Accounting principles chapter 04

ILLUSTRATION 4-1WORK SHEET Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Balance Sheet Trial Balance Adjustments Adjusted Trial Balance Income Statement

Accounting Principles

Second Canadian Edition

Prepared by:

Carole Bowman, Sheridan College Weygandt · Kieso · Kimmel ·

Trenholm

COMPLETION OF THE ACCOUNTING CYCLE

CHAPTER

4

 A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements.

 It is a working tool or a supplementary device

for the accountant and not a permanent

accounting record.

 Use of a work sheet should make the preparation of adjusting entries and financial statements easier.

WORK SHEET

ILLUSTRATION 4-1

WORK SHEET

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Balance Sheet Trial Balance Adjustments Adjusted Trial Balance Income Statement

1 Prepare trial balance

on the worksheet.

2 Enter adjustment data.

3 Enter adjusted balances

4 Extend adjusted balance to appropriate

columns.

5 Calculate income/loss and complete the worksheet.

PURPOSE OF CLOSING ENTRIES

1 Updates the owner’s capital account

in the ledger by transferring net

income (loss) and owner’s drawings

to owner’s capital

(revenue, expense, drawings) for the next period’s postings by reducing their balances to zero

All revenue accounts All asset accounts

All expense accounts All liability accounts

Owner’s drawings Owner’s capital account

(Balance Sheet Accounts) (Income Statement /

Drawings Accounts)

ILLUSTRATION 4-3

DIAGRAM OF CLOSING PROCESS

(INDIVIDUAL) REVENUES

1

1 Debit each revenue account for its balance, and credit the

owner’s capital account for total revenues.

2 Debit the owner’s capital account for total expenses, and credit

each expense account for its balance.

1 Debit each revenue account for its balance, and credit the

owner’s capital account for total revenues.

2 Debit the owner’s capital account for total expenses, and credit

each expense account for its balance.

(INDIVIDUAL) EXPENSES

Normal Dr

Balance

Normal Cr Balance

Cr to close Dr to close

-OWNER’S CAPITAL

Expenses Revenues

Opening Balance2

ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS

3

3 Debit owner’s capital for the balance in the owner’s drawings

account and credit owner’s drawings for the same amount.

3 Debit owner’s capital for the balance in the owner’s drawings

account and credit owner’s drawings for the same amount.

OWNER’S DRAWINGS

Normal Dr

Balance Cr to close

0

-OWNER’S CAPITAL

Expenses

Revenues

Opening Balance Drawings

Ending Balance

CLOSING ENTRIES

STOP AND CHECK

1 Does the balance in your

Owner’s Capital account equal the ending capital balance reported in the Balance Sheet and

Statement of Owner’s Equity?

2 Are all of your temporary

account balances zero?

POST-CLOSING TRIAL BALANCE

 After all closing entries have been

journalized and posted, a post-closing trial balance is prepared.

 The purpose of this trial balance is to prove the equality of the permanent (balance

sheet) account balances that are carried

forward into the next accounting period.

POST-CLOSING TRIAL BALANCE

The post-closing trial balance is prepared from the permanent accounts in the ledger.

The post-closing trial balance is prepared from the permanent accounts in the ledger.

The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.

The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.

1 Analyse transactions 2 Journalize the

transactions

3 Post to ledger

accounts

4 Prepare a trial balance

5 Journalize and post adjusting entries

6 Prepare adjusted trial balance

 A reversing entry is made at the beginning

of the next accounting period.

 A reversing entry reverses certain adjusting

entries made in the previous period

Opening balances can then be ignored

when preparing year-end adjusting entries.

 This topic is illustrated in Appendix 4A.

REVERSING ENTRIES (OPTIONAL STEP)

CORRECTING ENTRIES

 Errors that occur in recording transactions should be corrected as soon as they are

discovered by preparing correcting entries

 Correcting entries are unnecessary if the

records are free of errors; they can be

journalized and posted whenever an error

is discovered.

