acct 100 chapter 4 completing the accounting cycle

ACCT 100

Chapter 4

Completing the Accounting Cycle

Accrual Accounting and the Financial Statements 2

Objectives of the Chapter Discuss the steps in the accounting cycle. Introduce the worksheet paper to facilitate the

preparation of financial statements. Explain the process of closing the books. Discuss the content of a post-closing trial

balance. Explain the correcting entries. Discuss the sections of a classified balance

sheet. Accounting ratios for decision making.

Accounting Cycle 3

The Accounting Process1. Identification and measurement of business

transactions;

2. Journalization (record business transactions using the double-entry system);

3. Post (post journal entries to ledger accounts);

4. Prepare worksheet (including unadjusted trial balance, adjustments; adjusted trial balance, etc.)

5. Prepare financial statements based on the adjusted trial balance;

Accounting Cycle 4

Accounting Process (contd.)

6. Prepare and post adjusting entries;

7. Prepare and post closing entries;

8. Prepare post-closing trial balance (optional).

Note: Steps 1,2 ,3 and the unadjusted trial balance are discussed in chapter 2. The adjustments (i.e., adjusting entries) are discussed in chapter 3.

A multiple-column form used in preparing financial statements.

Not a permanent accounting record.

Use of worksheet is optional.

Using A Worksheet Using A Worksheet (Source: KWW PowerPoint Presentations)

Using A Worksheet Using A Worksheet (Source: KWW PowerPoint Presentations)

SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet Steps in Preparing a Worksheet (Source: KWW (Source: KWW PowerPoint Presentations) PowerPoint Presentations) Steps in Preparing a Worksheet Steps in Preparing a Worksheet (Source: KWW (Source: KWW PowerPoint Presentations) PowerPoint Presentations)

SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

Illustration 4-1


A Worksheet Paper with Unadjusted Trial Balance (Source: Financial Accounting by Harrison and Horngren)

Trial Balance Account Title Debit Credit Cash 24,800 Accounts receivable 2,250 Supplies 700 Prepaid rent 3,000 Furniture 16,500 Accumulated depreciation Accounts payable 13,100 Salary Payable Unearned service revenue 450 Income tax payable Common stock 20,000 Retained earnings 11,250 Dividends 3,200 Service revenue 7,000 Rent expense Salary expense 950 Supplies expense Depreciation expense Utilities expense 400 Income tax expense

AIR & SEA TRAVEL, INC.Unadjusted Trial Balance

April 30, 19X1

7


Information for Adjustments at 4/30/ 19x1 (from Financial Accounting by Harrison and Horngren and used in chapter 3 notes):

(a) Prepaid rent expired, $1,000.

(b) Supplies on hand, $400 (balance before adjustment equals $700).

(c) Depreciation on furniture, $275.

(d) Accrued salary expense, $950.

(e) Accrued service revenue, $250.

(f) Amount of unearned service revenue that has been earned, $150.

(g) Accrued income tax expense, $540.8


Worksheet Paper with Adjusted Trial Balance

Trial Balance Adjustments Adjusted Trial BalanceAccount Title Debit Credit Debit Credit Debit CreditCash 24,800 24,800Accounts receivable 2,250 (e) 250 2,500Supplies 700 (b) 300 400Prepaid rent 3,000 (a) 1,000 2,000Furniture 16,500 16,500Accumulated depreciation (c) 275 275Accounts payable 13,100 13,100Salary Payable (d) 950 950Unearned service revenue 450 (f) 150 300Income tax payable (g) 540 540Common stock 20,000 20,000Retained earnings 11,250 11,250Dividends 3,200 3,200Service revenue 7,000 (e) 250 7,400

(f) 150Rent expense (a) 1,000 1,000Salary expense 950 (d) 950 1,900Supplies expense (b) 300 300Depreciation expense (c) 275 275Utilities expense 400 400Income tax expense (g) 540 540

AIR & SEA TRAVEL, INC.Preparation of Adjusted Trial BalanceApril 30, 19X1 (from Harrison and Horngren)

9


Preparing the Financial Statements of Air & Sea Travel, Inc., from the Adjusted Trial Balance (from Harrison and Horngren

Adjusted Trial BalanceAccount Title Debit CreditCash 24,800Accounts receivable 2,500Supplies 400Prepaid rent 2,000Furniture 16,500Accumulated depreciation 275Accounts payable 13,100Salary Payable 950Unearned service revenue 300Income tax payable 540Common stock 20,000Retained earnings 11,250Dividends 3,200Service revenue 7,400Rent expense 1,000Salary expense 1,900Supplies expense 300Depreciation expense 275Utilities expense 400Income tax expense 540

53,815 53,815

Balance Sheet(Exhibit 4-3)

Income Statement(Exhibit 4-1)

Statement of Retained Earnings(Exhibit 4-2)

10


Exhibit 4-1 Income Statement (from Harrison and Horngren)

Revenue:Service revenue…………...

