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Completing the
Accounting
Cycle and
Classifying
Accounts
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
CHAPTER
4
Learning Objectives
1. Describe and prepare a worksheet and
explain its usefulness. (LO1)
2. Describe the closing process and explain
why temporary accounts are closed each
period. (LO2)
3. Prepare closing entries. (LO3)
4. Explain and prepare a post-closing trial
balance. (LO4)
© 2013 McGraw-Hill Ryerson Limited.2
Learning Objectives
5. Complete the steps in the accounting
cycle. (LO5)6. Explain and prepare a classified balance
sheet. (LO6)7. Prepare reversing entries and explain
their purpose. (Appendix 4A) (LO7)8. Calculate the current ratio and describe
what it reveals about a company’s
financial condition. (Appendix 4B) (LO8)© 2013 McGraw-Hill Ryerson Limited.3
Prepare
post-closing
trial balance
Journalize
Close
Prepare
unadjusted
trial balance
Post
Analyze
transactions
Prepare
adjusted
trial balance
Prepare
statements
Adjust
2
3
4
6
8
19
The Accounting Cycle
5
LO 1
7
© 2013 McGraw-Hill Ryerson Limited.4
An optional working paper that can be
used to simplify the preparation of financial
statements.
It is:
• Prepared before adjusting entries are made.
• Not distributed to decision makers.
• Helpful in preventing errors.
• Often used by auditors.
© 2013 McGraw-Hill Ryerson Limited.
The Worksheet
LO 15
Account
Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
Balance Sheet and
Statement of
Changes in Equity
Unadjusted Trial
Balance Adjustments
Adjusted Trial
Balance Income Statement
A Blank Worksheet
Steps:
1. Enter unadjusted trial balance.
2. Enter adjustments.
3. Prepare adjusted trial balance.
4. Extend adjusted trial balance columns.
5. Enter net income (or loss) and balance
financial statement columns.
6. Prepare financial statements.
© 2013 McGraw-Hill Ryerson Limited. LO 16
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070
Supplies 3,600
Prepaid insurance 2,400
Equipment 6,000
Accumulated depreciation, equipment
Accounts payable 200
Unearned teachingrevenue 3,000
Notes payable 6,000
Virgil Klimb, capital 10,000
Virgil Klimb, withdrawals 600
Teaching revenue 3,800
Equipment rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
23,300 23,300
For Month Ended March 31, 2014
Vertically Inclined Rock Gym
Work Sheet
Unadjusted Trial Balance Adjustments Adjusted Trial Balance
Step 1
Prepare Unadjusted
Trial Balance© 2013 McGraw-Hill Ryerson Limited.
LO 17
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070
Supplies 3,600 b) 1,050
Prepaid insurance 2,400 a) 100
Equipment 6,000
Accumulated depreciation, equipment c) 200
Accounts payable 200
Unearned teaching revenue 3,000 d) 250
Notes payable 6,000
Virgil Klimb, capital 10,000
Virgil Klimb, withdrawals 600
Teaching revenue 3,800 d) 250
g) 1,800
Equipment rental revenue 300
Salaries expense 1,400 e) 70
Rent expense 1,000
Utilities expense 230
Totals 23,300 23,300
Insurance expense a) 100
Supplies expense b) 1,050
Depreciation expense, equipment c) 200
Salaries payable e) 70
Interest expense f) 35
Interest payable f) 35
Accounts receivable g) 1,800
3,505 3,505
For Month Ended March 31, 2014
Vertically Inclined Rock Gym
Work Sheet
Trial Balance Adjustments Adjusted Trial Balance
Step 2
Enter Adjustments
© 2013 McGraw-Hill Ryerson Limited.
