Copyright © 2007 Prentice-Hall. All rights reserved Completing the Accounting Cycle Chapter 4 1.

Copyright © 2007 Prentice-Hall. All rights reserved

Completing theCompleting theAccounting CycleAccounting CycleCompleting theCompleting the

Accounting CycleAccounting Cycle

Chapter 4

1


Objective 1Objective 1Objective 1Objective 1

Explain the steps in the accounting cycle

2


The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle

• Process of gathering financial information and preparing the financial statements

3


Computerized Computerized Accounting CycleAccounting Cycle

Computerized Computerized Accounting CycleAccounting Cycle

1. Identify business transactions

2. Record transactions

3. Post journal entries to ledger and

Prepare the trial balance

4. Record and post Adjusting entries

5. Prepare theAdjusted trial balance

6. Prepare theFinancial statements

7. Record & post closing entries

8. Prepare post-closing trial balance

4


Manual Accounting CycleManual Accounting CycleManual Accounting CycleManual Accounting Cycle

5


Smart Touch Learning Adjusted Trial Balance

May 31, 2020 Debit Credit

Cash 4,800Accounts Receivable 2,600Supplies 600Prepaid Rent 2,000Furniture 18,000

Building 48,000 Accum. Deprec. Furniture 300

Accum. Depreciation:Building 200

Accounts Payable 18,200Salary Payable 900

Interest Payable 100Unearned Service Revenue 400

Notes Payable 20,000Sheena Bright, Capital 33,200Sheena Bright, Withdrawals 1,000Service Revenue 7,600

Rent expense 1,000 Salary expense 1,800

Supplies expense 100 Deprec. Expense: Furniture 300

Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900

6


Smart Touch LearningIncome Statement

Month Ended May 31, 2010

Service Revenue $7,600 Expenses: Salary expense $1,800 Rent Expense 1,000 Utilities Expense 400 Deprec. Expense-Furniture 300 Deprec. Expense-Building 200 Interest Expense 100 Supplies Expense 100 Total expenses 3,900 Net income $3,700






Accum. Depreciation:Building 200 Accounts Payable 18,200Salary Payable 900






8


Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

Sheena Bright, capital, May 1, 2010 $ 33,200 Net income 3,700 $36,900Less withdrawals (1,000) Sheena Bright, Capital May 31, 2010 $35,900

Smart Touch LearningStatement of Owners Equity Month Ended May 31, 2010













10


LiquidityLiquidityLiquidityLiquidity

• 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

11


Current AssetsCurrent AssetsCurrent AssetsCurrent Assets

• Cash, or assets that will be converted to cash, sold, or used up in one year or within normal business operating cycle

• Examples– Cash– Short-term receivables– Inventory– Prepaid expenses

12


Assets Current Assets: Cash $4,800Accounts Receivable 2,600Supplies 600Prepaid rent 2,000 Total Current Assets $10,000

13

Smart Touch Learning Balance Sheet May 31, 2020


Long-term AssetsLong-term AssetsLong-term AssetsLong-term Assets

• Plant Assets (Property, Plant, & Equipment)– Land– Building– Furniture– Equipment

14













15


Assets Current Assets: Cash $4,800Accounts Receivable 2,600Supplies 600Prepaid rent 2,000 Total Current Assets $10,000Plant Assets:Furniture $18,000 Less: Accum Dep. -300

17,700

Building 48,000Accumulated

depreciation -200 47,800 Total Plant Assets $65,500 Total Assets

$75,500

16



Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities

• Debts or obligations that must be paid or extinguished within one year or operating cycle, whichever is shorter

• Examples– Accounts and salary payables– Short-term notes payable– Unearned revenue

17













18



17,700



$75,500

LiabilitiesCurrent Liabilities:

Accounts Payable$18,200

Salary Payable900

Interest Payable 100

Unearned Serv. Rev. 400 Total Current Liabilities $19,600

19



Long-term LiabilitiesLong-term Liabilities Long-term LiabilitiesLong-term Liabilities

• Long-term liabilities - all other debts due in longer than one year or entity’s operating cycle– Long-term notes payable– Mortgage payable

