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Chapter 4 Completing the Accounting Cycle PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 4-2 P1 Benefits of a Work Sheet Aids the preparation of financial statements. Reduces possibility of errors. Links accounts and their adjustments. Assists in planning and organizing an audit. Not a required report. Helps in preparing interim financial statements. Shows the effects of proposed transactions. P1 4-3 FastForward Worksheet For the Month Ended December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet and Statement of Changes in Equity P1 4-4 FastForward Worksheet For the Month Ended December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet and Statement of Changes in Equity P1 4-5 FastForward Worksheet For the Month Ended December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet and Statement of Changes in Equity P1 4-6 FastForward Worksheet For the Month Ended December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet and Statement of Changes in Equity P1 4-7 FastForward Worksheet For the Month Ended December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet and Statement of Changes in Equity 4-8 P1 Preparing the Financial Statements 4-9 C1 Recording Closing Entries 1. Resets revenue, expense and withdrawal account balances to zero at the end of the period. 2. Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. 4 - 10 Temporary and Permanent Accounts C1 Income Summary Liabilities Permanent Accounts The The closing closing process process applies applies only only to to temporary temporary accounts. accounts. Owner’s Capital Temporary Accounts Assets Withdrawals Expenses Revenues 4 - 11 P2 Recording Closing Entries Close Credit Balances in Let’s see how Revenue Accounts to Income Summary. the closing Close Debit Balances in Expense process works! accounts to Income Summary. Close Income Summary account to Owner’s Capital. Close Withdrawals to Owner’s Capital. 4 - 12 P2 FastForward Adjusted Trial Balance December 31, 2011 Debit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 200 Consulting revenue Rental revenue Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals $ 47,685 Credit $ 375 6,200 210 2,750 30,000 7,850 300 $ 47,685 Using the adjusted trial balance, let’s prepare the closing entries for FastForward. 4 - 13 P2 FastForward Adjusted Trial Balance December 31, 2011 Debit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 200 Consulting revenue Rental revenue Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals $ 47,685 Credit $ 375 6,200 210 2,750 30,000 7,850 300 $ 47,685 1. Close Credit Balances in Revenue Accounts to Income Summary. 4 - 14 P2  Close Credit Balances in Revenue Accounts to Income Summary Dr. Dec. 31 Consulting revenue Rental revenue Income summary Cr. 7,850 300 8,150 Now, let’s look at the ledger accounts after posting this closing entry. 4 - 15 P2  Close Credit Balances in Revenue Accounts to Income Summary Consulting Revenue 7,850 7,850 Income Summary 8,150 Rental Revenue 300 300 - 4 - 16 P2 FastForward Adjusted Trial Balance December 31, 2011 Debit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 200 Consulting revenue Rental revenue Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals $ 47,685 Credit $ 375 6,200 210 2,750 30,000 7,850 300 $ 47,685 2. Close Debit Balances in Expense Accounts to Income Summary. 4 - 17 P2  Close Debit Balances in Expense Accounts to Income Summary Dec. 31 Income summary Depreciation expense-Equipment Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Dr. 4,365 Now, let’s look at the ledger accounts after posting this closing entry. Cr. 375 1,610 100 1,000 1,050 230 4 - 18 P2  Close Debit Balances in Expense Accounts to Income Summary Depreciation Expense- Eq. 375 375 - Rent Expense 1,000 1,000 - Salaries Expense 1,610 1,610 - Supplies Expense 1,050 1,050 - Insurance Expense 100 100 - Utilities Expense 230 230 - Income Summary 4,365 8,150 3,785 Net Income 4 - 19 P2 FastForward Adjusted Trial Balance December 31, 2011 Debit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 200 Consulting revenue Rental revenue Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals $ 47,685 Credit $ 375 6,200 210 2,750 30,000 7,850 300 $ 47,685 3. Close Income Summary to Owner’s Capital. 4 - 20 P2  CLOSE INCOME SUMMARY TO OWNER’S CAPITAL Dec. 31 Income summary C. Taylor, Capital Dr. 3,785 Cr. 3,785 Now, let’s look at the ledger accounts after posting this closing entry. 4 - 21 P2  CLOSE INCOME SUMMARY TO OWNER’S CAPITAL C. Taylor, Capital 30,000 3,785 33,785 Income Summary 4,365 8,150 3,785 - 4 - 22 P2 FastForward Adjusted Trial Balance December 31, 2011 Debit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 200 Consulting revenue Rental revenue Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals $ 47,685 Credit $ 375 6,200 210 2,750 30,000 7,850 300 $ 47,685 4. Close Withdrawals Account to Owner’s Capital. 4 - 23 P2  CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL Dec. 31 C. Taylor, Capital C. Taylor, Withdrawals Dr. 200 Now, let’s look at the ledger accounts after posting this closing entry. Cr. 200 4 - 24 P2  CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL C. Taylor, Withdrawals 200 200 - C. Taylor, Capital 200 30,000 3,785 33,585 4 - 25 Summary of the Closing Process 1. Close Credit Balances in Revenue Accounts to Income Summary. 2. Close Debit Balances in Expense Accounts to Income Summary. 3. Close Income Summary to Owner’s Capital. 4. Close Withdrawals Account to Owner’s Capital. 4 - 26 P3 Post-Closing Trial Balance List of permanent accounts and their balances after posting closing entries. Total debits and credits must be equal. 4 - 27 P3 Post-Closing Trial Balance FastForward Post-Closing Trial Balance December 31, 2011 Debit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depreciation expense-Equipment Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals $ 43,120 Credit $ 375 6,200 210 2,750 33,585 - $ 43,120 4 - 28 C2 Accounting Cycle 4 - 29 C3 Classified Balance Sheet Categories of a Classified Balance Sheet Assets Liabilities and Equity Current assets Current liabilities Noncurrent assets Noncurrent liabilities Long-term investments Equity Property, plant and equipment Intangible assets Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle. 4 - 30 C3 Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle. 4 - 31 C3 Long-term financial assets or investments are expected to be held for more than one year or the operating cycle. 4 - 32 C3 Property, plant and equipment are tangible long-term assets used to produce or sell products and services. 4 - 33 C3 Intangible assets are long-term resources used to produce or sell products and services and that lack physical form. 4 - 34 C3 Current liabilities are obligations due within the longer of one year or the company’s operating cycle. 4 - 35 C3 Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle. 4 - 36 C3 Equity Equity is is the the owner’s owner’s claim claim on on the the assets. assets. 4 - 37 A1 Current Ratio Helps assess the company’s ability to pay its debts in the near future Current Ratio = Current Assets Current Liabilities Limited Brands, Inc. $ in millions Current assets Current liabilities 2009 2008 2007 2006 $ 2,867 $ 2,919 $ 2,771 $ 2,784 1,225 1,374 1,709 1,575 Current ratio 2.3 2.1 1.6 1.8 Industry current ratlo 2.0 2.1 2.3 2.4 4 - 38 P4 4A – REVERSING ENTRIES Reversing entries are optional. They are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period. The purpose of reversing entries is to simplify a company’s recordkeeping. Let’s see how the accounting for our payroll accrual will be handled with and without reversing entries. 4 - 39 P4 4 - 40 P4 Without Reversing Entries With Reversing Entries 4 - 41 END OF CHAPTER 4