Chapter 4 Completing the Accounting Cycle © 2009 The McGraw-Hill Companies, Inc.

Slide 2 The solution for this timing difference is to record adjusting entries at the end of the period to get the amounts reported as revenues and expenses up to date. Accounting systems are designed to record most recurring daily transactions, particularly any involving cash. The problem is that cash is not always received or paid in the period when the revenue is earned or when the expense is incurred. Reasons for Adjustments

Slide 3 Types of Adjustments Unearned Revenues Previously recorded liabilities that were created when cash was received in advance, and that must be adjusted for the amount of revenue actually earned during the period. Accrued Revenues Revenues that were earned but not recorded because cash was received after the services were performed or goods were delivered. Prepaid Expenses Previously recorded assets that must be adjusted for the amount of expense actually incurred during the period through the use of the asset. Accrued Expenses Expenses that were incurred but were not recorded because cash was paid after the goods or services were used.

Slide 4 Analysis of Adjustments Analyzing Adjustments 1.Identify the type of adjustment. 2.Determine the amount. 3.Record the adjusting entry.

Slide 5 Unearned Revenues Delivers pizza; earns $400. May Month End 5/31/09

Slide 6 Accrued Revenues Time passes; earns $30. May Month End 5/31/09 June – Oct.

Slide 7 Prepaid Expenses Use the store; incur $800 expense May Month End 5/31/09

Slide 8 Prepaid Expenses Use the equipment; incur $300 expense May Month End 5/31/09

Slide 9 Prepaid Expenses Use the equipment; incur $300 expense May Month End 5/31/09

Slide 10 Accrued Expenses Use employee labor; incur $100 expense. May Month End 5/31/09 June

Slide 11 Here is a summary of all eight adjusting entries for Pizza Aroma. Summary of Pizza Aroma’s Adjusting Entries

Slide 12 The adjusted trial balance is a list of all accounts and their adjusted balances to check on the equality of recorded debits and credits. Here is the adjusted trial balance for Pizza Aroma. The amounts were taken from the balances in the ledger accounts after all adjusting entries were recorded.

Slide 13 Revenue minus expenses yields net income on the Income Statement. Net income, withdrawals by the owner, and any additional contributions made by the owner during the period affect the balance in the owner’s capital account on the Statement of Owner’s Equity. The owner’s capital account is a component of the Balance Sheet. Relationships among Financial Statements Thus, if a number on the income statement changes or is in error, it will impact the other statements.

Slide 14 Relationships among Financial Statements Temporary accounts accumulate balances for a period, but start with a zero balance at the beginning of the next period. Revenues Expenses Drawing Temporary Accounts Permanent Accounts Assets Liabilities Equity Permanent accounts retain their balances from the end of one period to the beginning of the next.

Slide 15 Now let’s prepare the financial statements for Pizza Aroma. Let’s prepare the financial statements in this order: 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet

Slide 16

Slide 17 From the Income Statement

Slide 18

Slide 19 Completing the Accounting Cycle 1. Debit Revenue accounts and credit Income Summary. 2. Debit Income Summary and credit Expense accounts. 3. Close the balance in Income Summary to “Owner’s Name,” Capital. 4. Debit “Owner’s Name,” Capital and credit “Owner’s Name,” Drawing. 1. Debit Revenue accounts and credit Income Summary. 2. Debit Income Summary and credit Expense accounts. 3. Close the balance in Income Summary to “Owner’s Name,” Capital. 4. Debit “Owner’s Name,” Capital and credit “Owner’s Name,” Drawing.

Slide 20 Completing the Accounting Cycle

Slide 21 Post-Closing Trial Balance Final check that all debits still equal credits and that all temporary accounts have been closed. Contains only permanent accounts. Is the last step in the accounting process.

Slide 22 Net Profit Margin (NPM) Net Profit Margin = $5,230 $14,400 = 36.3% Net Profit Margin Net Income Total Sales Revenues = × 100 Net profit margin provides information on managers’ relative success at generating revenues and controlling costs. Because managers’ sales growth strategies and cost control measures impact this ratio, a rising net profit margin signals more effective management of sales and/or control of expenses.

Slide 23 Making Comparisons to Benchmarks Comparing a company’s ratio (1) over time and (2) to its competition provides additional useful information on the effectiveness of management. Papa John’s Net Profit Margin

McGraw-Hill/Irwin Slide 24 Supplement 4-A: Using an Accounting Worksheet An accounting worksheet may be prepared to facilitate end-of-period accounting activities. The final worksheet provides all the data needed to complete the remaining end-of-period steps, bringing together in one place (1) the unadjusted trial balance, (2) the amounts for adjusting entries, (3) the income statement, (4) the statement of owner’s equity, and (5) the balance sheet.

End of Chapter 4 Slide 25