Chapter 4 Completing the Accounting Cycle

 Prepare the Income Statement. Prepare the Financial Statements A work sheet does not substitute for financial statements. P1

 Prepare the Statement of Owner’s Equity. P1

 Prepare the Balance Sheet.

Resets revenue, expense and withdrawal account balances to zero at the end of the period. Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. Closing Process C1

Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital The closing process applies only to temporary accounts. Temporary and Permanent Accounts C1

Let’s see how the closing process works! Recording Closing Entries  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital.  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital. P2

Balances before closing. Closing Process P2

 Close Revenue accounts to Income Summary. Closing Process P2

 Close Expense accounts to Income Summary. Closing Process The balance in Income Summary equals net income. P2

 Close Income Summary to Owner’s Capital. Closing Process P2

Closing Process  Close Withdrawals account to Owner’s Capital. P2

Using the adjusted trial balance, let’s prepare the closing entries for FastForward. P2

 Close Revenue accounts to Income Summary. P2

 Close Revenue Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry. P2

 Close Revenue Accounts to Income Summary P2

 Close Expense accounts to Income Summary. P2

Now, let’s look at the ledger accounts after posting this closing entry.  Close Expense Accounts to Income Summary P2

Net Income  Close Expense Accounts to Income Summary P2

 Close Income Summary to Owner’s Capital. P2

Now, let’s look at the ledger accounts after posting this closing entry.  Close Income Summary to Owner’s Capital P2

 Close Income Summary to Owner’s Capital P2

 Close Withdrawals to Owner’s Capital. P2

Now, let’s look at the ledger accounts after posting this closing entry.  Close Withdrawals to Owner’s Capital P2

 Close Withdrawals to Owner’s Capital P2

Let’s look at FastForward’s post-closing trial balance. Post-Closing Trial Balance List of permanent accounts and their balances after posting closing entries. Total debits and credits must be equal. List of permanent accounts and their balances after posting closing entries. Total debits and credits must be equal. P3

Post-Closing Trial Balance P3

Let’s discuss the components of a classified balance sheet. C3

Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle. Classified Balance Sheet C3

Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle. C3

Long-term investments are expected to be held for more than one year or the operating cycle. C3

Plant assets are tangible long-lived assets used to produce or sell products and services. C3

Intangible assets are long-term resources used to produce or sell products and services and that lack physical form. C3

Current liabilities are obligations due within the longer of one year or the company’s operating cycle. C3

Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle. C3

Equity is the owner’s claim on the assets. C3

Current Ratio Helps assess the company’s ability to pay its debts in the near future A1

End of Chapter 4