Copyright © 2007 Prentice-Hall. All rights reserved 1 Completing the Accounting Cycle Chapter 4

Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Prepare an accounting worksheet

Copyright © 2007 Prentice-Hall. All rights reserved 3 The Accounting Cycle Process by which accountants prepare financial statements for an entity for a specific period of time

Copyright © 2007 Prentice-Hall. All rights reserved 4 Accounting Cycle Journalize Transaction Post to Accounts Adjust Accounts Close Accounts Prepare Financial Statements

Copyright © 2007 Prentice-Hall. All rights reserved 5 The Accounting Worksheet Used to help move data from the trial balance to the financial statements An internal document – not financial statement

Copyright © 2007 Prentice-Hall. All rights reserved 6 Objective 2 Use the worksheet

Step 1 Prepare Unadjusted Trial Balance Step 2 Plan Adjustments Step 3 Adjusted Trial Balance Step 4 Sort Adjusted Amounts to Statement Columns

Exercise 4-13

a. 300 b. 100 c. 500 d. 800 e.1,600 3,300 3,500 3, ,700 34,100 2, , ,600 1,900 5, ,000 7,400 50, , ,600 7,400 3,500 3, ,700 34,100 2,000 1,900 5, ,000 5,5007,400 1,900 7,400 45,40043,500 1,900 45,400 Net Income

Copyright © 2007 Prentice-Hall. All rights reserved 10 Recording Adjusting Entries Work sheet helps identify accounts that need adjustments Actual adjustment of accounts requires journalizing and posting entries

Copyright © 2007 Prentice-Hall. All rights reserved 11 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Accounts Receivable300 Service Revenue300 30Depreciation Expense, Equipment100 Accumulated Depreciation, Equipment100

Copyright © 2007 Prentice-Hall. All rights reserved 12 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Salary Expense500 Salary Payable500 30Rent Expense800 Prepaid Rent800

Copyright © 2007 Prentice-Hall. All rights reserved 13 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Supplies Expense1,600 Supplies1,600

Copyright © 2007 Prentice-Hall. All rights reserved 14 Objective 3 Close the revenue, expense, and withdrawal accounts

Copyright © 2007 Prentice-Hall. All rights reserved 15 Closing the Accounts Prepares accounts for recording transactions during next period Updates owner’s capital account

Copyright © 2007 Prentice-Hall. All rights reserved 16 Closing the Accounts Permanent Accounts Temporary Accounts

Copyright © 2007 Prentice-Hall. All rights reserved 17 Four Closing Entries Four Closing Entries Close all income statement accounts to Income Summary Entry 1: Close revenue accounts to Income Summary Entry 2: Close expense accounts to Income Summary

Copyright © 2007 Prentice-Hall. All rights reserved 18 Four Closing Entries Four Closing Entries 500 Revenue 500 Bal Expense 200 Bal Income Summary 500 Bal 300 Revenues – Expenses = Net Income

Copyright © 2007 Prentice-Hall. All rights reserved 19 Four Closing Entries Four Closing Entries Entry 3: Close Income Summary to Capital Entry 4: Close Withdrawals to Capital

Copyright © 2007 Prentice-Hall. All rights reserved 20 Four Closing Entries Four Closing Entries 200 Income Summary 500 Bal Withdrawals 100 Bal Capital 300 1,000 Beginning balance 300 1,200 Ending balance Bal 0

Copyright © 2007 Prentice-Hall. All rights reserved 21 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Service Revenue7,400 Income Summary7,400 To close revenue accounts

Copyright © 2007 Prentice-Hall. All rights reserved 22 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Income Summary5,500 Depreciation Expense100 Salary Expense2,300 Rent Expense800 Utilities Expense700 Supplies Expense1,600 To close expense accounts Notice: Only income statement accounts are closed to income summary

Copyright © 2007 Prentice-Hall. All rights reserved 23 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Income Summary1,900 C. Voss, Capital1,900 To close income summary 30C. Voss, Capital2,000 C. Voss, Withdrawals2,000 To close withdrawals

Copyright © 2007 Prentice-Hall. All rights reserved 24 Accounts ReceivablePrepaid Rent 3,4001,200Adj.800 Adj.300Bal.400 Bal.3,700 SuppliesAccumulated Depreciation 3,300Adj.1,6001,800 Bal.1,700Adj.100 Bal.1,900 Salary PayableGail Pfeiffer, CapitalAdj.50036,000 Bal.500Clo.2,000Clo.1,900 Bal.35,900 Gail Pfeiffer, WithdrawalsIncome Summary 2,000Clo.2,000Clo.5,500Clo.7,400 Clo.1,900Bal.0 Exercise 4-15

