COMPLETING THE ACCOUNTING CYCLE handout

chap 4

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Completing the Accounting Cycle

Financial Accounting, Sixth Edition

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1 Prepare a worksheet.

2 Explain the process of closing the books.

3 Describe the content and purpose of a post-closing

trial balance.

4 State the required steps in the accounting cycle.

5 Explain the approaches to preparing correcting

entries.

6 Identify the sections of a classified balance sheet.

Study Objectives

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Closing the Books

Summary of Accounting Cycle

Classified Balance Sheet

Current assets Long-term investments Property, plant, and equipment Intangible assets Current liabilities Long-term

liabilities Stockholders’

Reversing entries—An optional step Correcting entries—An avoidable step

Completing the Accounting Cycle

Preparing closing entries Posting closing entries

Preparing a post-closing trial balance

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A multiple-column form used in preparing financial statements

Not a permanent accounting record.

Five step process.

Use of worksheet is optional.

Using A Worksheet

Worksheet

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Chapter

Steps in Preparing a Worksheet

Illustration 4-1

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Illustration The trial balance for Undercover Roofing for the month ended March 31, 2008, is as follows.

1 Supplies on hand total $140.

2 Depreciation for March is

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Chapter

Account Titles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 2,500

Trial balance amounts come directly from ledger accounts.

Include all accounts with balances.

1 Prepare a Trial Balance on the Worksheet

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Account Titles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 2,500

(a)

(b)

(b) (d)

(d)

(c) (c)

Enter adjustment amounts, total adjustments columns, and check for equality.

Add additional accounts as

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Chapter

Account Titles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 2,500 2,500

(a)

(b)

(b) (d)

(d)

(c) (c)

Total the adjusted trial balance columns and check for equality.

3 Complete the Adjusted Trial Balance Columns

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Account Titles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 2,500 2,500

Extend all revenue and expense account balances to the income

4 Extend Amounts to Financial Statement Columns

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Chapter

Account Titles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 2,500 2,500 2,500

Accounts Receivable 1,800 1,800 1,800

Roofing Supplies 1,100 960 140 140

Equipment 6,000 6,000 6,000

Accumulated Depreciation 1,200 200 1,400 1,400 Accounts Payable 1,400 1,400 1,400 Unearned Revenue 300 170 130 130 Common stock 1,000 1,000 1,000 Retained earnings 6,000 6,000 6,000 Dividends 600 600 600

Totals

Balance Sheet

Adjusted Income Trial Balance Adjustments Trial Balance Statement

Extend all asset, liability, and equity account balances to the

balance sheet columns.

4 Extend Amounts to Financial Statement Columns

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Account Titles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Cash 2,500 2,500 2,500

Accounts Receivable 1,800 1,800 1,800

Roofing Supplies 1,100 960 140 140

Equipment 6,000 6,000 6,000

Accumulated Depreciation 1,200 200 1,400 1,400 Accounts Payable 1,400 1,400 1,400 Unearned Revenue 300 170 130 130 Common stock 1,000 1,000 1,000 Retained earnings 6,000 6,000 6,000 Dividends 600 600 600

Totals 3,170 3,170 11,040 11,040

Balance Sheet

Adjusted Income Trial Balance Adjustments Trial Balance Statement

5 Total Columns, Compute Net Income (Loss)

Compute Net income or Net loss.

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Chapter

Net income is shown on a work sheet in the:

a income statement debit column only.

b balance sheet debit column only.

c income statement credit column and balance

sheet debit column.

d income statement debit column and balance

sheet credit column.

Review Question

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Income statement is prepared from the income statement columns

Balance sheet and retained earnings statement are prepared from the balance sheet columns.

Preparing Financial Statements from a Worksheet

Worksheet

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Chapter

Revenues $ 3,170

Service revenues Expenses

Salaries expense $ 1,050 Supplies expense 960 Depreciation expense 200 Miscellaneous expense 200

Total expenses 2,410 Net income $ 760

Undercover Roofing Income Statement For the Month Ended March 31, 2008

b Prepare an income statement for the month ended

March 31, 2008

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b Prepare a statement of retained earnings for the

month ended March 31, 2008

Undercover Roofing Retained Earnings Statement For the Month Ended March 31, 2008

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Chapter

Equipment 6,000 Less: Accumulated depreciation 1,400 4,600 Total assets $ 9,040

Current liabilities Accounts payable $ 1,400 Salaries payable 350 Unearned revenue 130 Total current liabilities 1,880 Stockholders' equity

Common stock 1,000 Retained earnings 6,160 Total liabilities and stockholder's equity $ 9,040 Liabilities and Stockholders' Equity

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The adjusting entries are prepared from the adjustments columns of the worksheet.