$7,400Expenses:

Salary expense…………… $1,900Rent expense……………… 1,000Utilities expense………….. 400Supplies expense…………. 300Depreciation expense…….. 275 3,875

Income before tax………….. 3,525Income tax expense………… 540Net income…………………. $2,985

AIR & SEA TRAVEL, INC.Income Statement

For the Month Ended April 30, 19X1

11


Exhibit 4-2 Statement of Earnings (from Harrison and Horngren)

Retained earnings, April 1, 19X1…… $11,250Add: Net income……………………… $2,985

14,235Less: Dividends……………………… 3,200Retained earnings, April 30, 19X1….. $11,035

AIR & SEA TRAVEL, INC.Statement of Retained Earnings

For the Month Ended April 30, 19X1

12


Exhibit 4-3 Balance Sheet (from Harrison and Horngren

AssetsCash……………….….. $24,800Account receivable...…. 25,00Supplies………………. 400Prepaid rent…………... 2,000Furniture…….. $16,500

Less Accumulateddepreciation….. 275 16,225

.

Total assets………….. $45,925

LiabilitiesAccounts payable…………. $13,100Salary payable…………….. 950Unearned service revenue.... 300Income tax payable….……. 540Total liabilities……………. 14,890

Stockholders’ EquityCommon stock……………. 20,000Retained earnings…………. 11,035 Total stockholders’ equity… 31,035Total liabilities and .

stockholders’ equity……. $45,925

AIR & SEA TRAVEL, INC.Balance SheetApril 30, 19X1

13


Preparing the Adjusting Entries (a) Rent Expense 1,000

Prepaid Rent 1,000To record rent expense.

(b) Supplies Expense 300Supplies 300

To record supplies used.

(c) Depreciation Exp. - Furniture 275Accumulated Depr. - Furniture 275

To record depreciation on furniture.

(d) Salary Expense 950Salary Payable 950

To accrue salary expense.

14


Adjusting Entries(contd.)

(e) Accounts Receivable 250Service Revenue 250

To accrue service revenue.

(f) Unearned Service Revenue 150Service Revenue 150

To record unearned revenue that has been earned.

(g) Income Tax Expense 540Income Tax Payable 540

To accrue income tax expense.

15


Ledger Accounts with Adjusted Entries Posted

ASSETS LIABILITIES STOCKHOLDERS’ EQUITYCash

Bal.24,800

Salary Payable(d) 950

Bal. 950

Comm Stock Bal. 20,000

EXPENSESRent Exp.

(a) 1,000Bal.1,000

A/R2,250

(e) 250Bal. 2,500

Supplies700 (b) 300

Bal. 400

Prepaid Rent3,000 (a) 1,000

Bal. 2,000

Retained Earnings

Bal.11,250

REVENUEService Rev.

7,000(e) 250(f) 150

Bal. 7,400

Salary Exp.950

(d) 950Bal.1,900

Supplies Exp.(b) 300Bal. 300

FurnitureBal.16,500

AccumulatedDepr.--Furniture

(c) 275Bal. 275

A/PBal.13,100

UnearnedService Rev.

(f) 150 450Bal. 300

I/T Payable(g) 540

Bal. 540

DividendsBal.3,200

Depr. Exp.-Furniture

(c) 275Bal. 275

Utilities Exp.Bal. 400

I/T Exp.(g) 540Bal. 540

16


Closing Entries

All temporary accounts (i.e., revenues, expenses, gains and losses accounts) are closed to an income summary account.

The income summary account is closed to the retained earnings account.

Purpose: all temporary accounts would have a zero beginning balance in a subsequent period after being closed at the end of a previous period.

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

Closing the Books Closing the Books (source: KWW (source: KWW PowerPoint presentations)PowerPoint presentations)Closing the Books Closing the Books (source: KWW (source: KWW PowerPoint presentations)PowerPoint presentations)

SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.

