completing the accounting cycle chapter 4 4-1copyright ©2014 pearson education, inc. publishing as...

Completing the Accounting Cycle

Chapter 4

4-1Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives

1. Prepare the financial statements including the classified balance sheet

2. Use the worksheet to prepare financial statements

3. Explain the purpose of, journalize, and post-closing entries

4. Prepare the post-closing trial balance


Learning Objectives

5. Describe the accounting cycle

6. Use the current ratio to evaluate business performance

7. Explain the purpose of and journalize reversing entries (Appendix 4A)


Learning Objective 1

Prepare the financial statements including the classified balance

sheet


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.


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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

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

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SMART TOUCH LEARNINGStatement of Retained Earnings


Retained Earnings, 11/1/14 -$ Net income for two months 8,550

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





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






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



The Classified Balance Sheet

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The Asset section is sub-divided into current and

long-term groups.

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

term investments.


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Liabilities are also sub-divided into current and

long-term groups.

Equity is usually not sub-divided.



Use the worksheet to prepare financial

statements



Explain the purpose of, journalize, and post-

closing entries


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


Closing Revenues


Closing Expenses


Closing Income Summary


Closing Withdrawals



Prepare the post-closing trial balance


• 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.


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


Summary of the Accounting Cycle


Start with beginning account balances



Analyze & journalize

transactions





transactions

Post journal

entries to ledger

accounts





transactions

Post journal

entries to ledger

accounts

Prepare unadjusted trial balance





transactions

Post journal

entries to ledger

accounts

Prepare unadjusted trial balance


Prepare the worksheet (optional)




transactions

Post journal

entries to ledger

accounts Prepare unadjusted trial balance

Journalize and post adjusting

entries






transactions

Post journal

entries to ledger



entries

Prepare adjusted trial

balance






transactions

Post journal

entries to ledger



entries


balance

Prepare financial

statements






transactions.

Post journal

entries to ledger



entries


balance

Prepare financial

statements

Journalize and post

closing entries






transactions

Post journal

entries to ledger



entries


balance

Prepare financial

statements

Prepare post-closing trial

balance

Journalize and post

closing entries




Use the current ratio to evaluate business

performance


Current Ratio



Explain the purpose of and journalize reversing entries

(Appendix 4A)


Reversing Entries

• The opposite of accrual entries

• Not required by GAAP

• Used for convenience and to save time


1. Record the accrual at the end of the period

2. Reverse the accrual at the beginning of the next period

3. Record the cash flow without referring to the earlier accrual

Accrued Expenses

• On December 31, record Smart Touch Learning’s $1,200 salary accrual.


Date Accounts and Explanation Debit Credit

Dec. 31 Salaries Expense 1,200 Salaries Payable 1,200 To accrue salaries expense.

Accrued Expenses

• On January 1, after closing the previous period’s accounts, reverse the previous accrual.

• The payable is eliminated, and the expense will now have a credit balance.



2015 Salaries Payable 1,200 Jan. 1 Salaries Expense 1,200

To reverse the salaries adjusting entry.

Accrued Expenses

• When the salaries are paid, simply debit Salaries Expense and credit Cash.

• Salaries Expense will carry the proper $1,200 balance after posting.



Jan. 15 Salaries Expense 2,400 Cash 2,400 To record payment of salaries.

End of Chapter 4


completing the accounting cycle chapter 4 4-1copyright ©2014 pearson education, inc. publishing as...

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