chapter 4 completing the accounting cycle

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4- 4-1 Chapter 4 Chapter 4 Completing the Completing the Accounting Cycle Accounting Cycle

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Chapter 4 Completing the Accounting Cycle. LEARNING OBJECTIVES. 1.State all the steps in the accounting cycle. 2.Explain the purposes of closing entries. 3.Prepare the required closing entries. 4.Prepare the post-closing trial balance. 5.Prepare reversing entries as appropriate. - PowerPoint PPT Presentation

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Page 1: Chapter 4 Completing the Accounting Cycle

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Chapter 4Chapter 4Completing the Completing the

Accounting CycleAccounting Cycle

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LEARNING OBJECTIVESLEARNING OBJECTIVES

1. State all the steps in the accounting cycle.2. Explain the purposes of closing entries.3. Prepare the required closing entries.4. Prepare the post-closing trial balance.5. Prepare reversing entries as appropriate.6. Prepare a work sheet.7. Use a work sheet for three different

purposes.

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Overview of theOverview of theAccounting CycleAccounting Cycle

OBJECTIVE 1 State all the steps in the accounting

cycle.

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THE ACCOUNTING CYCLE

DECISIONMAKERS

MEASUREMENT

1.Analyzebusinesstransactions

COMMUNICATION

6.Preparefinancialstatements

PROCESSING

5.Close theaccountsand preparea post-closing trialbalance

2.Record theentries

4.Adjust theaccountsand preparean adjustedtrial balance

3.Post theentries andprepare atrial balance

BUSINESS ACTIVITIES

Overview of the Accounting CycleOverview of the Accounting Cycle

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Short Exercise #1Short Exercise #11. AnalyzeAnalyze business transactions

from source documents.2. RecordRecord the entries in the journal.3. PostPost the entries to the ledger and4. Prepare the initial trial balance.

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Short Exercise #1 (continued)Short Exercise #1 (continued)5. AdjustAdjust the accounts 6. Prepare an adjusted trial balance.7. CloseClose the accounts8. PreparePrepare financial statements. 9. Prepare a post-closing trial

balance.

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Closing EntriesClosing Entries

OBJECTIVE 2Explain the purposes of closing entries.

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Types of Accounts Types of Accounts and Closing Entriesand Closing Entries

Balance sheet accounts are known as permanent accounts.accounts.

Revenue and expense accounts are temporary accounts.accounts.

The withdrawals account is also a temporary account.

Closing entriesClosing entries are journal entries made at the end of an accounting period.

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Purposes of Closing EntriesPurposes of Closing Entries1. To clear the revenue, expense, and withdrawals

accounts of their balances and prepare the accounts for the next accounting period.

2. To summarize a period’s revenues and expenses. The balance of the Income Summary account equals

the net income or loss for the period. The net income or loss is transferred to the Owner’s

Capital account.

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Q. What is the purpose of the Income Summary account?

A. The Income Summary account summarizes the revenue and expense accounts. The balance in the account before it is closed is either the net income or the net loss for the period.

Discussion Discussion

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Required Closing EntriesRequired Closing Entries

OBJECTIVE 3Prepare the required closing entries.

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Overview of the Closing ProcessOverview of the Closing Process

Expense Accounts Revenue Accounts

xxx

xxxxxx

xx

xxx

To close Expense Accounts

To close Revenue AccountsIncome Summary

xxxx

Owner’s Capital

xx

Owner’s Withdrawals

To close Income Summary

To close Withdrawals

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The Four Steps to The Four Steps to Close the AccountsClose the Accounts

1. Close the credit balances from income statement accounts to the Income Summary account. Sets the balances of the revenue accounts to zero. Transfers the total revenues to the credit side of the

Income Summary account.

2. Close the debit balances from income statement accounts to the Income Summary account. Reduces the expense account balances to zero. Transfers the total expenses to the debit side of the

Income Summary account.

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3. Close the Income SummaryIncome Summary account balance to the Owner’s Capital account. Closes the Income Summary account. Transfers the balance, income or loss, to the

Owner’s Capital account.

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3. Close the Income SummaryIncome Summary account balance to the Owner’s Capital account. Closes the Income Summary account. Transfers the balance, income or loss, to the

Owner’s Capital account.

4. Close the Withdrawal account balance to the Owner’s Capital account. Closes the Withdrawal account. Transfers the balance to the Owner’s Capital

account.

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Preparing Closing EntriesPreparing Closing EntriesShort Exercise #2Short Exercise #2

Entry 1:Dec 31 Patient Services 3,400Lab Fees 1,800

Income Summary 5,200 To close the revenue accounts.

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Preparing Closing EntriesPreparing Closing EntriesShort Exercise #3Short Exercise #3

Entry 1:Dec 31 Income Summary 3,000

Rent Expense 1,400 Wages Expense 1,100Other Expense 500

To close the expense accounts.

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Preparing Closing EntriesPreparing Closing EntriesShort Exercise #4Short Exercise #4

Entry 1: Dec 31

Income Summary 2,200 R. Richards, Capital 2,200

To close the income summary accounts.

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Preparing Closing EntriesPreparing Closing EntriesShort Exercise #5Short Exercise #5

Entry 1: Dec 31

R. Richards, Capital 800 R. Richards, Withdrawals 800

To close the withdrawals account.(Also known as Drawing)

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The Accounts After ClosingThe Accounts After Closing Accounts are ready for the next period. Revenue, expense, and withdrawals

(temporary accounts) have zero balances. Owner’s Capital has been increased to

reflect the company’s net income and decreased for dividends.