LO 18
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070 8,070
Supplies 3,600 b) 1,050 2,550
Prepaid insurance 2,400 a) 100 2,300
Equipment 6,000 6,000
Accumulated depreciation, equipment c) 200 200
Accounts payable 200 200
Unearned teaching revenue 3,000 d) 250 2,750
Notes payable 6,000 6,000
Virgil Klimb, capital 10,000 10,000
Virgil Klimb, withdrawals 600 600
Teaching revenue 3,800 d) 250 5,850
g) 1,800
Equipment rental revenue 300 300
Salaries expense 1,400 e) 70 1,470
Rent expense 1,000 1,000
Utilities expense 230 230
Totals 23,300 23,300
Insurance expense a) 100 100
Supplies expense b) 1,050 1,050
Depreciation expense ,equipment c) 200 200
Salaries payable e) 70 70
Interest expense f) 35 35
Interest payable f) 35 35
Accounts receivable g) 1,800 1,800
Totals 3,505 3,505 25,405 25,405
For Month Ended March 31, 2014
Work Sheet
Trial Balance Adjustments Adjusted Trial Balance
Step 3
Prepare Adjusted Trial
Balance
© 2013 McGraw-Hill Ryerson Limited. LO 19
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070 8,070
Supplies 2,550 2,550
Prepaid insurance 2,300 2,300
Equipment 6,000 6,000
Accumulated depreciation, equipment 200 200
Accounts payable 200 200
Unearned teaching revenue 2,750 2,750
Notes payable 6,000 6,000
Virgil Klimb, capital 10,000 10,000
Virgil Klimb, withdrawals 600 600
Teaching revenue 5,850 5,850
Equipment rental revenue 300 300
Salaries expense 1,470 1,470
Rent expense 1000 1,000
Utilities expense 230 230
Insurance expense 100 100
Supplies expense 1,050 1,050
Depreciation expense ,equipment 200 200
Salaries payable 70 70
Interest expense 35 35
Interest payable 35 35
Accounts receivable 1,800 1,800
Totals 25,405 25,405 4,085 6,150 21,320 19,255
Net Income 2,065 2,065
Income Statement
Balance Sheet and
Statement of Changes in
Equity
Adjusted Trial Balance
Step 4
Extend Adjusted Amounts to
Statement Columns© 2013 McGraw-Hill Ryerson Limited.
LO 110
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070 8,070
Supplies 2,550 2,550
Prepaid insurance 2,300 2,300
Equipment 6,000 6,000
Accumulated depreciation, equipment 200 200
Accounts payable 200 200
Unearned teaching revenue 2,750 2,750
Notes payable 6,000 6,000
Virgil Klimb, capital 10,000 10,000
Virgil Klimb, withdrawals 600 600
Teaching revenue 5,850 5,850
Equipment rental revenue 300 300
Salaries expense 1,470 1,470
Rent expense 1000 1,000
Utilities expense 230 230
Insurance expense 100 100
Supplies expense 1,050 1,050
Depreciation expense, equipment 200 200
Salaries payable 70 70
Interest expense 35 35
Interest payable 35 35
Accounts receivable 1,800 1,800
Totals 25,405 25,405 4,085 6,150 21,320 19,255
Net Income 2,065 2065
Totals 6,150 6,150 21,320 21,320
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
Income Statement
Balance Sheet and
Statement of Changes in
Equity
Adjusted Trial Balance
Step 5
Enter net income (or loss) and balance
financial statement columns.
© 2013 McGraw-Hill Ryerson Limited. LO 111
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070 8,070
Supplies 2,550 2,550
Prepaid insurance 2,300 2,300
Equipment 6,000 6,000
Accumulated depreciation, equipment 200 200
Accounts payable 200 200
Unearned teaching revenue 2,750 2,750
Notes payable 6,000 6,000
Virgil Klimb, capital 10,000 10,000
Virgil Klimb, withdrawals 600 600
Teaching revenue 5,850 5,850
Equipment rental revenue 300 300
Salaries expense 1,470 1,470
Rent expense 1000 1,000
Utilities expense 230 230
Insurance expense 100 100
Supplies expense 1,050 1,050
Depreciation expense, equipment 200 200
Salaries payable 70 70
Interest expense 35 35
Interest payable 35 35
Accounts receivable 1,800 1,800
Totals 25,405 25,405 4,085 6,150 21,320 19,255
Net Income 2,065 2065
Totals 6,150 6,150 21,320 21,320
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
Income Statement
Balance Sheet and
Statement of Changes in
Equity
Adjusted Trial Balance
Step 6
Prepare financial statements from
worksheet information.
© 2013 McGraw-Hill Ryerson Limited.
LO 112
The Closing Process
The closing process occurs at the end of an accounting period after financial statements are prepared.
Closing entries:
1. Reset revenue, expense and withdrawal account balances to zero at the end of the period.
2. Update the capital account to reflect net income (or loss) and drawings from the period just ending.
© 2013 McGraw-Hill Ryerson Limited. LO 213
Four-Step Closing Process
(REID)1. Close Revenue accounts to Income
Summary account.
