Withdrawals are closed to Capital. In a corporation, Dividends are closed to Retained Earnings.

Closing the Accounts

Income Summary A debit balance represents net loss. A credit balance represents net income.

Closing the Accounts

Revenue 28,500 12,000 7,500 9,000 Salary Exp 1,500 3,300 1,800 Rent Exp 800 800 Supplies Exp 350 350
2002 Prentice Hall, Inc.

(Close Revenue Account)

Income Summary (Close Expense 4,450 28,500 Accounts) 24,050 (Close Income Summary) Capital Account 2,500 24,050 (Close Withdrawals Withdrawals Account) 2,500 2,500
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Postclosing Trial Balance

The accounting cycle ends with the postclosing trial balance. The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.

Permanent Accounts
What accounts never close? Assets Liabilities Owners equity Balances of permanent accounts carry over to the next period.

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

Liquidity
This is a 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.

Current Assets
Current assets are cash, or will be converted to cash, in one year or within the normal business operating cycle. What are some other examples? short-term receivables inventory prepaid expenses

Current Liabilities
Current liabilities are debts or obligations due within one year or within the operating cycle. What are some examples? accounts and salary payables short-term notes payable unearned revenue

Long-term Assets and Liabilities

Long-term assets include all other assets. property, equipment, and intangibles Long-term liabilities are all other debts due in longer than one year or the entitys operating cycle.

The Classified Balance Sheet

Debit side Current assets Long-term assets Listed in the order of decreasing liquidity Credit side Current liabilities Long-term liabilities Listed in the order of how soon they must be paid

The Classified Balance Sheet

XYZ Services January 31, 20XX
Assets Current assets: Cash 12,100 Accounts receivable 3,050 Supplies 150 Total current assets 15,300 Plant assets Equipment 15,500 Less Accum. deprec. 7,700 7,800 Total assets 23,100 Liabilities Current liabilities: Accounts payable Salary payable Unearned revenue Total liabilities Owners equity Capital Total liabilities and owners equity 1,200 1,100 1,500 3,800 19,300

23,100

Different Formats of the Balance Sheet

Report Format Assets Liabilities Owners Equity Account Format Assets = Liabilities + Owners Equity

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

Comparative Financial Statements

They enhance the users ability to analyze a companys past performance. What are two common ratios used to measure liquidity? 1 Current ratio 2 Debt ratio

Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.

Current ratio = Current assets Current liabilities

Debt Ratio
It indicates the proportion of a businesss assets that are financed with debt. It measures their ability to pay both current and long-term debt.

Total liabilities Total assets

Trend Analysis
Decision makers compare various ratios over a period of time.

End of Chapter 4