Electronic Presentations in
Microsoft® PowerPoint®
Completing the
Accounting Cycle
and Classifying
the Accounts
CHAPTER 5
© 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
1.
2.
3.
4.
Describe and prepare a worksheet and
describe its usefulness.
Describe the closing process and explain
why temporary accounts are closed each
period.
Prepare closing entries.
Explain and prepare a post-closing trial
balance.
© 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
5.
6.
7.
8.
Describe the steps in the accounting
cycle.
Explain and prepare a classified balance
sheet.
Prepare reversing entries and explain
their purpose. (Appendix 5A)
Compute the current ratio and describe
what it reveals about a company’s
financial condition. (Appendix 5B)
© 2007 McGraw-Hill Ryerson Ltd.
The Accounting Cycle
1 Analyze
9 Prepare
transactions
22
Journalize
3
post-closing
trial balance
8
Close
Accounts
Post
7 Prepare
4 Prepare
statements
unadjusted
trial balance
5
Adjust
Prepare
adjusted
trial balance
6
© 2007 McGraw-Hill Ryerson Ltd.
The Worksheet
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.

© 2007 McGraw-Hill Ryerson Ltd.
A Blank Worksheet
Finlay Interiors
Work Sheet
For Month Ended January 31, 2011
Unadjusted Trial
Balance
Adjustments
Adjusted Trial
Balance
Dr
Dr
Income Statement
Account
Dr
Cr
Cr
Cr
Steps:
1.
2.
3.
4.
5.
6.
Enter unadjusted trial balance.
Enter adjustments.
Prepare adjusted trial balance.
Extend adjusted trial balance columns.
Enter net income and balance financial
statement columns.
Prepare financial statements.
© 2007 McGraw-Hill Ryerson Ltd.
Dr
Cr
Balance Sheet and
Statement of Owner's
Equity
Dr
Cr
Finlay Interiors
Work Sheet
For Month Ended January 31, 2011
Account
Unadjusted Trial Balance
Dr
Cr
Cash
8,070
Supplies
3,600
Prepaid insurance
2,400
Furniture
6,000
Adjustments
Dr
Cr
Accumulated amortization, furniture
Accounts payable
200
Unearned consulting revenue
3,000
Notes payable
6,000
Carol Finlay, capital
Carol Finlay, withdrawals
10,000
600
Consulting revenue
3,800
Rental revenue
300
Salaries expense
1,400
Rent expense
1,000
Utilities expense
230
23,300
23,300
Step 1
Prepare Unadjusted
Trial Balance
© 2007 McGraw-Hill Ryerson Ltd.
Adjusted Trial Balance
Dr
Cr
Finlay Interiors
Work Sheet
For Month Ended January 31, 2011
Account
Trial Balance
Dr
Adjustments
Cr
Dr
Adjusted Trial Balance
Cr
Dr
Cash
8,070
Supplies
3,600
b)
1,050
Prepaid insurance
2,400
a)
100
Furniture
6,000
c)
200
d)
250
g)
1,800
e)
70
Accumulated amortization, furniture
Accounts payable
200
Unearned consulting revenue
3,000 d)
Notes payable
6,000
Carol Finlay, capital
Carol Finlay, withdrawals
250
10,000
Step 2
Consulting revenue
Enter Adjustments
Rental revenue
600
3,800
300
Salaries expense
1,400
e)
70
Rent expense
1,000
Insurance expense
a)
100
Supplies expense
b)
1,050
Amortization expense, furniture
c)
200
Utilities expense
Totals
230
23,300
23,300
Salaries payable
Interest expense
f)
35
Interest payable
Accounts receivable
f)
g)
35
1,800
3,505
© 2007 McGraw-Hill Ryerson Ltd.
3,505
Cr
Finlay Interiors
Work Sheet
For Month Ended January 31, 2011
Account
Trial Balance
Dr
Adjustments
Cr
Dr
Adjusted Trial Balance
Cr
Dr
Cr
Cash
8,070
8,070
Supplies
3,600
b)
1,050
2,550
Prepaid insurance
2,400
a)
100
2,300
Furniture
6,000
6,000
Accumulated amortization, furniture
c)
Accounts payable
200
200
200
200
Unearned consulting revenue
3,000
Notes payable
6,000
6,000
10,000
10,000
Carol Finlay, capital
Carol Finlay, withdrawals
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Totals
d)
250
2,750
600
600
3,800
Step 3
300
Prepare Adjusted
Trial
1,400
e)
70
1,000
Balance
230
23,300
d)
250
g)
1,800
5,850
300
1,470
1,000
230
23,300
Insurance expense
a)
100
100
Supplies expense
b)
1,050
1,050
Amortization expense
c)
200
200
Salaries payable
Interest expense
e)
f)
35
Interest payable
Accounts receivable
Totals
35
1,800
3,505
© 2007 McGraw-Hill Ryerson Ltd.
