ch04 completing the accounting cycle, intro accounting, 21st edition warren reeve fess eng

Chapter Chapter 44Completing the Completing the

Accounting CycleAccounting CycleAccounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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1. Review the seven basic steps of the accounting cycle.2. Prepare a work sheet.3. Prepare financial statements from a work sheet.4. Prepare adjusting and closing entries from a work

sheet.5. Explain what is meant by the fiscal year and the

natural business year.6. Analyze and interpret the financial solvency of a

business by computing working capital and the current ratio.

ObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

Seven Basic Steps of the Accounting Cycle

1. Transactions are analyzed and recorded in the journal.2. Transactions are posted to the ledger.3. A trial balance is prepared, adjustment data are

assembled, and an optional work sheet is completed.4. Financial statements are prepared.5. Adjusting entries are journalized and posted.6. Closing entries are journalized and posted.7. A post-closing trial balance is prepared.

Assets are commonly divided into classes and that two of these classes are current

assets and property, plant, and equipment.

That’s correct. Cash and other assets that are expected to be converted into cash, sold, or used up usually in less than a

year are current assets.

For example?

Well… besides cash, there’s notes receivable, accounts receivable, supplies, and

other prepaid items.

So, assets that have a life over a year are listed under

property, plant, and equipment.

There are some exceptions, but that’s basically correct. Assets

such as office equipment, machinery, buildings, and land

would appear under that heading.

Liabilities due usually within one year or less and that are to be paid

out of current assets are called current liabilities.

Accounts payable Wages payable Interest payable Unearned fees

Liabilities not due for more than a year usually are long-term liabilities.

Mortgage note payable

Mortgage payableBond payable

The work sheet is a useful device for understanding the flow of accounting data from the unadjusted trial balance to

the financial statements.

The Work SheetThe Work Sheet

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, owner’s equity, revenues, and expenses.

Adjustments are entered here. Two possibilities:1. Deferrals – Existing balances are

changed.2. Accruals – New information is

entered.

Trial Balance





Adjustments are combined with the trial balance. Account balances are now adjusted.

Trial Balance



Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

The Unadjusted The Unadjusted Trial BalanceTrial Balance

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(a) The (a) The SuppliesSupplies account has a debit of account has a debit of $2,000. A count of supplies at the end of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used Therefore, $1,240 in supplies was used during the two-month period.during the two-month period.

Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600





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(a) 1,240

(a) 1,240

(b)(b) The The Prepaid Insurance Prepaid Insurance account has a account has a debit balance of $2,400, which debit balance of $2,400, which represents prepayment of insurance for represents prepayment of insurance for 24 months beginning December 1. 24 months beginning December 1. Thus, the insurance expense for this Thus, the insurance expense for this month is $100 ($2,400 ÷ 24).month is $100 ($2,400 ÷ 24).

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100

Accounts are added as needed.

(b) 100

(c) The (c) The Unearned Rent Unearned Rent account has a credit account has a credit balance of $360, which represents the balance of $360, which represents the receipt of three-months’ rent beginning receipt of three-months’ rent beginning with December 1. Thus, the rent revenue with December 1. Thus, the rent revenue for December is $120.for December is $120.

FOR REN

T

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100

(c) 120

Rent Revenue (c) 120

(d) Wages accrued but not paid at (d) Wages accrued but not paid at the end of December total $250.the end of December total $250.

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

(d) 250

(e) Fees accrued at the end of (e) Fees accrued at the end of December, but not recorded, December, but not recorded, total $500.total $500.

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

(e) 500

(e) 500

(f) Depreciation of the office (f) Depreciation of the office equipment is $50 for December.equipment is $50 for December.

Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250Depreciation Expense (f) 50Accum. Depreciation (f) 50


42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

To make more space, let’s remove

the heading.


42,600 42,600



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2,260 2,260Summed Summed

and and ruledruled

31

Next, the unadjusted Trial Balance columns and the Adjustments columns are

combined to determine the amounts displayed in the Adjusted Trial Balance.


42,600 42,600



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2,260 2,260

33

Cash 2,065 2,065Accounts Receivable 2,220 (e) 500 2,720Supplies 2,000 (a) 1,240 760Prepaid Insurance 2,400 (b) 100 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 360 (c) 120 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,340 (e) 500 16,840Wages Expense 4,275 (d) 250 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 800 (a) 1,240 2,040Miscellaneous Expense 455 455

42,600 42,600



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Insurance Expense (b) 100 100 Rent Revenue (c) 120 120 Wages Payable (d) 250 250 Depreciation Expense (f) 50 50 Accum. Depreciation (f) 50 50

2,260 2,260 43,400 43,400

34

Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.

Adjusted TB


Income State. Balance Sheet


Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

Adjusted TB


Income State. Balance Sheet


To make room on the slides for the Income statement and

Balance Sheet columns, the Trial Balance and Adjustments columns have been removed.

Cash 2,065Accounts Receivable 2,720Supplies 760Prepaid Insurance 2,300Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 240Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,840Wages Expense 4,525Rent Expense 1,600Utilities Expense 985Supplies Expense 2,040Miscellaneous Expense 455


Adjusted Trial Balance Income Statement Balance Sheet

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Insurance Expense 100 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50

43,400 43,400

38

Now, let’s extend the balances from the Adjusted Trial

Balance column.

Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455



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Insurance Expense 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50

43,400 43,400

40

These four columns are

summed.

Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455



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Insurance Expense 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50

43,400 43,400 9,755 16,960 33,645 26,440

42

The difference between the Income Statement column

totals is the net income (or net loss) for the period.

