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

Copyright © 2007 Prentice-Hall. All rights reserved Objective 1 Explain the steps in the accounting cycle 2

Copyright © 2007 Prentice-Hall. All rights reserved The Accounting Cycle Process of gathering financial information and preparing the financial statements 3

Copyright © 2007 Prentice-Hall. All rights reserved Computerized Accounting Cycle 1.Identify business transactions 1.Record transactions 1.Post journal entries to ledger and Prepare the trial balance 1.Record and post Adjusting entries 1.Prepare the Adjusted trial balance 1.Prepare the Financial statements 7. Record & post closing entries 8. Prepare post- closing trial balance 4

Copyright © 2007 Prentice-Hall. All rights reserved Manual Accounting Cycle 5 1.Identify business transaction s 1.Record transactions 1.Post journal entries to ledger and Prepare the worksheet 1.Prepare financial statements 1.Record and post adjusting entries. 1.Record and post closing entries 7. Prepare post-closing trial balance

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Adjusted Trial Balance May 31, 2020 Debit Credit Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Building 48,000 Accum. Deprec. Furniture 300 Accum. Depreciation:Building 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 33,200 Sheena Bright, Withdrawals 1,000 Service Revenue 7,600 Rent expense 1,000 Salary expense 1,800 Supplies expense 100 Deprec. Expense: Furniture 300 Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900 6

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Income Statement Month Ended May 31, 2010 Service Revenue $7,600 Expenses: Salary expense$1,800 Rent Expense 1,000 Utilities Expense 400 Deprec. Expense-Furniture300 Deprec. Expense-Building 200 Interest Expense 100 Supplies Expense 100 Total expenses 3,900 Net income $3,700

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Adjusted Trial Balance May 31, 2020 Debit Credit Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Building 48,000 Accum. Deprec. Furniture 300 Accum. Depreciation:Building 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 33,200 Sheena Bright, Withdrawals 1,000 Service Revenue 7,600 Rent expense 1,000 Salary expense 1,800 Supplies expense 100 Deprec. Expense: Furniture 300 Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900 8

Copyright © 2007 Prentice-Hall. All rights reserved Financial Statements Sheena Bright, capital, May 1, 2010 $ 33,200 Net income 3,700 $36,900 Less withdrawals(1,000) Sheena Bright, Capital May 31, 2010 $35,900 Smart Touch Learning Statement of Owners Equity Month Ended May 31, 2010

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Adjusted Trial Balance May 31, 2020 Debit Credit Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Building 48,000 Accum. Deprec. Furniture 300 Accum. Depreciation:Building 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 33,200 Sheena Bright, Withdrawals 1,000 Service Revenue 7,600 Rent expense 1,000 Salary expense 1,800 Supplies expense 100 Deprec. Expense: Furniture 300 Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900 10

Copyright © 2007 Prentice-Hall. All rights reserved 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 11

Copyright © 2007 Prentice-Hall. All rights reserved Current Assets Cash, or assets that will be converted to cash, sold, or used up in one year or within normal business operating cycle Examples –Cash –Short-term receivables –Inventory –Prepaid expenses 12

Copyright © 2007 Prentice-Hall. All rights reserved Assets Current Assets: Cash$4,800 Accounts Receivable2,600 Supplies600 Prepaid rent2,000 Total Current Assets $10, Smart Touch Learning Balance Sheet May 31, 2020

Copyright © 2007 Prentice-Hall. All rights reserved Long-term Assets Plant Assets (Property, Plant, & Equipment) –Land –Building –Furniture –Equipment 14

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Adjusted Trial Balance May 31, 2020 Debit Credit Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Building 48,000 Accum. Deprec. Furniture 300 Accum. Depreciation:Building 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 33,200 Sheena Bright, Withdrawals 1,000 Service Revenue 7,600 Rent expense 1,000 Salary expense 1,800 Supplies expense 100 Deprec. Expense: Furniture 300 Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900 15

