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Completing the Accounting Cycle

4. Completing the Accounting Cycle. 0. 4-1. 5. Example Exercise 4-1. 0. 4-1.

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Completing the Accounting Cycle

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  1. 4 Completing the Accounting Cycle

  2. 0 4-1 5

  3. Example Exercise 4-1 0 4-1 The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column. • Fees Earned • Accounts Payable • Rent Revenue • Supplies • Amber Bablock, Drawing • Utilities Expense • Accumulated Depreciation—Equipment • Unearned Rent 11

  4. Follow My Example 4-1 0 4-1 • Balance Sheet column • Income Statement column • Balance Sheet column • Balance Sheet column • Income Statement column • Balance Sheet column • Income Statement column • Balance Sheet column For Practice: PE 4-1A, PE 4-1B 12

  5. 0 4-2 A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

  6. 0 4-2 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 current assets. • Cash • Accounts Receivable • Supplies

  7. 0 4-2 Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

  8. 0 4-2 Property, plant, and equipment(also called fixed 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

  9. 0 4-2 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

  10. 0 4-2 Liabilities not due for a long time (usually more than one year) are long-term liabilities. • Notes payable • Mortgage payable • Bond payable

  11. 0 4-2 Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and the total must be equal to the total assets.

  12. Example Exercise 4-4 0 4-2 The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007 balance sheet of Hindsight Consulting. • Jason Corbin, Capital 5. Cash • Notes Receivable (due 6. Unearned Rent • in 6 months) months) • Notes Payable (due in 7. Accumulated Depr.— • 2009) Equipment • 4. Land 8. Accounts Payable 27

  13. 0 4-2 Follow My Example 4-4 • Owner’s equity 5. Current asset • Current asset 6. Current liability • Long-term liability 7. Property, plant, and equipment • Property, plant, and equip. 8. Current liability For Practice: PE 4-4A, PE 4-4B 28

  14. 0 4-3 Objective 3 Prepare closing entries.

  15. 0 4-3 Accounts that are relatively permanent from year to year are called realaccounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.

  16. 0 4-3 To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary.

  17. 0 4-3 The balance of Income Summary is then transferred to the owner’s capital account. The balance of the owner’s drawing account is also transferred to the owner’s capital account. The entries that transfer these balances are called closing entries.

  18. 0 4-3 33

  19. Fees Earned Bal. 16,840 0 4-3 Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue. Step 1: 16,840 Income Summary Step 1 16,960 Rent Revenue Bal. 120 120 34

  20. Bal. 4,525 4,525 1,600 Bal. 1,600 Bal. 50 50 Bal. 985 985 Bal. 2,040 2,040 Insurance Expense 200 Bal. 200 Miscellaneous Expense 455 Bal. 455 4-3 Wages Expense Income Summary 9,855 16,960 Rent Expense Depreciation Expense Utilities Expense Step 2 Debit Income Summary for the total expenses and credit each expense account for its balance. Supplies Expense 35

  21. Step 3 Debit Income Summaryfor the amount of its balance (in this case, the net income) and credit the capital account. Chris Clark, Capital Bal. 25,000 Chris Clark, Drawing Bal. 4,000 4-3 Income Summary 9,855 16,960 7,105 7,105 36

  22. Step 4 Debit the capital account for the balance of the drawing account, and credit drawing for the same amount. Chris Clark, Capital Bal. 25,000 7,105 Chris Clark, Drawing Bal. 4,000 4-3 4,000 4,000 37

  23. 0 4-3 Step 1 Step 2 Step 3 Step 4 38

  24. 0 4-3 After the closing entries are posted, all of the temporary accounts have zero balances.

  25. Example Exercise 4-4 Example Exercise 4-5 0 4-3 The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting. After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co. Terry Lambert, Capital $615,850 Terry Lambert, Drawing 25,000 Fees Earned 380,450 Wages Expense 250,000 Rent Expense 65,000 Supplies Expense 18,250 Miscellaneous Expense 6,200 Journalize the four entries required to close the accounts. 40

  26. Follow My Example 4-5 0 4-3 July 31 Fees Earned 380,450 Income Summary 380,450 31 Income Summary 339,450 Wages Expense 250,000 Rent Expense 65,000 Supplies Expense 18,250 Miscellaneous Expense 6,200 31 Income Summary 41,000 Terry Lambert, Capital 41,000 31 Terry Lambert, Capital 25,000 Terry Lambert, Drawing 25,000 41 For Practice: PE 4-5A, PE 4-5B

  27. NetSolutions Post-Closing Trial Balance December 31, 2007 Cash 2 065 00 Accounts Receivable 2 720 00 Supplies 760 00 Prepaid Insurance 2 200 00 Land 20 000 00 Office Equipment 1 800 00 Accumulated Depreciation 50 00 Accounts Payable 900 00 Wages Payable 250 00 Unearned Rent 240 00 Chris Clark, Capital 28 105 00 29 545 00 29 545 00 0 4-3 Exhibit 7 Post-Closing Trial Balance 42

  28. 0 4-4 Objective 4 Describe the accounting cycle.

