1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Completing the Accounting Cycle Chapter 4

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Prepare an accounting worksheet

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 The Accounting Cycle Process by which accountants prepare financial statements for an entity for a specific period of time

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Accounting Cycle Journalize Transaction Post to Accounts Adjust Accounts Close Accounts Prepare Financial Statements

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 The Accounting Worksheet Used to help move data from the trial balance to the financial statements An internal document – not financial statement

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Objective 2 Use the worksheet

7. Step 1 Prepare Unadjusted Trial Balance Step 2 Plan Adjustments Step 3 Adjusted Trial Balance Step 4 Sort Adjusted Amounts to Statement Columns

8. Exercise 4-13

9. a. 300 b. 100 c. 500 d. 800 e.1,600 3,300 3,500 3,700 400 1,700 34,100 2,000 100 2,300 800 700 1,600 1,900 5,100 500 36,000 7,400 50,900 100 2,300 800 700 1,600 7,400 3,500 3,700 400 1,700 34,100 2,000 1,900 5,100 500 36,000 5,5007,400 1,900 7,400 45,40043,500 1,900 45,400 Net Income

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 Recording Adjusting Entries Work sheet helps identify accounts that need adjustments Actual adjustment of accounts requires journalizing and posting entries

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Accounts Receivable300 Service Revenue300 30Depreciation Expense, Equipment100 Accumulated Depreciation, Equipment100

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Salary Expense500 Salary Payable500 30Rent Expense800 Prepaid Rent800

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Supplies Expense1,600 Supplies1,600

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 Objective 3 Close the revenue, expense, and withdrawal accounts

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Closing the Accounts Prepares accounts for recording transactions during next period Updates owner’s capital account

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 Closing the Accounts Permanent Accounts Temporary Accounts

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 Four Closing Entries Four Closing Entries Close all income statement accounts to Income Summary Entry 1: Close revenue accounts to Income Summary Entry 2: Close expense accounts to Income Summary

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 Four Closing Entries Four Closing Entries 500 Revenue 500 Bal 0 200 Expense 200 Bal 0 200 Income Summary 500 Bal 300 Revenues – Expenses = Net Income

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 Four Closing Entries Four Closing Entries Entry 3: Close Income Summary to Capital Entry 4: Close Withdrawals to Capital

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 Four Closing Entries Four Closing Entries 200 Income Summary 500 Bal 300 100 Withdrawals 100 Bal 0 100 Capital 300 1,000 Beginning balance 300 1,200 Ending balance Bal 0

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Service Revenue7,400 Income Summary7,400 To close revenue accounts

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Income Summary5,500 Depreciation Expense100 Salary Expense2,300 Rent Expense800 Utilities Expense700 Supplies Expense1,600 To close expense accounts Notice: Only income statement accounts are closed to income summary

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 Exercise 4-14 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Nov30Income Summary1,900 C. Voss, Capital1,900 To close income summary 30C. Voss, Capital2,000 C. Voss, Withdrawals2,000 To close withdrawals

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 Accounts ReceivablePrepaid Rent 3,4001,200Adj.800 Adj.300Bal.400 Bal.3,700 SuppliesAccumulated Depreciation 3,300Adj.1,6001,800 Bal.1,700Adj.100 Bal.1,900 Salary PayableGail Pfeiffer, CapitalAdj.50036,000 Bal.500Clo.2,000Clo.1,900 Bal.35,900 Gail Pfeiffer, WithdrawalsIncome Summary 2,000Clo.2,000Clo.5,500Clo.7,400 Clo.1,900Bal.0 Exercise 4-15

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 Service RevenueDepreciation Expense 7,100Adj.100 Adj.300Bal.100Clo.100 Clo.7,400Bal.7,400 Salary ExpenseRent Expense 1,800Adj.800 Adj.500Bal.800Clo.800 Bal.2,300Clo.2,300 Utilities ExpenseSupplies Expense 700Adj.1,600 Bal.700Clo.700Bal.1,600Clo.1,600 Exercise 4-15

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Income Summary Account Debit balance = Net Loss Credit balance = Net Income

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 Post-Closing Trial Balance List of permanent accounts and their balances after posting closing entries Total debits and credits must be equal

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 E4-16E4-16 Wireless Solutions Postclosing Trial Balance November 30, 2006 ACCOUNTDEBITCREDIT Cash$ 3,500 Accounts receivable3,700 Prepaid rent400 Supplies1,700 Equipment34,100 Accumulated depreciation$ 1,900 Accounts payable5,100 Salary payable500 Gail Pfeiffer, capital 35,900 Total $43,400 Only Balance Sheet accounts remain on the Post-Closing Trial Balance. All other accounts have a - $0- balance

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 Objective 4 Classify assets and liabilities as current or long-term

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 LiquidityLiquidity Measure of how quickly an item can be converted into cash On the balance sheet, assets and liabilities are classified as either current or long- term to indicate their relative liquidity

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 Current Assets Cash, or assets that will be converted to cash or used up, in one year or within normal business operating cycle Examples –Short-term receivables –Inventory –Prepaid expenses

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 Current Liabilities Debts or obligations due within one year or within operating cycle Examples –Accounts and salary payables –Short-term notes payable –Unearned revenue

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 Long-term Assets and Liabilities Long-term Assets and Liabilities Long-term assets - all other assets –Property, equipment –Intangibles Long-term liabilities - all other debts due in longer than one year or entity’s operating cycle

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 Debit side Current assets Long-term assets Credit side Current liabilities Long-term liabilities The Classified Balance Sheet

35. S4-9S4-9 Current Assets Cash Receivables Prepaid expenses Long-term Assets Equipment Buildings Accumulated depreciation Current Liabilities Accounts payable Accrued liabilities Long-term liabilities None

36. Copyright © 2007 Prentice-Hall. All rights reserved 36 Different Formats of the Balance Sheet Account Format Report Format

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 Objective 5 Use the current ratio and the debt ratio to evaluate a company

38. Copyright © 2007 Prentice-Hall. All rights reserved 38 Comparative Financial Statements Enhance user’s ability to analyze company’s past performance Two common ratios used to measure liquidity 1.Current ratio 2.Debt ratio

39. Copyright © 2007 Prentice-Hall. All rights reserved 39 Current assets ÷ Current liabilities Current Ratio Measures ability of a business to pay its current liabilities with its current assets

40. Copyright © 2007 Prentice-Hall. All rights reserved 40 Total liabilities ÷ Total assets Debt Ratio Indicates the proportion of a business’s assets that are financed with debt Measures business’s ability to pay both current and long-term debt

41. Copyright © 2007 Prentice-Hall. All rights reserved 41 S4-11S4-11 Current Assets: Cash$3,000 Accounts receivable6,000 Prepaid rent2,000 Supplies1,000 Total$12,000 Current Liabilities: Accounts payable$4,000 Salary payable2,000 Total$6,000 Current Ratio: Current assets/ Current liabilities = $12,000 / $6,000 = 2

42. Copyright © 2007 Prentice-Hall. All rights reserved 42 S4-11S4-11 Total Assets: Cash$3,000 Accounts receivable6,000 Prepaid rent2,000 Supplies1,000 Equipment12,000 Total$24,000 Total Liabilities: Accounts payable$4,000 Salary payable2,000 Note payable9,000 Total$15,000 Debt Ratio: Total liabilities/Total assets = $15,000 / $24,000 =.625

43. Copyright © 2007 Prentice-Hall. All rights reserved 43 End of Chapter 4