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Completing the Accounting Cycle

Completing the Accounting Cycle. Chapter 4. Prepare an accounting work sheet. Objective 1. 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.

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Completing the Accounting Cycle

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  1. Completing theAccounting Cycle Chapter 4

  2. Prepare an accounting work sheet. Objective 1

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

  4. 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.

  5. The Accounting Cycle 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

  6. The Accounting Cycle Work Sheet 12,100 3,050 Cash Accounts receivable Income Statement Balance Sheet

  7. The Accounting Cycle Adjusting entries Closing entries Cash Accounts Receivable 12,100 3,050 Postclosing Trial Balance Cash Accounts receivable 12,100 3,050

  8. 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.

  9. The Accounting Work Sheet Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 12,100 1,350 250 15,500 1,000 12,000 42,200 7,500 1,200 1,100 1,500 7,200 23,700 42,200 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 9

  10. The Accounting Work Sheet • The company has earned revenue of $1,700 which will be collected next month. • Inventory of supplies at month end totaled $150. • Depreciation for the period was calculated as $200.

  11. The Accounting Work Sheet Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 12,100 3,050 150 15,500 1,000 12,000 100 200 44,100 12,100 1,350 250 15,500 1,000 12,000 42,200 a) 1,700 b) 100 c) 200 2,000 b) 100 c) 200 a) 1,700 2,000 7,700 1,200 1,100 1,500 7,200 25,400 44,100 7,500 1,200 1,100 1,500 7,200 23,700 42,200 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 11

  12. The Accounting Work Sheet Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 12,100 3,050 150 15,500 1,000 12,000 100 200 44,100 12,100 3,050 150 15,500 1,000 31,800 7,700 1,200 1,100 1,500 7,200 25,400 44,100 7,700 1,200 1,100 1,500 7,200 18,700 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 12

  13. The Accounting Work Sheet Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 12,100 3,050 150 15,500 1,000 12,000 100 200 44,100 12,100 3,050 150 15,500 1,000 31,800 7,700 1,200 1,100 1,500 7,200 25,400 44,100 7,700 1,200 1,100 1,500 7,200 18,700 25,400 25,400 12,000 100 200 12,300 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 13

  14. The Accounting Work Sheet Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. 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 12,100 3,050 150 15,500 1,000 12,000 100 200 44,100 12,100 3,050 150 15,500 1,000 31,800 31,800 7,700 1,200 1,100 1,500 7,200 25,400 44,100 7,700 1,200 1,100 1,500 7,200 18,700 13,100 31,800 25,400 25,400 25,400 12,000 100 200 12,300 13,100 25,400 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 14

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

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

  17. Recording theAdjusting 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.

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

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

  20. Closing the Accounts Closing Entries Expenses and Withdrawals decrease Owner’s Equity. Revenues increase Owner’s Equity.

  21. 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.

  22. Closing the Accounts Income Summary A creditbalance represents net income. A debitbalance represents net loss.

  23. Closing the Accounts (Close Revenue Account) Income Summary Revenue 28,500 12,000 7,500 9,000 (Close Expense Accounts) 28,500 4,450 24,050 (Close Income Summary) Salary Exp 3,300 1,500 1,800 Capital Account Rent Exp 24,050 2,500 800 800 (Close Withdrawals Account) Withdrawals Supplies Exp 2,5002,500 350 350 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 23

  24. 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.

  25. Permanent Accounts • What accounts never close? • Assets • Liabilities • Owner’s equity • Balances of permanent accounts carry over to the next period.

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

  27. 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.

  28. 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

  29. 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

  30. 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 entity’s operating cycle.

  31. The Classified Balance Sheet Debit side Current assets Long-term assets Credit side Current liabilities Long-term liabilities Listed in the order of decreasing liquidity Listed in the order of how soon they must be paid

  32. The Classified Balance Sheet XYZ Services January 31, 20XX AssetsLiabilities Current assets: Current liabilities: Cash 12,100 Accounts payable 1,200 Accounts receivable 3,050 Salary payable 1,100 Supplies 150 Unearned revenue 1,500 Total current assets 15,300 Total liabilities 3,800 Plant 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

  33. Different Formats ofthe Balance Sheet Report Format Account Format Assets Liabilities Owner’s Equity Assets = Liabilities + Owner’s Equity

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

  35. Comparative Financial Statements • They enhance the user’s ability to analyze a company’s past performance. • What are two common ratios used to measure liquidity? • Current ratio • Debt ratio

  36. Current Ratio • This measures the ability of a business to pay its current liabilities with its current assets. Current ratio = Current assets ÷ Current liabilities

  37. 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. Total liabilities ÷ Total assets

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

  39. End of Chapter 4

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