Copyright © 2007 Prentice-Hall. All rights reserved Assets Current Assets: Cash$4,800 Accounts Receivable2,600 Supplies600 Prepaid rent2,000 Total Current Assets $10,000 Plant Assets: Furniture $18,000 Less: Accum Dep ,700 Building 48,000 Accumulated depreciation-20047,800 Total Plant Assets $65,500 Total Assets $75, Smart Touch Learning Balance Sheet May 31, 2020

Copyright © 2007 Prentice-Hall. All rights reserved Current Liabilities Debts or obligations that must be paid or extinguished within one year or operating cycle, whichever is shorter Examples –Accounts and salary payables –Short-term notes payable –Unearned revenue 17

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Adjusted Trial Balance May 31, 2020 Debit Credit Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Building 48,000 Accum. Deprec. Furniture 300 Accum. Depreciation:Building 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 33,200 Sheena Bright, Withdrawals 1,000 Service Revenue 7,600 Rent expense 1,000 Salary expense 1,800 Supplies expense 100 Deprec. Expense: Furniture 300 Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900 18

Copyright © 2007 Prentice-Hall. All rights reserved Assets Current Assets: Cash$4,800 Accounts Receivable2,600 Supplies600 Prepaid rent2,000 Total Current Assets $10,000 Plant Assets: Furniture $18,000 Less: Accum Dep ,700 Building 48,000 Accumulated depreciation-20047,800 Total Plant Assets $65,500 Total Assets $75,500 Liabilities Current Liabilities: Accounts Payable$18,200 Salary Payable900 Interest Payable 100 Unearned Serv. Rev. 400 Total Current Liabilities $19, Smart Touch Learning Balance Sheet May 31, 2020

Copyright © 2007 Prentice-Hall. All rights reserved Long-term Liabilities Long-term Liabilities Long-term liabilities - all other debts due in longer than one year or entity’s operating cycle –Long-term notes payable –Mortgage payable 20

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Adjusted Trial Balance May 31, 2020 Debit Credit Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Building 48,000 Accum. Deprec. Furniture 300 Accum. Depreciation:Building 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 33,200 Sheena Bright, Withdrawals 1,000 Service Revenue 7,600 Rent expense 1,000 Salary expense 1,800 Supplies expense 100 Deprec. Expense: Furniture 300 Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900 21

Copyright © 2007 Prentice-Hall. All rights reserved Assets Current Assets: Cash$4,800 Accounts Receivable2,600 Supplies600 Prepaid rent2,000 Total Current Assets $10,000 Plant Assets: Furniture $18,000 Less: Accum Dep ,700 Building 48,000 Accumulated depreciation-20047,800 Total Plant Assets $65,500 Total Assets $75,500 Liabilities Current Liabilities: Accounts Payable$18,200 Salary Payable900 Interest Payable 100 Unearned Serv. Rev. 400 Total Current Liabilities $19,600 Long-Term Liabilities 20,000 Total Liabilities $ 39,600 Owner’s Equity Sheens Bright, Capital35,900 Total Liabilities & Owner’s Equity $75, Smart Touch Learning Balance Sheet May 31, 2020

Copyright © 2007 Prentice-Hall. All rights reserved Objective 4 Close the revenue, expense, and withdrawals accounts 23

Copyright © 2007 Prentice-Hall. All rights reserved Closing the Accounts Prepares accounts for recording transactions during next period Updates owner’s capital account 24

Copyright © 2007 Prentice-Hall. All rights reserved Closing the Accounts Permanent Accounts Temporary Accounts 25

Copyright © 2007 Prentice-Hall. All rights reserved 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 26

Copyright © 2007 Prentice-Hall. All rights reserved Smart Touch Learning Adjusted Trial Balance May 31, 2020 Debit Credit Cash 4,800 Accounts Receivable 2,600 Supplies 600 Prepaid Rent 2,000 Furniture 18,000 Building 48,000 Accum. Deprec. Furniture 300 Accum. Depreciation:Building 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 33,200 Sheena Bright, Withdrawals 1,000 Service Revenue 7,600 Rent expense 1,000 Salary expense 1,800 Supplies expense 100 Deprec. Expense: Furniture 300 Depreciation Expense: Build. 200 Interest Expense 100 Utilities Expense 400 _ ____ 80,900 80,900 27

