Completing the Accounting Cycle potx

The Accounting Cycle The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time... Work Sheet CashAccounts receiva

Completing the

Accounting

Cycle Chapter

4

Prepare an accounting

work sheet.

Objective 1

The Accounting Cycle

 The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time

The Accounting Cycle

 For a new business, begin by setting up ledger accounts

 For an established business, begin with account balances carried over from the previous period

Accounts Receivable

1,350

Accounts Receivable 1,700 Service Revenue 1,700

Accounts Receivable 1,350

1,700 3,050

Work Sheet Cash

Accounts receivable

12,100 3,050

Balance Sheet StatementIncomeThe Accounting Cycle

Postclosing Trial Balance Cash

Accounts receivable

12,100 3,050

Adjusting entries Closing entries

Cash Accounts Receivable

12,100 3,050

The Accounting Cycle

The Accounting Work Sheet

 What is the work sheet?

 A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements

 It is an internal document

Adjusted Trial Balance Adjustments Trial Balance Account Title Dr Cr Dr Cr Dr Cr.

1,000 12,000 42,200

7,500 1,200 1,100 1,500 7,200 23,700

42,200

The Accounting Work Sheet

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The Accounting Work Sheet

a The company has earned revenue of $1,700 which will be collected next month

b Inventory of supplies at month end totaled

$150

c Depreciation for the period was calculated

as $200

Adjusted Trial Balance Adjustments Trial Balance

1,000 12,000 42,200

7,500 1,200 1,100 1,500 7,200 23,700

42,200

a) 1,700

b) 100 c) 200 2,000

b) 100 c) 200

a) 1,700

2,000

12,100 3,050 150 15,500

1,000

12,000 100 200 44,100

7,700 1,200 1,100 1,500 7,200 25,400

44,100

The Accounting Work Sheet

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Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr Cr Dr Cr Dr Cr.

44,100

12,10

0 3,050 150 15,50

0

1,000

12,00

0 100 200 44,10

0

12,10

0 3,050 150 15,50

18,700

The Accounting Work Sheet

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Adjusted Income Balance

44,100

12,10

0 3,050 150 15,50

0

1,000

12,00

0 100 200 44,10

0

12,10

0 3,050 150 15,50

18,700

12,000 100 200 12,300

25,400

25,400

The Accounting Work Sheet

©2002 Prentice Hall, Inc Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 13

Adjusted Income Balance

44,100

12,10

0 3,050 150 15,50

0

1,000

12,00

0 100 200 44,10

0

12,10

0 3,050 150 15,50

18,700 13,100 31,800

12,000 100 200 12,300 13,100 25,400

25,400

25,400 25,400

The Accounting Work Sheet

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Use the work sheet

to complete the accounting cycle.

Objective 2

The work sheet

Recording the

Adjusting Entries

Recording the

Adjusting Entries

 The adjusting entries may be recorded in the journal when they are entered on the work sheet

 Many accountants journalize and post the adjusting entries just before they make the closing entries

Close the revenue,

expense, and withdrawal accounts.

Objective 3

Closing the Accounts

 Closing the accounts is the end of period process that prepares the accounts for

recording transactions during the next

period

Owner’s Equity

Closing the Accounts

Closing the Accounts

 Revenues and Expense accounts are closed

to Income Summary

 Income Summary is closed to Capital

 Withdrawals are closed to Capital

 In a corporation, Dividends are closed to Retained Earnings

Income Summary

A credit

balance represents net income

A debit

balance represents net loss

Closing the Accounts

Revenue Summary Income

12,000 7,500 9,000 Salary Exp

(Close Income Summary)

Withdrawals 2,500 2,500

2,500

Capital Account

(Close Withdrawals Account)

Closing the Accounts

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Postclosing Trial Balance

 The accounting cycle ends with the

postclosing trial balance

 The postclosing trial balance is dated as

of the end of the period for which the

statements have been prepared

 Balances of permanent accounts carry over

to the next period

Classify assets and liabilities

as current or long-term.

Objective 4

Current Assets

 Current assets are cash, or will be converted

to cash, in one year or within the normal

business operating cycle

 What are some other examples?

– short-term receivables

– inventory

– prepaid expenses

Current Liabilities

 Current liabilities are debts or obligations due within one year or within the operating cycle

 What are some examples?

– accounts and salary payables

– short-term notes payable

– unearned revenue

Long-term Assets and

Liabilities

 Long-term assets include all other assets

– property, equipment, and intangibles

 Long-term liabilities are all other debts due

in longer than one year or the entity’s

operating cycle

Listed in the order

of decreasing

liquidity

Listed in the order

of how soon they must be paid

The Classified Balance Sheet

Assets Liabilities

Current assets: Current liabilities:

Cash 12,100 Accounts payable 1,200 Accounts receivable 3,050 Salary payable 1,100 Supplies 150 Unearned revenue 1,500 Total current assets 15,300 Total liabilities 3,800 Plant assets Owner’s equity

Equipment 15,500 Capital 19,300 Less Accum deprec 7,700 7,800

Total liabilities and

Total assets 23,100 owner’s equity 23,100

XYZ Services January 31, 20XX

The Classified Balance Sheet

Different Formats of

the Balance Sheet

Use the current ratio and the debt

ratio to evaluate a company.

Objective 5

Comparative Financial

Statements

 They enhance the user’s ability to analyze

a company’s past performance

 What are two common ratios used to

measure liquidity?

1 Current ratio

2 Debt ratio

Current ratio = Current assets ÷ Current liabilities

Current Ratio

 This measures the ability of a business to pay its current liabilities with its current assets

Total liabilities ÷ Total assets

Trend Analysis

 Decision makers compare various ratios over a period of time

End of Chapter

4