20






Accum. Depreciation:Building 200 Accounts Payable 18,200Salary Payable 900






21



17,700



$75,500

LiabilitiesCurrent Liabilities:

Accounts Payable $18,200Salary Payable 900Interest Payable 100Unearned Serv. Rev. 400 Total Current Liabilities $19,600

Long-Term Liabilities 20,000

Total Liabilities $39,600 Owner’s Equity

Sheens Bright, Capital 35,900 Total Liabilities &

Owner’s Equity $75,500

22



Objective 4Objective 4Objective 4Objective 4

Close the revenue, expense, and withdrawals accounts

23


Closing the AccountsClosing the AccountsClosing the AccountsClosing the Accounts

• Prepares accounts for recording transactions during next period

• Updates owner’s capital account

24


Closing the AccountsClosing the AccountsClosing the AccountsClosing the Accounts

• Permanent Accounts• Temporary Accounts

25


Four Closing EntriesFour Closing Entries Four Closing EntriesFour Closing Entries

• Close all income statement accounts to Income Summary

• Entry 1: Close revenue accounts to Income Summary

• Entry 2: Close expense accounts to Income Summary

26













27

Copyright © 2007 Prentice-Hall. All rights reserved 28

Rent ExpenseBal.

1,000Supplies Expense

Bal. 100Salary Expense

Bal.1,800

Dep. Exp.: FurnitureBal.

300Dep. Exp. Building

Interest ExpenseBal.

200

100

Utilites Expense 400

Service Revenue

Bal.7,600

Income Summary

Sheena Bright, Capital

Bal.33,200

Sheena Bright, Withdrawals

Bal.1,000

The Closing ProcessThe Closing Process


GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

May31 Service Revenue 7,600

Income Summary 7,600

To close revenue accounts


Rent ExpenseBal.



Bal.1,800




200

100


Service Revenue

Bal.7,600

7,6007,600Income Summary

7,6007,600

Sheena Bright, Capital Close RevenuesClose Revenues

Bal.33,200


Bal.1,000

TotalRevenues




Dep. expense: Build 200

Interest expense 100

Utilities expense 400

Utilities expense 400

May31 Income Summary 3,900

Rent expense 1,000

Supplies expense 100

Salary expense 1,800

Dep. expense: Furniture 300


Rent ExpenseBal.



Bal.1,800




200

100


Service Revenue

Bal.7,600


7,6007,600


Bal.33,200


Bal.1,000

TotalRevenues


1,0001,000

100100

1,8001,800

300300

200200

100100

400400

Close ExpensesClose Expenses

3,9003,900


Four Closing EntriesFour Closing Entries Four Closing EntriesFour Closing Entries

• Entry 3: Close Income Summary to Capital

• Entry 4: Close Withdrawals to Capital

33




Sheena Bright, Capital 3,700

To close income summary


Rent ExpenseBal.



Bal.1,800




200

100


Service Revenue

Bal.7,600


7,6007,600


Bal.33,200


Bal.1,000


1,0001,000

100100

1,8001,800

300300

200200

100100

400400


3,9003,900

Close Income SummaryClose Income Summary

3,7003,700

3,7003,700Net IncomeNet Income




Sheena Bright, Capital 3,700

To close income summary

30 Sheena Bright, Capital 1,000

Sheena Bright, Withdrawals 1,000

To close withdrawals


Rent ExpenseBal.



Bal.1,800




200

100


Service Revenue

Bal.7,600


7,6007,600


Bal.33,200


Bal.1,000


1,0001,000

100100

1,8001,800

300300

200200

100100

400400


3,9003,900


3,7003,700

3,7003,700

Net IncomeNet Income

Close WithdrawalsClose Withdrawals

1,0001,000

WithdrawalWithdrawal

1,0001,000


Rent Expense

Supplies Expense

Salary Expense

Dep. Exp.: Furniture

Dep. Exp. Building

Interest Expense

Service Revenue

Income Summary


Bal.33,200





3,7003,700

35,90035,900 Close WithdrawalsClose Withdrawals

1,0001,000


Smart Touch LearningPost-Closing Trial Balance

May 31, 2008

Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Accum. Depreciation:Furn 300 Building 48,000 Accum. Depreciation:Build 200 Accounts Payable 18,200 Salary Payable 900

Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 35,900 76,000 76,000


Work SheetWork SheetWork SheetWork Sheet

• Internal summary device• NOT:

– A journal– A ledger– A financial statement

• Computerized spreadsheets work well

40

Copyright (c) 2009. Prentice Hall. All rights reserved.

