Completing the Accounting Cycle – Part I Chapter 4 1

Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. Objective 1 2

3 End-of-Period Spreadsheet (Work Sheet) Exhibit 1

4 Spreadsheet (Work Sheet) Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Accounts are listed in the Trial Balance column using the ending balance found in the general ledger. Flow of Accounting Information

5 Spreadsheet (Work Sheet) Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Adjustments are entered here. Two possibilities: 1. Deferrals – Existing balances are changed. 2. Accruals – New information is entered.

6 Adjustments are combined with the trial balance. Account balances are now adjusted. Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Spreadsheet (Work Sheet) Flow of Accounting Information

7 Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column. Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet Spreadsheet (Work Sheet) Flow of Accounting Information

8 Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column. Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet Spreadsheet (Work Sheet) Flow of Accounting Information

9 The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column. 1.Amber Bablock, Drawing 2.Utilities Expense 3.Accumulated Depreciation— Equipment 4.Unearned Rent 5.Fees Earned 6.Accounts Payable 7.Rent Revenue 8.Supplies Example Exercise 4-1 Flow of Accounts into Financial Statements

10 1.Balance Sheet column 2.Income Statement column 3.Balance Sheet column 4.Balance Sheet column 5.Income Statement column 6.Balance Sheet column 7.Income Statement column 8.Balance Sheet column Example Exercise 4-1 (continued)

11 Prepare financial statements from adjusted account balances. Objective 2

12 The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the spreadsheet (work sheet).

13 Financial Statements Prepared from Work Sheet Exhibit 2

14 In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for Dimple Consulting Co. for the current year, the Debit column total is $678,450, and the Credit column total is $599,750 before the amount of net income or net loss has been included. In preparing the income statement from the end-of- period spreadsheet (work sheet), what is the amount of net income or net loss? Example Exercise 4-2 Determining the Net Income from End-of-Period Spreadsheet

15 Example Exercise 4-2 (continued) A net income of $78,700 ($678,450 – $599,750) would be reported. When the Debit column of the Balance Sheet columns is more than the Credit column, net income is reported. If the Credit column exceeds the Debit column, a net loss is reported.

16 The first item presented on the statement of owner’s equity is the balance of the owner’s capital account at the beginning of the period.

17 from the income statement to the balance sheet Exhibit 2

18 The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the spreadsheet (or worksheet).

19 A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

20 Cash and other assets that are expected to be converted into cash, sold or used up usually within a year or less, through the normal operations of the business, are called current assets. Cash Accounts Receivable Supplies

21 Property, plant, and equipment (also called fixed assets) include assets that depreciate over a period of time. Land is an exception as it is not subject to depreciation. Equipment Machinery Buildings Land

22 Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities. Accounts payable Wages payable Interest payable Unearned fees

23 Liabilities not due for a long time (usually more than one year) are long-term liabilities. Notes payable Mortgage payable Bond payable

24 Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and the total must be equal to the total assets.

25 from the statement of owner’s equity Financial Statements Prepared from Work Sheet (continued) Exhibit 2

26 The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2009 balance sheet of Hindsight Consulting. 1.Jason Corbin, Capital5.Cash 2.Notes Receivable (due 6.Unearned Rent in 6 months)7. Accumulated Depr.— 3.Notes Payable (due in Equipment 2011)8.Accounts Payable 4.Land Example Exercise 4-4 Classified Balance Sheet

27 Example Exercise 4-4 ( continued) 1. Stockholders’ equity 2. Current asset 3. Long-term liability 4. Property, plant, and equipment 5.Current asset 6.Current liability 7. Property, plant, and equipment 8. Current liability

28 Prepare closing entries. Objective 3

29 Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts. Closing Entries

30 To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary. Closing Entries

31 The balance of Income Summary is then transferred to the owner’s capital account. The balance of the owner’s drawing account is also transferred to the owner’s capital account. The entries that transfer these balances are called closing entries. Closing Entries

32 The Closing Process Exhibit 3

33 Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue. Fees Earned Bal.16,840 Rent Revenue Bal.120 Income Summary 16, ,960 Flowchart of Closing Entries for NetSolutions Exhibit 4

34 Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Bal.200 Miscellaneous Expense Bal.455 Income Summary Debit Income Summary for the total expenses and credit each expense account for its balance. 16,960 Bal.4,525 Bal.1,600 Bal.50 Bal.985 Bal.2,040 9, , ,600 4,525 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4

35 Chris Clark, Capital Bal.25,000 Chris Clark, Drawing Bal.4,000 Income Summary 16,9609,855 7,105 Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account. Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4

36 Chris Clark, Capital Bal.25,000 7,105 Chris Clark, Drawing Bal.4,000 4,000 Debit the capital account for the balance of the drawing account, and credit drawing for the same amount. Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4

37 Flowchart of Closing Entries for NetSolutions (summary) Exhibit 4

38 Closing Entries for NetSolutions Step 2 Step 3 Step 1 Step 4 Exhibit 5

39 After the closing entries are posted, all of the temporary accounts have zero balances.

40 After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co. Terry Lambert, Capital$615,850 Terry Lambert, Drawing25,000 Fees Earned380,450 Wages Expense250,000 Rent Expense65,000 Supplies Expense18,250 Miscellaneous Expense6,200 Journalize the four entries required to close the accounts. Example Exercise 4-5 Closing Entries

41 Example Exercise 4-5 (continued) July 31Fees Earned……………………………..380,450 Income Summary………………….380,450 31Income Summary………………………339,450 Wages Expense……………………250,000 Rent Expense………………………65,000 Supplies Expense…………………18,250 Miscellaneous Expense………….6,200 31Income Summary……………………….41,000 Terry Lambert, Capital……………41,000 31Terry Lambert, Capital…………………25,000 Terry Lambert, Drawing…………..25,000

42 A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.

43 Post-Closing Trial Balance Exhibit 7

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