No Slide Title Presentations/Chapter 4 PP...information from the unadjusted trial balance into the...

Prepared by: C. Douglas Cloud Professor Emeritus of AccountingPepperdine University

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Completing the Accounting Cycle

Chapter 4


Learning Objectives1. Describe the flow of accounting

information from the unadjusted trial balance into the adjusted trial balance and financial statements.

2. Prepare financial statements from adjusted account balances.

3. Prepare closing entries.4. Describe the accounting cycle.5. Illustrate the accounting cycle for one

period.


Learning Objectives6. Explain what is meant by the fiscal year and

the natural business year.7. Describe and illustrate the use of working

capital and the current ratio in evaluating a company’s financial condition.

6. Explain what is meant by the fiscal year and the natural business year.


Learning Objective 1

Describe the flow of accounting information from the unadjusted trial balance

into the adjusted trial balance and financial

statements.


Flow of Accounting InformationLO 1

(continued)



(continued)



(concluded)


End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Flow of Accounting Information

Account balances are listed in the Unadjusted Trial Balance columns using the ending balances found in the general ledger.

LO 1

(continued)






Adjustments are entered here. Two possibilities: Deferrals – Existing balances are changed Accruals – New information is entered

LO 1

(continued)

Unadjusted TB






Adjustments are combined with the unadjusted trial balance amounts to provide balances for the Adjusted Trial Balance columns.

LO 1

(continued)

Unadjusted TB


Adjusted TB


Income State. Balance Sheet


LO 1


Revenue and expense balances in the Adjusted Trial Balance columns are extended to the Income Statement columns.

(continued)


Adjusted TB


Income State. Balance Sheet



Asset, liability, and stockholders’ equity, balances in the Adjusted Trial Balance columns are extended to the Balance Sheet columns.

LO 1

(concluded)


EE 4-1



Prepare financial statements from adjusted account

balances.


Income Statement

The income statement for NetSolutions is prepared directly from the Income Statement or Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet) beginning with fees earned of $16,840.

LO 2


to retained earnings statement

LO 2

Income Statement


Retained Earnings Statement

The first item presented on the retained earnings statement is the balance of the Retained Earnings account at the beginning of the period.

LO 2


LO 2

from the income statement

to the balance sheet



EE 4-2


Balance Sheet

The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065.

LO 2


from the retained earnings statement

Balance SheetLO 2


Classified Balance Sheet

A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; current liabilities; and long-term liabilities.

LO 2


Current Assets

Cash and other assets that are expected to be converted into cash, sold, or used up usually within a year or less, through the normal operations of the business, are called currentassets.

Cash Accounts

Receivable Notes

Receivable Supplies

LO 2


Notes Receivable

Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

LO 2


Fixed Assets

Property, plant, andequipment (also called fixed assetsor plant assets) include assets that depreciate over a period of time. Land is an exception, as it is not subject to depreciation.

Equipment Machinery Buildings Land

LO 2


Current Liabilities

Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities.

Accounts payable Wages payable Interest payable Unearned fees

LO 2


Long-Term Liabilities

Liabilities not due for a long time (usually more than one year) are called long-term liabilities.

Long-term notes payable

Mortgage payable Bond payable

LO 2


Stockholders’ Equity

Stockholders’ equity is the stockholders’ right to the assets of the business. It is presented on the balance sheet below the liabilities section.

LO 2

Capital stock Retained earnings


EE 4-3



Prepare closing entries.


Closing Entries

Accounts that are relatively permanent from year to year are called permanent accounts or real accounts. These accounts are carried forward from year to year.

LO 3


Closing Entries

Accounts that report amounts for only one period are called temporary accounts or nominal accounts. Temporary accounts are not carried forward because they relate to only one period.

LO 3


Closing Entries

To report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period.

To achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period.

LO 3


Closing Entries

The balance of Income Summary (net income or net loss) is then transferred to the Retained Earnings account.

The balance of the Dividends account is also transferred to the Retained Earnings account.

The entries that transfer these balances are called closing entries.

LO 3


LO 3

Closing Entries


Closing EntriesLO 3

Income Summary is a temporary account that is only used during the closing process.

At the end of the closing process, the Income Summary account will have a zero balance.

Closing entries are recorded in the journal and dated as of the last date of the accounting period.


