1. Completing the Accounting Cycle
PRINCIPLES OF FINANCIAL ACCOUNTING
12e
PRINCIPLES OF ACCOUNTING
24e
Chapter 4
ACCOUNTING PRINCIPLES
Using excel for Success 2e
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
These slides should be viewed using the presentation mode (click the icon to start presentation).
Reeve Warren Duchac
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. Learning Objective 1
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

3. Flow of Accounting Information

4. Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Unadjusted TB
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Account balances are listed in the Trial Balance column using the ending balances found in the general ledger.
(continued)

5. Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Unadjusted TB
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are entered here. Two possibilities:
Deferrals – Existing balances are changed
Accruals – New information is entered
(continued)

6. Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Unadjusted TB
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are combined with the trial balance amounts. Account balances are now adjusted.
(continued)

7. Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Adjusted TB
Income State.
Balance Sheet
Accounts Dr Cr Dr Cr Dr Cr
Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.
(continued)

8. Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Adjusted TB
Income State.
Balance Sheet
Accounts Dr Cr Dr Cr Dr Cr
Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.
(concluded)

9. Learning Objective 2
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
Prepare financial statements from adjusted account balances.

10. LO 2
Income Statement
The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet) beginning with fees earned of $16,840.

11. Statement of Owner’s Equity
LO 2
Statement of Owner’s Equity
The first item presented on the statement of owner’s equity is the balance of the owner’s capital account at the beginning of the period.

12. LO 2
Balance Sheet
The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065.

13. Classified Balance Sheet
LO 2
Classified Balance Sheet
A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; current liabilities; and long-term liabilities.

14. LO 2
Current Assets
Cash and other assets that are expected to be converted into cash, sold, or used up usually within a year or less, through the normal operations of the business, are called current assets.
Cash
Accounts Receivable
Notes Receivable
Supplies

15. LO 2
Notes Receivable
Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

16. LO 2
Fixed Assets
Property, plant, and equipment (also called fixed assets or plant assets) include assets that depreciate over a period of time. Land is an exception, as it is not subject to depreciation.
Equipment
Machinery
Buildings
Land

17. LO 2
Current Liabilities
Liabilities that will be due within a short time (usually 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

18. Long-Term Liabilities
Liabilities not due for a long time (usually more than one year) are called long-term liabilities.
Short-term notes payable
Mortgages payable
Bonds payable

19. LO 2
Owner’s Equity
Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and this total must be equal to the total assets.

20. Learning Objective 3
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
Prepare financial statements from adjusted account balances.
Prepare closing entries.

21. LO 3
Closing Entries
Accounts that are relatively permanent from year to year are called permanent accounts or real accounts. These accounts are carried forward from year to year.

22. LO 3
Closing Entries
Accounts that report amounts for only one period are called temporary accounts or nominal accounts. Temporary accounts are not carried forward because they relate to only one period.

23. LO 3
Closing Entries
To report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period.
To achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period.

24. The entries that transfer these balances are called closing entries.
The balance of Income Summary (net income or net loss) is then transferred to the owner’s capital account.
The balance of the owner’s drawing account is also transferred to the owner’s capital account.
The entries that transfer these balances are called closing entries.

25. LO 3
Closing Entries
Income Summary is a temporary account that is only used during the closing process.
At the end of the closing process, the Income Summary account will have a zero balance.
Income Summary is sometimes called a clearing account.

26. Journalizing and Posting Closing Entries

27. Journalizing and Posting Closing Entries

28. Journalizing and Posting Closing Entries

29. Journalizing and Posting Closing Entries

30. LO 3
Closing Entries
Step 1
Step 2
Step 3
Step 4

31. Temporary Account Balances
LO 3
Temporary Account Balances
After the closing entries are posted, all of the temporary accounts have zero balances.

32. Post-Closing Trial Balance
A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance at the beginning of the next period.

33. Learning Objective 4
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
Prepare financial statements from adjusted account balances.
Prepare closing entries.
Describe the accounting cycle.

34. LO 4
Accounting Cycle
The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle.

35. Transactions are analyzed and recorded in the journal.
LO 4
Accounting Cycle
Transactions are analyzed and recorded in the journal.
Transactions are posted to the ledger.
An unadjusted trial balance is prepared.
Adjustment data are assembled and analyzed.
An optional end-of-period spreadsheet (work sheet) is prepared.
(continued)

36. Adjusting entries are journalized and posted to the ledger.
LO 4
Accounting Cycle
Adjusting entries are journalized and posted to the ledger.
An adjusted trial balance is prepared.
Financial statements are prepared.
Closing entries are journalized and posted to the ledger.
A post-closing trial balance is prepared.

37. Learning Objective 5
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
Prepare financial statements from adjusted account balances.
Prepare closing entries.
Describe the accounting cycle.
Illustrate the accounting cycle for one period.

38. LO 5
Accounting Cycle
Kelly Consulting
(continued)

39. LO 5
Accounting Cycle
Kelly Consulting
(continued)

40. LO 5
Accounting Cycle
Kelly Consulting
(concluded)

41. LO 5
Accounting Cycle
Kelly Consulting

42. Unadjusted Trial Balance
LO 5
Unadjusted Trial Balance
Kelly Consulting

43. LO 5
Adjusting Entries
Kelly Consulting

44. Adjusted Trial Balance Kelly Consulting
LO 5
Adjusted Trial Balance
Kelly Consulting

45. Learning Objective 6
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
Prepare financial statements from adjusted account balances.
Prepare closing entries.
Describe the accounting cycle.
Illustrate the accounting cycle for one period.
Explain what is meant by the fiscal year and the natural business year.

46. LO 6
Accounting Period
The annual accounting period adopted by a business is known as its fiscal year.
When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural business year.

47. Learning Objective 7
6. Explain what is meant by the fiscal year and the natural business year.
7. Describe and illustrate the use of working capital and the current ratio in evaluating a company’s financial condition.

48. Working Capital and Current Ratio
LO 7
Working Capital and Current Ratio
The ability to convert assets into cash is called liquidity.
The ability of a business to pay its debts is called solvency.
Working capital is the excess of the current assets of a business over its current liabilities.

49. Working Capital and Current Ratio
LO 7
Working Capital and Current Ratio
NetSolutions’ working capital at the end of 2011 is $6,355 as computed below. This amount of working capital implies that NetSolutions is able to pay it current liabilities.
Working Capital = Current Assets – Current liabilities
= $7,745 – $1,390
= $6,355

50. Working Capital and Current Ratio
LO 7
Working Capital and Current Ratio
The current ratio is another means of expressing the relationship between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities.

51. Working Capital and Current Ratio
LO 7
Working Capital and Current Ratio
The current ratio for NetSolutions at the end of 2011 is 5.6, computed as follows:
Current Ratio =
Current Assets
Current Liabilities =
$7,745
$1,390
= (rounded)

52. Completing the Accounting Cycle
The End