1. ACCT 201 WEEK 4 Completing the Accounting Cycle
Chapter 4

2. Prepare an accounting work sheet

3. The Accounting Work Sheet
Used to help move data from the trial balance to the financial statements
An internal document – not financial statement

4. Accounting Cycle: Process by which accountants prepare financial statements for an entity for a specific period of time

5. The Accounting Cycle
For a new business, begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.

6. The Accounting Cycle Accounts Receivable Accounts Receivable 1,700
1,350
Accounts Receivable 1,700
Service Revenue ,700
Accounts Receivable
1,350
1,700
3,050
Accounts Receivable
1,350
1,700

7. The Accounting Cycle Work Sheet Cash Accounts receivable 12,100 3,050
Balance
Sheet
Income
Statement

8. Postclosing Trial Balance
The Accounting Cycle
Adjusting entries
Closing entries
Cash Accounts Receivable
12,100 3,050
Postclosing Trial Balance
Cash
Accounts
receivable
12,100
3,050

9. Use the work sheet
to complete the
accounting cycle.

10. Recording the Adjusting Entries
The work sheet
helps identify
the accounts
that need
adjustments.
Actual adjustment
of the accounts
requires
journalizing
and posting
the entries.

11. Recording the Adjusting Entries
The adjusting entries may be recorded in the journal when they are entered on the work sheet.
Many accountants journalize and post the adjusting entries just before they make the closing entries.

12. The Accounting Work Sheet
What is the work sheet?
A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements.
It is an internal document.

13. The Accounting Work Sheet
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr Dr Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
1,350
250
15,500
1,000
12,000
42,200
7,500
1,200
1,100
1,500
7,200
23,700
42,200
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

14. The Accounting Work Sheet
The company has earned revenue of $1,700 which will be collected next month.
Inventory of supplies at month end totaled $150.
Depreciation for the period was calculated as $200.

15. The Accounting Work Sheet
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr Dr Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
1,350
250
15,500
1,000
12,000
42,200
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
a) 1,700 b) c)
2,000 b) c)
a) 1,700
2,000
7,500
1,200
1,100
1,500
7,200
23,700
42,200
7,700
1,200
1,100
1,500
7,200
25,400
44,100
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

16. Close the revenue,
expense, and
withdrawal accounts.

17. Closing the Accounts
Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.

18. Expenses and Withdrawals
Closing the Accounts
Closing Entries
Expenses and Withdrawals
decrease
Owner’s Equity.
Revenues
increase
Owner’s Equity.

19. Closing the Accounts
Revenues and Expense accounts are closed to Income Summary.
Income Summary is closed to Capital.
Withdrawals are closed to Capital.
In a corporation, Dividends are closed to Retained Earnings.

20. Closing the Accounts Income Summary
A debit balance represents net loss.
A credit balance represents net income.

21. (Close Revenue Account)
Closing the Accounts
(Close Revenue Account)
Income
Summary
Revenue
28,500
12,000
7,500
9,000
(Close Expense
Accounts)
4,450
28,500
24,050
Salary Exp
(Close Income
Summary)
1,500
1,800
3,300
Capital
Account
Rent Exp
2,500
24,050
(Close
Withdrawals
Account)
Withdrawals
Supplies Exp
2, ,500
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

22. Postclosing Trial Balance
The accounting cycle ends with the postclosing trial balance.
The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.

23. Permanent Accounts What accounts never close? Assets Liabilities
Owner’s equity
Balances of permanent accounts carry over to the next period.

24. Classify assets and liabilities as current or long-term.

25. Liquidity
This is a 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.

26. Current Assets
Current assets are cash, or will be converted to cash, in one year or within the normal business operating cycle.
What are some other examples?
short-term receivables
inventory
prepaid expenses

27. Current Liabilities
Current liabilities are debts or obligations due within one year or within the operating cycle.
What are some examples?
accounts and salary payables
short-term notes payable
unearned revenue

28. Long-term Assets and Liabilities
Long-term assets include all other assets.
property, equipment, and intangibles
Long-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.