LO 3

Journalizing and Posting Closing Entries


LO 3



LO 3



LO 3



LO 3

Closing Entries

Step 1

Step 2

Step 3

Step 4


Temporary Account Balances

After the closing entries are posted, all of the temporary accounts have zero balances.

LO 3


LedgerLO 3

(continued)


LO 3

LedgerLO 3

(continued)


LO 3

LedgerLO 3

(continued)


LO 3

LedgerLO 3

(continued)


LO 3

LedgerLO 3

(continued)


LO 3

LedgerLO 3

(concluded)


EE 4-4


EE 4-4


Post-Closing Trial Balance

A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance and ready for the next accounting period.

LO 3


LO 3




Describe the accounting cycle.


Accounting Cycle

The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle.

LO 4


Accounting Cycle

1. Transactions are analyzed and recorded in the journal.

2. Transactions are posted to the ledger.3. An unadjusted trial balance is prepared.4. Adjustment data are assembled and

analyzed.5. An optional end-of-period spreadsheet

(work sheet) is prepared.

(continued)

LO 4


Accounting Cycle

6. Adjusting entries are journalized and posted to the ledger.

7. An adjusted trial balance is prepared.8. Financial statements are prepared.9. Closing entries are journalized and posted

to the ledger.10. A post-closing trial balance is prepared.

LO 4


EE 4-5


Accounting CycleLO 4

to the financial statements



From the adjusted trial balance



Illustrate the accounting cycle for one period.



(continued)



(continued)


LO 5

Accounting Cycle

(continued)


LO 5

Accounting Cycle


LO 5

Unadjusted Trial Balance


LO 5

End-of-Period Spreadsheet


LO 5

Adjusting Entries


LO 5

Adjusted Trial Balance


LO 5

Income Statement

(continued)


LO 5


(continued)


LO 5

Balance Sheet


LO 5

Closing Entries


LO 5



LO 5

Ledger

(continued)


LO 5

Ledger

(continued)


LO 5LO 5

Ledger

(continued)


LO 5LO 5LO 5

Ledger

(continued)


LO 5LO 5LO 5

Ledger



Explain what is meant by the fiscal

year and the natural business

year.


Accounting Period

The annual accounting period adopted by a business is known as its fiscal year.

When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural business year.

LO 6


Accounting PeriodLO 6


Financial History of a BusinessLO 6



Describe and illustrate the use of working capital and the current ratio in

evaluating a company’s financial

condition.


Working Capital and Current Ratio

The ability to convert assets into cash is called liquidity.

LO 7



The ability of a business to pay its debts is called solvency.

LO 7



Working capital is the excess of the current assets of a business over its current liabilities.

LO 7


NetSolutions’ working capital at the end of 2011 is $6,355 as computed below. This amount of working capital implies that NetSolutions is able to pay its current liabilities.

Working Capital and Current RatioLO 7

Working Capital = Current Assets – Current liabilities= $7,745 – $1,390= $6,355



The current ratio is another means of expressing the relationship between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities.

LO 7


Working Capital and Current RatioLO 7

The current ratio for NetSolutions at the end of 2011 is 5.6, computed as follows:

Current Ratio =Current Assets

Current Liabilities

= $7,745$1,390

= 5.6 (rounded)


EE 4-6


Appendix

End-of-Period Spreadsheet


Account Title Debit Credit Debit Credit Debit Credit123456789

10111213141516171819202122232425

UnadjustedTrial Balance Adjustments Trial Balance

Adjusted

Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accumulated Depr.Accounts Payable 900Wages PayableUnearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Rent RevenueWages Expense 4,275Rent Expense 1,600Depreciation ExpenseUtilities Expense 985Supplies Expense 800Insurance ExpenseMiscellaneous Exp. 455

42,600 42,600

The unadjusted trial balance is checked

for equality.




10111213141516171819202122232425

Trial Balance Adjustments Trial BalanceAdjusted

Supplies needs adjusting


42,600 42,600

Unadjusted




10111213141516171819202122232425

(a) 1,240

(a) 1,240



42,600 42,600

(a) Cost of supplies on hand at December 31 is $760.

Unadjusted




10111213141516171819202122232425

(b) 200

(b) 200


(a) 1,240


42,600 42,600

(a) 1,240

(b) The insurance expense for December is $200 ($2,400 ÷12).

Unadjusted




10111213141516171819202122232425

(c) 120

(c) 120


(b) 200(a) 1,240

(b) 200


42,600 42,600

(a) 1,240

(c) Rent revenue earned during December was $120 ($360 ÷ 3).

