completing the accounting cycle chapter 4 4-1. prepare the financial statements including the...

Completing the Accounting Cycle

Chapter 4

4-1

Prepare the financial statements including the classified balance

sheet

4-2

The financial statements come from the Adjusted

Trial Balance.

Each account on the Adjusted T/B has ONE and only ONE home on one of the financial statements.

No account is EVER used twice.

4-3

4-4

Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$

SMART TOUCH LEARNINGIncome Statement

Two Months Ended December 31, 2014

Income Statement Amounts

4-5

SMART TOUCH LEARNINGStatement of Retained Earnings

Two Months Ended December 31, 2014

Retained Eanings, 11/1/14 -$ Net income for the month 8,550

8,550 Dividends (5,000) Retained Earnings, 12/31/14 3,550$

Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$

SMART TOUCH LEARNINGIncome Statement

Two Months Ended December 31, 2014

4-6

SMART TOUCH LEARNINGStatement of Retained Earnings

Two Months Ended December 31, 2014

Retained Earnings, 11/1/14 -$ Net income for the month 8,550

8,550 Dividends (5,000) Retained Earnings, 12/31/14 3,550$

The Classified Balance Sheet

4-7

Classified Balance Sheet• Assets

– The Asset section is sub-divided into • current and• long-term groups

• Liabilities– Liabilities are also sub-divided into

• current and • long-term groups.

• Presentation makes it easier to evaluate– Liquidity– Solvency

4-8

Current Assets

• Cash or assets that will convert to cash or will be used up in the current operating cycle– Usually 1 year or lease

• Examples:– Cash– Accounts receivable– Supplies– Prepaid expenses– Inventory

9

Long-Term Assets• Not converted to cash within the current

year or operating cycle• Categories

– Plant assets• Land• Building• Furniture• Equipment

– Long-term investments– Intangible assets

10

Current Liabilities

• Must be paid either with cash or goods and services within operating cycle– Typically one year or less

• Examples:– Accounts payable– Notes payable due within one year– Salary payable– Interest payable– Unearned revenue

11

Long-Term Liabilities

• Are not due within the current year or operating cycle

• Examples:– Notes payable with due dates over one year– Mortgages

12

4-13

The Asset section is sub-divided into current and

long-term groups.

Sometimes, there is also a sub-grouping for long-

term investments.

Current Assets

4-14

Liabilities are also sub-divided into current and

long-term groups.

Equity is usually not sub-divided.

Current Liabilities

Long-term Liabilities

Closing the Accounts• Occurs at the end of the period

– Gets accounts ready for next period

• Zeroes out revenue and expense accounts• Updates Capital to the ending balance• Four step process

15

Closing the Accounts

• Step 1 – Close Revenues to Income summary account

• Step 2 – Close individual Expense accounts to Income summary account

• Step 3 – Close Income summary account to Retained Earnings account

• Step 4 - Close Dividend account to Retained Earnings account

16

Close these• Revenue accounts• Expense accounts• Dividends account

Do not close these• Asset accounts• Liability accounts• Common Stock and

Retained Earnings accounts

At the end of each period must transfer the temporary account balances to the permanent Retained Earnings account.

Closing Entries

4-17

4-18

Closing Revenues

4-19

Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$

SMART TOUCH LEARNINGIncome Statement

Two Months Ended December 31, 2014

Closing Expenses

4-20

Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$

SMART TOUCH LEARNINGIncome Statement

Two Months Ended December 31, 2014

Closing Income Summary

4-21

Closing Dividends

4-22

Prepare the post-closing trial balance

4-23

• Only balance sheet accounts are left after the closing entries are posted.

• The revenue and expense accounts now have a $0 balance.

• The books are ready for the start of the next fiscal period.

4-24

Smart Touch Learning

Post-Closing Trial Balance

December 31, 2014

Debit Credit

Cash 12,200$

Accounts Receivable 1,800

Office Supplies 100

Prepaid Rent 2,000

Furniture 18,000

Accum Depr - Furniture 300$

Building 60,000

Accum Depr - Building 250

Land 20,000

Accounts Payable 200

Utilities Payable 100

Salaries Payable 1,200

Interest Payable 100

Unearned Revenue 400

Notes Payable 60,000

Common Stock 48,000

Retained Earnings 3,550

114,100$ 114,100$

Describe the accounting cycle

4-25

Summary of the Accounting Cycle

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-26

Start with beginning account balances

Summary of the Accounting Cycle

4-27

Analyze & journalize

transactions

Start with beginning account balances

Summary of the Accounting Cycle

4-28

Analyze & journalize

transactions

Post journal

entries to ledger

accounts

Start with beginning account balances

Summary of the Accounting Cycle

4-29

Analyze & journalize

transactions

Post journal

entries to ledger

accounts

Prepare unadjusted trial balance

Start with beginning account balances

Summary of the Accounting Cycle

4-30

Analyze & journalize

transactions

Post journal

entries to ledger

accounts

Prepare unadjusted trial balance

Start with beginning account balances

Prepare the worksheet (optional)

Summary of the Accounting Cycle

4-31

Analyze & journalize

transactions

Post journal

entries to ledger

accounts Prepare unadjusted trial balance

Journalize and post adjusting

entries

Start with beginning account balances

Prepare the worksheet (optional)

Summary of the Accounting Cycle

4-32

Analyze & journalize

transactions

Post journal

entries to ledger

accounts Prepare unadjusted trial balance

Journalize and post adjusting

entries

Prepare adjusted trial

balance

Start with beginning account balances

Prepare the worksheet (optional)

Summary of the Accounting Cycle

4-33

Analyze & journalize

transactions

Post journal

entries to ledger

accounts Prepare unadjusted trial balance

Journalize and post adjusting

entries

Prepare adjusted trial

balance

Prepare financial

statements

Start with beginning account balances

Prepare the worksheet (optional)

Summary of the Accounting Cycle

4-34

Analyze & journalize

transactions.

Post journal

entries to ledger

accounts Prepare unadjusted trial balance

Journalize and post adjusting

entries

Prepare adjusted trial

balance

Prepare financial

statements

Journalize and post

closing entries

Start with beginning account balances

Prepare the worksheet (optional)

Summary of the Accounting Cycle

4-35

Analyze & journalize

transactions

Post journal

entries to ledger

accounts Prepare unadjusted trial balance

Journalize and post adjusting

entries

Prepare adjusted trial

balance

Prepare financial

statements

Prepare post-closing trial

balance

Journalize and post

closing entries

Start with beginning account balances

Prepare the worksheet (optional)

Use the current ratio to evaluate business

performance

4-36

Current Ratio(Liquidity Measure)

4-37

Measures a company’s ability to pay its current liabilities

38

Current ratio

2047 = 1.911070

Wal-Mart

39

Current ratio

51893 = .88758484

Cisco

40

Current ratio

51421 = 2.6719233