29. The Classified Balance Sheet
Debit side
Current assets
Long-term assets
Credit side
Current liabilities
Long-term liabilities
Listed in the order
of decreasing
liquidity
Listed in the order
of how soon they
must be paid

30. The Classified Balance Sheet
XYZ Services
January 31, 20XX
Assets Liabilities
Current assets: Current liabilities:
Cash ,100 Accounts payable ,200
Accounts receivable ,050 Salary payable 1,100
Supplies Unearned revenue 1,500
Total current assets 15, Total liabilities 3,800
Plant assets Owner’s equity
Equipment 15, Capital 19,300
Less Accum. deprec. 7, ,800
Total liabilities and
Total assets 23,100 owner’s equity 23,100

31. Different Formats of Balance Sheet
Report Format
Account Format
Assets
Liabilities
Owner’s Equity
Assets = Liabilities +
Owner’s Equity

32. Use the current ratio and the debt ratio to evaluate a company.

33. Comparative Financial Statements
They enhance the user’s ability to analyze a company’s past performance.
What are two common ratios used to measure liquidity?
Current ratio
Debt ratio

34. Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.
Current ratio = Current assets ÷ Current liabilities

35. Total liabilities ÷ Total assets
Debt Ratio
It indicates the proportion of a business’s assets that are financed with debt.
It measures their ability to pay both current and long-term debt.
Total liabilities ÷ Total assets

36. Trend Analysis
Decision makers compare various ratios over a period of time.

37. Closing the Accounts Permanent Accounts Temporary Accounts
Prepares accounts for recording transactions during next period
Updates retained earnings account
Permanent Accounts
Temporary Accounts

38. 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

39. Four Closing Entries Revenue Expense Income Summary
500
500
200
200
Bal 0
Bal 0
Income Summary
200
500
Bal
Revenues – Expenses =
Net Income

40. Four Closing Entries
Entry 3: Close Income Summary to Retained Earnings
Entry 4: Close Dividends to Retained Earnings

41. Four Closing Entries Income Summary Dividends Retained Earnings 200
500
100
100
300
Bal
Bal 0
Bal
Retained Earnings
1,000 Beginning balance
100
300
1, Ending balance

42. Income Summary Account
Debit balance = Net Loss
Credit balance = Net Income

43. Post-Closing Trial Balance
List of permanent accounts and their balances after posting closing entries
Total debits and credits must be equal

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

45. Current Ratio: Current assets/ Current liabilities =
EXAMPLE
Current Assets:
Cash $3,000
Accounts receivable 6,000
Prepaid rent 2,000
Supplies 1,000
Total $12,000
Current Liabilities:
Accounts payable $4,000
Salary payable 2,000
Total $6,000
Current Ratio: Current assets/ Current liabilities =
$12,000 / $6,000 = 2

46. Debt Ratio: Total liabilities/Total assets =
EXAMPLE
Total Assets:
Cash $3,000
Accounts receivable 6,000
Prepaid rent 2,000
Supplies 1,000
Equipment 12,000
Total $24,000
Total Liabilities:
Accounts payable $4,000
Salary payable 2,000
Note payable 9,000
Total $15,000
Debt Ratio: Total liabilities/Total assets =
$15,000 / $24,000 = 0.63

47. REVISION QUESTIONS

48. The worksheet helps accountants with all of the following except:
Post to the accounts
Prepare financial statements
Close the accounts
Make adjusting entries

49. Answer: 1
The worksheet is a tool that helps accountants organize the end-of-year activities – preparing adjusting and closing entries and the financial statements.

50. On the work sheet, in the balance sheet columns, if the total credits are $600 and total debits are $200, then
An error has been made
Net loss is $400
Total assets are $400
Net income is $400

51. Answer: 2
The difference between the debit and credit columns is the amount of net income or loss, which is used to balance the columns. In this case, $400 is needed in the debit column to balance them. A debit indicates that capital is decreasing.