 They involve any combination of balance sheet and income statement accounts.

ILLUSTRATION 4-10

STANDARD BALANCE SHEET

CLASSIFICATIONS

Assets Liabilities and Equity

elements are classified into significant subgroups.

standard classifications:

Current

Assets Current Liabilities

Long-Term Investments Long-Term Liabilities

Capital Assets Owner’s/ Partners’/ Shareholders’ Equity

 Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business

within one year of the balance sheet date or the company’s operating cycle, whichever is longer.

 Listed in the order of liquidity.

temporary investments, accounts receivable, inventory, and prepaids.

CURRENT ASSETS

XYZ shares

LONG-TERM INVESTMENTS

 Long-term investments are resources that can

be realized in cash, but the conversion into

cash is not expected within one year or the

operating cycle, whichever is longer.

bonds of another company or investment in land held for resale.

CAPITAL ASSETS

that are used in the business and not intended for sale

(1) Examples of property, plant, and equipment include land,

buildings, and machinery.

(2) Examples of natural resources include tracts of timber, oil

and gas reserves, and mineral deposits.

 Intangible assets are noncurrent resources that

do not have physical substance.

trademarks, or trade names that give the

holder exclusive right of use for a specified period of time.

CAPITAL ASSETS

 Current liabilities are obligations that are reasonably expected to be paid from

existing current assets or through the

creation of other current liabilities within one year or the operating cycle, whichever

is longer.

 Examples include accounts payable,

unearned revenue, interest payable, and current maturities of long-term debt.

CURRENT LIABILITIES

 Obligations expected to be paid after one year are classified as long-term liabilities

 Examples include long-term notes payable, bonds payable, mortgages payable, and

lease liabilities.

LONG-TERM LIABILITIES

 The content of the equity section varies with the form of business organization.

 In a proprietorship, there is a single owner’s

equity account called (Owner’s Name), Capital

 In a partnership, there are separate capital

accounts for each partner.

 For a corporation, owners’ equity is called

shareholders’ equity, and it consists of two

accounts: Share Capital and Retained Earnings

EQUITY

Current Assets

Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Total Current Assets 16,950 Capital Assets

Office Equipment $ 5,000 Less: Accumulated Amortization 83 4,917 Total Assets $ 21,867

Current Liabilities

Notes Payable $ 1,000 Accounts Payable 2,500 Unearned Revenue 800 Salaries Payable 1,200 Interest Payable 25 Total Current Liabilities 5,525 Long-term Liabilties

Notes Payable 4,000 Total Liabilities 9,525 Owner's Equity

C.R Byrd, Capital 12,342

Total Liabilities and Owner's Equity $ 21,867

Pioneer Advertising Agency

Balance Sheet

Liabilities and Owner's Equity

October 31, 2002 Assets

ILLUSTRATION 4-17

CLASSIFIED BALANCE SHEET IN REPORT FORM

A classified balance sheet helps the

financial statement user determine:

• The availability of assets to meet debts as they come due, and

•The claims of short-

and long-term creditors on total assets

A classified balance sheet helps the

financial statement user determine:

• The availability of assets to meet debts as they come due, and

•The claims of short-

and long-term creditors on total assets

The balance sheet is most often presented in the report form, with the assets shown above the liabilities and

owner’s equity

The balance sheet is most often presented in the report form, with the assets shown above the liabilities and

owner’s equity

 Liquidity measures ability to pay

short-term obligations when they come due.

 Working capital is one important measure

of liquidity.

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

CURRENT RATIO

The current ratio (working capital ratio) is a

widely used measure for evaluating a company’s liquidity and short-term debt-paying ability It is calculated by dividing current assets by current liabilities and is a more dependable indicator of liquidity than working capital

CURRENT ASSETS

CURRENT RATIO = ———————————

CURRENT LIABILITIES

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