Illustration 4-5


Closing Entries for Air and Sea Travel, Inc. on 4/30

4/30 Service Revenue 7,400Income Summary 7,400

4/30 Income Summary 4,415Rent Exp. 1,000Salary Exp. 1,900Supplies Exp 300Depre. Exp. 275Utilities Exp. 400Income Tax Exp. 540

4/30 Income Summary ($7,400-$4,415) 2,985Retained Earnings 2,985

4/30 Retained Earnings 3,200Dividends 3,200

19


Posting Closing Entries to the Ledger Accounts

Adj. 1,000 7,000Bal. 1,000 Clo. 1,000 Adj. 250

Adj. 150Col. 7,400 Bal. 7,400

950Adj. 950Bal. 1,900 Clo. 1,900

Adj. 300 Clo. 4,415 Clo. 7,400Bal. 300 Clo. 300 Clo. 2,985 Bal. 2,985

Adj. 275 Bal. 3,200 Clo. 3,200Bal. 275 Clo. 275

Adj. 400 Clo. 3,200 11,250Bal. 400 Clo. 400 Clo. 2,985

Bal. 11,035

Adj. 540Bal. 540 Clo. 540

Rent Expense

Salary Expense

Supplies Expense

Income Tax Expense

Utilities Expense

Depreciation Expense

Service Revenue

Income Summary

Dividends

Retained Earnings

20


Post-Closing Trial Balance (from Harrison and Horngren

Cash………………………………. $24,800Accounts receivable…………….. 2,500Supplies…………………………… 400Prepaid rent……………………….. 2,000Furniture…………………………... 16,500Accumulated depreciation………. $ 275Accounts payable…………………. 13,100Salary payable…………………….. 950Unearned service revenue………. 300Income tax payable……………….. 540Common stock…………………….. 20,000Retained earnings………………… 11,035Total……………………………….. $46,200 $46,200

AIR & SEA TRAVEL, INC.Post-closing Trial Balance

April 30, 19X1

21


Correcting Accounting Errors

When an error is detected after posting, the accountant makes a correcting entry.

Example: $5,000 cash was paid for furniture but was erroneously debited supplies as follows:

Supplies 5,000Cash 5,000

Correcting EntryFurniture 5,000

Supplies 5,000


Classified Balance Sheet Statement

Accounts with similar characteristics are grouped together on the balance sheet.

Categories of accounts:

1. Assets

2. Liabilities

3. Stockholders’ equity

The Classified Balance Sheet The Classified Balance Sheet (Source: KWW PowerPoint (Source: KWW PowerPoint Presentations)Presentations)The Classified Balance Sheet The Classified Balance Sheet (Source: KWW PowerPoint (Source: KWW PowerPoint Presentations)Presentations)

SO 6 Identify the sections of a classified balance sheet.SO 6 Identify the sections of a classified balance sheet.

Presents a snapshot at a point in time.

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

Assets Liabilities and Owner’s Equity

Current assets Current liabilitiesLong-term investments Long-term liabilitiesProperty, plant, and equipment Stockholders’ equityIntangible assets

Illustration 4-17Standard Classifications


Assets

Assets: Resources with future economic benefit to a business entity as a result of a past transaction

a. Current assets: Cash and other assets that are reasonably expected to be realized in cash or sold, or consumed during the normal operating cycle or one year, whichever is longer.

The Classified Balance Sheet The Classified Balance Sheet (Source: KWW (Source: KWW PowerPoint Presentations)PowerPoint Presentations)The Classified Balance Sheet The Classified Balance Sheet (Source: KWW (Source: KWW PowerPoint Presentations)PowerPoint Presentations)


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

Illustration 4-19

Current Assets



b.Investments in buildings or land not used in current operations; investments in bonds or stocks of other companies .

Long-Term Investments

Illustration 4-20


Assets (contd.)

c. Property, plant, and equipment: assets used in firms' operations and meet the following criteria:

Economic life > 1 year. Acquired for use in operation. Not for resale to customers. $ is material.Depreciation is applied.



Illustration 4-21

Property, Plant, and Equipment


Assets (contd.)

d. Intangible assets: Assets with no physical substance but have value based on rights or privileges that belong to the owner (i.e., patents, franchises, trademarks,…)

e. Other assets: Deferred charges (long-term prepayments)



Assets that do not have physical substance.

Intangible Assets

Illustration 4-22


Liabilities

Legal obligations required future payments of assets or services as a result of a business entity’s past transactions or events.

a. Current liabilities:

Obligations must be fulfilled in one year or one operating cycle, whichever is longer. Will require the use of current assets or the creation of current liability.



