acct 100 chapter 4 completing the accounting cycle

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  • Slide 1
  • Slide 2
  • ACCT 100 Chapter 4 Completing the Accounting Cycle
  • Slide 3
  • 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.
  • Slide 4
  • Accounting Cycle 3 The Accounting Process 1.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 ;
  • Slide 5
  • 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.
  • Slide 6
  • 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) SO 1 Prepare a worksheet.
  • Slide 7
  • Steps in Preparing a Worksheet (Source: KWW PowerPoint Presentations) SO 1 Prepare a worksheet. Illustration 4-1
  • Slide 8
  • Accrual Accounting and the Financial Statements 7 A Worksheet Paper with Unadjusted Trial Balance (Source: Financial Accounting by Harrison and Horngren) AIR & SEA TRAVEL, INC. Unadjusted Trial Balance April 30, 19X1 7
  • Slide 9
  • Accrual Accounting and the Financial Statements 8 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
  • Slide 10
  • Accrual Accounting and the Financial Statements 9 Worksheet Paper with Adjusted Trial Balance AIR & SEA TRAVEL, INC. Preparation of Adjusted Trial Balance April 30, 19X1 (from Harrison and Horngren) 9
  • Slide 11
  • Accrual Accounting and the Financial Statements 10 Preparing the Financial Statements of Air & Sea Travel, Inc., from the Adjusted Trial Balance (from Harrison and Horngren Balance Sheet (Exhibit 4-3) Income Statement (Exhibit 4-1) Statement of Retained Earnings (Exhibit 4-2) 10
  • Slide 12
  • Accrual Accounting and the Financial Statements 11 Exhibit 4-1 Income Statement (from Harrison and Horngren) Revenue: Service revenue...$7,400 Expenses: Salary expense$1,900 Rent expense1,000 Utilities expense..400 Supplies expense.300 Depreciation expense.. 275 3,875 Income before tax..3,525 Income tax expense 540 Net income.$2,985 AIR & SEA TRAVEL, INC. Income Statement For the Month Ended April 30, 19X1 11
  • Slide 13
  • Accrual Accounting and the Financial Statements 12 Exhibit 4-2 Statement of Earnings (from Harrison and Horngren) Retained earnings, April 1, 19X1$11,250 Add: Net income $2,985 14,235 Less: Dividends 3,200 Retained earnings, April 30, 19X1..$11,035 AIR & SEA TRAVEL, INC. Statement of Retained Earnings For the Month Ended April 30, 19X1 12
  • Slide 14
  • Accrual Accounting and the Financial Statements 13 Exhibit 4-3 Balance Sheet (from Harrison and Horngren Assets Cash...$24,800 Account receivable....25,00 Supplies.400 Prepaid rent...2,000 Furniture.. $16,500 Less Accumulated depreciation.. 27516,225. Total assets..$45,925 Liabilities Accounts payable.$13,100 Salary payable..950 Unearned service revenue....300 Income tax payable.. 540 Total liabilities.14,890 Stockholders Equity Common stock.20,000 Retained earnings. 11,035 Total stockholders equity31,035 Total liabilities and. stockholders equity.$45,925 AIR & SEA TRAVEL, INC. Balance Sheet April 30, 19X1 13
  • Slide 15
  • Accrual Accounting and the Financial Statements 14 Preparing the Adjusting Entries (a)Rent Expense1,000 Prepaid Rent1,000 To record rent expense. (b)Supplies Expense300 Supplies300 To record supplies used. (c)Depreciation Exp. - Furniture275 Accumulated Depr. - Furniture275 To record depreciation on furniture. (d)Salary Expense950 Salary Payable950 To accrue salary expense. 14
  • Slide 16
  • Accrual Accounting and the Financial Statements 15 Adjusting Entries(contd.) (e)Accounts Receivable250 Service Revenue250 To accrue service revenue. (f)Unearned Service Revenue150 Service Revenue150 To record unearned revenue that has been earned. (g)Income Tax Expense540 Income Tax Payable540 To accrue income tax expense. 15
  • Slide 17
