Completing the
Accounting
Cycle and
Classifying
Accounts
CHAPTER
4
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
Learning Objectives
Describe and prepare a worksheet and
explain its usefulness. (LO1)
Describe the closing process and explain
why temporary accounts are closed each
period. (LO2)
Prepare closing entries. (LO3)
Explain and prepare a post-closing trial
balance. (LO4)
1.
2.
3.
4.
2
© 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Complete the steps in the accounting
cycle. (LO5)
Explain and prepare a classified balance
sheet. (LO6)
Prepare reversing entries and explain
their purpose. (Appendix 4A) (LO7)
Calculate the current ratio and describe
what it reveals about a company’s
financial condition. (Appendix 4B) (LO8)
5.
6.
7.
8.
3
© 2013 McGraw-Hill Ryerson Limited.
The Accounting Cycle
9 Prepare
post-closing
trial balance
1 Analyze
transactions
2
Journalize
8
Close
3
Post
7 Prepare
4 Prepare
statements
unadjusted
trial balance
6 Prepare
adjusted
trial balance
4
© 2013 McGraw-Hill Ryerson Limited.
5
Adjust
LO 1
The Worksheet
An optional working paper that can be
used to simplify the preparation of financial
statements.
It is:
•
•
•
•
5
Prepared before adjusting entries are made.
Not distributed to decision makers.
Helpful in preventing errors.
Often used by auditors.
© 2013 McGraw-Hill Ryerson Limited.
LO 1
A Blank Worksheet
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
Unadjusted Trial
Balance
Adjustments
Adjusted Trial
Balance
Dr
Dr
Income Statement
Account
Dr
Cr
Cr
Cr
Dr
Cr
Balance Sheet and
Statement of
Changes in Equity
Dr
Cr
Steps:
1.
2.
3.
4.
5.
6.
6
Enter unadjusted trial balance.
Enter adjustments.
Prepare adjusted trial balance.
Extend adjusted trial balance columns.
Enter net income (or loss) and balance
financial statement columns.
Prepare financial statements.
© 2013 McGraw-Hill Ryerson Limited.
LO 1
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
Account
Unadjusted Trial Balance
Dr
Cr
Cash
8,070
Supplies
3,600
Prepaid insurance
2,400
Equipment
6,000
Adjustments
Dr
Cr
Adjusted Trial Balance
Dr
Cr
Accumulated depreciation, equipment
Accounts payable
200
Unearned teachingrevenue
3,000
Notes payable
6,000
Virgil Klimb, capital
Virgil Klimb, withdrawals
10,000
600
Teaching revenue
3,800
Equipment rental revenue
300
Salaries expense
1,400
Rent expense
1,000
Utilities expense
230
23,300
23,300
Step 1
Prepare Unadjusted
Trial Balance
7
© 2013 McGraw-Hill Ryerson Limited.
LO 1
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
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
Equipment
6,000
c)
200
d)
250
g)
1,800
e)
70
Accumulated depreciation, equipment
Accounts payable
200
Unearned teaching revenue
3,000 d)
Notes payable
6,000
Virgil Klimb, capital
Virgil Klimb, withdrawals
250
10,000
600
Step 2
Enter Adjustments
Equipment rental revenue
Teaching revenue
Salaries expense
1,400
Rent expense
1,000
3,800
300
e)
70
Insurance expense
a)
100
Supplies expense
b)
1,050
Depreciation expense, equipment
c)
200
Utilities expense
Totals
230
23,300
23,300
Salaries payable
Interest expense
f)
35
Interest payable
Accounts receivable
f)
g)
© 2013 McGraw-Hill Ryerson Limited.
35
1,800
3,505
8
Cr
3,505
LO 1
Work Sheet
For Month Ended March 31, 2014
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
Equipment
6,000
6,000
Accumulated depreciation, equipment
c)
Accounts payable
200
200
200
200
Unearned teaching revenue
3,000
Notes payable
6,000
6,000
10,000
10,000
Virgil Klimb, capital
Virgil Klimb, withdrawals
Salaries expense
Rent expense
Utilities expense
250
2,750
600
Teaching revenue
Equipment rental revenue
d)
600
3,800
Step 3 300
1,400
e)
70
Prepare Adjusted
Trial
1,000
230
Balance
Totals
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
Depreciation expense ,equipment
c)
200
200
Salaries payable
Interest expense
e)
f)
35
Interest payable
Accounts receivable
Totals
9
© 2013 McGraw-Hill Ryerson Limited.