52. Granite Company had revenues of $600 and expenses of $200 during the year. The owner’s beginning capital balance was $1,000, and the owner made no additional investments during the year. What is the balance in the capital account on Granite Company’s worksheet?

53. Answer: $1,000
The capital balance on the worksheet is the amount in the account before closing entries. If the beginning balance was $1,000 and there were no additional investments, $1,000 would appear in the worksheet.

54. The purpose of closing entries is to
Get the accounts ready for the next period
Verify that the balances in the accounts are correct
Ensure that debits equal credits
Bring the accounts up to date so that financial statements can be prepared

55. Answer: 1
Closing entries zero out the temporary accounts and transfers their balances to the owner’s capital account. The temporary accounts are now ready to begin measuring activity for the next accounting period.

56. Which of the following accounts would not be closed?
Utilities Expense
Accumulated Depreciation
Service Revenue
Withdrawals

57. Answer: 2
Accumulated depreciation is a permanent account and is reported on the balance sheet. Permanent account balances carry forward into the next period.

58. Which of the following is a permanent account?
Fees earned
Unearned revenue
Depreciation expense
Income summary

59. Answer: 2
Unearned revenue is a liability. It’s balance carries forward into the next accounting period.

60. Revenues for an accounting period are $900 and expenses are $500
Revenues for an accounting period are $900 and expenses are $500. The balance in the income summary account before closing it to capital would be
$500 debit
$900 credit
$400 credit
$400 debit

61. Answer: 3
Revenues are closed by debiting revenues and crediting income summary. Expenses are closed by debiting income summary and crediting expenses.
Income Summary
900
500
400 Bal

62. Which account would not appear in the postclosing trial balance?
Cash
Prepaid Insurance
Fees earned
E. Morgan, Capital

63. Answer: 3
Fees earned is a temporary account and would have been closed before the postclosing trial balance was prepared.

64. In what order are assets listed on a classified balance sheet?
In the order of their liquidity
Alphabetically
In ascending dollar amounts
In descending dollars amounts

65. Answer: 1

66. Mica Company has the following assets:. Land. $600. Building. 800
Mica Company has the following assets: Land $600 Building Inventory Accumulated depreciation, Building Prepaid rent 400 Cash 100 How much are total current assets?

67. Answer: $800
Current assets:
Cash $100
Prepaid rent 400
Inventory 300
$800

68. Mica Company has the following assets:. Land……………………………. $600
Mica Company has the following assets: Land……………………………. $600 Building………………………… Inventory……………………… Accumulated depreciation, building………………………… Prepaid rent…………………… Cash…………………………… How much are total plant assets?

69. Answer: $1,200
Current assets:
Land $600
Building 800
Less Accumulated depreciation (200) 600
$1,200

70. At the end of the accounting period, Quartz Company has a note payable of $82,000. Quartz Company pays $1,000 per month on the principal amount of the note. The company also has $3,000 in accounts payable. How much are total current liabilities?

71. Answer: $15,000
Current liabilities:
Accounts payable $3,000
Currently maturing portion of long-term note 12,000
$15,000

72. A 2:1 current ratio indicates that
Current assets are two times greater than current liabilities
Total assets are two times greater than total liabilities
Current liabilities are two times greater than current assets
Total liabilities are two times greater than total assets

73. Answer: 1
The current ratio is current assets ÷ current liabilities.

74. A high debt ratio is Safer than a low debt ratio
Riskier than a low debt ratio
Indicates high profitability
Indicates that total assets are considerably higher than total liabilities

75. Answer: 2
The debt ratio is computed by dividing total liabilities by total assets. The debt ratio indicates the proportion of a company’s assets that are financed with debt. A low debt ratio is safer than a high debt ratio.