Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen University College Chapter 4 Completion of the Accounting Cycle

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Closing Entries Transfer temporary account balances to the owner’s capital accountTransfer temporary account balances to the owner’s capital account Updates the owner’s capital account balanceUpdates the owner’s capital account balance Reduces balances in all temporary accounts to zero, so they are ready for the next periodReduces balances in all temporary accounts to zero, so they are ready for the next period Journalizing and posting closing entries are a required step in the accounting cycleJournalizing and posting closing entries are a required step in the accounting cycle Revenue and expense accounts are closed to Income Summary (a temporary account)Revenue and expense accounts are closed to Income Summary (a temporary account)

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. The Closing Process (Individual)Expenses Dr.(normalbalance) Cr. to close 0 Owner’sDrawings Dr.(normalbalance) Cr. 0 (Individual)Revenues Cr.(normalbalance) Dr. 0 Owner’sCapital Drawings NetIncome Cr.(normalbalance) IncomeSummary Dr.Expenses Cr.Revenue Cr. balance = Net Income Dr. to close 0 2 Close expenses to income summary 21 Close revenues to income summary 13 Close income summary to Owner’s Capital 34 Close Owner’s Drawings to Owner’s Capital 4 Owner’s Capital is a permanent account. All other accounts shown here are temporary accounts.

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Post-Closing Trial Balance

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Accounting Cycle Summarized Analyze business transactions 1 Journalize the transactions 2 Post to ledger accounts 3 Prepare a trial balance 4 Journalize & post adjusting entries 5 Prepare adjusted trial balance 6 Prepare financial statements 7 Journalize & post closing entries 8 Prepare post adjusting trial balance 9

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Work Sheets A working tool for the accountant; not a permanent accounting record A working tool for the accountant; not a permanent accounting record An aid in the preparation of adjusting entries and financial statements An aid in the preparation of adjusting entries and financial statements Useful for the preparation of interim financial information or for internal use Useful for the preparation of interim financial information or for internal use

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Reversing Entries – An Optional Step Reversing entries reverse certain adjusting entries made in the previous period Reversing entries reverse certain adjusting entries made in the previous period Made at the beginning of the next accounting periodMade at the beginning of the next accounting period To simplify recording of transactions in future accounting periodsTo simplify recording of transactions in future accounting periods

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Classified Balance Sheet Financial statements are more useful when the accounts are classified into significant subgroups Financial statements are more useful when the accounts are classified into significant subgroups A classified balance sheet generally has the following standard classifications: A classified balance sheet generally has the following standard classifications: Assets Current assets Long-term investments Property, plant and equipment Intangible assets Assets Current assets Long-term investments Property, plant and equipment Intangible assets Liabilities and Owner’s Equity Current liabilities Long-term liabilities Owner’s equity Liabilities and Owner’s Equity Current liabilities Long-term liabilities Owner’s equity

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Current Assets Cash and other resources that will be realized within one year of the balance sheet date Cash and other resources that will be realized within one year of the balance sheet date Realized in cash or sold or consumed in the businessRealized in cash or sold or consumed in the business Listed in the order of liquidity Listed in the order of liquidity Examples: Examples: Cash, short-term investments, accounts receivable, inventory, prepaidsCash, short-term investments, accounts receivable, inventory, prepaids

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Long-Term Investments Investments that are expected to be held for many years Investments that are expected to be held for many years Not readily marketable or expected to be converted into cash within one year Not readily marketable or expected to be converted into cash within one year Examples: Examples: Investments in shares or bonds of another company, investment in land held for resaleInvestments in shares or bonds of another company, investment in land held for resale

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Property, Plant and Equipment Long-lived tangible assets that are used in the business and not intended for sale Long-lived tangible assets that are used in the business and not intended for sale Examples: land, buildings, machinery Examples: land, buildings, machinery Intangible Assets Long-lived assets that do not have physical substance Long-lived assets that do not have physical substance Examples: goodwill, patents, copyrights, trademarks, trade names, licences Examples: goodwill, patents, copyrights, trademarks, trade names, licences

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Current Liabilities Obligations that are expected to be paid in the coming year from existing current assets or by creating other current liabilities Obligations that are expected to be paid in the coming year from existing current assets or by creating other current liabilities Listed first in the liabilities and equity section of the balance sheet Listed first in the liabilities and equity section of the balance sheet Examples: Examples: accounts payable, interest payable, salaries payable, unearned revenue, current maturities of long-term debtaccounts payable, interest payable, salaries payable, unearned revenue, current maturities of long-term debt

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Long-Term Liabilities Obligations expected to be paid after one year or longer Obligations expected to be paid after one year or longer Examples: Examples: Future income taxes, long-term notes payable, bonds payable, mortgages payable, lease liabilitiesFuture income taxes, long-term notes payable, bonds payable, mortgages payable, lease liabilities

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Equity Content of the equity section varies with the form of business organization: Content of the equity section varies with the form of business organization: Proprietorship: one capital account under the heading “Owner’s Equity”Proprietorship: one capital account under the heading “Owner’s Equity” Partnership: Capital account for each partner under the heading “Partners’ Equity”Partnership: Capital account for each partner under the heading “Partners’ Equity” Corporation: shareholders’ equity consists of two sections: “Share Capital” and “Retained Earnings”Corporation: shareholders’ equity consists of two sections: “Share Capital” and “Retained Earnings”

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Classified Balance Sheet Illustrated Usually presented in report form, with assets shown above liabilities and owner’s equity Usually presented in report form, with assets shown above liabilities and owner’s equity Can also be presented in account form, with assets placed on the left and liabilities and owner’s equity placed on the right Can also be presented in account form, with assets placed on the left and liabilities and owner’s equity placed on the right

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Using Information in the Financial Statements Liquidity: the ability to pay obligations as they come due within the next year Liquidity: the ability to pay obligations as they come due within the next year Working capital: an important measure of liquidity Working capital: an important measure of liquidity = Current assets - Current liabilities Current ratio: a second, more useful measure of short-term debt-paying ability Current ratio: a second, more useful measure of short-term debt-paying ability = Current assets ÷ Current liabilities

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. COPYRIGHT Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.