Accounts Debit Credit Debit Credit Debit Credit Debit Credit Debit CreditTrial Balance Adjustments Adj. Trial Balance Income Statement Balance Sheet

COMPANY NAMEAccounting Work Sheet

May 31, 2010


Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps• Enter account titles

and their unadjusted balances in the Trial Balance columns

• Total the amounts

41Copyright (c) 2009. Prentice Hall. All rights reserved.

Accounts Debit CreditCash 4,800 Accounts receivable 2,200 Supplies 700 Furniture 18,000 Accum. depr. 1,000 Accounts payable 7,200 Salaries payableUnearned revenue 600 J osie Smith, Capital 13,200 J osie Smith, W/D 1,000 Service revenue 6,000

Salary expense 900 Supplies expenseDepreciation exp.Utilities expense 400

28,000 28,000

Trial Balance


Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps

• Enter the adjusting entries in the Adjustments columns

• Total the amounts

42


Accounts Debit CreditCashAccounts receivable c 300 Supplies a 500 FurnitureAccum. depr. b 1,000 Accounts payableSalaries payable d 100 Unearned revenue e 200 J osie Smith, CapitalJ osie Smith, W/DService revenue c 300

d 200 Salary expense d 100 Supplies expense a 500 Depreciation exp. b 1,000 Utilities expense

2,100 2,100

Adjustments



• Compute each account’s adjusted balance by combining the trial balance and adjustment figures

• Enter each account’s adjusted amount in the Adjusted trial balance columns

• See following slide

43



44



Accounts Debit Credit Debit Credit Debit Credit

Cash 4,800 4,800

Accounts receivable 2,200 c 300 2,500

Supplies 700 a 500 200

Furniture 18,000 18,000

Accum. depr. 1,000 b 1,000 2,000

Accounts payable 7,200 7,200

Salaries payable d 100 100

Unearned revenue 600 e 200 400

J osie Smith, Capital 13,200 13,200

J osie Smith, W/D 1,000 1,000

Service revenue 6,000 c 300 6,500

d 200

Salary expense 900 d 100 1,000

Supplies expense a 500 500

Depreciation exp. b 1,000 1,000

Utilities expense 400 400

28,000 28,000 2,100 2,100 29,400 29,400

Trial Balance Adjustments Adj. Trial Balance


Work Sheet StepsWork Sheet StepsWork Sheet StepsWork Sheet Steps• Draw an imaginary

line above the first revenue account

• Every account above goes to the Balance sheet columns

• Every account below goes to the Income Statement columns


Accounts Debit CreditCash 4,800 Accounts receivable 2,500 Supplies 200 Furniture 18,000 Accum. depr. 2,000 Accounts payable 7,200 Salaries payable 100 Unearned revenue 400 J osie Smith, Capital 13,200 J osie Smith, W/D 1,000 Service revenue 6,500

Salary expense 1,000 Supplies expense 500 Depreciation exp. 1,000 Utilities expense 400

29,400 29,400

Adj. Trial Balance



Accounts Debit Credit Debit Credit Debit CreditCash 4,800 4,800 Accounts receivable 2,500 2,500 Supplies 200 200 Furniture 18,000 18,000 Accum. depr. 2,000 2,000 Accounts payable 7,200 7,200 Salaries payable 100 100 Unearned revenue 400 400 J osie Smith, Capital 13,200 13,200 J osie Smith, W/D 1,000 1,000 Service revenue 6,500 6,500

Salary expense 1,000 1,000 Supplies expense 500 500 Depreciation exp. 1,000 1,000 Utilities expense 400 400

29,400 29,400 2,900 6,500 26,500 22,900


May 31, 2010Adj. Trial BalanceIncome statement Balance sheet


Work Sheet Work Sheet StepsSteps


• On the income statement, compute net income– Revenues minus

expenses

• Enter net income as the balancing amount


Net Income

Accounts DebitDebit CreditCash

Accounts receivable

Supplies

Furniture

Accum. depr.

