Chapter 4 Completing the Accounting Cycle 高立翰

Chapter 4 Completing the Accounting Cycle 高立翰

Study Objectives 1. Prepare a worksheet. 2. Explain the process of closing the books. 3. Describe the content and purpose of a postclosing trial balance. 4. State the required steps in the accounting cycle. 5. Explain the approaches to preparing correcting entries. 6. Identify the sections of a classified statement of financial position. 會計學 ( 一 ) http://ppt.cc/mjfq 2

PREVIEW OF CHAPTER 4 會計學 ( 一 ) http://ppt.cc/mjfq 3

Using A Worksheet (1/2) Worksheet ( 工作底稿 ) A multiple-column form used in preparing financial statements. Not a permanent accounting record. May be a computerized worksheet using an electronic spreadsheet program such as Excel. Five step process. Use of worksheet is optional. 會計學 ( 一 ) http://ppt.cc/mjfq 4

Using A Worksheet (2/2) Illustration: pp. 162-164 Illustration 4-1 會計學 ( 一 ) http://ppt.cc/mjfq 5

Steps in Preparing a Worksheet (1/5) 1. Prepare a Trial Balance on the Worksheet Adjusted Income Statement of Trial Balance Adjustments Trial Balance Statement Financial Position Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 Share Capital 10,000 Dividends 500 Service Revenue 10,000 Salaries Expense 4,000 Rent 900 Totals 28,700 28,700 Trial balance amounts come directly from ledger accounts. Include all accounts with balances. 會計學 ( 一 ) http://ppt.cc/mjfq 6

Steps in Preparing a Worksheet Adjusting Journal Entries in Chapter 3 Illustration 3-23 General journal showing adjusting entries 會計學 ( 一 ) http://ppt.cc/mjfq 7

Steps in Preparing a Worksheet (2/5) 2. Enter the Adjustments in the Adjustments Columns Adjusted Income Statement of Trial Balance Adjustments Trial Balance Statement Financial Position Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 Advertising Supplies 2,500 (a) 1,500 Prepaid Insurance 600 (b) 50 Office Equipment 5,000 Adjustments Key: Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 (d) 400 Share Capital 10,000 Dividends 500 Service Revenue 10,000 (d) (e) 400 200 Salaries Expense 4,000 (g) 1,200 Rent 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 Insurance Expense (b) 50 Accumulated Depreciation (c) 40 Depreciation Expense (c) 40 (e) Accounts Receivable 200 (f) Interest Expense 50 Interest Payable (f) 50 (g) Salaries Payable 1,200 Totals 3,440 3,440 Add additional accounts as needed. (a) Supplies Used. (b) Insurance Expired. (c) Depreciation Expensed. (d) Service Revenue Earned. (e) Service Revenue Accrued. (f) Interest Accrued. (g) Salaries Accrued. Enter adjustment amounts, total adjustments columns, and check for equality. 會計學 ( 一 ) http://ppt.cc/mjfq 8

Steps in Preparing a Worksheet (3/5) 3. Complete the Adjusted Trial Balance Columns Adjusted Income Statement of Trial Balance Adjustments Trial Balance Statement Financial Position Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 Advertising Supplies 2,500 (a) 1,500 1,000 Prepaid Insurance 600 (b) 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 (d) 400 800 Share Capital 10,000 10,000 Dividends 500 500 Service Revenue 10,000 (d) 400 10,600 (e) 200 Salaries Expense 4,000 (g) 1,200 5,200 Rent 900 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 1,500 Insurance Expense (b) 50 50 Accumulated Depreciation (c) 40 40 Depreciation Expense (c) 40 40 Accounts Receivable (e) 200 200 (f) Interest Expense 50 50 Interest Payable (f) 50 50 (g) Salaries Payable 1,200 1,200 Totals 3,440 3,440 30,190 30,190 Total the adjusted trial balance columns and check for equality. 會計學 ( 一 ) http://ppt.cc/mjfq 9

Steps in Preparing a Worksheet (4/5) 4. Extend Amounts to Financial Statement Columns Adjusted Income Statement of Trial Balance Adjustments Trial Balance Statement Financial Position Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 Advertising Supplies 2,500 (a) 1,500 1,000 Prepaid Insurance 600 (b) 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 (d) 400 800 Share Capital 10,000 10,000 Dividends 500 500 Service Revenue 10,000 (d) 400 10,600 10,600 (e) 200 Salaries Expense 4,000 (g) 1,200 5,200 5,200 Rent 900 900 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 1,500 1,500 Insurance Expense (b) 50 50 50 Accumulated Depreciation (c) 40 40 Depreciation Expense (c) 40 40 40 Accounts Receivable (e) 200 200 (f) Interest Expense 50 50 50 Interest Payable (f) 50 50 (g) Salaries Payable 1,200 1,200 Totals 3,440 3,440 30,190 30,190 7,740 10,600 Extend all revenue and expense account balances to the income statement columns. 會計學 ( 一 ) http://ppt.cc/mjfq 10

