completing the accounting cycle chapter 4 horngren ♦ harrison ♦ bamber ♦ best ♦ fraser ♦...

Completing theAccounting

CycleChapter

4

HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

4 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education AustraliaHorngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia

Objectives

1. Prepare an accounting work sheet.2. Use the work sheet to complete the

accounting cycle.3. Close the revenue, expense and drawings

accounts.4. Classify assets and liabilities as current or

non-current.5. Use the current and debt ratios to

evaluate a business’s ability to pay its debts


Prepare an accounting

work sheet.

Objective 1


The Accounting Cycle

The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.



For a new business, begin by setting up ledger accounts..

For an established business, begin with account balances carried over from the previous period.


Accounts Receivable 1,350

Accounts Receivable 1,700 Service Revenue 1,700

Accounts Receivable 1,350 1,700 3,050

Accounts Receivable 1,350 1,700



Work Sheet

CashAccountsreceivable

12,100

3,050

Statement ofFinancialPosition

Statement ofFinancial

Performance



Postclosing Trial Balance

CashAccountsreceivable

12,100

3,050

Adjusting entries Closing entries

Cash Accounts Receivable12,100 3,050



The Accounting Work Sheet

What is the work sheet? A work sheet is a multi-columned

document used by accountants to help move data from the trial balance to the financial statements.

It is an internal document.


Adjusted Trial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalDrawingsRevenueSalary expenseSupplies expenseDepreciation expense

Totals

12,1001,350

25015,500

1,000

12,000

42,200

7,5001,2001,1001,5007,200

23,700

42,200




a The company has earned revenue of $1,700 which will be collected next month.

b Inventory of supplies at month end totaled $150.

c Depreciation for the period was calculated as $200.


Adjusted Trial Balance Adjustments Trial Balance


Totals

12,1001,350

25015,500

1,000

12,000

42,200

7,5001,2001,1001,5007,200

23,700

42,200

a) 1,700

b) 100c) 200

2,000

b) 100

c) 200

a) 1,700

2,000

12,1003,050

15015,500

1,000

12,000100200

44,100

7,7001,2001,1001,5007,200

25,400

44,100



Adjusted Income Balance Trial Balance Statement Sheet


Totals

7,7001,2001,1001,5007,200

25,400

44,100

12,100

3,050150

15,500

1,000

12,000

100200

44,100

12,100

3,050150

15,500

1,000

31,800

7,7001,2001,1001,5007,200

18,700





Totals

7,7001,2001,1001,5007,200

25,400

44,100

12,100

3,050150

15,500

1,000

12,000

100200

44,100

12,100

3,050150

15,500

1,000

31,800

7,7001,2001,1001,5007,200

18,700

12,000100200

12,300

25,400

25,400





TotalsNet profit

7,7001,2001,1001,5007,200

25,400

44,100

12,100

3,050150

15,500

1,000

12,000

100200

44,100

12,100

3,050150

15,500

1,000

31,800

31,800

7,7001,2001,1001,5007,200

18,70013,10031,800

12,000100200

12,30013,10025,400

25,400

25,400

25,400



Use the work sheet

to complete theaccounting

cycle.

Objective 2


The work sheethelps identifythe accounts

that needadjustments.

Actual adjustmentof the accounts

requiresjournalisingand postingthe entries.

Recording theAdjusting Entries


Recording theAdjusting Entries

The adjusting entries may be recorded in the journal when they are entered on the work sheet.

Many accountants journalise and post the adjusting entries just before they make the closing entries.


Close the revenue,expense, and

drawings accounts.

Objective 3


Closing the Accounts

Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.


Closing EntriesClosing Entries

RevenuesincreaseOwner’s Equity.

RevenuesincreaseOwner’s Equity.

Expenses and

DrawingsdecreaseOwner’s Equity.

Expenses and

DrawingsdecreaseOwner’s Equity.




Revenues and Expense accounts are closed to Profit and Loss Summary.

Profit and Loss Summary is closed to Capital.

Drawings are closed to Capital. In a company, Dividends are closed to

Retained Profits.


Profit and Loss SummaryProfit and Loss Summary

A credit balance

represents net profit.

A credit balance

represents net profit.

A debit balance

represents net loss.

A debit balance

represents net loss.



RevenueP & L

Summary12,000

7,5009,000

Salary Exp3,300

28,500

1,5001,800

4,450 28,500

Rent Exp800 800

Supplies Exp350 350

24,050

24,050

(Close RevenueAccount)

(Close ExpenseAccounts)

(Close P & LSummary)

Drawings2,500 2,500

2,500

CapitalAccount

(CloseDrawingsAccount)



Post-closing Trial Balance

The accounting cycle ends with the postclosing trial balance.

The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.


Permanent Accounts

What accounts never close?– Assets– Liabilities– Owner’s equity Balances of permanent accounts carry

over to the next period.


Classify assets and liabilitiesas current or non-current.

Objective 4


Liquidity

This is a measure of how quickly an item can be converted into cash.

On the statement of financial position, assets and liabilities are classified as either current or non-current to indicate their relative liquidity.


Current Assets

Current assets are cash, or will be converted to cash, in one year (or within the normal business operating cycle).

What are some other examples?– short-term receivables– inventory– prepaid expenses


Current Liabilities

Current liabilities are debts or obligations due within one year or within the operating cycle.

What are some examples?– accounts and salary payables– short-term bills payable– unearned revenue


Non-current Assets and Liabilities

Non-current assets include all other assets.

– property, equipment, and intangibles Non-current liabilities are all other debts

due in longer than one year (or the entity’s operating cycle).


Debit sideCurrent assets

Non-current assets

Credit sideCurrent liabilities

Non-current liabilities

Listed in the orderof decreasing

liquidity

Listed in the orderof decreasing

liquidity

Listed in the orderof how soon they

must be paid

Listed in the orderof how soon they

must be paid

The Classified Statement of Financial Position


Assets LiabilitiesCurrent assets: Current liabilities:Cash 12,100 Accounts payable 1,200Accounts receivable 3,050 Salary payable 1,100Supplies 150 Unearned revenue 1,500 Total current assets 15,300 Total liabilities 3,800Non-current assets Owner’s equity Equipment 15,500 Capital 19,300 Less Accum. deprec. 7,700 7,800 Total liabilities and

Total assets 23,100 owner’s equity 23,100

XYZ ServicesJune 30, 2005

The Classified Statement of Financial

Position

See exhibit 4-12 (MYOB) page 151 of the textbookSee exhibit 4-12 (MYOB) page 151 of the textbook


Report Format

Assets =Liabilities +

Owner’s Equity

Account Format

Assets = Liabilities + Owner’s Equity

Different Formats ofStatements of Financial

Position


Use the current and debtratios to evaluate a business’s

ability to pay its debts.

Objective 5


Comparative Financial Statements

They enhance the user’s ability to analyse a company’s past performance.

What are two common ratios used to measure liquidity?

1 Current ratio2 Debt ratio


Current ratio = Current assets ÷ Current liabilitiesCurrent ratio = Current assets ÷ Current liabilities

Current Ratio

This measures the ability of a business to pay its current liabilities with its current assets.


Total liabilities ÷ Total assetsTotal liabilities ÷ Total assets

Debt Ratio

It indicates the proportion of a business’s assets that are financed with debt.

It measures their ability to pay both current and long-term debt.


Trend Analysis

Decision makers compare various ratios over a period of time.


End of Chapter 4

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