35
1,800
3,505
70
35
f)
g)
70
35
1,800
3,505
25,405
25,405
LO 1
Adjusted Trial Balance
Balance Sheet and
Statement of Changes in
Equity
Income Statement
Account
Dr
Cr
Dr
Cr
Dr
Cr
Cash
8,070
8,070
Supplies
2,550
2,550
Prepaid insurance
2,300
2,300
Equipment
6,000
6,000
Accumulated depreciation, equipment
200
200
Accounts payable
200
200
Unearned teaching revenue
2,750
2,750
Notes payable
6,000
6,000
10,000
10,000
Virgil Klimb, capital
Virgil Klimb, withdrawals
600
Teaching revenue
Equipment rental revenue
Salaries expense
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
Depreciation expense ,equipment
Salaries payable
Interest expense
70
35
Interest payable
Accounts receivable
Totals
Net Income
1,000
35
35
1,800
35
1,800
Step6,150
4 21,320 19,255
25,405
25,405
4,085
2,065
2,065
Extend Adjusted
Amounts to
Statement Columns
© 2013 McGraw-Hill Ryerson Limited.
10
70
LO 1
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
Adjusted Trial Balance
Balance Sheet and
Statement of Changes in
Equity
Income Statement
Account
Dr
Cr
Dr
Cr
Dr
Cr
Cash
8,070
8,070
Supplies
2,550
2,550
Prepaid insurance
2,300
2,300
Equipment
6,000
6,000
Accumulated depreciation, equipment
200
200
Accounts payable
200
200
Unearned teaching revenue
2,750
2,750
Notes payable
6,000
6,000
10,000
10,000
Virgil Klimb, capital
Virgil Klimb, withdrawals
600
Teaching revenue
Equipment rental revenue
Salaries expense
Rent expense
Utilities expense
Insurance expense
Supplies expense
300
300
200
200
70
35
Interest payable
Totals
5,850
1,470
Salaries payable
Accounts receivable
5,850
Step1,4705
1,000
Enter net1000
income
(or
loss) and balance
230
230
100
100
financial
statement
columns.
1,050
1,050
Depreciation expense, equipment
Interest expense
600
35
35
35
1,800
25,405
1,800
25,405
Net Income
Totals
11
70
© 2013 McGraw-Hill Ryerson Limited.
4,085
6,150
21,320
19,255
2,065
6,150
6,150
21,320
2065
21,320
LO 1
Vertically Inclined Rock Gym
Work Sheet
For Month Ended March 31, 2014
Adjusted Trial Balance
Balance Sheet and
Statement of Changes in
Equity
Income Statement
Account
Dr
Cr
Dr
Cr
Dr
Cr
Cash
8,070
8,070
Supplies
2,550
2,550
Prepaid insurance
2,300
2,300
Equipment
6,000
6,000
200
Step
6
Accounts payable
200
Unearned teaching revenue
2,750
Prepare
financial
statements
from
Notes payable
6,000
Virgil Klimb, capital
10,000
worksheet information.
Accumulated depreciation, equipment
Virgil Klimb, withdrawals
200
2,750
6,000
10,000
600
Teaching revenue
Equipment rental revenue
Salaries expense
200
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
Depreciation expense, equipment
Salaries payable
Interest expense
70
35
Interest payable
Accounts receivable
Totals
1,000
35
35
35
1,800
25,405
1,800
25,405
Net Income
Totals
12
70
© 2013 McGraw-Hill Ryerson Limited.
4,085
6,150
21,320
19,255
2,065
6,150
6,150
21,320
2065
21,320
LO 1
The 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.
13
© 2013 McGraw-Hill Ryerson Limited.
LO 2
Four-Step Closing Process
(REID)
Close Revenue accounts to Income
Summary account.
Close Expense accounts to Income
Summary account.
Close Income Summary account to
Owner’s Capital account.
Close Drawings (Withdrawals)
account to the Capital account.
1.
2.
3.
4.
14
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Four-Step Closing Process
(REID)
Example
Please see the Adjusted Trial Balance
illustration in the textbook.
15
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Step 1: Close Revenue accounts to Income
Summary
Teaching Revenue
5,850
5,850
Teaching Revenue
5,850
Equip. Rental Revenue 300
Income Summary
66,150
Equip. Rental Revenue
300
300
-
Income Summary
6,150
6,150
16
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Step 2: Close Expense Accounts to Income
Summary
Income Summary
Depreciation 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
-
Income Summary
4,085
6,150
2,065
Salaries Expense
1,470
1,470
-
Supplies Expense
1,050
1,050
-
Depreciation
Expense
200
200
-
Interest Expense
35
35
-
Utilities Expense
230
230
-
17
© 2013 McGraw-Hill Ryerson Limited.
Rent Expense
1,000
1,000
-
LO 3
Step 3: Close Income Summary to Capital
Income Summary
Virgil Klimb, Capital
2,065
2,065
Income Summary
4,085
6,150
bal.
2,065
2,065 -
Virgil Klimb,
Capital
10,000
2,065
bal.
12,065
18
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Step 4: Close Drawings to Capital
Virgil Klimb, Capital
600
Virgil Klimb, Withdrawals
600
Virgil Klimb,
Capital
10,000
600
2,065
balance
11,465
Virgil Klimb,
Withdrawals
600
600
balance
19
© 2013 McGraw-Hill Ryerson Limited.
