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Completing the Accounting Cycle

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  1. 0 4 Completing the Accounting Cycle

  2. 0 After studying this chapter, you should be able to: Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. Prepare financial statements from adjusted account balances. Prepare closing entries.

  3. 0 After studying this chapter, you should be able to: Describe the accounting cycle. Illustrate the accounting cycle for one period. Explain what is meant by the fiscal year and the natural business year. 3

  4. 0 4-1 Objective 1 Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

  5. 0 4-1 Spreadsheet (Work Sheet) Trial Balance Adjustments Adjusted TB Accounts Dr Cr Dr Cr Dr Cr Accounts are listed in the Trial Balance column using the ending balance found in the general ledger. 6

  6. 0 4-1 Spreadsheet (Work Sheet) Trial Balance Adjustments Adjusted TB Accounts Dr Cr Dr Cr Dr Cr Adjustments are entered here. Two possibilities: 1. Deferrals – Existing balances are changed. 2. Accruals – New information is entered. 7

  7. 0 4-1 Spreadsheet (Work Sheet) Trial Balance Adjustments Adjusted TB Accounts Dr Cr Dr Cr Dr Cr Adjustments are combined with the trial balance. Account balances are now adjusted. 8

  8. 0 4-1 Spreadsheet (Work Sheet) Adjusted TB Income State. Balance Sheet Accounts Dr Cr Dr Cr Dr Cr Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column. 9

  9. 0 4-1 Spreadsheet (Work Sheet) Adjusted TB Income State. Balance Sheet Accounts Dr Cr Dr Cr Dr Cr Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column. 10

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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 Summed and ruled 63

  19. 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.

  20. 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

  21. 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 2,065 Accounts Receivable 2,220 (e) 500 2,720 Supplies 2,000 (a) 1,240760 Prepaid Insurance 2,400 (b) 200 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accounts Payable 900 900 Unearned Rent 360 (c) 120 240 Chris Clark, Capital 25,00025,000 Chris Clark, Drawing 4,000 4,000 Fees Earned 16,340 (e) 500 16,840 Wages Expense 4,275 (d) 250 4,525 Rent Expense 1,600 1,600 Utilities Expense 985 985 Supplies Expense 800 (a) 1,2402,040 Miscellaneous Expense 455 455 42,600 42,600 Insurance Expense (b) 200 200 Rent Revenue (c) 120 120 Wages Payable (d) 250 250 Depreciation Expense (f) 50 50 Accum. Depreciation (f) 50 50 2,360 2,360 43,400 43,400 66

  22. 0 Because of space constraints, the Unadjusted Trial Balance and the Adjustments columns will not be shown in the following slides.

  23. Adjusted Trial Balance Income Statement Balance Sheet 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 2,720 Supplies 760 Prepaid Insurance 2,200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 240 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,840 Wages Expense 4,525 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 2,040 Miscellaneous Expense 455 Insurance Expense 200 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50 43,400 43,400 68

  24. 0 The next step is to extend amounts in the Adjusted Trial Balance columns to the Income Statement and Balance Sheet columns.

  25. Adjusted Trial Balance Income Statement Balance Sheet 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 2,720 Supplies 760 Prepaid Insurance 2,200 Land 20,000 Office Equipment 1,800 Accounts Payable 900 Unearned Rent 240 Chris Clark, Capital 25,000 Chris Clark, Drawing 4,000 Fees Earned 16,840 Wages Expense 4,525 Rent Expense 1,600 Utilities Expense 985 Supplies Expense 2,040 Miscellaneous Expense 455 Insurance Expense 200 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50 43,400 43,400 70

  26. Adjusted Trial Balance Income Statement Balance Sheet 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 2,065 Accounts Receivable 2,720 2,720 Supplies 760 760 Prepaid Insurance 2,200 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accounts Payable 900 900 Unearned Rent 240 240 Chris Clark, Capital 25,00025,000 Chris Clark, Drawing 4,000 4,000 Fees Earned 16,840 16,840 Wages Expense 4,525 4,525 Rent Expense 1,600 1,600 Utilities Expense 985 985 Supplies Expense 2,040 2,040 Miscellaneous Expense 455 455 Insurance Expense 200 200 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50 43,400 43,400 71

  27. 0 The Income Statement and Balance Sheet columns are totaled.