Accounts payable

Salaries payable

Unearned revenue

J osie Smith, Capital

J osie Smith, W/D

Service revenue 6,500

Salary expense 1,000 Supplies expense 500 Depreciation exp. 1,000 Utilities expense 400

2,900 6,500 3,600

Accounting Work Sheet May 31, 2010

Income Statement




• Also enter net income as a balancing amount on the balance sheet


Net Income

Accounts Debit CreditCash 4,800 Accounts receivable 2,500 Supplies 200 Furniture 18,000 Accum. depr. 2,000 Accounts payable 7,200 Salaries payable 100 Unearned revenue 400 J osie Smith, Capital 13,200 J osie Smith, W/D 1,000 Service revenue

Salary expense

Supplies expense

Depreciation exp.

Utilities expense26,500 22,900

3,600 26,500 26,500


May 31, 2010Balance Sheet



Accounts Debit Credit Debit Credit Debit Credit Debit Credit Debit CreditCash 4,800 4,800 4,800 Accounts receivable 2,200 c 300 2,500 2,500 Supplies 700 a 500 200 200 Furniture 18,000 18,000 18,000 Accum. depr. 1,000 b 1,000 2,000 2,000 Accounts payable 7,200 7,200 7,200 Salaries payable d 100 100 100 Unearned revenue 600 e 200 400 400 J osie Smith, Capital 13,200 13,200 13,200 J osie Smith, W/D 1,000 1,000 1,000 Service revenue 6,000 c 300 6,500 6,500

d 200

Salary expense 900 d 100 1,000 1,000 Supplies expense a 500 500 500 Depreciation exp. b 1,000 1,000 1,000 Utilities expense 400 400 400

28,000 28,000 2,100 2,100 29,400 29,400 2,900 6,500 26,500 22,900 Net income 3,600 3,600

6,500 6,500 26,500 26,500


May 31, 2010Trial Balance Adjustments Adj. Trial BalanceIncome Statement Balance Sheet


Use the current ratio and the debt ratio to evaluate a company

50

Learning Objective 6Learning Objective 6Learning Objective 6Learning Objective 6



51

Current RatioCurrent RatioCurrent RatioCurrent Ratio

Current assets Current liabilities

• Measures a company’s ability to pay its current liabilities

• Rule of thumb– Strong current ratio is 1.5



• Indicates the proportion of a business’s assets that are financed with debt

• Measures business’s ability to pay its debts• Rule of thumb:

– Below 60% is considered safe

52

Debt RatioDebt RatioDebt RatioDebt Ratio



• Indicates the proportion of a business’s assets that are financed with debt

• Measures business’s ability to pay its debts• Rule of thumb:

– Below 60% is considered safe

53

Debt RatioDebt RatioDebt RatioDebt Ratio

Total liabilities Total assets



Single Step Income Single Step Income StatementStatement

Single Step Income Single Step Income StatementStatement

• A single-step income statement is one of two commonly used formats for the income statement or profit and loss statement. The single-step format uses only one subtraction to arrive at net income.

• Net Income = (Revenues + Gains) – (Expenses + Losses)

54


Single Step Income Single Step Income Statement: ExampleStatement: ExampleSingle Step Income Single Step Income

Statement: ExampleStatement: Example

55


Multiple Step Income Multiple Step Income StatementStatement

Multiple Step Income Multiple Step Income StatementStatement

• The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold).

56


Multiple Step Income Statement: Multiple Step Income Statement: ExampleExample

Multiple Step Income Statement: Multiple Step Income Statement: ExampleExample

57

Date post:	28-Dec-2015
Category:	Documents
Upload:	clyde-parrish
View:	214 times
Download:	0 times

Copyright © 2007 Prentice-Hall. All rights reserved Completing the Accounting Cycle Chapter 4 1.

Documents