Copyright © 2007 Prentice-Hall. All rights reserved 28 Rent Expense Bal.1,000 Supplies Expense Bal. 100 Salary Expense Bal.1,800 Dep. Exp.: Furniture Bal.300 Dep. Exp. Building Interest Expense Bal Utilites Expense 400 Service Revenue Bal.7,600 Income Summary Sheena Bright, Capital Bal.33,200 Sheena Bright, Withdrawals Bal.1,000 The Closing Process

Copyright © 2007 Prentice-Hall. All rights reserved 29 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT May31 Service Revenue7,600 Income Summary7,600 To close revenue accounts

Copyright © 2007 Prentice-Hall. All rights reserved 30 Rent Expense Bal.1,000 Supplies Expense Bal. 100 Salary Expense Bal.1,800 Dep. Exp.: Furniture Bal.300 Dep. Exp. Building Interest Expense Bal Utilites Expense 400 Service Revenue Bal.7,600 7,600 Income Summary 7,600 7,600 Sheena Bright, Capital Close Revenues Close Revenues Bal.33,200 Sheena Bright, Withdrawals Bal.1,000 Total Revenues The Closing Process

Copyright © 2007 Prentice-Hall. All rights reserved 31 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Dep. expense: Build 200 Interest expense 100 Utilities expense 400 Utilities expense 400 May31Income Summary3,900 Rent expense1,000 Supplies expense 100 Salary expense1,800 Dep. expense: Furniture300

Copyright © 2007 Prentice-Hall. All rights reserved 32 Rent Expense Bal.1,000 Supplies Expense Bal. 100 Salary Expense Bal.1,800 Dep. Exp.: Furniture Bal.300 Dep. Exp. Building Interest Expense Bal Utilites Expense 400 Service Revenue Bal.7,600 7,600 Income Summary 7,600 7,600 Sheena Bright, Capital Close Revenues Close Revenues Bal.33,200 Sheena Bright, Withdrawals Bal.1,000 Total Revenues The Closing Process 1,000 1, ,800 1, Close Expenses Close Expenses 3,900 3,900

Copyright © 2007 Prentice-Hall. All rights reserved Four Closing Entries Four Closing Entries Entry 3: Close Income Summary to Capital Entry 4: Close Withdrawals to Capital 33

Copyright © 2007 Prentice-Hall. All rights reserved 34 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT May31 Income Summary3,700 Sheena Bright, Capital3,700 To close income summary

Copyright © 2007 Prentice-Hall. All rights reserved 35 Rent Expense Bal.1,000 Supplies Expense Bal. 100 Salary Expense Bal.1,800 Dep. Exp.: Furniture Bal.300 Dep. Exp. Building Interest Expense Bal Utilites Expense 400 Service Revenue Bal.7,600 7,600 Income Summary 7,600 7,600 Sheena Bright, Capital Close Revenues Close Revenues Bal.33,200 Sheena Bright, Withdrawals Bal.1,000 The Closing Process 1,000 1, ,800 1, Close Expenses Close Expenses 3,900 3,900 Close Income Summary 3,700 3,700 Net Income

Copyright © 2007 Prentice-Hall. All rights reserved 36 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT May31Income Summary3,700 Sheena Bright, Capital3,700 To close income summary 30Sheena Bright, Capital1,000 Sheena Bright, Withdrawals1,000 To close withdrawals

