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Completing the Accounting Cycle

These slides should be viewed using the presentation mode (click the icon to start presentation). Completing the Accounting Cycle. Chapter 4. Learning Objective 1.

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Completing the Accounting Cycle

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  1. These slides should be viewed using the presentation mode (click the icon to start presentation). Completing the Accounting Cycle Chapter 4

  2. Learning Objective 1 Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

  3. Seven Basic Steps of the Accounting Cycle 1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed. 4. Financial statements are prepared. 5. Adjusting entries are journalized and posted. 6. Closing entries are journalized and posted. 7. A post-closing trial balance is prepared.

  4. LO 1 Flow of Accounting Information

  5. Flow of Accounting Information Account balances are listed in the Trial Balance column using the ending balances found in the general ledger. LO 1 End-of-Period Spreadsheet (Work Sheet) Unadjusted TB Adjustments Adjusted TB Accounts Dr Cr Dr Cr Dr Cr (continued)

  6. Flow of Accounting Information Adjustments are entered here. Two possibilities: Deferrals – Existing balances are changed Accruals – New information is entered LO 1 End-of-Period Spreadsheet (Work Sheet) Unadjusted TB Adjustments Adjusted TB Accounts Dr Cr Dr Cr Dr Cr (continued)

  7. Flow of Accounting Information Adjustments are combined with the trial balance amounts. Account balances are now adjusted. LO 1 End-of-Period Spreadsheet (Work Sheet) Unadjusted TB Adjustments Adjusted TB Accounts Dr Cr Dr Cr Dr Cr (continued)

  8. NetSolutions Work Sheet For the Two Months Ended December 31, 2011 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

  9. (a) The Supplies account has a debit of P2,000. A count of supplies at the end of the period reveals that P760 is on hand. Therefore, P1,240 in supplies was used during the two-month period.

  10. NetSolutions Work Sheet For the Two Months Ended December 31, 2005 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 (a) 1,240

  11. (b) The Prepaid Insurance account has a debit balance of P2,400, which represents prepayment of insurance for 12 months beginning December 1. Thus, the insurance expense for this month is P100 (P2,400 ÷ 24).

  12. NetSolutions Work Sheet For the Two Months Ended December 31, 2005 Accounts are added as needed. 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) 100 Insurance Expense (b) 100

  13. FOR RENT (c) The Unearned Rent account has a credit balance of P360, which represents the receipt of three-months’ rent beginning with December 1. Thus, the rent revenue for December is P120.

  14. NetSolutions Work Sheet For the Two Months Ended December 31, 2005 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) 100 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 (c) 120 Insurance Expense (b) 100 Rent Revenue (c) 120

  15. (d) Wages accrued but not paid at the end of December total P250.

  16. NetSolutions Work Sheet For the Two Months Ended December 31, 2005 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) 100 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 (d) 250 Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

  17. (e) Fees accrued at the end of December, but not recorded, total P500.

  18. NetSolutions Work Sheet For the Two Months Ended December 31, 2005 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) 100 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 (e) 500 Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

  19. (f) Depreciation of the office equipment is P50 for December.

  20. NetSolutions Work Sheet For the Two Months Ended December 31, 2005 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) 100 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) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

  21. NetSolutions Work Sheet For the Two Months Ended December 31, 2005 Adjusted Trial Balance Adjustments Trial Balance To make more space, let’s remove the heading. 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) 100 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) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

  22. Adjusted Trial Balance Adjustments Trial Balance 31 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) 100 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) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50 2,260 2,260 Summed and ruled

  23. Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine the amounts displayed in the Adjusted Trial Balance.

  24. Adjusted Trial Balance Adjustments Trial Balance 33 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) 100 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) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50 2,260 2,260

  25. Adjusted Trial Balance Adjustments Trial Balance 34 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) 100 2,300 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) 100 100 Rent Revenue (c) 120 120 Wages Payable (d) 250 250 Depreciation Expense (f) 50 50 Accum. Depreciation (f) 50 50 2,260 2,260 43,400 43,400

  26. Flow of Accounting Information Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column. LO 1 End-of-Period Spreadsheet (Work Sheet) Adjusted TB Income State. Balance Sheet Accounts Dr Cr Dr Cr Dr Cr (continued)

  27. Flow of Accounting Information Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column. LO 1 End-of-Period Spreadsheet (Work Sheet) Adjusted TB Income State. Balance Sheet Accounts Dr Cr Dr Cr Dr Cr (concluded)

  28. Adjusted Trial Balance Income Statement Balance Sheet 38 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 2,300 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 100 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50 43,400 43,400

  29. Now, let’s extend the balances from the Adjusted Trial Balance column.

  30. Adjusted Trial Balance Income Statement Balance Sheet 40 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 2,300 2,300 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 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50 43,400 43,400

  31. These four columns are summed.

  32. Adjusted Trial Balance Income Statement Balance Sheet 42 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 2,300 2,300 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 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 5043,400 43,400 9,755 16,960 33,645 26,440

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

  34. The difference between the Balance Sheet column totals is also the income (or net loss) for the period.

  35. Net Income Net Income Income Statement Balance Sheet 9,755 16,960 33,645 26,440 7,205 7,205 16,960 16,960 33,645 33,645

  36. Learning Objective 2 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.

  37. Income Statement The income statement 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 P16,840. LO 2

  38. NetSolutionsIncome StatementFor Two Months Ended December 31, 2011 Fees earned P16,840 Rent revenue 120 Total revenues P16,960 Expenses: Wages expense P 4,525 Supplies expense 2,040 Rent expense 1,600 Utilities expense 985 Insurance expense 100 Depreciation expense 50 Miscellaneous expense 455 Total expenses 9,755 Net income P 7,205 Every amount on this income statement was taken from the Income Statement column of the work sheet.

  39. Statement of Owner’s Equity The first item presented on the statement of owner’s equity is the balance of the owner’s capital account at the beginning of the period. LO 2

  40. NetSolutionsStatement of Owner’s EquityFor the Two Months Ended December 31, 2011 Chris Clark, Capital, November 1, 2011 P 0 Investment on November 1, 2011 P25,000 Net income for November and December 7,205 P32,205 Less withdrawals 4,000 Increase in owner’s equity 28,205 Chris Clark, Capital, December 31, 2011 $28,205 From the Balance Sheet debit column of the work sheet. Either from the income statement or the work sheet.

  41. 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

  42. NetSolutionsBalance SheetDecember 31, 2005 Assets Liabilities Current assets: Current liabilities: Cash P 2,065 Accounts payable $900 Accounts receivable 2,720 Wages payable 250 Supplies 760 Unearned rent 240 Prepaid insurance 2,300 Total liabilities P 1,390 Total current assets P 7,845 Property, plant, and equipment: Land P20,000 Office equip. P1,800 Less accum. depreciation 50 1,750Owner’s Equity Total property, plant Chris Clark, Capital 28,205 and equipment 21,750 Total liabilities and Total assets P29,595 owner’s equity P29,595 From the Statement of Owner’s Equity

  43. 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

  44. 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

  45. 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

  46. 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

  47. 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

  48. Long-Term Liabilities Liabilities not due for a long time (usually more than one year) are called long-term liabilities. Short-term notes payable Mortgages payable Bonds payable LO 2

  49. Owner’s Equity Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and this total must be equal to the total assets. LO 2

  50. Learning Objective 3 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.

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