Copyright © 2007 Prentice-Hall. All rights reserved 25 Service RevenueDepreciation Expense 7,100Adj.100 Adj.300Bal.100Clo.100 Clo.7,400Bal.7,400 Salary ExpenseRent Expense 1,800Adj.800 Adj.500Bal.800Clo.800 Bal.2,300Clo.2,300 Utilities ExpenseSupplies Expense 700Adj.1,600 Bal.700Clo.700Bal.1,600Clo.1,600 Exercise 4-15

Copyright © 2007 Prentice-Hall. All rights reserved 26 Income Summary Account Debit balance = Net Loss Credit balance = Net Income

Copyright © 2007 Prentice-Hall. All rights reserved 27 Post-Closing Trial Balance List of permanent accounts and their balances after posting closing entries Total debits and credits must be equal

Copyright © 2007 Prentice-Hall. All rights reserved 28 E4-16E4-16 Wireless Solutions Postclosing Trial Balance November 30, 2006 ACCOUNTDEBITCREDIT Cash$ 3,500 Accounts receivable3,700 Prepaid rent400 Supplies1,700 Equipment34,100 Accumulated depreciation$ 1,900 Accounts payable5,100 Salary payable500 Gail Pfeiffer, capital 35,900 Total $43,400 Only Balance Sheet accounts remain on the Post-Closing Trial Balance. All other accounts have a - $0- balance

Copyright © 2007 Prentice-Hall. All rights reserved 29 Objective 4 Classify assets and liabilities as current or long-term

Copyright © 2007 Prentice-Hall. All rights reserved 30 LiquidityLiquidity Measure of how quickly an item can be converted into cash On the balance sheet, assets and liabilities are classified as either current or long- term to indicate their relative liquidity

Copyright © 2007 Prentice-Hall. All rights reserved 31 Current Assets Cash, or assets that will be converted to cash or used up, in one year or within normal business operating cycle Examples –Short-term receivables –Inventory –Prepaid expenses

Copyright © 2007 Prentice-Hall. All rights reserved 32 Current Liabilities Debts or obligations due within one year or within operating cycle Examples –Accounts and salary payables –Short-term notes payable –Unearned revenue

Copyright © 2007 Prentice-Hall. All rights reserved 33 Long-term Assets and Liabilities Long-term Assets and Liabilities Long-term assets - all other assets –Property, equipment –Intangibles Long-term liabilities - all other debts due in longer than one year or entity’s operating cycle

Copyright © 2007 Prentice-Hall. All rights reserved 34 Debit side Current assets Long-term assets Credit side Current liabilities Long-term liabilities The Classified Balance Sheet

S4-9S4-9 Current Assets Cash Receivables Prepaid expenses Long-term Assets Equipment Buildings Accumulated depreciation Current Liabilities Accounts payable Accrued liabilities Long-term liabilities None

Copyright © 2007 Prentice-Hall. All rights reserved 36 Different Formats of the Balance Sheet Account Format Report Format

Copyright © 2007 Prentice-Hall. All rights reserved 37 Objective 5 Use the current ratio and the debt ratio to evaluate a company

Copyright © 2007 Prentice-Hall. All rights reserved 38 Comparative Financial Statements Enhance user’s ability to analyze company’s past performance Two common ratios used to measure liquidity 1.Current ratio 2.Debt ratio

Copyright © 2007 Prentice-Hall. All rights reserved 39 Current assets ÷ Current liabilities Current Ratio Measures ability of a business to pay its current liabilities with its current assets

Copyright © 2007 Prentice-Hall. All rights reserved 40 Total liabilities ÷ Total assets Debt Ratio Indicates the proportion of a business’s assets that are financed with debt Measures business’s ability to pay both current and long-term debt

Copyright © 2007 Prentice-Hall. All rights reserved 41 S4-11S4-11 Current Assets: Cash$3,000 Accounts receivable6,000 Prepaid rent2,000 Supplies1,000 Total$12,000 Current Liabilities: Accounts payable$4,000 Salary payable2,000 Total$6,000 Current Ratio: Current assets/ Current liabilities = $12,000 / $6,000 = 2

Copyright © 2007 Prentice-Hall. All rights reserved 42 S4-11S4-11 Total Assets: Cash$3,000 Accounts receivable6,000 Prepaid rent2,000 Supplies1,000 Equipment12,000 Total$24,000 Total Liabilities: Accounts payable$4,000 Salary payable2,000 Note payable9,000 Total$15,000 Debt Ratio: Total liabilities/Total assets = $15,000 / $24,000 =.625

Copyright © 2007 Prentice-Hall. All rights reserved 43 End of Chapter 4