1. Completing the Accounting Cycle
Chapter 4

2. Prepare the financial statements including the classified balance sheet

3. The financial statements come from the Adjusted Trial Balance
The financial statements come from the Adjusted Trial Balance. Each account on the Adjusted T/B has ONE and only ONE home on one of the financial statements. No account is EVER used twice.
After posting all of the adjusting entries to the General Ledger, the balances will change. An Adjusted Trial Balance can now be pulled, showing all of the adjusted balances. The financial statements will be drawn from the Adjusted Trial Balance. The important thing to remember is that no account on the Adjusted Trial Balance will be used more than once. Each account will be used on one financial statement. For example, Service Revenue will appear on the Income Statement, but will not appear on any other statement.

4. Income Statement Amounts
We always prepare the Income Statement first. The amounts for the Income Statement will come from the Adjusted Trial Balance. The resulting Net Income will then be used on the Statement of Retained Earnings.
Income Statement Amounts

5. The Net Income from the Income Statement will be used on the Statement of Retained Earnings.

6. The only number that does not come from the Adjusted Trial Balance is the ending Retained Earnings balance, which comes from the Statement of Retained Earnings.

7. The Classified Balance Sheet
We can further refine the Balance Sheet presentation by “classifying” the accounts on the Balance Sheet.

8. Classified Balance Sheet
Assets
The Asset section is sub-divided into
current and
long-term groups
Liabilities
Liabilities are also sub-divided into
long-term groups.
Presentation makes it easier to evaluate
Liquidity
Solvency

9. Current Assets
Cash or assets that will convert to cash or will be used up in the current operating cycle
Usually 1 year or lease
Examples:
Cash
Accounts receivable
Supplies
Prepaid expenses
Inventory
Cash, Accounts receivable, Supplies, and Prepaid expenses are current assets. Merchandising entities have another current asset–inventory. Inventory shows the cost of the goods the company holds for sale to customers.

10. Long-Term Assets
Not converted to cash within the current year or operating cycle
Categories
Plant assets
Land
Building
Furniture
Equipment
Long-term investments
Intangible assets
Long-term assets are all the assets that will not be converted to cash within the business’s operating cycle. One category of long-term assets is plant assets (also called fixed assets or property, plant, and equipment). Land, Buildings, Furniture, and Equipment are plant assets. Other categories of long-term assets include Long-term investments and Other assets (a catch-all category).

11. Current Liabilities
Must be paid either with cash or goods and services within operating cycle
Typically one year or less
Examples:
Accounts payable
Notes payable due within one year
Salary payable
Interest payable
Unearned revenue
Current liabilities must be paid either with cash or with goods and services within one year, or within the entity’s operating cycle if the cycle is longer than a year. Accounts payable, Notes payable due within one year, Salary payable, Interest payable, and Unearned revenue are all current liabilities.

12. Long-Term Liabilities
Are not due within the current year or operating cycle
Examples:
Notes payable with due dates over one year
Mortgages
All liabilities that do not have to be paid within the entity’s operating cycle are classified as long-term liabilities . Many notes payable are long-term–for example, a mortgage on a building.

13. The Asset section is sub-divided into current and long-term groups.
Sometimes, there is also a sub-grouping for long-term investments.
Current Assets
We can subdivide the Asset section into Current Assets and Non-Current Assets. The Non-Current Assets are sometimes further sub-divided into Plant Assets, Investments, and Intangible Assets.

14. Liabilities are also sub-divided into current and long-term groups.
Equity is usually not sub-divided.
Current Liabilities
The Liabilities on a Classified Balance Sheet can be subdivided into Current Liabilities and Long-term Liabilities.
Long-term Liabilities

15. Closing the Accounts Occurs at the end of the period
Gets accounts ready for next period
Zeroes out revenue and expense accounts
Updates Capital to the ending balance
Four step process
Closing the accounts occurs at the end of the period. Closing consists of journalizing and posting the closing entries in order to get the accounts ready for the next period. The closing process zeroes out all the revenues and all the expenses in order to measure each period’s net income separately from all other periods. It also updates the Capital account balance.

16. Closing the Accounts Step 1 – Close Revenues to Income summary account
Step 2 – Close individual Expense accounts to Income summary account
Step 3 – Close Income summary account to Retained Earnings account
Step 4 - Close Dividend account to Retained Earnings account
Closing entries transfer the revenue, expense, and dividends balances to the Retained earnings account to ready the company’s books for the next period.
As an intermediate step, the revenues and the expenses may be transferred first to an account titled Income summary. The Income summary account summarizes the net income (or net loss) for the period by collecting the sum of all the expenses (a debit) and the sum of all the revenues (a credit).
The Income summary account is like a temporary “holding tank” that shows the amount of net income or net loss of the current period. Its balance—net income or net loss—is then transferred (closed) to Capital (the final account in the closing process).
Step 1 – Close Revenues to Income summary account. The revenue account now has a zero balance. Step 2 – Close individual Expense accounts to Income summary account. The expense accounts now have a zero balance. The Income summary account now contains the revenues and expenses and its balance represents net income or loss. Step 3 – Close Income summary account to Capital account. This moves the actual net income or loss into the Capital account. Net income increases Capital, while a net loss decreases Capital.
Step 4 – Close Drawing account to Capital account. This entry will zero out the drawing account and get it ready for a new year.