Journalizing and posting of adjusting entries follows the preparation of financial

statements when a worksheet is used.

Preparing Adjusting Entries from a Worksheet

Adjusting Entries

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Chapter

c Journalize the adjusting entries from the

adjustments columns of the worksheet.

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At the end of the accounting period, the company makes the accounts ready for the next period.

Illustration 4-5

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Chapter

ledger, the transfer of

net income (or net loss) and dividends

to retained earnings at the end of the accounting period.

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Illustration 4-6

Retained Earnings is a permanent account; all other accounts are temporary accounts.

Dividends are closed directly

to Retained Earnings and not

to Income Summary because

Dividends are not an expense.

Note:

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Miscellaneous expense 200

d Journalize the closing entries from the financial

statement columns of the worksheet.

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Purpose is to prove the equality of the permanent

account balances after journalizing and posting of

closing entries

Preparing a Post-Closing Trial Balance

Account Titles Dr Cr.

Cash $ 2,500 Accounts Receivable 1,800 Roofing Supplies 140 Equipment 6,000 Accumulated Depreciation $ 1,400 Accounts Payable 1,400 Salaries payable 350 Unearned Revenue 130 Common Stock 1,000 Retained Earnings 6,160 Totals $ 10,440 $ 10,440

Trial Balance

Post-Closing

All temporary accounts

will have zero balances.

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Chapter

Summary of the Accounting Cycle

1 Analyze business transactions

2 Journalize the transactions

6 Prepare an adjusted trial

4 Prepare a trial balance

3 Post to ledger accounts

5 Journalize and post adjusting entries

Illustration 4-12

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Correcting entries

are unnecessary if the records are error-free.

are made whenever an error is discovered.

must be posted before closing entries.

Instead of preparing a correcting entry, it is possible

to reverse the incorrect entry and then prepare the

correct entry.

Correcting Entries—An Avoidable Step

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Chapter

BE4-9 At Batavia Company, the following errors were

discovered after the transactions had been journalized and

posted Prepare the correcting entries.

1 A collection on account from a customer was recorded as a debit to Cash and a credit to Service Revenue for $780.

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BE4-9 At Batavia Company, the following errors were

discovered after the transactions had been journalized and

posted Prepare the correcting entries.

2 The purchase of supplies on account for $1,570 was recorded

as a debit to Supplies and a credit to Accounts Payable $1,750.

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Chapter

The Classified Balance Sheet

Presents a snapshot at a point in time.

To improve understanding, companies group similar assets and similar liabilities together.

Current assets Current liabilities

Long-term investments Long-term liabilities

Property, plant, and equipment Stockholders’ equity

Intangible assets

Illustration 4-17

Standard Classifications

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Assets that a company expects to convert to cash or use up within one year or the

from the purchase of inventory to the collection of cash from customers.

Current Assets

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Chapter

Companies usually list current asset accounts in the order they expect to convert them into cash.

Illustration 4-19

Current Assets

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Cash, and other resources that are reasonably

expected to be realized in cash or sold or

consumed in the business within one year or the

operating cycle, are called:

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Chapter

Investments in stocks and bonds of other companies

Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities.

Long-Term Investments

Illustration 4-20

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Long useful lives.

Currently used in operations.

number of years.

depreciation expensed thus far in the asset’s life.

Property, Plant, and Equipment

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Chapter

Illustration 4-21

Property, Plant, and Equipment

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Assets that do not have physical substance.

Intangible Assets

Illustration 4-22

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Obligations the company is to pay within the coming year.

Usually list notes payable first, followed by accounts payable Other items follow in order

of magnitude.

to be due within the next year.

Current Liabilities

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Chapter

Illustration 4-23

Current Liabilities

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Obligations a company expects to pay after one year Long-Term Liabilities

Illustration 4-24

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Chapter

Which of the following is not a long-term

liability?

a Bonds payable

b Current maturities of long-term obligations

c Long-term notes payable

d Mortgages payable

Review Question

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Proprietorship - one capital account

Partnership - capital account for each partner

Corporation - Capital Stock and Retained Earnings.

Stockholders’ (Owners’) Equity

Illustration 4-25

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What are your personal assets ?

What are your personal liabilities ?

All About You

Your Personal Balance Sheet

Net Worth

=

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All About You

Your Personal Balance Sheet

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In a recent study, individuals were asked whether

they could save 20% of their household income.

All About You

Inconsistent thinking?

Should you prepare a personal balance sheet?

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What Do You Think?

Should you prepare a personal balance sheet?

All About You

YES: In order to attain your desired financial

objectives, you need to set goals early.

NO: Your financial situation right now bears very

little resemblance to what it will look like after you graduate At that point, you will have a better job, and you won’t have to pay tuition Right now, you’re just “bleeding cash.”

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