Completing the Accounting Cycle

1. Completing the Accounting Cycle Chapter 4

2. Learning Objectives • 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. • Describe the accounting cycle. • Illustrate the accounting cycle for one period.

3. Learning Objectives • Explain what is meant by the fiscal year and the natural business • Describe and illustrate the use of working capital and the current ratio in evaluating a company’s financial condition.

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

5. Flow of Accounting Information

6. Flow of Accounting Information • Account balances are listed in the Unadjusted Trial Balance column using the ending balances found in the general ledger. 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 entered here. Two possibilities: • Deferrals – Existing balances are changed • Accruals – New information is entered End-of-Period Spreadsheet (Work Sheet) Unadjusted TB Adjustments Adjusted TB Accounts Dr Cr Dr Cr Dr Cr (continued)

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

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

10. 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. End-of-Period Spreadsheet (Work Sheet) Adjusted TB Income State. Balance Sheet Accounts Dr Cr Dr Cr Dr Cr (concluded)

11. Learning Objective 2 Prepare financial statements from adjusted account balances.

12. 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 $16,840.

13. Financial Statement Preparation from End-of-Period Spreadsheet – Income Statement to statement of owner’s equity

14. 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.

15. Financial Statement Preparation from End-of-PeriodSpreadsheet – Statement of Owner’s Equity from the income statement to the balance sheet

16. 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.

17. Financial Statement Preparation from End-of-Period Spreadsheet – Balance Sheet from the statement of owner’s equity

18. Classified Balance Sheet • A classified balance sheet is a balance sheet that was expanded by adding subsections for (1) current assets, (2) property, plant, and equipment, (3) current liabilities, and (4) long-term liabilities.

19. 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

20. Notes Receivable • Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

21. Fixed Assets Property,plant, andequipment (also called fixed assetsor plant assets) include assets that depreciate over a period of time. Land is an exception, since it is not subject to depreciation. • Equipment • Machinery • Buildings • Land

22. 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

23. Long-Term Liabilities Liabilities not due for a long time (usually more than one year) are called long-term liabilities. • Long-term notes payable • Mortgage payable • Bond payable

24. 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 combined total must be equal to the total assets.

25. Learning Objective 3 Prepare closing entries.

26. Closing Entries • Accounts that are relatively permanent from year to year are called permanent accounts or real accounts. These accounts are carried forward from year to year.

27. Closing Entries • Accounts that report amounts for only one period are called temporary accounts or nominal accounts. Temporary accounts are not carried forward because they relate to only one period.

28. Closing Entries • To report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period. • To achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period.

29. Closing Entries • The balance of Income Summary (net income or net loss) 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.

30. Closing Entries

31. Closing Entries • Income Summary is a temporary account that is only used during the closing process. • At the end of the closing process, the Income Summary account will have a zero balance. • Income Summary is sometimes called a clearing account.

32. Journalizing and Posting Closing Entries

33. Journalizing and Posting Closing Entries

34. Journalizing and Posting Closing Entries

35. Journalizing and Posting Closing Entries

36. Step 1 Step 2 Step 3 Step 4 Closing Entries

37. Temporary Account Balances • After the closing entries are posted, all of the temporary accounts have zero balances.

38. Ledger (continued)

39. Ledger (continued)

40. Ledger (continued)

41. Ledger

42. Ledger (concluded)

43. Post-Closing Trial Balance • A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance at the beginning of the next period.

44. Post-Closing Trial Balance

45. Learning Objective 4 Describe the accounting cycle.

46. Accounting Cycle • 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.

47. 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)

48. Accounting Cycle • 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.

49. Accounting Cycle to the financial statements

50. Accounting Cycle From the adjusted trial balance