1. 1 4 Completing the Accounting Cycle

2. 2 5 4-1

3. 3 Spreadsheet (Work Sheet) Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Accounts are listed in the Trial Balance column using the ending balance found in the general ledger. 6 4-1

4. 4 7 Adjustments are entered here. Two possibilities: 1. Deferrals – Existing balances are changed. 2. Accruals – New information is entered. Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Spreadsheet (Work Sheet) 4-1

5. 5 8 Spreadsheet (Work Sheet) Adjustments are combined with the trial balance. Account balances are now adjusted. Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB 4-1

6. 6 9 Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column. Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet Spreadsheet (Work Sheet) 4-1

7. 7 10 Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column. Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet Spreadsheet (Work Sheet) 4-1

8. 8 Prepare financial statements from adjusted account balances. 4-2

9. 9 14 4-2 To balance sheet

10. 10 15 (Concluded) From statement of owner’ equity 4-2

11. 11 A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities. 4-2

12. 12 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  Supplies 4-2

13. 13 Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate. 4-2

14. 14 Property, plant, and equipment (also called fixed 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 4-2

15. 15 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 4-2

16. 16 Liabilities not due for a long time (usually more than one year) are long-term liabilities. Notes payable Mortgage payable Bond payable 4-2

17. 17 Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and the total must be equal to the total assets. 4-2

18. 18 Example Exercise 4-4 The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007 balance sheet of Hindsight Consulting. 27 4-2 1.Jason Corbin, Capital5.Cash 2.Notes Receivable (due 6.Unearned Rent in 6 months)months) 3.Notes Payable (due in7.Accumulated Depr.— 2009) Equipment 4.Land8.Accounts Payable

19. 19 Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts. 4-3

20. 20 To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary. 4-3

21. 21 The balance of Income Summary 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. 4-3

22. 22 33 4-3

23. 23 34 Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue. Fees Earned Bal.16,840 Rent Revenue Bal.120 Income Summary 16,840 120 16,960 4-3

24. 24 Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Bal.200 Miscellaneous Expense Bal.455 Income Summary Debit Income Summary for the total expenses and credit each expense account for its balance. 16,9609,855 Bal.4,525 Bal.1,600 Bal.50 Bal.985 Bal.2,040 455 200 2,040 985 50 1,600 4,525 35 4-3

25. 25 Chris Clark, Capital Bal.25,000 Chris Clark, Drawing Bal.4,000 Income Summary 16,9609,855 7,105 Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account. 4-3 36

26. 26 Chris Clark, Capital Bal.25,000 7,105 Chris Clark, Drawing Bal.4,000 4,000 37 Debit the capital account for the balance of the drawing account, and credit drawing for the same amount. 4-3

27. 27 4-3 Step 4 Step 3 Step 2 Step 1 38

28. 28 After the closing entries are posted, all of the temporary accounts have zero balances. 4-3

29. 29 Example Exercise 4-4 The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting. Example Exercise 4-5 After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co. Terry Lambert, Capital$615,850 Terry Lambert, Drawing25,000 Fees Earned380,450 Wages Expense250,000 Rent Expense65,000 Supplies Expense18,250 Miscellaneous Expense6,200 Journalize the four entries required to close the accounts. 40 4-3

30. 30 42 4-3 Exhibit 7 Post-Closing Trial Balance NetSolutions Post-Closing Trial Balance December 31, 2007 Cash2 065 00 Accounts Receivable2 720 00 Supplies760 00 Prepaid Insurance2 200 00 Land20 000 00 Office Equipment1 800 00 Accumulated Depreciation50 00 Accounts Payable900 00 Wages Payable250 00 Unearned Rent240 00 Chris Clark, Capital28 105 00 29 545 0029 545 00

31. 31 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. 4-4

32. 32 2.Transactions are posted to the ledger. 3.An unadjusted trial balance is prepared. 4.Adjustment data are assembled and analyzed. 5.An optional end-of-period spreadsheet (work sheet) is prepared. 1.Transactions are analyzed and recorded in the journal. The Accounting Cycle 4-4 Continued

33. 33 7.An adjusted trial balance is prepared. 8.Financial statements are prepared. 9.Closing entries are journalized and posted to the ledger. 10.A post-closing trial balance is prepared. 6.Adjusting entries are journalized and posted to the ledger. 4-4

34. 34 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 year. 4-6

35. 35 52 4-6 The financial history of a business may be shown by a series of balance sheets and income statements, as displayed below. Financial History of a Business

36. 36 The end-of-period spreadsheet (work sheet) shown in the following slides does not have the usual spreadsheet headings due to space constraints.