Copyright © 2007 Prentice-Hall. All rights reserved 37 Rent Expense Bal.1,000 Supplies Expense Bal. 100 Salary Expense Bal.1,800 Dep. Exp.: Furniture Bal.300 Dep. Exp. Building Interest Expense Bal Utilites Expense 400 Service Revenue Bal.7,600 7,600 Income Summary 7,600 7,600 Sheena Bright, Capital Close Revenues Close Revenues Bal.33,200 Sheena Bright, Withdrawals Bal.1,000 The Closing Process 1,000 1, ,800 1, Close Expenses Close Expenses 3,900 3,900 Close Income Summary 3,700 3,700 Net Income Close Withdrawals Close Withdrawals 1,000 1,000Withdrawal

Copyright © 2007 Prentice-Hall. All rights reserved 38 Rent Expense Supplies Expense Salary Expense Dep. Exp.: Furniture Dep. Exp. Building Interest Expense Service Revenue Income Summary Sheena Bright, Capital Close Revenues Close Revenues Bal.33,200 Sheena Bright, Withdrawals The Closing Process Close Expenses Close Expenses Close Income Summary 3,700 3,70035,900 Close Withdrawals Close Withdrawals 1,000 1,000

Copyright © 2007 Prentice-Hall. All rights reserved 39 Smart Touch Learning Post-Closing Trial Balance May 31, 2008 Cash4,800 Accounts Receivable2,600 Supplies600 Prepaid Rent2,000 Furniture18,000 Accum. Depreciation:Furn300 Building48,000 Accum. Depreciation:Build 200 Accounts Payable 18,200 Salary Payable 900 Interest Payable 100 Unearned Service Revenue 400 Notes Payable 20,000 Sheena Bright, Capital 35,900 76,000 76,000

Copyright © 2007 Prentice-Hall. All rights reserved Work Sheet Internal summary device NOT: –A journal –A ledger –A financial statement Computerized spreadsheets work well 40 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Work Sheet Steps Enter account titles and their unadjusted balances in the Trial Balance columns Total the amounts 41 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Work Sheet Steps Enter the adjusting entries in the Adjustments columns Total the amounts 42 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Work Sheet Steps Compute each account’s adjusted balance by combining the trial balance and adjustment figures Enter each account’s adjusted amount in the Adjusted trial balance columns See following slide 43 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved 44 Work Sheet Steps Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Work Sheet Steps Draw an imaginary line above the first revenue account Every account above goes to the Balance sheet columns Every account below goes to the Income Statement columns 45 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved 46 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Work Sheet Steps On the income statement, compute net income –Revenues minus expenses Enter net income as the balancing amount 47 Copyright (c) Prentice Hall. All rights reserved. Net Income

Copyright © 2007 Prentice-Hall. All rights reserved Work Sheet Steps Also enter net income as a balancing amount on the balance sheet 48 Copyright (c) Prentice Hall. All rights reserved. Net Income

Copyright © 2007 Prentice-Hall. All rights reserved 49 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Use the current ratio and the debt ratio to evaluate a company 50 Learning Objective 6 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved 51 Current Ratio Current assets Current liabilities Measures a company’s ability to pay its current liabilities Rule of thumb –Strong current ratio is 1.5 Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Indicates the proportion of a business’s assets that are financed with debt Measures business’s ability to pay its debts Rule of thumb: –Below 60% is considered safe 52 Debt Ratio Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Indicates the proportion of a business’s assets that are financed with debt Measures business’s ability to pay its debts Rule of thumb: –Below 60% is considered safe 53 Debt Ratio Total liabilities Total assets Copyright (c) Prentice Hall. All rights reserved.

Copyright © 2007 Prentice-Hall. All rights reserved Single Step Income Statement A single-step income statement is one of two commonly used formats for the income statement or profit and loss statement. The single-step format uses only one subtraction to arrive at net income. Net Income = (Revenues + Gains) – (Expenses + Losses) 54

Copyright © 2007 Prentice-Hall. All rights reserved Single Step Income Statement: Example 55

Copyright © 2007 Prentice-Hall. All rights reserved Multiple Step Income Statement The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold). 56

Copyright © 2007 Prentice-Hall. All rights reserved Multiple Step Income Statement: Example 57