70
35
f)
g)
70
35
1,800
3,505
25,405
25,405
Account
Adjusted Trial Balance
Dr
Cr
Balance Sheet and
Statement of Owner's Equity
Income Statement
Dr
Cr
Dr
Cr
Cash
8,070
8,070
Supplies
2,550
2,550
Prepaid insurance
2,300
2,300
Furniture
6,000
6,000
Accumulated amortization, furniture
200
200
Accounts payable
200
200
Unearned consulting revenue
2,750
2,750
Notes payable
6,000
6,000
10,000
10,000
Carol Finlay, capital
Carol Finlay, withdrawals
600
600
Consulting revenue
Rental revenue
Salaries expense
5,850
5,850
300
300
1,470
1,470
Rent expense
1000
Utilities expense
230
230
Insurance expense
100
100
1,050
1,050
200
200
Supplies expense
Amortization expense, furniture
Salaries payable
Interest expense
70
35
Interest payable
Accounts receivable
Totals
Net Income
1,000
70
35
35
35
1,800
25,405
1,800
6,150
21,320
19,255
Step
4
2,065
2,065
Extend Adjusted Amounts to
Statement Columns
25,405
4,085
© 2007 McGraw-Hill Ryerson Ltd.
Finlay Interiors
Work Sheet
For Month Ended January 31, 2011
Adjusted Trial Balance
Account
Dr
Cr
Balance Sheet and
Statement of Owner's Equity
Income Statement
Dr
Cr
Dr
Cr
Cash
8,070
8,070
Supplies
2,550
2,550
Prepaid insurance
2,300
2,300
Furniture
6,000
6,000
Accumulated amortization, furniture
200
200
Accounts payable
200
200
Unearned consulting revenue
2,750
2,750
Notes payable
6,000
6,000
10,000
10,000
Carol Finlay, capital
Carol Finlay, withdrawals
600
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Insurance expense
Supplies expense
Amortization expense, furniture
Totals
Net Income
Totals
5,850
300
300
1,470
Step
5
1000
1,000
230balance financial
Enter net230
income
and
100
100
1,050
statement 1,050
columns.
200
200
70
35
Interest payable
Accounts receivable
5,850
1,470
Salaries payable
Interest expense
600
70
35
35
35
1,800
25,405
1,800
25,405
4,085
6,150
21,320
19,255
2,065
6,150
6,150
21,320
2065
21,320
© 2007 McGraw-Hill Ryerson Ltd.
Finlay Interiors
Work Sheet
For Month Ended January 31, 2011
Account
Adjusted Trial Balance
Dr
Cr
Balance Sheet and
Statement of Owner's Equity
Income Statement
Dr
Cr
Dr
Cr
Cash
8,070
8,070
Supplies
2,550
2,550
Prepaid insurance
2,300
2,300
Furniture
6,000
6,000
Accumulated amortization, furniture
200
200
200
Step 6
Unearned consulting revenue
2,750
Prepare
financial
statements
Notes payable
6,000from
Carol Finlay, capital
10,000
worksheet
information.
Carol Finlay, withdrawals
600
Accounts payable
Consulting revenue
Rental revenue
Salaries expense
200
2,750
6,000
10,000
600
5,850
5,850
300
300
1,470
1,470
Rent expense
1000
Utilities expense
230
230
Insurance expense
100
100
1,050
1,050
200
200
Supplies expense
Amortization expense, furniture
Salaries payable
Interest expense
70
35
Interest payable
Accounts receivable
Totals
Net Income
Totals
1,000
70
35
35
35
1,800
25,405
1,800
25,405
4,085
2,065
6,150
© 2007 McGraw-Hill Ryerson Ltd.
6,150
6,150
21,320
19,255
21,320
2065
21,320
The Closing Process
The closing process occurs at the end
of an accounting period after financial
statements are prepared.
Reasons for closing entries:
1. Resets revenue, expense and withdrawal
account balances to zero at the end of the
period.
2. Updates the capital account to reflect net
income and drawings.
© 2007 McGraw-Hill Ryerson Ltd.
Four-Step Closing Process
(REID)
1.
2.
3.
4.
Close Revenue accounts to Income
Summary.
Close Expense accounts to Income
Summary.
Close Income Summary account to
Owner’s Capital.