17. Closing Entries Do not close these Close these
Asset accounts
Liability accounts
Common Stock and Retained Earnings accounts
Close these
Revenue accounts
Expense accounts
Dividends account
At the end of every period, it is necessary to “reset” certain accounts to zero before the beginning of the next period. The process of “resetting” the accounts to zero is called the “Closing Process.” Only the Revenue, Expense, Income Summary and Dividends accounts are closed.
At the end of each period must transfer the temporary account balances to the permanent Retained Earnings account.

18. Closing the revenue accounts requires that a debit be entered into the revenue account in an amount equal to the existing balance. The matching credit is entered into the Income Summary account. Next, each expense account receives a credit entry in an amount equal to the debit balance in each expense account. A matching debit is entered into the Income Summary account. At this point, all of the revenue accounts and expense accounts will show a zero balance. The Income Summary account, when balanced, will have a balance equal to Net Income(or Net Loss). The Income Summary account is then closed to the Retained Earnings account. The Dividends account has a debit balance and is closed with a credit entry equal to the balance in the account. The matching debit is entered into the Retained Earnings account.

19. Closing Revenues
In the case of Smart Touch Learning, the Service Revenue account showed a credit balance of $17,500. A closing entry is prepared that debits Service Revenue for $17,500 and credits Income Summary for $17,500.

20. Closing Expenses
We can prepare a closing entry for expenses by crediting each expense account and making a debit entry to Income Summary for the amount of the total expense balances.

21. Closing Income Summary
Income Summary now has a credit balance of $8,550. By debiting Income Summary for $8,550 and crediting Retained Earnings for $8,550, we have effectively updated the Retained Earnings account for the amount of Net Income earned by Smart Touch Learning during the year.

22. Closing Dividends
The Dividends account is also closed to Retained Earnings. Because Dividends has a $5,000 debit balance, we close it by crediting Dividends and debiting Retained Earnings.

23. Prepare the post-closing trial balance

24. The revenue and expense accounts now have a $0 balance.
Only balance sheet accounts are left after the closing entries are posted.
The revenue and expense accounts now have a $0 balance.
The books are ready for the start of the next fiscal period.
At this point, since all of the revenue, expense, and dividend accounts have been closed, they will all have a zero balance. After the entries are posted to the General Ledger, the only accounts left with balances in them are the balance sheet accounts. The resulting trial balance is called a Post-Closing Trial Balance.

25. Describe the accounting cycle

26. Summary of the Accounting Cycle
Start with beginning account balances
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27. Summary of the Accounting Cycle
Start with beginning account balances
Analyze & journalize transactions

28. Summary of the Accounting Cycle
Start with beginning account balances
Analyze & journalize transactions
Post journal entries to ledger accounts

29. Summary of the Accounting Cycle
Start with beginning account balances
Analyze & journalize transactions
Post journal entries to ledger accounts
Prepare unadjusted trial balance

30. Summary of the Accounting Cycle
Start with beginning account balances
Analyze & journalize transactions
Post journal entries to ledger accounts
Prepare unadjusted trial balance
Prepare the worksheet (optional)

31. Summary of the Accounting Cycle
Post journal entries to ledger accounts
Start with beginning account balances
Analyze & journalize transactions
Prepare unadjusted trial balance
Prepare the worksheet (optional)
Journalize and post adjusting entries

32. Summary of the Accounting Cycle
Post journal entries to ledger accounts
Start with beginning account balances
Analyze & journalize transactions
Prepare unadjusted trial balance
Prepare the worksheet (optional)
Journalize and post adjusting entries
Prepare adjusted trial balance

33. Summary of the Accounting Cycle
Post journal entries to ledger accounts
Start with beginning account balances
Analyze & journalize transactions
Prepare unadjusted trial balance
Prepare the worksheet (optional)
Journalize and post adjusting entries
Prepare financial statements
Prepare adjusted trial balance

34. Summary of the Accounting Cycle
Post journal entries to ledger accounts
Start with beginning account balances
Analyze & journalize transactions.
Prepare unadjusted trial balance
Prepare the worksheet (optional)
Journalize and post adjusting entries
Journalize and post closing entries
Prepare financial statements
Prepare adjusted trial balance

35. Summary of the Accounting Cycle
Start with beginning account balances
Post journal entries to ledger accounts
Analyze & journalize transactions
Prepare unadjusted trial balance
Prepare post-closing trial balance
Prepare the worksheet (optional)
Journalize and post adjusting entries
Journalize and post closing entries
Prepare financial statements
Prepare adjusted trial balance

36. Use the current ratio to evaluate business performance

37. Current Ratio(Liquidity Measure)
Measures a company’s ability to pay its current liabilities
The most commonly used ratio is the Current Ratio. It is computed as the ratio of Current Assets to Current Liabilities and is a measure of the company’s ability to quickly pay its debts.

38. Current ratio
2047 = 1.91
1070

39. Wal-Mart
Current ratio
51893 = .887
58484

40. Cisco
Current ratio
51421 = 2.67
19233