COMPLETING THE ACCOUNTING CYCLE

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1 Chapter 04 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 McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2 4-2 P 1 BENEFITS OF A WORK SHEET Aids the preparation of financial statements. Reduces possibility of errors. Links accounts and their adjustments. Not a required report. Assists in planning and organizing an audit. Helps in preparing interim financial statements. Shows the effects of proposed transactions.

3 P 1 FastForward Worksheet For the Month Ended December 31,

4 P 1 FastForward Worksheet For the Month Ended December 31,

5 P 1 FastForward Worksheet For the Month Ended December 31,

6 P 1 FastForward Worksheet For the Month Ended December 31,

7 P 1 FastForward Worksheet For the Month Ended December 31,

8 4-8 P 1 PREPARING THE FINANCIAL STATEMENTS

9 4-9 P 1 PREPARING THE FINANCIAL STATEMENTS

10 4-10 C 1 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.

11 4-11 C 1 TEMPORARY AND PERMANENT ACCOUNTS Revenues Assets Expenses Temporary Accounts Withdrawals Liabilities Permanent Accounts Owner s Capital Income Summary The closing process applies only to temporary accounts.

12 4-12 P 2 RECORDING CLOSING ENTRIES Close Credit Balances in Revenue Accounts to Income Summary. Close Debit Balances in Expense accounts to Income Summary. Close Income Summary account to Owner s Capital. Close Withdrawals to Owner s Capital. Let s see how the closing process works!

13 P FastForward Adjusted Trial Balance December 31, 2011 Debit Credit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-equip. $ 375 Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 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 $ 47,685 Using the adjusted trial balance, let s prepare the closing entries for FastForward.

14 P FastForward Adjusted Trial Balance December 31, 2011 Debit Credit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-equip. $ 375 Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 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 $ 47,685 Close Credit Balances in Revenue Accounts to Income Summary.

15 4-15 P 2 CLOSE CREDIT BALANCES IN REVENUE ACCOUNTS TO INCOME SUMMARY Dr. Cr. Dec. 31 Consulting revenue 7,850 Rental revenue 300 Income summary 8,150 Now, let s look at the ledger accounts after posting this closing entry.

16 4-16 P 2 CLOSE CREDIT BALANCES IN REVENUE ACCOUNTS TO INCOME SUMMARY Consulting Revenue 7,850 7,850 - Income Summary 8,150 Rental Revenue

17 P 2 FastForward Adjusted Trial Balance December 31, 2011 Debit Credit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-equip. $ 375 Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 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 $ 47, Close Debit Balances in Expense Accounts to Income Summary.

18 4-18 P 2 CLOSE DEBIT BALANCES IN EXPENSE ACCOUNTS TO INCOME SUMMARY Dr. Cr. Dec. 31 Income summary 4,365 Depreciation expense-equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Now, let s look at the ledger accounts after posting this closing entry.

19 4-19 P 2 CLOSE DEBIT BALANCES IN EXPENSE ACCOUNTS TO INCOME SUMMARY Depreciation Expense- Eq Rent Expense 1,000 1,000 - Salaries Expense 1,610 1,610 - Supplies Expense 1,050 1,050 - Income Summary 4,365 8,150 3,785 Insurance Expense Utilities Expense Net Income

20 P 2 FastForward Adjusted Trial Balance December 31, 2011 Debit Credit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-equip. $ 375 Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 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 $ 47, Close Income Summary to Owner s Capital.

21 P 2 CLOSE INCOME SUMMARY TO OWNER S CAPITAL 4-21 Dr. Cr. Dec. 31 Income summary 3,785 C. Taylor, Capital 3,785 Now, let s look at the ledger accounts after posting this closing entry.

22 4-22 P 2 CLOSE INCOME SUMMARY TO OWNER S CAPITAL C. Taylor, Capital 30,000 3,785 33,785 Income Summary 4,365 8,150 3,785 -

23 P FastForward Adjusted Trial Balance December 31, 2011 Debit Credit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-equip. $ 375 Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 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 $ 47,685 Close Withdrawals Account to Owner s Capital.

24 P 2 CLOSE WITHDRAWALS ACCOUNT TO OWNER S CAPITAL 4-24 Dr. Cr. Dec. 31 C. Taylor, Capital 200 C. Taylor, Withdrawals 200 Now, let s look at the ledger accounts after posting this closing entry.

25 4-25 P 2 CLOSE WITHDRAWALS ACCOUNT TO OWNER S CAPITAL C. Taylor, Withdrawals C. Taylor, Capital ,000 3,785 33,585

26 4-26 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.

27 4-27 P 3 POST-CLOSING TRIAL BALANCE List of permanent accounts and their balances after posting closing entries. Let s look at FastForward s post-closing trial balance. Total debits and credits must be equal.

28 4-28 P 3 POST-CLOSING TRIAL BALANCE FastForward Post-Closing Trial Balance December 31, 2011 Debit Credit Cash $ 4,350 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-equip. $ 375 Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 33,585 C. Taylor, Withdrawals - Consulting revenue - Rental revenue - Depreciation expense-equipment - Salaries expense - Insurance expense - Rent expense - Supplies expense - Utilities expense - Totals $ 43,120 $ 43,120

29 4-29 C 2 ACCOUNTING CYCLE

30 4-30 C 3 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 Plant assets 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.

31 4-31 C 3 Current assets are expected to be sold, collected, or used within one year or the company s operating cycle.

32 4-32 C 3 Long-term investments are expected to be held for more than one year or the operating cycle.

33 4-33 C 3 Plant assets are tangible long-lived assets used to produce or sell products and services.

34 4-34 C 3 Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.

35 4-35 C 3 Current liabilities are obligations due within the longer of one year or the company s operating cycle.

36 4-36 C 3 Long-term liabilities are obligations not due within the longer of one year or the company s operating cycle.

37 4-37 C 3 Equity is the owner s claim on the assets.

4-38 GLOBAL VIEW The definition of an asset is similar under U.S.

the right to use the item, (2)the right arises from a past transaction or event,

Both systems define the initial asset value as historical cost for nearly all

GAAP and IFRS and involves three basic criteria: (1) the item is a present

38 4-38 GLOBAL VIEW The definition of an asset is similar under U.S. GAAP and IFRS and involves three basic criteria: (1)the company owns or controls the right to use the item, (2)the right arises from a past transaction or event, and (3)the item can be reliably measured. Both systems define the initial asset value as historical cost for nearly all assets. The definition of a liability is similar under U.S. GAAP and IFRS and involves three basic criteria: (1) the item is a present obligation requiring a probable future resource outlay, (2) the obligation arises from a past transaction or event, and (3) the obligation can be reliably measured.

39 4-39 A 1 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 $ 2,867 $ 2,919 $ 2,771 $ 2,784 Current liabilities 1,225 1,374 1,709 1,575 Current ratio Industry current ratlo

40 4-40 P 4 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.

41 P

42 4-42 P 4 Without Reversing Entries With Reversing Entries

43 END OF CHAPTER

The Accounting Cycle Accruals and Deferrals

The Accounting Cycle Accruals and Deferrals Chapter 4 McGraw-Hill/Irwin PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J.