Illustration 4-23

Current Liabilities


Liabilities (contd.)

b. Long-term liabilities:

Obligations are not due in next year or next operating cycle, whichever is longer.

c. Other liabilities:

Long-term advances from customers, deferred income taxes.

The Classified Balance Sheet The Classified Balance Sheet (Source: KWW (Source: KWW PowerPoint PresentationsPowerPoint Presentations))The Classified Balance Sheet The Classified Balance Sheet (Source: KWW (Source: KWW PowerPoint PresentationsPowerPoint Presentations))


Obligations a company expects to pay after one year.

Long-Term Liabilities

Illustration 4-24


Stockholders’ Equity Residual claims (Assets-Liabilities) to the

business entity from stockholders.

a. Contributed capital (Legal capital): includes Par value of common stock, par value of prefer stock and paid-in capital in excess of par value of common stock or preferred stock.

b. Retained Earnings (or deficit): income not distributed to stockholders



Proprietorship - one capital account.

Partnership - capital account for each partner.

Corporation - Capital Stock and Retained Earnings.

Stockholders’ (Owner’s) Equity

Illustration 4-25


Classified Balance Sheet of Hawaiian Airlines, Inc. (Source: Harrison and Horngren)

ASSETSCurrent Assets:

1.Cash and cash equivalents…………….. $ 5,389 $ 3,501 2.Accounts receivable………………….... 18,178 16,275 3. Inventories…………………………….. 7,648 6,234 4.Assets held for sale……………………. 1,344 1,594 5.Prepaid expenses………………………. 5,804 6,079 6. Total current assets………………... 38,363 33,683

PROPERTY AND EQUIPMENT 7.Flight equipment……………………….. 40,659 34,702 8.Ground equipment, buildings, and

leasehold improvements…………….. 5,775 3,976 9.Accumulated depr. and amortization…... (5,043)

(922)10. Property and equipment, net…………. 41,391 37,75611. Other Assets…………………………… 81,886 91,86212. Total Assets…………………………. $ 161,640 $163,301

HAWAIIAN AIRLINES, INC.Classified Balance Sheet (Adapted)

December 31, 1995 and 1994 (In thousands)1995 1994

38


Exhibit 3-17 (Continued)

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:

13.Current portion of long-term debt………………….. $ 6,027 $ 6,39414.Current portion of capital lease obligations………... 2,662 2,90715.Accounts payable…………………………………... 35,182 17,52916.Air traffic liability…………………………………... 30,461 40,38217.Other accrued liabilities…………………………….. 15,730 12,29818. Total current liabilities…………………………. 90,062 79,51019.Long-Term Debt…………………………………... 5,523 14,15220.Capital Lease Obligations………………………… 10,102 12,76421.Other Liabilities…………………………………… 26,775 23,026

Shareholders’ Equity22.Common stock……………………………………… 41,287 40,00023.Other………………………………………………... (452) ----24.Accumulated deficit………………………………… (11,657) (6,151)25. Shareholders’ equity……………………………. 29,178 33,84926. Total Liabilities and Shareholders’ Equity...$161,640 $163,301

(In thousands)1995 1994

39


6. Different Formats for the Balance Sheet

B/S B/S

Assets Liabilities Assets

Equity

Liabilities and Equity


Using Accounting Information in Decision making: Accounting Ratios

A. Current Ratio

B. Debt Ratio


A. Current Ratio

Current Ratio = Current Assets Current Liabilities

1. This ratio measures the company’s ability to pay current liabilities with current assets.

2. Users of this ratios: creditor, stockholders, and managers (who must maintain enough cash to pay the company’s current liabilities).

1.


A. Current Ratio (contd.)

3. What is a good value of this ratio: depends on the industry and the cash flows of a company. A company with a strong cash flow can operate at a lower current ratio than a company with weak cash flow.

4. What happens when the ratio is low?

5. Can the current ratio be too high?


B. Debt Ratio

Debt Ratio = Total Liabilities Total Assets

1. This ratio measures the ability of a company to pay its total liabilities.

2. Users of this ratio: creditors, stockholders and manager.


B. Debt Ratio (contd.)

3. What is a good value of this ratio: depends on the industry and the cash flows of a company. A company with a strong cash flow can operate with a high debt ratio at than otherwise.

4. What happens when the debt ratio is high?

5. Can the ratio be too low?

acct 100 chapter 4 completing the accounting cycle

Documents

financial accounting

accrual accounting

accounting cycle slide

adjusted trial balance

accounting process

accounting ratios

permanent accounting

worksheet source