1. Completing the Accounting Cycle
Chapter 4
Completing the Accounting Cycle
Accounting, 21st Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3. After studying this chapter, you should be able to:
Objectives
1. Review the seven basic steps of the accounting cycle.
2. Prepare a work sheet.
3. Prepare financial statements from a work sheet.
4. Prepare adjusting and closing entries from a work sheet.
5. Explain what is meant by the fiscal year and the natural business year.
6. Analyze and interpret the financial solvency of a business by computing working capital and the current ratio.
After studying this chapter, you should be able to:

4. Seven Basic Steps of the Accounting Cycle
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.

5. Assets are commonly divided into classes and that two of these classes are current assets and property, plant, and equipment.

6. That’s correct. Cash and other assets that are expected to be converted into cash, sold, or used up usually in less than a year are current assets.

7. Well… besides cash, there’s notes receivable, accounts receivable, supplies, and other prepaid items.
For example?

8. There are some exceptions, but that’s basically correct
There are some exceptions, but that’s basically correct. Assets such as office equipment, machinery, buildings, and land would appear under that heading.
So, assets that have a life over a year are listed under property, plant, and equipment.

9. Liabilities due usually within 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

10. Liabilities not due for more than a year usually are long-term liabilities.
Mortgage note payable
Mortgage payable
Bond payable

11. The work sheet is a useful device for understanding the flow of accounting data from the unadjusted trial balance to the financial statements.

12. The Work Sheet
Trial Balance
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, owner’s equity, revenues, and expenses.

13. Adjustments are entered here. Two possibilities:
The Work Sheet
Trial Balance
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are entered here. Two possibilities:
1. Deferrals – Existing balances are changed.
2. Accruals – New information is entered.

14. The Work Sheet
Trial Balance
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are combined with the trial balance. Account balances are now adjusted.

15. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000
Prepaid Insurance 2,400
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800
Miscellaneous Expense 455
42,600 42,600
The Unadjusted Trial Balance

16. (a) The Supplies account has a debit of $2,000
(a) The Supplies account has a debit of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used during the two-month period.

17. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000
Prepaid Insurance 2,400
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800
Miscellaneous Expense 455
42,600 42,600
(a) 1,240
(a) 1,240

18. (b) The Prepaid Insurance account has a debit balance of $2,400, which represents prepayment of insurance for 24 months beginning December 1. Thus, the insurance expense for this month is $100 ($2,400 ÷ 24).

19. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
(b)
Insurance Expense (b) 100
Accounts are added as needed.

20. (c) The Unearned Rent account has a credit balance of $360, which represents the receipt of three-months’ rent beginning with December 1. Thus, the rent revenue for December is $120.
FOR RENT

21. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
(c)
Insurance Expense (b) 100
Rent Revenue (c) 120