completing the accounting cycle and classifying accounts powerpoint slides to accompany fundamental...

Completing Completing the the

Accounting Accounting Cycle and Cycle and Classifying Classifying AccountsAccounts

PowerPoint Slides to accompanyFundamental Accounting Principles, 14ce

Prepared byJoe Pidutti, Durham College

CHAPTER

4

Learning ObjectivesLearning Objectives

1. Describe and prepare a worksheet and explain its usefulness. (LO1)

2. Describe the closing process and explain why temporary accounts are closed each period. (LO2)

3. Prepare closing entries. (LO3)

4. Explain and prepare a post-closing trial balance. (LO4)

© 2013 McGraw-Hill Ryerson Limited.2

Learning ObjectivesLearning Objectives

5. Complete the steps in the accounting cycle. (LO5)

6. Explain and prepare a classified balance sheet. (LO6)

7. Prepare reversing entries and explain their purpose. (Appendix 4A) (LO7)

8. Calculate the current ratio and describe what it reveals about a company’s financial condition. (Appendix 4B) (LO8)


Prepare post-closingtrial balance

Journalize

Close

Prepareunadjusted trial balance

Post

Analyzetransactions

Prepare adjusted

trial balance

Prepare statements

Adjust

2

3

4

6

8

19

The Accounting CycleThe Accounting Cycle

5

LO 1

7


An optional working paper that can be used to simplify the preparation of financial statements.

It is:• Prepared before adjusting entries are made.• Not distributed to decision makers.• Helpful in preventing errors.• Often used by auditors.

© 2013 McGraw-Hill Ryerson Limited.

The WorksheetThe Worksheet

LO 15

AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Vertically Inclined Rock GymWork Sheet

For Month Ended March 31, 2014

Balance Sheet and Statement of

Changes in Equity

Unadjusted Trial Balance

Adjustments Adjusted Trial

Balance Income Statement

A Blank Worksheet

Steps:

1. Enter unadjusted trial balance.

2. Enter adjustments.

3. Prepare adjusted trial balance.

4. Extend adjusted trial balance columns.

5. Enter net income (or loss) and balance financial statement columns.

6. Prepare financial statements.

© 2013 McGraw-Hill Ryerson Limited. LO 16

Account

Dr Cr Dr Cr Dr Cr

Cash 8,070

Supplies 3,600

Prepaid insurance 2,400

Equipment 6,000

Accumulated depreciation, equipment

Accounts payable 200

Unearned teachingrevenue 3,000

Notes payable 6,000

Virgil Klimb, capital 10,000

Virgil Klimb, withdrawals 600

Teaching revenue 3,800

Equipment rental revenue 300

Salaries expense 1,400

Rent expense 1,000

Utilities expense 230

23,300 23,300



Unadjusted Trial Balance Adjustments Adjusted Trial Balance

Step 1Prepare Unadjusted

Trial Balance© 2013 McGraw-Hill Ryerson Limited.

