Completing theAccounting
CycleChapter
4
HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
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Objectives
1. Prepare an accounting work sheet.2. Use the work sheet to complete the
accounting cycle.3. Close the revenue, expense and drawings
accounts.4. Classify assets and liabilities as current or
non-current.5. Use the current and debt ratios to
evaluate a business’s ability to pay its debts
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Prepare an accounting
work sheet.
Objective 1
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The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.
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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.
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Accounts Receivable 1,350
Accounts Receivable 1,700 Service Revenue 1,700
Accounts Receivable 1,350 1,700 3,050
Accounts Receivable 1,350 1,700
The Accounting Cycle
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Work Sheet
CashAccountsreceivable
12,100
3,050
Statement ofFinancialPosition
Statement ofFinancial
Performance
The Accounting Cycle
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Postclosing Trial Balance
CashAccountsreceivable
12,100
3,050
Adjusting entries Closing entries
Cash Accounts Receivable12,100 3,050
The Accounting Cycle
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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.
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Adjusted Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalDrawingsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
12,1001,350
25015,500
1,000
12,000
42,200
7,5001,2001,1001,5007,200
23,700
42,200
The Accounting Work Sheet
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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.
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Adjusted Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalDrawingsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
12,1001,350
25015,500
1,000
12,000
42,200
7,5001,2001,1001,5007,200
23,700
42,200
a) 1,700
b) 100c) 200
2,000
b) 100
c) 200
a) 1,700
2,000
12,1003,050
15015,500
1,000
12,000100200
44,100
7,7001,2001,1001,5007,200
25,400
44,100
The Accounting Work Sheet
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Adjusted Income Balance Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalDrawingsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
7,7001,2001,1001,5007,200
25,400
44,100
12,100
3,050150
15,500
1,000
12,000
100200
44,100
12,100
3,050150
15,500
1,000
31,800
7,7001,2001,1001,5007,200
18,700
The Accounting Work Sheet
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Adjusted Income Balance Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalDrawingsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
7,7001,2001,1001,5007,200
25,400
44,100
12,100
3,050150
15,500
1,000
12,000
100200
44,100
12,100
3,050150
15,500
1,000
31,800
7,7001,2001,1001,5007,200
18,700
12,000100200
12,300
25,400
25,400
The Accounting Work Sheet
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Adjusted Income Balance Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalDrawingsRevenueSalary expenseSupplies expenseDepreciation expense
TotalsNet profit
7,7001,2001,1001,5007,200
25,400
44,100
12,100
3,050150
15,500
1,000
12,000
100200
44,100
12,100
3,050150
15,500
1,000
31,800
31,800
7,7001,2001,1001,5007,200
18,70013,10031,800
12,000100200
12,30013,10025,400
25,400
25,400
25,400
The Accounting Work Sheet
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Use the work sheet
to complete theaccounting
cycle.
Objective 2
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The work sheethelps identifythe accounts
that needadjustments.
Actual adjustmentof the accounts
requiresjournalisingand postingthe entries.
Recording theAdjusting Entries
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Recording theAdjusting Entries
The adjusting entries may be recorded in the journal when they are entered on the work sheet.
Many accountants journalise and post the adjusting entries just before they make the closing entries.
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Close the revenue,expense, and
drawings accounts.
Objective 3
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Closing the Accounts
Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.
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Closing EntriesClosing Entries
RevenuesincreaseOwner’s Equity.
RevenuesincreaseOwner’s Equity.
Expenses and
DrawingsdecreaseOwner’s Equity.
Expenses and
DrawingsdecreaseOwner’s Equity.
Closing the Accounts
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Closing the Accounts
Revenues and Expense accounts are closed to Profit and Loss Summary.
Profit and Loss Summary is closed to Capital.
Drawings are closed to Capital. In a company, Dividends are closed to
Retained Profits.
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Profit and Loss SummaryProfit and Loss Summary
A credit balance
represents net profit.
A credit balance
represents net profit.
A debit balance
represents net loss.
A debit balance
represents net loss.
Closing the Accounts
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RevenueP & L
Summary12,000
7,5009,000
Salary Exp3,300
28,500
1,5001,800
4,450 28,500
Rent Exp800 800
Supplies Exp350 350
24,050
24,050
(Close RevenueAccount)
(Close ExpenseAccounts)
(Close P & LSummary)
Drawings2,500 2,500
2,500
CapitalAccount
(CloseDrawingsAccount)
Closing the Accounts
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Post-closing 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.
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Permanent Accounts
What accounts never close?– Assets– Liabilities– Owner’s equity Balances of permanent accounts carry
over to the next period.
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Classify assets and liabilitiesas current or non-current.
Objective 4
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Liquidity
This is a measure of how quickly an item can be converted into cash.
On the statement of financial position, assets and liabilities are classified as either current or non-current to indicate their relative liquidity.
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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
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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 bills payable– unearned revenue
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Non-current Assets and Liabilities
Non-current assets include all other assets.
– property, equipment, and intangibles Non-current liabilities are all other debts
due in longer than one year (or the entity’s operating cycle).
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Debit sideCurrent assets
Non-current assets
Credit sideCurrent liabilities
Non-current liabilities
Listed in the orderof decreasing
liquidity
Listed in the orderof decreasing
liquidity
Listed in the orderof how soon they
must be paid
Listed in the orderof how soon they
must be paid
The Classified Statement of Financial Position
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Assets LiabilitiesCurrent assets: Current liabilities:Cash 12,100 Accounts payable 1,200Accounts receivable 3,050 Salary payable 1,100Supplies 150 Unearned revenue 1,500 Total current assets 15,300 Total liabilities 3,800Non-current assets Owner’s equity Equipment 15,500 Capital 19,300 Less Accum. deprec. 7,700 7,800 Total liabilities and
Total assets 23,100 owner’s equity 23,100
XYZ ServicesJune 30, 2005
The Classified Statement of Financial
Position
See exhibit 4-12 (MYOB) page 151 of the textbookSee exhibit 4-12 (MYOB) page 151 of the textbook
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Report Format
Assets =Liabilities +
Owner’s Equity
Account Format
Assets = Liabilities + Owner’s Equity
Different Formats ofStatements of Financial
Position
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Use the current and debtratios to evaluate a business’s
ability to pay its debts.
Objective 5
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Comparative Financial Statements
They enhance the user’s ability to analyse a company’s past performance.
What are two common ratios used to measure liquidity?
1 Current ratio2 Debt ratio
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Current ratio = Current assets ÷ Current liabilitiesCurrent ratio = Current assets ÷ Current liabilities
Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.
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Total liabilities ÷ Total assetsTotal liabilities ÷ Total assets
Debt Ratio
It indicates the proportion of a business’s assets that are financed with debt.
It measures their ability to pay both current and long-term debt.
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Trend Analysis
Decision makers compare various ratios over a period of time.
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End of Chapter 4