  • Accrual Accounting and the Financial Statements 16 Ledger Accounts with Adjusted Entries Posted ASSETS LIABILITIES STOCKHOLDERS EQUITY Cash Bal.24,800 Salary Payable (d)950 Bal.950 Comm Stock Bal.20,000 EXPENSES Rent Exp. (a)1,000 Bal.1,000 A/R 2,250 (e)250 Bal.2,500 Supplies 700(b)300 Bal.400 Prepaid Rent 3,000(a)1,000 Bal.2,000 Retained Earnings Bal.11,250 REVENUE Service Rev. 7,000 (e)250 (f)150 Bal.7,400 Salary Exp. 950 (d)950 Bal.1,900 Supplies Exp. (b)300 Bal.300 Furniture Bal.16,500 Accumulated Depr.--Furniture (c) 275 Bal.275 A/P Bal.13,100 Unearned Service Rev. (f)150450 Bal.300 I/T Payable (g)540 Bal.540 Dividends Bal.3,200 Depr. Exp.- Furniture (c)275 Bal.275 Utilities Exp. Bal.400 I/T Exp. (g)540 Bal.540 16
  • Slide 18
  • Accrual Accounting and the Financial Statements 17 Closing Entries n All temporary accounts (i.e., revenues, expenses, gains and losses accounts) are closed to an income summary account. n The income summary account is closed to the retained earnings account. n Purpose: all temporary accounts would have a zero beginning balance in a subsequent period after being closed at the end of a previous period.
  • Slide 19
  • At the end of the accounting period, the company makes the accounts ready for the next period. Closing the Books (source: KWW PowerPoint presentations) SO 2 Explain the process of closing the books. Illustration 4-5
  • Slide 20
  • Accrual Accounting and the Financial Statements 19 Closing Entries for Air and Sea Travel, Inc. on 4/30 4/30Service Revenue7,400 Income Summary7,400 4/30Income Summary4,415 Rent Exp. 1,000 Salary Exp.1,900 Supplies Exp300 Depre. Exp.275 Utilities Exp. 400 Income Tax Exp. 540 4/30Income Summary ($7,400-$4,415) 2,985 Retained Earnings2,985 4/30Retained Earnings3,200 Dividends3,200 19
  • Slide 21
  • Accrual Accounting and the Financial Statements 20 Posting Closing Entries to the Ledger Accounts 20
  • Slide 22
  • Accrual Accounting and the Financial Statements 21 Post-Closing Trial Balance (from Harrison and Horngren Cash.$24,800 Accounts receivable..2,500 Supplies400 Prepaid rent..2,000 Furniture...16,500 Accumulated depreciation.$275 Accounts payable.13,100 Salary payable..950 Unearned service revenue.300 Income tax payable..540 Common stock..20,000 Retained earnings 11,035 Total.. $46,200 $46,200 AIR & SEA TRAVEL, INC. Post-closing Trial Balance April 30, 19X1 21
  • Slide 23
  • Accrual Accounting and the Financial Statements 22 Correcting Accounting Errors n When an error is detected after posting, the accountant makes a correcting entry. n Example: $5,000 cash was paid for furniture but was erroneously debited supplies as follows: Supplies5,000 Cash5,000 Correcting Entry Furniture5,000 Supplies5,000
  • Slide 24
  • Accrual Accounting and the Financial Statements 23 Classified Balance Sheet Statement n Accounts with similar characteristics are grouped together on the balance sheet. n Categories of accounts: 1. Assets 2. Liabilities 3. Stockholders equity
  • Slide 25
  • The Classified Balance Sheet (Source: KWW PowerPoint Presentations) 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. AssetsLiabilities and Owners Equity Current assetsCurrent liabilities Long-term investmentsLong-term liabilities Property, plant, and equipmentStockholders equity Intangible assets Illustration 4-17 Standard Classifications
  • Slide 26
  • Accrual Accounting and the Financial Statements 25 Assets n 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.
  • Slide 27
  • The Classified Balance Sheet (Source: KWW PowerPoint Presentations) SO 6 Identify the sections of a classified balance sheet. Companies usually list current asset accounts in the order they expect to convert them into cash. Illustration 4-19 Current Assets
  • Slide 28
  • Th

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