2. Close Expense accounts to Income Summary account.
3. Close Income Summary account to Owner’s Capital account.
4. Close Drawings (Withdrawals) account to the Capital account.
© 2013 McGraw-Hill Ryerson Limited. LO 314
Four-Step Closing Process
(REID)Example
Please see the Adjusted Trial Balance
illustration in the textbook.
© 2013 McGraw-Hill Ryerson Limited. LO 315
Income Summary
6,150
6,150
Teaching Revenue
5,850 5,850
-
Equip. Rental Revenue
300 300
-
Step 1: Close Revenue accounts to Income
Summary
© 2013 McGraw-Hill Ryerson Limited.
Teaching Revenue 5,850
Equip. Rental Revenue 300Income Summary 66,150
LO 316
Insurance Expense
100 100
-
Step 2: Close Expense Accounts to Income
Summary
Income Summary
4,085 6,150
2,065
Salaries Expense
1,470 1,470
-
© 2013 McGraw-Hill Ryerson Limited.
Income Summary 4,085
Depreciation Expense 200
Salaries Expense 1,470
Interest Expense 35
Insurance Expense 100
Rent Expense 1,000
Supplies Expense 1,050
Utilities Expense 230
Interest Expense
35 35
-
Depreciation
Expense
200 200
-
Utilities Expense
230 230
-
Supplies Expense
1,050 1,050
-
Rent Expense
1,000 1,000
-
LO 317
Virgil Klimb,
Capital
10,000
2,065
bal. 12,065
Income Summary
4,085 6,150
bal. 2,065
2,065 -
Step 3: Close Income Summary to Capital
© 2013 McGraw-Hill Ryerson Limited.
Income Summary 2,065
Virgil Klimb, Capital 2,065
LO 318
Virgil Klimb,
Capital
10,000
600 2,065
balance 11,465
Step 4: Close Drawings to Capital
Virgil Klimb,
Withdrawals
600 600
balance -
© 2013 McGraw-Hill Ryerson Limited.
Virgil Klimb, Capital 600
Virgil Klimb, Withdrawals 600
LO 319
After closing:
1. All temporary accounts (revenue, expense, and withdrawal accounts will have zero balances.
2. The capital account will be updated to reflect net income (or loss) and withdrawals from the period just ending.
3. All other accounts will be unchanged.
© 2013 McGraw-Hill Ryerson Limited.
Account Balances after Closing
LO 420
A list of permanent accounts and their balances after closing entries are journalized and posted.
It verifies that:
• Total debits = total credits for permanent accounts.
• All temporary accounts have zero balances.
© 2013 McGraw-Hill Ryerson Limited.
Post-Closing Trial Balance
LO 421
Prepare
post-closing
trial balance
Journalize
Close
Prepare
unadjusted
trial balance
Post
Analyze
transactions
Prepare
adjusted
trial balance
Prepare
statements
Adjust
2
3
4
6
8
19
The Accounting Cycle
5
LO 2
7
© 2013 McGraw-Hill Ryerson Limited.22
Closing the temporary accounts at the end of each accounting period:A)Serves to transfer the effects of these
accounts to the proper equity account on the balance sheet.
B)Prepares the withdrawals account for use in the next period.
C)Gives the revenue and expense accounts zero balances.
D)Both A and C.
E)All of the above.
© 2013 McGraw-Hill Ryerson Limited.
Mini-Quiz
23
Closing the temporary accounts at the end of each accounting period:A)Serves to transfer the effects of these
accounts to the proper equity account on the balance sheet.
B)Prepares the withdrawals account for use in the next period.
C)Gives the revenue and expense accounts zero balances.
D)Both A and C.
E)All of the above.
© 2013 McGraw-Hill Ryerson Limited.
Mini-Quiz
24
A classified balance sheet:
• Organizes assets and liabilities into important subgroups.
• Provides users with more useful information for decision making.
© 2013 McGraw-Hill Ryerson Limited.
Classified Balance Sheet
LO 625
Assets
Current Assets:
Cash 6,500$
Short -term investments 2,100
Accounts receivable 4,400
Merchandise inventory 29,000
Prepaid expenses 2,400
Total current assets 44,400$
Long-term investments:
Notes Receivable, due Mar. 31,2016 18,000$
Land not currently used in operations 48,000
Total investments 66,000
Property, plant and equipment:
Land 73,200$
Buildings 170,000$
Less: Accumulated depreciation 45,000 125,000
Store equipment 33,200$
Less: Accumulated depreciation 8,000 25,200
Total property, plant and equipment 223,400
Intangible assets:
Trademark 10,000
Total assets 343,800$
Music Components
Balance Sheet
January 31, 2014
Current assets are assets that are
expected to be sold, collected, or
used within the longer of one year
or the company’s operating cycle.