Steps in Preparing a Worksheet (5/5) 5. Total Columns, Compute Net Income (Loss) Adjusted Income Statement of Trial Balance Adjustments Trial Balance Statement Financial Position Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 15,200 15,200 15,200 Advertising Supplies 2,500 (a) 1,500 1,000 1,000 Prepaid Insurance 600 (b) 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 (d) 400 800 800 Share Capital 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 (d) 400 10,600 10,600 (e) 200 Salaries Expense 4,000 (g) 1,200 5,200 5,200 Rent 900 900 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 1,500 1,500 Insurance Expense (b) 50 50 50 Accumulated Depreciation (c) 40 40 40 Depreciation Expense (c) 40 40 40 Accounts Receivable (e) 200 200 (f) Interest Expense 50 50 50 200 Interest Payable (f) 50 50 50 Salaries Payable (g) 1,200 1,200 1,200 Totals Q4 1. 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590 Net income 2,860 2,860 Totals 10,600 10,600 22,450 22,450 Compute Net Income or Net Loss. 11

Preparing Financial Statements from a Worksheet Income Statement is prepared from the income statement columns. Statement of Financial Position and Retained Earnings Statement are prepared from the Statement of Financial Position columns. Companies can prepare financial statements before they journalize and post adjusting entries. 會計學 ( 一 ) http://ppt.cc/mjfq 12

Income Statement from a Worksheet Illustration 4-3 會計學 ( 一 ) http://ppt.cc/mjfq 13

Retained Earnings Statement from a Worksheet Illustration 4-3 會計學 ( 一 ) http://ppt.cc/mjfq 14

Statement of Financial Position from a Worksheet Illustration 4-3 會計學 ( 一 ) http://ppt.cc/mjfq 15

Preparing Adjusting Entries from a Worksheet The adjusting entries are prepared from the adjustments columns of the worksheet. Journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used. Adjusting Journal Entries (Chapter 3) Illustration 3-23 General journal showing adjusting entries 會計學 ( 一 ) http://ppt.cc/mjfq 16

Closing the Books (1/4) At the end of the accounting period, the company makes the accounts ready for the next period. Temporary ( 暫時性 ) and Permanent ( 永久性 ) accounts 會計學 ( 一 ) http://ppt.cc/mjfq 17

Closing the Books (2/4) Closing Entries ( 結帳分錄 ) formally recognize, in the general ledger, the transfer of Net Income (or Net Loss), and Dividends to Retained Earnings. Closing entries are only journalized and posted at the end of the annual accounting period. Closing entries produce a zero balance in each temporary account. Q4 2. 會計學 ( 一 ) http://ppt.cc/mjfq 18

Note: Dividends are closed directly to Retained Earnings and not to Income Summary because Dividends are not an expense. 會計學 ( 一 ) http://ppt.cc/mjfq 19

Closing the Books (3/4) Closing entries need to be posted Illustration 4-6 Closing entries journalized 會計學 ( 一 ) http://ppt.cc/mjfq 20

Closing the Books (4/4) Posting closing entries Illustration 4-7 Posting of closing entries 會計學 ( 一 ) http://ppt.cc/mjfq 21

Preparing a Post-Closing Trial Balance Post-Closing Trial Balance ( 結帳後試算表 ) Lists permanent accounts and their balances after the journalizing and posting of closing entries. To prove the equality of the permanent account balances after journalizing and posting of closing entries. Only contains balances for permanent statement of financial position accounts. All temporary accounts will have zero balances. Q4 3. 會計學 ( 一 ) http://ppt.cc/mjfq 22

Illustration 4-8 Post-closing trial balance 會計學 ( 一 ) http://ppt.cc/mjfq 23

Summary of the Accounting Cycle 1. Analyze business transactions Illustration 4-11 9. Prepare a post-closing trial balance 2. Journalize the transactions 8. Journalize and post closing entries 3. Post to ledger accounts 7. Prepare financial statements 4. Prepare a trial balance 6. Prepare an adjusted trial balance 5. Journalize and post adjusting entries Q4 4. 會計學 ( 一 ) http://ppt.cc/mjfq 24

Correcting Entries An Avoidable Step Correcting Entries ( 更正分錄 ) are unnecessary if the records are error-free are made whenever an error is discovered must be posted before closing entries Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry 會計學 ( 一 ) http://ppt.cc/mjfq 25

