1. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen Polytechnic University Chapter 4 Completion of the Accounting Cycle

2. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Completion of the Accounting Cycle Closing the books Closing the books Preparing and posting closing entriesPreparing and posting closing entries Preparing the post-closing trial balancePreparing the post-closing trial balance Summary of the accounting cycle Summary of the accounting cycle Worksheets, reversing and correcting entriesWorksheets, reversing and correcting entries Classified balance sheet Classified balance sheet Using information in the financial statements Using information in the financial statements Working capital and current and acid-test ratiosWorking capital and current and acid-test ratios

3. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Closing the Books Done at the end of the accounting period Done at the end of the accounting period Accounts are made ready for the next periodAccounts are made ready for the next period Temporary accounts: Temporary accounts: Only collect data for a single period; closed at the end of the periodOnly collect data for a single period; closed at the end of the period Revenue, expense and owner’s drawings accountsRevenue, expense and owner’s drawings accounts Permanent accounts: Permanent accounts: Not closedNot closed Balances are carried forward into next periodBalances are carried forward into next period All balance sheet accountsAll balance sheet accounts

4. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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)

5. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Closing Process

6. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. The Closing Process 1.Close revenue accounts Debit each revenue account for its balanceDebit each revenue account for its balance Credit Income Summary for total revenuesCredit Income Summary for total revenues 2.Close expense accounts Debit Income Summary for total expensesDebit Income Summary for total expenses Credit each expense account for its balanceCredit each expense account for its balance 3.Close Income Summary Debit Income Summary for balance (credit if loss)Debit Income Summary for balance (credit if loss) Credit (debit) owner’s drawing accountCredit (debit) owner’s drawing account 4.Close drawings Debit owner’s capital accountDebit owner’s capital account Credit owner’s drawings account for the balanceCredit owner’s drawings account for the balance

7. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Post-Closing Trial Balance Prepared after all closing entries have been journalized and posted Prepared after all closing entries have been journalized and posted Provides a list of all permanent accounts and their balances Provides a list of all permanent accounts and their balances These balances are carried forward into the next periodThese balances are carried forward into the next period Since all temporary accounts have zero balances, only permanent accounts remainSince all temporary accounts have zero balances, only permanent accounts remain

8. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Post-Closing Trial Balance

9. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Accounting Cycle Summarized Analyze business transactions 1 Journalize the transactions 2 Post to general 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-closing trial balance 9

10. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Work Sheets – An Optional Step Multi-part form to help prepare adjusting entries and financial statements Multi-part form to help prepare adjusting entries and financial statements A working tool - not a permanent accounting record A working tool - not a permanent accounting record Useful for the preparation of interim financial information or for internal use Useful for the preparation of interim financial information or for internal use

11. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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

12. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Correcting Entries – An Avoidable Step Correcting entries correct errors that have occurred in the recording process Correcting entries correct errors that have occurred in the recording process Unnecessary if the records are free of errorsUnnecessary if the records are free of errors Can be journalized and posted whenever an error is discoveredCan be journalized and posted whenever an error is discovered Must be done before closing entries are prepared and postedMust be done before closing entries are prepared and posted

13. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Classified Balance Sheet Financial statements are more useful when similar assets and liabilities are grouped together Financial statements are more useful when similar assets and liabilities are grouped together 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 (Shareholders’) equity Liabilities and Owner’s Equity Current liabilities Long-term liabilities Owner’s (Shareholders’) equity

14. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Operating Cycle The length of it takes from starting with cash to ending with cash in producing revenues The length of it takes from starting with cash to ending with cash in producing revenues Usually less than one year, but for some companies it may be longer than one year Usually less than one year, but for some companies it may be longer than one year

15. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Current Assets Cash and other resources that will be converted to cash, sold or used up in one year from the balance sheet date Cash and other resources that will be converted to cash, sold or used up in one year from the balance sheet date Can be longer period if operating cycle is greater than one year Can be longer period if operating cycle is greater than one year Listed in order of liquidity Listed in order of liquidity Examples: Examples: Cash, short-term investments, accounts receivable, inventory, prepaidsCash, short-term investments, accounts receivable, inventory, prepaids

16. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Long-Term Investments Investments in debt or equity that are expected to be held for many years Investments in debt or equity 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

17. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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

18. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Current Liabilities Obligations expected to be settled within one year from the balance sheet date or in the normal operating cycle Obligations expected to be settled within one year from the balance sheet date or in the normal operating cycle Listed first in the liabilities and equity section of the balance sheet Listed first in the liabilities and equity section of the balance sheet Listed in order of liquidity Listed in order of liquidity 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

19. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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: Long-term notes payable, bonds payable, mortgages payable, lease liabilities, future income taxes (or deferred income taxes)Long-term notes payable, bonds payable, mortgages payable, lease liabilities, future income taxes (or deferred income taxes)

20. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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”

21. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Impact of IFRS Balance sheet may be called “statement of financial position” Balance sheet may be called “statement of financial position” Either is acceptable for under IFRS and Cdn GAAP for Private EnterprisesEither is acceptable for under IFRS and Cdn GAAP for Private Enterprises Classification of balance sheet items Classification of balance sheet items Separate classifications as previously outlinedSeparate classifications as previously outlined Order of items Order of items Companies are allowed to choose on the basis of relevancy – for example may put non- current items before current itemsCompanies are allowed to choose on the basis of relevancy – for example may put non- current items before current items

22. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. IFRS Illustrated

23. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. IFRS Illustrated cont’d…

24. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 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

25. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Using Information in the Financial Statements Current ratio: a measure of short-term debt-paying ability Current ratio: a measure of short-term debt-paying ability = Current assets ÷ Current liabilities Acid-test ratio: measures immediate short- term liquidity Acid-test ratio: measures immediate short- term liquidity ={Cash + Short-term investments + Receivables} ÷ Current liabilities

26. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Appendix 4A: Work Sheets A multiple-column form used in preparing financial statements A multiple-column form used in preparing financial statements Steps in preparing a work sheet: Steps in preparing a work sheet: 1.Prepare a trial balance on the work sheet 2.Enter adjustments in the adjustment columns 3.Enter adjusted balances in the adjusted trial balance columns 4.Enter adjusted trial balance amounts in the correct financial statement columns 5.Total columns, calculate profit (loss) and complete the work sheet

27. Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd. Appendix 4B: Reversing Entries Entries that reverse the adjusting entries at the beginning of the next period Entries that reverse the adjusting entries at the beginning of the next period Used to reverse accrued revenues and expensesUsed to reverse accrued revenues and expenses Simplifies the recording of future transactions related to an adjusting entry Simplifies the recording of future transactions related to an adjusting entry When transaction is recorded, no need to refer back to adjusting entries to determine how much relates to prior periodWhen transaction is recorded, no need to refer back to adjusting entries to determine how much relates to prior period

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