© 2013 McGraw-Hill Ryerson Limited. LO 626
Assets
Current Assets:
Cash 6,500$
Short -term investments 2,100
Accounts receivable 4,400
Merchandise inventory 29,000
Prepaid expenses 2,400
Total current assets 44,400$
Long-term investments:
Notes Receivable, due Mar. 31,2016 18,000$
Land not currently used in operations 48,000
Total investments 66,000
Property, plant and equipment:
Land 73,200$
Buildings 170,000$
Less: Accumulated depreciation 45,000 125,000
Store equipment 33,200$
Less: Accumulated depreciation 8,000 25,200
Total property, plant and equipment 223,400
Intangible assets:
Trademark 10,000
Total assets 343,800$
Music Components
Balance Sheet
January 31, 2014
Long-term investments are held for
more than one year or the operating
cycle.
© 2013 McGraw-Hill Ryerson Limited. LO 627
Assets
Current Assets:
Cash 6,500$
Short -term investments 2,100
Accounts receivable 4,400
Merchandise inventory 29,000
Prepaid expenses 2,400
Total current assets 44,400$
Long-term investments:
Notes Receivable, due Mar. 31,2016 18,000$
Land not currently used in operations 48,000
Total investments 66,000
Property, Plant and Equipment:
Land 73,200$
Buildings 170,000$
Less: Accumulated depreciation 45,000 125,000
Store equipment 33,200$
Less: Accumulated depreciation 8,000 25,200
Total property, plant and equipment 223,400
Intangible assets:
Trademark 10,000
Total assets 343,800$
Music Components
Balance Sheet
January 31, 2014
Property, plant and equipment are
tangible assets used for more than one
accounting period to produce or sell
products and services.
© 2013 McGraw-Hill Ryerson Limited. LO 628
Assets
Current Assets:
Cash 6,500$
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 29,000
Prepaid expenses 2,400
Total current assets 44,400$
Long-term investments:
Notes Receivable, due Mar. 31,2016 18,000$
Land not currently used in operations 48,000
Total investments 66,000
Property, Plant and Equipment:
Land 73,200$
Buildings 170,000$
Less: Accumulated depreciation 45,000 125,000
Store equipment 33,200$
Less: Accumulated depreciaton 8,000 25,200
Total property, plant and equipment 223,400
Intangible assets:
Trademark 10,000
Total assets 343,800$
Music Components
Balance Sheet
January 31, 2014
Intangible assets are long-term
resources used to produce or sell
products and services. They lack
physical form.
© 2013 McGraw-Hill Ryerson Limited. LO 629
Liabilities
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$
Long-term liabilities:
Notes payable (less current portion) 150,000
Total liabiltiies 179,000
Equity
Donald Bowie, capital 164,800
Total liabilities and equity 343,800$
Music Components
Balance Sheet
January 31, 2014
Current liabilities are obligations due to be
paid or settled within the longer of one year
or the company’s operating cycle.
© 2013 McGraw-Hill Ryerson Limited. LO 630
Liabilities
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$
Long-term liabilities:
Notes payable (less current portion) 150,000
Total liabiltiies 179,000
Equity
Donald Bowie, capital 164,800
Total liabilities and equity 343,800$
Long-term liabilities are obligations due
beyond the longer of one year or the
company’s operating cycle.
© 2013 McGraw-Hill Ryerson Limited. LO 631
Music Components
Balance Sheet
January 31, 2014
Liabilities
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$
Long-term liabilities:
Notes payable (less current portion) 150,000
Total liabiltiies 179,000
Equity
Donald Bowie, capital 164,800
Total liabilities and equity 343,800$
Music Components
Balance Sheet
January 31, 2014
Equity is the owner’s claim on the assets
of a company.
© 2013 McGraw-Hill Ryerson Limited. LO 632
Q What classes of assets and liabilities are
shown on a typical classified balance
sheet?
A Current assets, long-term investments,
PP&E, intangible assets, current
liabilities, long-term liabilities
© 2013 McGraw-Hill Ryerson Limited.
Review
LO 633
End of Chapter
© 2013 McGraw-Hill Ryerson Limited.34