Unadjusted




10111213141516171819202122232425


(b) 200(a) 1,240

(b) 200

(c) 120

(c) 120

(d) 500

(d) 500


42,600 42,600

(a) 1,240

(d) Fees accrued at the end of December, but not recorded, totaled $500.

Unadjusted




10111213141516171819202122232425

(e) 250


(b) 200(a) 1,240

(d) 500

(b) 200

(c) 120

(c) 120


42,600 42,600

(d) 500

(e) 250

(a) 1,240

(e) Wages accrued, but not paid, at the end of December totaled $250.

Unadjusted




10111213141516171819202122232425


(b) 200(a) 1,240

(d) 500

(c) 120

(c) 120(d) 500

(f) 50

(f) 50

(b) 200


42,600 42,600

(e) 250

(a) 1,240

(e) 250

(f) Depreciation of office equipment is $50 for December.

Unadjusted




10111213141516171819202122232425

2,360 2,360


(b) 200(a) 1,240

(d) 500

(c) 120

(c) 120

(f) 50

(b) 200(a) 1,240

(e) 250

(e) 250

(d) 500


42,600 42,600Summed and ruled

(f) 50

Unadjusted



Add/Subtract Adjustments

The next step is to add or subtract the adjustments to (or from) the amounts found in the Unadjusted Trial Balance columns and enter the results in the Adjusted Trial Balance columns.


Account Title Debit Credit Debit Credit Debit Credit

Trial Balance Adjustments Trial Balance

123456789

10111213141516171819202122232425

Adjusted

2,360 2,360

(b) 200(a) 1,240

(d) 500

(c) 120

(c) 120(d) 500

(f) 50

(b) 200(a) 1,240

(e) 250

Cash 2,065 2,065Accounts Receivable 2,220 2,720Supplies 2,000 760Prepaid Insurance 2,400 2,200Land 20,000 20,000Office Equipment 1,800 1,800Accumulated Depr. 50Accounts Payable 900 900Wages Payable 250Unearned Rent 360 240Capital Stock 25,000 25,000Dividends 4,000 4,000Fees Earned 16,340 16,840Rent Revenue 120Wages Expense 4,275 4,525Rent Expense 1,600 1,600Depreciation Expense 50Utilities Expense 985 985Supplies Expense 800 2,040Insurance Expense 200Miscellaneous Exp. 455 455

42,600 42,600 43,400 43,400

(f) 50

Unadjusted

(e) 250



Spreadsheet

Preparing the work sheet as a spreadsheet allows the computer to assist you in the process. Exhibit 20 on the next slide shows you how the spreadsheet would appear on your computer screen.



The next step is to extend amounts in the Adjusted Trial Balance columns to the Income Statement and Balance Sheet columns.

Because of space limitations, the Unadjusted Trial Balance and the Adjustments columns have been removed for the remainder of this slide presentation.

Extending Amounts to Statement Columns



Trial Balance Income Statement Balance Sheet

123456789

10111213141516171819202122232425

Adjusted

Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,200 2,200Land 20,000 20,000Office Equipment 1,800 1,800Accumulated Depr. 50 50Accounts Payable 900 900Wages Payable 250 250Unearned Rent 240 240Capital Stock 25,000 25,000Dividends 4,000 4,000Fees Earned 16,840 16,840Rent Revenue 120 120Wages Expense 4,525 4,525Rent Expense 1,600 1,600Depreciation Expense 50 50Utilities Expense 985 985Supplies Expense 2,040 2,040Insurance Expense 200 200Miscellaneous Exp. 455 455

43,400 43,400





123456789

10111213141516171819202122232425

Adjusted

The four columns are summed.


43,400 43,400 9,855 16,960 33,545 26,440



9,855 16,960 33,545 26,4407,105 7,105

16,960 16,960 33,545 33,545

Income Statement Balance Sheet

Determining Net Income (Net Loss)

The difference between the Income Statement column totals is net income (or net loss) for the period.

Net Income




123456789

10111213141516171819202122232425

Adjusted


43,400 43,400 9,855 16,960 33,545 26,440Net income 7,105 7,105

16,960 16,960 33,545 33,545© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


Prepared by: C. Douglas Cloud Professor Emeritus of AccountingPepperdine University


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Completing the Accounting Cycle

The End

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