Close Drawings (Withdrawals)
account to Owner’s Capital.
© 2007 McGraw-Hill Ryerson Ltd.
Four-Step Closing Process
(REID)
Example
Please see the Adjusted Trial Balance
illustration in the textbook.
© 2007 McGraw-Hill Ryerson Ltd.
Step 1: Close Revenue accounts to Income
Summary
Consulting Revenue
5,850
5,850
Consulting Revenue
Rental Revenue
Income Summary
5,850
300
-
66,150
Rental Revenue
300
300
-
Income Summary
6,150
6,150
© 2007 McGraw-Hill Ryerson Ltd.
Step 2: Close Expense Accounts to Income
Summary
Income Summary
Amortization Expense
Salaries Expense
Interest Expense
Insurance Expense
Rent Expense
Supplies Expense
Utilities Expense
4,085
200
1,470
35
100
1,000
1,050
230
Insurance Expense
100
100
Rent Expense
1,000
1,000
-
Income Summary
4,085
6,150
2,065
Salaries Expense
1,470
1,470
-
Supplies Expense
1,050
1,050
-
Amortization
Expense
200
200
-
Interest Expense
35
35
-
Utilities Expense
230
230
-
© 2007 McGraw-Hill Ryerson Ltd.
Step 3: Close Income Summary to
Owner’s Capital
Income Summary
Carol Finlay, Capital
2,065
2,065
Income Summary
4,085
6,150
bal.
2,065
2,065 -
Carol Finlay,
Capital
10,000
2,065
bal.
12,065
© 2007 McGraw-Hill Ryerson Ltd.
Step 4: Close Drawings to Owner’s
Capital
Carol Finlay, Capital
600
Carol Finlay, Withdrawals
600
Carol Finlay,
Capital
10,000
600
2,065
balance
11,465
Carol Finlay,
Withdrawals
600
600
balance
© 2007 McGraw-Hill Ryerson Ltd.
-
Post-Closing Trial Balance
A list of balances for all accounts not
closed.
It verifies that:
 Total debits = total credits for permanent
accounts.
 All temporary accounts have zero balances.
© 2007 McGraw-Hill Ryerson Ltd.
The Accounting Cycle
1 Analyze
9 Prepare
transactions
22
Journalize
3
post-closing
trial balance
8
Close
Accounts
Post
7 Prepare
4 Prepare
statements
unadjusted
trial balance
5
Adjust
6 Prepare
adjusted
trial balance
© 2007 McGraw-Hill Ryerson Ltd.
Mini-Quiz
Closing the temporary accounts at the
end of each accounting period:
A) Serves to transfer the effects of these
accounts to the proper owner's 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.
© 2007 McGraw-Hill Ryerson Ltd.
Mini-Quiz
Closing the temporary accounts at the
end of each accounting period:
A) Serves to transfer the effects of these
accounts to the proper owner's 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.
© 2007 McGraw-Hill Ryerson Ltd.
Classified Balance Sheet
A balance sheet that presents the assets and
liabilities in relevant subgroups.
It provides users with more useful
information for decision making.
© 2007 McGraw-Hill Ryerson Ltd.
Music Components
Balance Sheet
January 31, 2011
Assets
Current Assets:
Cash
$
6,500
Temporary 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. 31,2013
$ 18,000
Land not currently used in operations
48,000
Total investments
66,000
Property, Plant and Equipment:
Plant and equipment:
Land
$ 73,200
Buildings
$ 170,000
Less: Accumulated amortization
45,000
125,000
Store equipment
$ 33,200
Less: Accumulated amortization
8,000
25,200
Total property, plant and equipment
223,400
Intangible assets:
Trademark
10,000
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.
© 2007
McGrawHill
Ryerson
Ltd.
Music Components
Balance Sheet
January 31, 2011
Assets
Current Assets:
Cash
$
6,500
Temporary 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. 31,2013
$ 18,000
Land not currently used in operations
48,000
Total investments
66,000
Property, Plant and Equipment:
Plant and equipment:
Land
$ 73,200
Buildings
$ 170,000
Less: Accumulated amortization
45,000
125,000
Store equipment
$ 33,200
Less: Accumulated amortization
8,000
25,200
Total property, plant and equipment
223,400
Intangible assets:
Trademark
10,000
Long-term investments are assets not
used in day-to-day operating activities
and are expected to be held for more
than one year or the operating cycle.
© 2007
McGrawHill
Ryerson
Ltd.