  29. 0 4-4 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.

  30. 0 4-4 The Accounting Cycle • Transactions are analyzed and recorded in the journal. • Transactions are posted to the ledger. • An unadjusted trial balance is prepared. • Adjustment data are assembled and analyzed. • An optional end-of-period spreadsheet (work sheet) is prepared. Continued

  31. 0 4-4 • Adjusting entries are journalized and posted to the ledger. • An adjusted trial balance is prepared. • Financial statements are prepared. • Closing entries are journalized and posted to the ledger. • A post-closing trial balance is prepared.

  32. Example Exercise 4-4 Example Exercise 4-6 0 4-4 The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting. From the following list of steps in the accounting cycle, identify what two steps are missing. • Transactions are analyzed and recorded in the journal. • Transactions are posted to the ledger. • Adjustment data are assembled and analyzed. • An optional end-of-period spreadsheet (work sheet) is prepared. • Adjusting entries are journalized and posted to the ledger. • Financial statements are prepared. • Closing entries are journalized and posted to the ledger. • A post-closing trial balance is prepared. 21 47

  33. Follow My Example 4-6 0 4-4 The following two steps are missing: (1) the preparation of an unadjusted trial balance and (2) the preparation of the adjusted trial balance. The unadjusted trial balance should be prepared after step (b). The adjusted trial balance should be prepared after step (e). 48 For Practice: PE 4-6A, PE 4-6B

  34. 0 4-5 Objective 5 Illustrate the accounting cycle for one period. Refer to the textbook for this extended illustration.

  35. 0 4-6 Objective 6 Explain what is meant by the fiscal year and the natural business year.

  36. 0 4-6 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 year.

  37. 0 4-6 Financial History of a Business The financial history of a business may be shown by a series of balance sheets and income statements, as displayed below. 52

  38. 0 Appendix End-of-Period Spreadsheet (Work Sheet)

  39. 0 The end-of-period spreadsheet (work sheet) shown in the following slides does not have the usual spreadsheet headings due to space constraints.

  40. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 Supplies 2,000 Prepaid Insurance 2,400 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 Wages Expense 4,275 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 Miscellaneous Expense 455 42,600 42,600 The unadjusted trial balance is checked for equality. 55

  41. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 Supplies 2,000 Prepaid Insurance 2,400 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 Wages Expense 4,275 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 Miscellaneous Expense 455 42,600 42,600 (a) 1,240 Cost of supplies on hand at end of period is $760. (a) 1,240 56

  42. Accounts are added as needed. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 Wages Expense 4,275 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 (b) 200 The insurance expense for December is $200 ($2,400/12) Insurance Expense (b) 200 57

  43. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 (b) 200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 Wages Expense 4,275 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 Rent revenue earned during December was $120. (c) 120 Insurance Expense (b) 200 58 Rent Revenue (c) 120

  44. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 (b) 200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 (c) 120 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 Wages Expense 4,275 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 Wages accrued but not paid at the end of December totaled $250. (d) 250 Insurance Expense (b) 200 Rent Revenue (c) 120 59 Wages Payable (d) 250

  45. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 (b) 200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 (c) 120 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 Wages Expense 4,275 (d) 250 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 (e) 500 Fees accrued at the end of December but not recorded total $500. (e) 500 Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250 60

  46. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 (e) 500 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 (b) 200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 (c) 120 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 (e) 500 Wages Expense 4,275 (d) 250 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 Depreciation of office equipment is $50 for December. Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250 61 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

  47. 0 Unadjusted Adjusted Trial Balance Adjustments Trial Balance Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash 2,065 Accounts Receivable 2,220 (e) 500 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 (b) 200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 (c) 120 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 (e) 500 Wages Expense 4,275 (d) 250 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 To make more space, let’s remove the heading. Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50 62

  48. Unadjusted Adjusted Trial Balance Adjustments Trial Balance 31 0 Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash 2,065 Accounts Receivable 2,220 (e) 500 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 (b) 200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 (c) 120 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 (e) 500 Wages Expense 4,275 (d) 250 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50 2,360 2,360 Summed and ruled 63

  49. 0 The next step is to add or subtract the adjustments from (to) the amounts found in the Unadjusted Trial Balance columns and enter the results in the Adjusted Trial Balance columns.

  50. 34 Unadjusted Adjusted Trial Balance Adjustments Trial Balance 0 Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash 2,065 Accounts Receivable 2,220 (e) 500 Supplies 2,000 (a) 1,240 Prepaid Insurance 2,400 (b) 200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 360 (c) 120 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,340 (e) 500 Wages Expense 4,275 (d) 250 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 800 (a) 1,240 Miscellaneous Expense 455 42,600 42,600 Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50 2,360 2,360 65

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