Completing the Accounting Cycle

1. Completing the Accounting Cycle Chapter 4

2. Learning objective • Use of Worksheet • Closing Process • Accounting Cycle • Classification of Financial Statement • Decision Analysis: Current ratio • Review Exercise • (6 Problems, Please be Prepared)

3. FastForwardWork Sheet For Month Ended December 31, 2004 First, enter the unadjusted amounts to the worksheet.

4. FastForwardWork Sheet For Month Ended December 31, 2004 Next, enter the adjustments.

5. FastForwardWork Sheet For Month Ended December 31, 2004 Prepare adjusted trial balance.

6. Sort adjusted trial balance amounts to financial statements. FastForwardWork Sheet For Month Ended December 31, 2004

7. Total statement columns, compute income or loss, and balance columns. FastForwardWork Sheet For Month Ended December 31, 2004 Total expenses Total revenue Profit

8. Prepare the Financial Statements Prepare the Income Statement. A work sheet does not substitute for financial statements.

9. Prepare the Statement of Changes in Owner’s Equity.

10. Prepare the Balance Sheet.

11. Benefits of a Work Sheet Aids the preparation of financial statements. Assists in planning and organizing an audit. Not a required report. Reduces possibility of errors. Helps in preparing interim financial statements. Links accounts and their adjustments. Shows the effects of proposed transactions.

12. Resets revenue, expense and withdrawal account balances to zero at the end of the period. Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. 2. Closing Process

13. Temporary and Permanent Accounts • Temporary accounts accumulate data related to one accounting period. • Permanent accounts report on activities related to one or more future accounting periods.

14. Revenues Assets Owner’s Capital Permanent Accounts Temporary Accounts Liabilities Withdrawals Expenses Income Summary Temporary and Permanent Accounts The closing process applies only to temporary accounts.

15. Let’s see how the closing process works! Recording Closing Entries • Close Revenue accounts to Income Summary. • Close Expense accounts to Income Summary. • Close Income Summary account to Owner’s Capital. • Close Withdrawals to Owner’s Capital.

16. Using the adjusted trial balance, let’s prepare the closing entries for FastForward.

17. Close Revenue accounts to Income Summary.

18. Close Revenue Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

19. Close Revenue Accounts to Income Summary

20. Close Expense accounts to Income Summary.

21. Close Expense Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

22. Close Expense Accounts to Income Summary • Close Expense Accounts to Income Summary Net Income

23. Close Income Summary to Owner’s Capital.

24. Close Income Summary to Owner’s Capital Now, let’s look at the ledger accounts after posting this closing entry.

25. Close Income Summary to Owner’s Capital • Close Income Summary to Owner’s Capital

26. Close Withdrawals to Owner’s Capital.

27. Close Withdrawals to Owner’s Capital Now, let’s look at the ledger accounts after posting this closing entry.

28. Close Withdrawals to Owner’s Capital

29. Post-Closing Trial Balance • List of permanent accounts and their balances after posting closing entries. • Total debits and credits must be equal. Let’s look at FastForward’s post-closing trial balance.

30. Post-Closing Trial Balance

31. 9. Prepare Post-closing Trial balance 1. Analyze transactions 2. Journalize 8. Close 3. Post 7. Prepare statements 4. Prepare unadjusted Trial balance 5. Adjust 6. Prepare adjusted Trial balance 3. Accounting cycle

32. Let’s discuss the components of a classified balance sheet.

33. 4. Classified Balance Sheet Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle.

34. Classified Balance Sheet • Operating cycle is the time span from when cash is used to acquire goods and services until cash is received from the sale of those goods and services. • Operating cycle of supermarket (a few weeks) vs. operating cycle of a construction company (several years).

35. Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.

36. Long-term investments are expected to be held for the longer of one year or the operating cycle.

37. Plant assets are tangible long-lived assets used to produce or sell products and services.

38. Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.

39. Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

40. Long-term liabilities are obligations notdue within the longer of one year or the company’s operating cycle.

41. Equity is the owner’s claim on the assets.

42. 5. Decision Analysis - Current Ratio • Helps assess the company’s ability to pay its debts in the near future • Liquidity measure

43. Review Exercise Chapter 1-3

44. Exercise 1: Business Entity (Chap 1) Sole proprietorship, Partnership, or Corporation? • Ownership of Spirit Company is divided into 1,000 shares of stock. • Delta is owned by Sarah Gomez, who is personally liable for the debts of the business. • Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen nor Fitch has personal responsibility for the debts of Financial Services. • Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally liable for the debts of the business. • XLT Services does not have separate legal existence apart from the one person who owns it. • BioProducts does not pay income taxes and has one owner. • Tampa Biz pays its own income taxes and has two owners.

45. Exercise 1: Business Entity (Chap 1) Sole proprietorship, Partnership, or Corporation? • Ownership of Spirit Company is divided into 1,000 shares of stock. • Delta is owned by Sarah Gomez, who is personally liable for the debts of the business. • Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen nor Fitch has personal responsibility for the debts of Financial Services. • Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally liable for the debts of the business. • XLT Services does not have separate legal existence apart from the one person who owns it. • BioProducts does not pay income taxes and has one owner. • Tampa Biz pays its own income taxes and has two owners.

46. Exercise 2: Accounting Equation & F/S (Chap 2) What is the number for ‘?’

47. Exercise 3: Account Type (Chap 2) • What is the type of account as an asset, liability, equity, revenue, or expense? • should we debit (Dr.) or credit (Cr.) the account when account increase? • Which side is the normal balance of the account?

48. Review Accounts:Asset Accounts Cash Accounts Receivable Land AssetAccounts Notes Receivable Buildings Prepaid Accounts Equipment Supplies

49. Asset account • Cash: reflects a company’s cash balance. • Account receivable: held by a seller and refer to promises of payment from customers to sellers. (credit sales or sales on account) • Note receivable: a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note. • Prepaid account: represent prepayments of future expenses. (ex. prepaid insurance)

50. Asset account • Supplies: belong to asset until they are used. When they are used, their costs are transferred from the asset accounts to expense accounts. • Equipment: When it is used and gets worn down its cost is gradually reported as an expense (called depreciation).