The difference between the Balance Sheet column totals

is also the income (or net loss) for the period.

9,755 16,960 33,645 26,4407,205 7,205

16,960 16,960 33,645 33,645

Income Statement Balance Sheet

Net IncomeNet Income Net IncomeNet Income

NetSolutionsIncome Statement

For Two Months Ended December 31, 2005

Fees earned $16,840Rent revenue 120

Total revenues $16,960Expenses:

Wages expense $ 4,525Supplies expense 2,040Rent expense 1,600Utilities expense 985Insurance expense 100Depreciation expense 50Miscellaneous expense 455

Total expenses 9,755Net income $ 7,205

Every amount on this income statement was taken from the Income Statement column of the work sheet.

NetSolutionsStatement of Owner’s Equity


Chris Clark, Capital, November 1, 2005 $ 0Investment on November 1, 2005 $25,000Net income for November and December 7,205

$32,205Less withdrawals 4,000Increase in owner’s equity 28,205Chris Clark, Capital, December 31, 2005 $28,205Either from the Either from the

income income statement or the statement or the

work sheet.work sheet.

From the From the Balance Sheet Balance Sheet

debit column of debit column of the work sheet.the work sheet.

NetSolutionsBalance Sheet

December 31, 2005 Assets LiabilitiesCurrent assets: Current liabilities:

Cash $ 2,065 Accounts payable $900Accounts receivable 2,720 Wages payable 250Supplies 760 Unearned rent 240Prepaid insurance 2,300 Total liabilities$ 1,390 Total current assets $ 7,845

Property, plant, and equipment:

Land $20,000Office equip. $1,800Less accum.

depreciation 50 1,750 Owner’s Equity Total property, plant Chris Clark, Capital 28,205

and equipment 21,750 Total liabilities and

Total assets $29,595 owner’s equity$29,595

From the From the Statement Statement

of Owner’s of Owner’s EquityEquity

Adjusting and Closing EntriesAdjusting and Closing Entries

Adjusting entries are recorded in the journal at the

end of the accounting period.


If a work sheet has been prepared, the data for these entries are in the Adjustments columns.

OWNER’S CAPITALOWNER’S CAPITAL

The Closing ProcessThe Closing Process

Income Summary

11Revenues are transferred to Income Summary22

Expenses are transferred to Income Summary

33 Net Income or Net Loss is transferred to Owner’s Capital

44 Drawings are transferred to Owner’s Capital

OWNER’S CAPITALOWNER’S CAPITAL

Income Summary

11Revenues are transferred to Income Summary22

Expenses are transferred to Income Summary

33 Net Income or Net Loss is transferred to Owner’s Capital

44 Drawings are transferred to Owner’s Capital

The The Income Summary Income Summary account does not appear on account does not appear on

the financial statements.the financial statements.


Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation ExpenseBal. 50

Utilities ExpenseBal. 985

Supplies ExpenseBal. 2,040

Insurance ExpenseBal. 100

Miscellaneous ExpenseBal. 455

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Chris Clark, Capital

Bal. 25,000

Chris Clark, Drawing

Bal. 4,000

Income Summary

Note: Note: The The balances shown balances shown

are adjusted are adjusted balances before balances before

closing. The closing. The following following sequence sequence

demonstrates the demonstrates the closing process.closing process.


Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600






Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120


Bal. 25,000


Bal. 4,000

Income Summary

Debit each revenue account for the amount of its

balance, and credit Income Summary

for the total revenue.

16,840

120

16,960


Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600







Bal. 25,000


Bal. 4,000

Income Summary

Debit Income Summary for the total expenses and credit each expense

account for its balance.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525


Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600







Bal. 25,000


Bal. 4,000

Income Summary

Debit Income Summary for the

amount of its balance (in this

case, the net income) and credit the capital account.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

7,205


Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600







Bal. 25,000


Bal. 4,000

Income Summary

Debit the capital account for the balance of the

drawing account, and credit drawing

for the same amount.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

7,205

4,000

4,000


Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600







Bal. 25,000


Bal. 4,000

Income Summary

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,480

120

16,9609,775

445

100

2,040

985

50

1,600

4,525

7,205

7,205

4,000

4,000

Close RevenuesClose Revenues

Close ExpensesClose Expenses

Close Income SummaryClose Income Summary

Close DrawingClose Drawing

16,84016,840

120120

16,96016,960

4,5254,525

1,6001,600

5050

985985

2,0402,040

100100

455455

9,7759,775

7,2057,205

7,2057,205

4,0004,000

4,0004,000

Review of the Closing ProcessReview of the Closing Process

After the closing entries are posted, all of the

temporary accounts have zero balances.

Post-closing Trial BalancePost-closing Trial BalanceNetSolutions

Post-Closing Trial BalanceDecember 31, 2005

Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 28 205 00

29 645 00 29 645 00

Financial Analysis for Financial Analysis for NetSolutionsNetSolutions

Working Capital = $7,845 – $1,390

Working Capital =

Current Assets – Current

Liabilities

Working Capital = $6,455

Current Ratio =

Current Assets ÷ Current

Liabilities


Current Ratio = $7,845 ÷ $1,390

Current Ratio = 5.6


This ratio implies that NetSolutions is able to pay

its current liabilities.


Current ratio = $7,845 ÷ $1,390

Current ratio =

Current Assets ÷ Current

Liabilities

Current ratio = 5.6


NetSolutions can use the current ratio to make comparisons across

companies and with industry averages.

The End

Chapter 4Chapter 4

ch04 completing the accounting cycle, intro accounting, 21st edition warren reeve fess eng

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