Music Components
Balance Sheet
January 31, 2011
Assets
Current Assets:
Cash
$
6,500
Temporary 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. 31,2013
$ 18,000
Land not currently used in operations
48,000
Total investments
66,000
Property, Plant and Equipment:
Plant and equipment:
Land
$ 73,200
Buildings
$ 170,000
Less: Accumulated amortization
45,000
125,000
Store equipment
$ 33,200
Less: Accumulated amortization
8,000
25,200
Total property, plant and equipment
223,400
Intangible assets:
Trademark
10,000
Property, plant and equipment are
tangible capital assets used in day-to
day operating activities to produce or
sell products and services and are
used for more than one accounting
period or operating cycle.
© 2007
McGrawHill
Ryerson
Ltd.
Music Components
Balance Sheet
January 31, 2011
Assets
Current Assets:
Cash
$
6,500
Temporary 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. 31,2013
$ 18,000
Land not currently used in operations
48,000
Total investments
66,000
Property, Plant and Equipment:
Plant and equipment:
Land
$ 73,200
Buildings
$ 170,000
Less: Accumulated amortization
45,000
125,000
Store equipment
$ 33,200
Less: Accumulated amortization
8,000
25,200
Total property, plant and equipment
223,400
Intangible assets:
Trademark
10,000
Intangible assets are long-term
resources used to produce or sell
products and services. They lack
physical form and their benefits are
uncertain.
© 2007
McGrawHill
Ryerson
Ltd.
Music Components
Balance Sheet
January 31, 2011
Liabilities
Current 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:
Current
liabilities
obligations due
within
Notes payable
(net of currentare
portion)
150,000
Totalyear
liabiltiiesor the company’s operating
179,000
one
cycle,
Owner's Equity
whichever is longer.
Donald Bowie, capital
164,800
Total liabilities and owner's equity
$ 343,800
© 2007 McGraw-Hill Ryerson Ltd.
Music Components
Balance Sheet
January 31, 2011
Liabilities
Current liabilities:
Accounts payable
Wages payable
Notes payable
Current portion of long-term liabilities
Total current liabilities
Long-term liabilities:
Notes payable (net of current portion)
Total liabiltiies
Owner's Equity
Donald Bowie, capital
Total liabilities and owner's equity
$ 15,300 not due
Long-term liabilities are obligations
3,200
within the longer of one year
or the
3,000
7,500
company’s operating cycle.
© 2007 McGraw-Hill Ryerson Ltd.
$ 29,000
150,000
179,000
164,800
$ 343,800
Music Components
Balance Sheet
January 31, 2011
Liabilities
Current 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:
Owner’s
equity is the owner’s claim on the
Notes payable (net of current portion)
150,000
Total liabiltiies assets of a company.
179,000
Owner's Equity
Donald Bowie, capital
164,800
Total liabilities and owner's equity
$ 343,800
© 2007 McGraw-Hill Ryerson Ltd.
Review
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
© 2007 McGraw-Hill Ryerson Ltd.
Appendix 5A
Reversing Entries
Optional entries used to simplify record
keeping.
They are:


Prepared on the first day of the new
accounting period.
Prepared for entries that created accrued
assets and liabilities.
© 2007 McGraw-Hill Ryerson Ltd.
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
Rent Revenue
2,400
2,400
© 2007 McGraw-Hill Ryerson Ltd.
Appendix 5A
Reversing Entries are Not used
Oct.31
Accounts Receivable
Rent Revenue
Accounts Receivable
2,400
Rent Revenue
2,400
Reversing Entries are Used
2,400
Accounts Receivable
2,400
Rent Revenue
Oct.31
Oct.31
Accounts Receivable
2,400
Rent Revenue
2,400
© 2007 McGraw-Hill Ryerson Ltd.
2,400
2,400
Appendix 5A
Reversing Entries are Not used
Reversing Entries are Used
Nov. 1 No entry
Rent Revenue
2,400
Accounts Receivable 2,400
Nov.3 Cash
2,400
Accounts Receivable
2,400
Accounts Receivable
2,400
2,400
0
Oct.31
Nov.1
Nov.3
balance
Rent Revenue
0
Nov.1
Nov.3
balance
Cash
Rent Revenue
Accounts Receivable
2,400
2,400
0
Rent Revenue
2,400
2,400
0
© 2007 McGraw-Hill Ryerson Ltd.
2,400
2,400
Appendix 5B
Using the Information
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
© 2007 McGraw-Hill Ryerson Ltd.
Appendix 5B
Using 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.
© 2007 McGraw-Hill Ryerson Ltd.
End of Chapter
© 2007 McGraw-Hill Ryerson Ltd.