LO 17

Account

Dr Cr Dr Cr Dr Cr

Cash 8,070

Supplies 3,600 b) 1,050

Prepaid insurance 2,400 a) 100

Equipment 6,000

Accumulated depreciation, equipment c) 200

Accounts payable 200

Unearned teaching revenue 3,000 d) 250

Notes payable 6,000

Virgil Klimb, capital 10,000

Virgil Klimb, withdrawals 600

Teaching revenue 3,800 d) 250

g) 1,800

Equipment rental revenue 300

Salaries expense 1,400 e) 70

Rent expense 1,000

Utilities expense 230

Totals 23,300 23,300

Insurance expense a) 100

Supplies expense b) 1,050

Depreciation expense, equipment c) 200

Salaries payable e) 70

Interest expense f) 35

Interest payable f) 35

Accounts receivable g) 1,800

3,505 3,505



Trial Balance Adjustments Adjusted Trial Balance

Step 2Enter Adjustments


Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

Supplies 3,600 b) 1,050 2,550

Prepaid insurance 2,400 a) 100 2,300

Equipment 6,000 6,000

Accumulated depreciation, equipment c) 200 200

Accounts payable 200 200

Unearned teaching revenue 3,000 d) 250 2,750

Notes payable 6,000 6,000

Virgil Klimb, capital 10,000 10,000

Virgil Klimb, withdrawals 600 600

Teaching revenue 3,800 d) 250 5,850

g) 1,800

Equipment rental revenue 300 300

Salaries expense 1,400 e) 70 1,470

Rent expense 1,000 1,000

Utilities expense 230 230

Totals 23,300 23,300

Insurance expense a) 100 100

Supplies expense b) 1,050 1,050

Depreciation expense ,equipment c) 200 200

Salaries payable e) 70 70

Interest expense f) 35 35

Interest payable f) 35 35

Accounts receivable g) 1,800 1,800

Totals 3,505 3,505 25,405 25,405


Work Sheet

Trial Balance Adjustments Adjusted Trial Balance

Step 3Prepare Adjusted Trial

Balance


Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

Supplies 2,550 2,550

Prepaid insurance 2,300 2,300


Accumulated depreciation, equipment 200 200


Unearned teaching revenue 2,750 2,750




Teaching revenue 5,850 5,850


Salaries expense 1,470 1,470

Rent expense 1000 1,000


Insurance expense 100 100

Supplies expense 1,050 1,050

Depreciation expense ,equipment 200 200

Salaries payable 70 70

Interest expense 35 35

Interest payable 35 35

Accounts receivable 1,800 1,800

Totals 25,405 25,405 4,085 6,150 21,320 19,255

Net Income 2,065 2,065

Income Statement Balance Sheet and

Statement of Changes in Equity

Adjusted Trial Balance

Step 4Extend Adjusted Amounts to

Statement Columns© 2013 McGraw-Hill Ryerson Limited.

LO 110

Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

















Depreciation expense, equipment 200 200





Totals 25,405 25,405 4,085 6,150 21,320 19,255

Net Income 2,065 2065Totals 6,150 6,150 21,320 21,320






Step 5Enter net income (or loss) and balance

financial statement columns.


Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

















Depreciation expense, equipment 200 200





Totals 25,405 25,405 4,085 6,150 21,320 19,255

Net Income 2,065 2065Totals 6,150 6,150 21,320 21,320






Step 6Prepare financial statements from

worksheet information.

© 2013 McGraw-Hill Ryerson Limited.LO 112

The Closing ProcessThe Closing Process

The closing process occurs at the end of an accounting period after financial statements are prepared.

Closing entries:1. Reset revenue, expense and withdrawal

account balances to zero at the end of the period.

2. Update the capital account to reflect net income (or loss) and drawings from the period just ending.


Four-Step Closing Process (REID)

1. Close Revenue accounts to Income Summary account.

2. Close Expense accounts to Income Summary account.

3. Close Income Summary account to Owner’s Capital account.

4. Close Drawings (Withdrawals) account to the Capital account.


Four-Step Closing Process (REID)

Example

Please see the Adjusted Trial Balance illustration in the textbook.


Income Summary6,150

6,150

Teaching Revenue5,850 5,850

-

Equip. Rental Revenue

300 300

-

Step 1: Close Revenue accounts to Income Summary


Teaching Revenue 5,850Equip. Rental Revenue 300 Income Summary 66,150

LO 316

Insurance Expense100 100

-

Step 2: Close Expense Accounts to Income Summary

Income Summary4,085 6,150

2,065

Salaries Expense1,470 1,470

-


Income Summary 4,085 Depreciation Expense 200 Salaries Expense 1,470 Interest Expense 35 Insurance Expense 100 Rent Expense 1,000 Supplies Expense 1,050 Utilities Expense 230

Interest Expense35 35

-

Depreciation Expense200 200

-

Utilities Expense230 230

-

Supplies Expense1,050 1,050

-

Rent Expense1,000 1,000

-

LO 317

Virgil Klimb, Capital

10,000 2,065

bal. 12,065

Income Summary4,085 6,150

bal. 2,065 2,065 -

Step 3: Close Income Summary to Capital


Income Summary 2,065 Virgil Klimb, Capital 2,065

LO 318

Virgil Klimb, Capital

10,000 600 2,065

balance 11,465

Step 4: Close Drawings to Capital

Virgil Klimb, Withdrawals

600 600

balance -


Virgil Klimb, Capital 600 Virgil Klimb, Withdrawals 600

LO 319

After closing:1. All temporary accounts (revenue, expense, and

withdrawal accounts will have zero balances.2. The capital account will be updated to reflect net

income (or loss) and withdrawals from the period just ending.

3. All other accounts will be unchanged.


Account Balances after ClosingAccount Balances after Closing

LO 420

A list of permanent accounts and their balances after closing entries are journalized and posted.

It verifies that:• Total debits = total credits for permanent

accounts.• All temporary accounts have zero balances.