The balance sheet accounts (permanent accounts) show the correct balances, which are carried forward to the next period.

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Q. Could the Income Summary account have a debit balance when the income statement accounts are closed to it?

A. Yes, if a net loss has been incurred.

Discussion Discussion

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How to remember what is closed

Draw a Boot around the WER---Accounts that WER with a balance.

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The Post-Closing Trial BalanceThe Post-Closing Trial Balance

OBECTIVE 4 Prepare the post-closingtrial balance.

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The Post-Closing Trial BalanceThe Post-Closing Trial Balance Errors can be made in posting the closing

entries to the ledger accounts. A post-closing trial balance is prepared to

determine that:1.All temporary accounts have a zero

balance.2.Debits equal credits.

Only balance sheet accounts should show a balance. (AL&C)

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Q. What is the significance of the post-closing trial balance?

A. The post-closing trial balance checks that the total debits and total credits in the ledger are equal after the closing entries have been posted and that only balance sheet accounts show balances.

Discussion Discussion

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Reversing Entries:Reversing Entries:The Optional First Step in theThe Optional First Step in the

Next Accounting PeriodNext Accounting Period

SUPPLEMENTAL OBJECTIVE 5Prepare reversing entriesas appropriate.

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About Reversing EntriesAbout Reversing Entries A reversing entryreversing entry is a general journal entry

made on the first day of a new accounting period that is the exact reverse of an adjusting entry made at the end of the previous period.

Reversing entries are optional. Reversing entries simplify the bookkeeping for

accrued revenues and accrued expenses. Deferrals cannot be reversed.

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Example of an Accrual Without Example of an Accrual Without Reversing EntryReversing Entry

Jan. 31 Wages Expense 180 Wages Payable 180 To accrue unrecorded wages

Feb. 9 Wages Payable 180 Wages Expense 420 Cash 600

Payment of two weeks’ wages to secretary, $180 of which accrued in the previous period.

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Example of an Accrual With Example of an Accrual With Reversing EntryReversing Entry

1. Adjusting entryJan. 31 Office Wages ExpenseOffice Wages Expense 180180

Wages Payable 1802. Closing entry

Jan. 31 Income Summary 1,380 Office Wages Expense 1,380Office Wages Expense 1,380

3. Reversing entryFeb. 1 Wages Payable 180

Office Wages Expense Office Wages Expense 180 1804. Payment entry

Feb. 9 Office Wages ExpenseOffice Wages Expense 600600 Cash 600

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Q. What is the purpose of reversing entries?

A. Reversing entries enable the bookkeeper to continue preparing routine journal entries in the new accounting period.

Discussion Discussion

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The Work Sheet:The Work Sheet:An Accountant’s ToolAn Accountant’s Tool

SUPPLEMENTAL OBJECTIVE 6Prepare a work sheet.

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Working PapersWorking Papers In order to prepare financial reports, accountants

must collect data in various forms to determine what should be included.

The data collected make up the accountant’s working papersworking papers..

Working papersWorking papers are important for two reasons.1.They help accountants organize their work and

avoid omitting important data or steps.2.They provide evidence of past work so that

accountants or auditors can retrace their steps and support the information in the financial statements.

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The Work SheetThe Work Sheet The work sheet, work sheet, a special kind of working paper, is

often used as a preliminary step in the preparation of financial statements.

A work sheet lessens the possibility of leaving out an adjustment.

A work sheet helps check the mathematical accuracy of the accounts.

A work sheet facilitates the preparation of financial statements.

A work sheet is not a published financial statement. A work sheet is often prepared using a computer.

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Preparing the Work SheetPreparing the Work Sheet1. Enter and total the account balances in the

Trial Balance columns. 2. Enter and total the adjustments in the

Adjustments columns. 3. Enter and total the adjusted account

balances in the Adjusted Trial Balance columns.

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4. Extend the account balances from the Adjusted Trial Balance columns to the Income Statement columns or the Balance Sheet columns.

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4. Extend the account balances from the Adjusted Trial Balance columns to the Income Statement columns or the Balance Sheet columns.

5. Total the Income Statement columns and the Balance Sheet columns. Enter the net income or net loss in both pairs of columns as a balancing figure, and recompute the column totals.

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Q. Why are work sheets never published and rarely seen by management?

A. Work sheets are never published and are rarely seen by management because they are a preliminary step in preparing financial statements. They are a tool for the accountant.

Discussion Discussion

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Using the Work SheetUsing the Work Sheet

SUPPLEMENTAL OBJECTIVE 7Use a work sheet forthree different purposes.

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Using the Work SheetUsing the Work Sheet The completed work sheet aids the accountant in three

principal tasks: 1. Preparing the Financial Statements.

Account balances have been sorted into Income Statement and Balance Sheet columns.

2. Recording the Adjusting Entries. Adjusting entries are copied to the general journal and then

posted to the general ledger.

3. Recording the Closing Entries. Closing entries are entered in the journal and posted to the

ledger. All accounts that need closing, except Dividends, may be found in the Income Statement columns of the work sheet.

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Q. Do the Income Statement columns and the Balance Sheet columns of the work sheet balance after the amounts from the Adjusted Trial Balance columns are extended?

A. No, they do not balance by the amount of net income or loss for the period.

Discussion Discussion

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1. State all the steps in the accounting cycle.

2. Explain the purposes of closing entries.

3. Prepare the required closing entries.4. Prepare the post-closing trial

balance.

OK, LET’S REVIEW . . .

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5. Prepare reversing entries as appropriate.

6. Prepare a work sheet.7. Use a work sheet for three different

purposes.

I was better looking in the last chapter--it’s not your imagination.