-
LO 3
Account Balances after Closing
1.
2.
3.
After closing:
All temporary accounts (revenue, expense,
and withdrawal accounts will have zero
balances.
The capital account will be updated to
reflect net income (or loss) and
withdrawals from the period just ending.
All other accounts will be unchanged.
20
© 2013 McGraw-Hill Ryerson Limited.
LO 4
Post-Closing Trial Balance
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.
21
© 2013 McGraw-Hill Ryerson Limited.
LO 4
The Accounting Cycle
9 Prepare
post-closing
trial balance
1 Analyze
transactions
2
Journalize
8
Close
3
Post
7 Prepare
4 Prepare
statements
unadjusted
trial balance
6 Prepare
adjusted
trial balance
22
© 2013 McGraw-Hill Ryerson Limited.
5
Adjust
LO 2
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 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.
23
© 2013 McGraw-Hill Ryerson Limited.
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 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.
24
© 2013 McGraw-Hill Ryerson Limited.
Classified Balance Sheet
A classified balance sheet:
•
Organizes assets and liabilities into
important subgroups.
•
Provides users with more useful
information for decision making.
25
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Music Components
Balance Sheet
January 31, 2014
Assets
Current 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
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.
26
Total assets
© 2013 McGraw-Hill Ryerson Limited.
$ 343,800
LO 6
Music Components
Balance Sheet
January 31, 2014
Assets
Current 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
Long-term investments are held for
more than one year or the operating
cycle.
27
Total assets
© 2013 McGraw-Hill Ryerson Limited.
$ 343,800
LO 6
Music Components
Balance Sheet
January 31, 2014
Assets
Current 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
Property, plant and equipment are
tangible assets used for more than one
accounting period to produce or sell
products and services.
28
Total assets
© 2013 McGraw-Hill Ryerson Limited.
$ 343,800
LO 6
Music Components
Balance Sheet
January 31, 2014
Assets
Current 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 depreciaton
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.
29
Total assets
© 2013 McGraw-Hill Ryerson Limited.
$ 343,800
LO 6
Music Components
Balance Sheet
January 31, 2014
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
are obligations due
to be
Notes payable
(less current portion)
150,000
Total or
liabiltiies
179,000year
paid
settled within the longer of one
Equity
or the company’s operating cycle.
Donald Bowie, capital
164,800
Total liabilities and equity
$ 343,800
30
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Music Components
Balance Sheet
January 31, 2014
Liabilities
Current liabilities:
Accounts payable
Wages payable
Notes payable
Current portion of long-term liabilities
Total current liabilities
Long-term liabilities:
Notes payable (less current portion)
Total liabiltiies
Equity
Donald Bowie, capital
Total liabilities and equity
$ 15,300
Long-term liabilities are obligations
due
3,200
beyond the longer of one year
3,000or the
7,500
company’s operating cycle.
31
© 2013 McGraw-Hill Ryerson Limited.
$ 29,000
150,000
179,000
164,800
$ 343,800
LO 6
Music Components
Balance Sheet
Liabilities January 31, 2014
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:
Notes payable
(less owner’s
current portion) claim on the 150,000
Equity
is the
assets
Total liabiltiies
179,000
of
a
company.
Equity
Donald Bowie, capital
164,800
Total liabilities and equity
$ 343,800
32
© 2013 McGraw-Hill Ryerson Limited.
LO 6
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
33
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Appendix 4A
Reversing Entries
Optional entries used to simplify record
keeping.
They are:
•
•
34
Prepared on the first day of the new
accounting period.
Prepared for adjusting entries that created
accrued assets and liabilities.
© 2013 McGraw-Hill Ryerson Limited.
LO 7
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
35
© 2013 McGraw-Hill Ryerson Limited.
LO 7
Appendix 4A
Reversing Entries are Not used
Oct.31
Accounts Receivable
Rent Revenue
Accounts Receivable
2,400
Rent Revenue
2,400
36
Reversing Entries are Used
2,400
Accounts Receivable
2,400
Rent Revenue
Oct.31
2,400
2,400
Accounts Receivable
2,400
Oct.31
© 2013 McGraw-Hill Ryerson Limited.
Rent Revenue
2,400
LO 7
Appendix 4A
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
37
Nov.1
Nov.3
balance
Cash
Rent Revenue
2,400
2,400
Accounts Receivable
2,400
2,400
0
Rent Revenue
2,400
2,400
0
© 2013 McGraw-Hill Ryerson Limited.
LO 7
Appendix 4B
Using the Information
Current ratio: A ratio that is used to evaluate a
company’s ability to pay its short-term obligations.
Current ratio
38
=
Current assets
Current liabilities
© 2013 McGraw-Hill Ryerson Limited.
LO 8
Appendix 4B
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.
39
© 2013 McGraw-Hill Ryerson Limited.
LO 8
End of Chapter
40
© 2013 McGraw-Hill Ryerson Limited.