  28. Adjusted Trial Balance Income Statement Balance Sheet 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 2,065 Accounts Receivable 2,720 2,720 Supplies 760 760 Prepaid Insurance 2,200 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accounts Payable 900 900 Unearned Rent 240 240 Chris Clark, Capital 25,000 25,000 Chris Clark, Drawing 4,000 4,000 Fees Earned 16,840 16,840 Wages Expense 4,525 4,525 Rent Expense 1,600 1,600 Utilities Expense 985 985 Supplies Expense 2,040 2,040 Miscellaneous Expense 455 455 Insurance Expense 200 200 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 5043,400 43,400 73

  29. Adjusted Trial Balance Income Statement Balance Sheet 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 2,065 Accounts Receivable 2,720 2,720 Supplies 760 760 Prepaid Insurance 2,200 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accounts Payable 900 900 Unearned Rent 240 240 Chris Clark, Capital 25,000 25,000 Chris Clark, Drawing 4,000 4,000 Fees Earned 16,840 16,840 Wages Expense 4,525 4,525 Rent Expense 1,600 1,600 Utilities Expense 985 985 Supplies Expense 2,040 2,040 Miscellaneous Expense 455 455 Insurance Expense 200 200 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 5043,400 43,400 9,855 16,960 33,545 26,440 74

  30. 0 The net income or net loss is determined. Then the Income Statement and Balance Sheet columns are totaled and double-ruled.

  31. Income Statement Balance Sheet 9,855 16,960 33,545 26,440 7,105 7,105 16,960 16,960 33,545 33,545 Net Income Net Income 0 The difference between the Income Statement column totals is the net income (or net loss) for the period. 78

  32. Adjusted Trial Balance Income Statement Balance Sheet 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 2,065 Accounts Receivable 2,720 2,720 Supplies 760 760 Prepaid Insurance 2,200 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accounts Payable 900 900 Unearned Rent 240 240 Chris Clark, Capital 25,000 25,000 Chris Clark, Drawing 4,000 4,000 Fees Earned 16,840 16,840 Wages Expense 4,525 4,525 Rent Expense 1,600 1,600 Utilities Expense 985 985 Supplies Expense 2,040 2,040 Miscellaneous Expense 455 455 Insurance Expense 200 200 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 5043,400 43,400 9,855 16,960 33,545 26,440 76

  33. Adjusted Trial Balance Income Statement Balance Sheet 77 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 2,065 Accounts Receivable 2,720 2,720 Supplies 760 760 Prepaid Insurance 2,200 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accounts Payable 900 900 Unearned Rent 240 240 Chris Clark, Capital 25,000 25,000 Chris Clark, Drawing 4,000 4,000 Fees Earned 16,840 16,840 Wages Expense 4,525 4,525 Rent Expense 1,600 1,600 Utilities Expense 985 985 Supplies Expense 2,040 2,040 Miscellaneous Expense 455 455 Insurance Expense 200 200 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 5043,400 43,400 9,855 16,960 33,545 26,440 Net income 7,105 7,105 16,960 16,960 33,545 33,545

  34. 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

  35. 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

  36. 0 4-1 5

  37. 0 4-2 Objective 2 Prepare financial statements from adjusted account balances.

  38. 0 4-2 To balance sheet 14

  39. 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.

  40. 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

  41. 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.

  42. 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

  43. 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

  44. 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

  45. 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.

  46. 0 4-2 (Concluded) From statement of owner’ equity 15

  47. Example Exercise 4-2 0 4-2 In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for Dimple Consulting Co. for the current year, the Debit column total is $678,450, and the Credit column total is $599,750 before the amount of net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet (work sheet), what is the amount of net income or net loss? 16

  48. 0 4-2 Follow My Example 4-2 A net income of $78,700 ($678,450 – $599,750) would be reported. When the Debit column of the Balance Sheet columns is more than the Credit column, net income is reported. If the Credit column exceeds the Debit column, a net loss is reported. For Practice: PE 4-2A, PE 4-2B 17

  49. Example Exercise 4-3 0 4-2 Zack Gaddis owns and operates Gaddis Employment Services. On January 1, 2007, Zack Gaddis, Capital had a balance of $186,000. During the year, Zack invested an additional $40,000 and withdrew $25,000. For the year ended December 31, 2007, Gaddis Employment Services reported a net income of $18,750. Prepare a statement of owner’s equity for the year ended December 31, 2007. 18

  50. 0 4-2 Follow My Example 4-3 GADDIS EMPLOYMENT SERVICES STATEMENT OF OWNER’S EQUITY For the Year Ended December 31, 2007 Zack Gaddis, capital, January 1, 2007 $186,000 Additional investment during 2007 40,000 Total $226,000 Withdrawals $ 25,000 Less net income 18,750 Decrease in owner’s equity 6,250 Zack Gaddis, capital, December 31, 2007 $219,750 For Practice: PE 4-3A, PE 4-3B 19