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Chapter 4

Chapter 4. The Accounting Cycle. List in correct order: (A) Financial statements prepared (B) Transactions posted to ledger (C) Closing entries journalized and posted to ledger (D) Transactions analyzed and recorded in journal

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Chapter 4

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  1. Chapter 4

  2. The Accounting Cycle • List in correct order: • (A) Financial statements prepared • (B) Transactions posted to ledger • (C) Closing entries journalized and posted to ledger • (D) Transactions analyzed and recorded in journal • (E) Trial balance prepared (unnecessary if worksheet completed); adjustment data assembled; worksheet completed • (F) Post-closing trial balance prepared • (G) Adjusting entries journalized and posted to ledger

  3. Answer • D; B; E; A; G; C; F • Exhibit 1, p.141

  4. Purpose of Worksheet • Facilitates End-of-the-Accounting-Period • Easy-to-use/All-in-one-sheet containing data needed for adjusting entries as well as financial statements • Excel adaptation

  5. The Worksheet Exhibit 2; p. 144B; 5 columns • “Trial Balance” • Transferred from Ledger; debits = credits • “Adjustments” • Record adjusting entries (p. 142: a-f); debits = credits • “Adjusted Trial Balance” • Compute the new balance after considering adjusting entries; check for accuracy as debits = credits • “Income Statement” • Enter the balance in the revenue and expense accounts; total debits and credits; difference between debits and credits is Net Income (Net Loss) • “Balance Sheet” • Enter the balance of assets, liabilities, capital, and drawings; total debit and credits; difference is Net Income (Net Loss)

  6. Class Exercise: Dixie Machinery • Adjusting entries: Record the following and prepare an Adjusted Trial Balance • $375 of prepaid insurance has expired • $400 of Office Equipment Depreciation • $350 in salaries are owed to employees • Note: While you must journalize and post adjusting entries on the books, we will ignore for now.

  7. Answer: Adjusted Trial Balance • Now prepare • Income Statement • What was the Net Income (Loss)? • Balance Sheet

  8. Answer: Net Income • Income Statement • Total credits (revenues): 15140 • Total debits (expenses): 11290 • Difference = Net income: $3850 • Balance Sheet: • Total debits (assets): $7400 • Total credits (liabilities & Owners’ Equity): $3550 • Difference = Net Income: $3850

  9. Balance Sheet • Prepare a formal (classified) balance sheet (bottom p. 144; 144C).

  10. Closing Entries • Why? • (1) Revenues and Expenses are recorded for the year to determine net for each year. • But to record each year, at EOY the balance must be reset to zero in each revenue, expenses, and drawing accounts. • Since each year they start at zero balance they are known as temporary accounts. All other accounts are known as real accounts. • (2) Need to move the balance of the 3 accounts to the owner’s capital account. • To show effect on Owner’s Equity.

  11. Income Summary • Why? • To move the balances from the temporary accounts. • The difference between revenues and expenses = Net Income (Loss) • How? • Close Revenues to Income Summary • Close Expenses to Income Summary • Confirm that balance in Income Summary = Net Income (Loss) • Close balance in Income Summary to Capital • Close drawing account to Capital (NOT IN INCOME SUMMARY) • Balance in Income Summary is closed to the owner’s capital account

  12. Class Exercise: Closing Entries

  13. Post-Closing Trial Balance • Why? • To make sure the Ledger accounts are at zero balance for next period. • Example: Exhibit 12

  14. Questions: • (1) Which type of accounts do not appear in the post-closing trial balance? • (2) Which accounts appear in the post-closing trial balance? • (3) If an account was overlooked in the closing process, would the post-closing trial balance still balance?

  15. Answers: • (1) Temporary accounts: Revenues, Expenses, Drawings • (2) Real accounts: Assets, Liabilities, and Capital • (3) Yes. However, the Owner’s Capital Account will not be the same as the one in the Balance Sheet

  16. Fiscal v. Calendar Year

  17. Financial Analysis • Working Capital • Current Ratio

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