Post-Closing Trial BalancePost-Closing Trial Balance

LO 421

Prepare post-closingtrial balance

Journalize

Close

Prepareunadjusted trial balance

Post

Analyzetransactions

Prepare adjusted

trial balance

Prepare statements

Adjust

2

3

4

6

8

19

The Accounting CycleThe Accounting Cycle

5

LO 2

7


Closing the temporary accounts at the end of each accounting period:

A)Serves to transfer the effects of these accounts to the proper equity account on the balance sheet.

B)Prepares the withdrawals account for use in the next period.

C)Gives the revenue and expense accounts zero balances.

D)Both A and C. E)All of the above.


Mini-QuizMini-Quiz

23

Closing the temporary accounts at the end of each accounting period:

A)Serves to transfer the effects of these accounts to the proper equity account on the balance sheet.

B)Prepares the withdrawals account for use in the next period.

C)Gives the revenue and expense accounts zero balances.

D)Both A and C. E)All of the above.


Mini-QuizMini-Quiz

24

A classified balance sheet:• Organizes assets and liabilities into

important subgroups.• Provides users with more useful

information for decision making.


Classified Balance SheetClassified Balance Sheet

LO 625

AssetsCurrent Assets:

Cash 6,500$ Short -term investments 2,100 Accounts receivable 4,400 Merchandise inventory 29,000 Prepaid expenses 2,400 Total current assets 44,400$

Long-term investments:Notes Receivable, due Mar. 31,2016 18,000$ Land not currently used in operations 48,000 Total investments 66,000

Property, plant and equipment: Land 73,200$

Buildings 170,000$ Less: Accumulated depreciation 45,000 125,000

Store equipment 33,200$ Less: Accumulated depreciation 8,000 25,200

Total property, plant and equipment 223,400 Intangible assets:

Trademark 10,000

Total assets 343,800$

Music ComponentsBalance Sheet

January 31, 2014

Current assets are assets that are expected to be sold, collected, or used within the longer of one year or the company’s operating cycle.





Property, plant and equipment: Land 73,200$




Trademark 10,000



January 31, 2014

Long-term investments are held for more than one year or the operating

cycle.





Property, Plant and Equipment: Land 73,200$




Trademark 10,000



January 31, 2014

Property, plant and equipment are tangible assets used for more than one

accounting period to produce or sell products and services.



Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 29,000 Prepaid expenses 2,400 Total current assets 44,400$


Property, Plant and Equipment: Land 73,200$


Store equipment 33,200$ Less: Accumulated depreciaton 8,000 25,200


Trademark 10,000



January 31, 2014

Intangible assets are long-term resources used to produce or sell products and services. They lack

physical form.


LiabilitiesCurrent liabilities:

Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$

Long-term liabilities:Notes payable (less current portion) 150,000

Total liabiltiies 179,000 Equity

Donald Bowie, capital 164,800 Total liabilities and equity 343,800$


January 31, 2014

Current liabilities are obligations due to be paid or settled within the longer of one year

or the company’s operating cycle.







Long-term liabilities are obligations due beyond the longer of one year or the

company’s operating cycle.



January 31, 2014







January 31, 2014

Equity is the owner’s claim on the assets of a company.


Q What classes of assets and liabilities are shown on a typical classified balance sheet?

A Current assets, long-term investments, PP&E, intangible assets, current liabilities, long-term liabilities


ReviewReview

LO 633

Optional entries used to simplify record keeping.

They are:

• Prepared on the first day of the new accounting period.

• Prepared for adjusting entries that created accrued assets and liabilities.

Appendix 4AAppendix 4AReversing EntriesReversing Entries


Reversing Entries - Example


DP Company rents unused office space to a tenant for $2,400 per month. The company had not received October’s rent payment from the tenant by October 31. Payment is expected on November 3.

The entry to record the accrued revenue would be:Oct.31 Accounts Receivable 2,400 Rent Revenue 2,400

LO 735

Current ratio: A ratio that is used to evaluate a company’s ability to pay its short-term obligations.

Current ratio = Current assets

Current liabilities

Appendix 4BAppendix 4BUsing the InformationUsing the Information


Current ratio = Current assets

Current liabilities

This ratio:• Should not be used in isolation as a

measure of liquidity.• Will vary from industry to industry.• May be tracked over time to spot trends.• May be used to compare to industry norms.

Appendix 4BAppendix 4BUsing the InformationUsing the Information


End of ChapterEnd of Chapter


completing the accounting cycle and classifying accounts powerpoint slides to accompany fundamental...

Documents

mcgrawhill ryerson limited

adjusted trial balance

postclosing trial balance

virgil klimb

classified balance sheet

rent expense1

rock gymwork sheetfor

notes payable6