Closing Entries Illustration (1/2) Case 1 On May 10, Bai Co. journalized and posted a NT$500 cash collection on account from a customer as a debit to Cash NT$500 and a credit to Service Revenue NT$500. The company discovered the error on May 20, when the customer paid the remaining balance in full. Incorrect entry Correct entry Correcting entry Cash 500 Service Revenue 500 Cash 500 Accounts Receivable 500 Service Revenue 500 Accounts Receivable 500 會計學 ( 一 ) http://ppt.cc/mjfq 26

Closing Entries Illustration (2/2) Case 2 On May 18, Mercato purchased on account equipment costing NT$4,500. The transaction was journalized and posted as a debit to Equipment NT$450 and a credit to Accounts Payable NT$450. The error was discovered on June 3. Incorrect Equipment 450 entry Accounts Payable 450 Correct entry Correcting entry Equipment 4,500 Accounts Payable 4,500 Equipment 4,050 Accounts Payable 4,050 會計學 ( 一 ) http://ppt.cc/mjfq 27

The Classified Statement of Financial Position Presents a snapshot at a point in time To improve understanding, companies group similar assets and similar liabilities together Assets accounts are listed by the reverse order of their liquidity Standard Classifications Illustration 4-16 Assets Intangible assets Property, plant, and equipment Long-term investments Current assets Equity and Liabilities Equity Non-current liabilities Current liabilities Q4 5. 會計學 ( 一 ) http://ppt.cc/mjfq 28

Classified statement of financial position 會計學 ( 一 ) http://ppt.cc/mjfq 29

Classified Statement of Financial Position (1/7) Intangible Assets ( 無形資產 ) Assets that do not have physical substance. Goodwill ( 商譽 ) Franchises ( 特許權 ) Trademark ( 商標 ) Illustration 4-18 Intangible assets section 會計學 ( 一 ) http://ppt.cc/mjfq 30

Classified Statement of Financial Position (2/7) Property, Plant, and Equipment ( 固定資產,PP&E) Long useful lives Currently used in operations Depreciation allocating the cost of assets to a number of years Accumulated depreciation total amount of depreciation expensed thus far in the asset s life 會計學 ( 一 ) http://ppt.cc/mjfq 31

Classified Statement of Financial Position (3/7) Long-term investments ( 長期投資 ) Investments in stocks and bonds of other companies Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities 房地產投資關聯企業投資 會計學 ( 一 ) http://ppt.cc/mjfq 32

Classified Statement of Financial Position (4/7) Current Assets ( 流動資產 ) Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers 低 流動性 高 Q4 6. 會計學 ( 一 ) http://ppt.cc/mjfq 33

Classified Statement of Financial Position (5/7) Equity ( 權益 ) Proprietorship - one capital account (Owner s Equity) Partnership - capital account for each partner Corporation Share Capital and Retained Earnings 會計學 ( 一 ) http://ppt.cc/mjfq 34

Classified Statement of Financial Position (6/7) Non-current Liabilities ( 非流動負債 ) Obligations a company expects to pay after one year. 會計學 ( 一 ) http://ppt.cc/mjfq 35

Classified Statement of Financial Position (7/7) Current Liabilities ( 流動負債 ) Obligations the company is to pay within the coming year Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude Liquidity ( 流動性 ) ability to pay obligations expected to be due within the next year 會計學 ( 一 ) http://ppt.cc/mjfq 36

Appx. 4A: Reversing Entries ( 不考 ) Reversing Entries ( 迴轉分錄 ) It is often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period Companies make a reversing entry at the beginning of the next accounting period Each reversing entry is the exact opposite of the adjusting entry made in the previous period The use of reversing entries does not change the amounts reported in the financial statements 會計學 ( 一 ) http://ppt.cc/mjfq 37

Reversing Entries Example Illustration: To illustrate the optional use of reversing entries for accrued expenses, we will use the salaries expense transactions for Yazici Advertising A.S. 1. October 26 (initial salary entry): Pioneer pays 4,000 of salaries and wages earned between October 15 and October 26. 2. October 31 (adjusting entry): Salaries and wages earned between October 29 and October 31 are 1,200. The company will pay these in the November 9 payroll. 3. November 9 (subsequent salary entry): Salaries and wages paid are 4,000. Of this amount, 1,200 applied to accrued salaries and wages payable and 2,800 was earned between November 1 and November 9. 會計學 ( 一 ) http://ppt.cc/mjfq 38

With Reversing Entries (per appendix) Oct. 26 Oct. 31 Oct. 31 Initial Salary Entry Same entry Adjusting Entry Same entry Closing Entry Same entry Nov. 1 Nov. 9 Reversing Entry Salaries and Wages Payable 1,200 Salaries and Wages Expense 1,200 Subsequent Salary Entry Salaries and Wages Expense 4,000 Cash 4,000 會計學 ( 一 ) http://ppt.cc/mjfq 39

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