37. 37 Cash2,065 Accounts Receivable2,220 Supplies2,000 Prepaid Insurance2,400 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 The unadjusted trial balance is checked for equality. 55 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

38. 38 Cash2,065 Accounts Receivable2,220 Supplies2,000 Prepaid Insurance2,400 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 (a) 1,240 Cost of supplies on hand at end of period is $760. 56 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

39. 39 Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 200 Accounts are added as needed. (b) 200 The insurance expense for December is $200 ($2,400/12) 57 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

40. 40 Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 200 (c) 120 Rent Revenue(c) 120 Rent revenue earned during December was $120. 58 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

41. 41 Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 200 Rent Revenue (c) 120 Wages Payable(d) 250 (d) 250 Wages accrued but not paid at the end of December totaled $250. 59 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

42. 42 Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 200 Rent Revenue (c) 120 Wages Payable(d) 250 (e) 500 Fees accrued at the end of December but not recorded total $500. 60 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

43. 43 Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 200 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 50 Depreciation of office equipment is $50 for December. UnadjustedAdjusted Trial Balance Adjustments Trial Balance 61

44. 44 Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit UnadjustedAdjusted Trial Balance Adjustments Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 200 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 50 To make more space, let’s remove the heading. 62

45. 45 Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense(b) 200 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 502,360 Summed and ruled 63 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

46. 46 The next step is to add or subtract the adjustments from (to) the amounts found in the Unadjusted Trial Balance columns and enter the results in the Adjusted Trial Balance columns.

47. 47 Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense(b) 200 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 502,360 65 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

48. 48 Cash2,0652,065 Accounts Receivable2,220(e) 5002,720 Supplies2,000(a) 1,240760 Prepaid Insurance2,400(b) 2002,200 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent360(c) 120240 Chris Clark, Capital25,00025,000 Chris Clark, Drawing4,0004,000 Fees Earned16,340(e) 50016,840 Wages Expense4,275(d) 2504,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense800(a) 1,2402,040 Miscellaneous Expense45545542,600 Account TitleDebitCreditDebitCreditDebitCredit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense(b) 200 200 Rent Revenue (c) 120120 Wages Payable(d) 250250 Depreciation Expense(f) 5050 Accum. Depreciation(f) 5050 2,3602,36043,40043,400 66 UnadjustedAdjusted Trial Balance Adjustments Trial Balance

49. 49 Because of space constraints, the Unadjusted Trial Balance and the Adjustments columns will not be shown in the following slides.

50. 50 Cash2,065 Accounts Receivable2,720 Supplies760 Prepaid Insurance2,200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent240 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,840 Wages Expense4,525 Rent Expense1,600 Utilities Expense985 Supplies Expense2,040 Miscellaneous Expense455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense200 Rent Revenue 120 Wages Payable250 Depreciation Expense50 Accum. Depreciation50 43,40043,400 68

51. 51 The next step is to extend amounts in the Adjusted Trial Balance columns to the Income Statement and Balance Sheet columns.

52. 52 Cash2,065 Accounts Receivable2,720 Supplies760 Prepaid Insurance2,200 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent240 Chris Clark, Capital25,000 Chris Clark, Drawing4,000 Fees Earned16,840 Wages Expense4,525 Rent Expense1,600 Utilities Expense985 Supplies Expense2,040 Miscellaneous Expense455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense200 Rent Revenue 120 Wages Payable250 Depreciation Expense50 Accum. Depreciation50 43,40043,400 70

53. 53 Cash2,0652,065 Accounts Receivable2,7202,720 Supplies760760 Prepaid Insurance2,2002,200 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent240240 Chris Clark, Capital25,00025,000 Chris Clark, Drawing4,0004,000 Fees Earned16,84016,840 Wages Expense4,5254,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense2,0402,040 Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense200200 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation5050 43,40043,400 71

54. 54 The Income Statement and Balance Sheet columns are totaled.

55. 55 Cash2,0652,065 Accounts Receivable2,7202,720 Supplies760760 Prepaid Insurance2,2002,200 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent240240 Chris Clark, Capital25,00025,000 Chris Clark, Drawing4,0004,000 Fees Earned16,84016,840 Wages Expense4,5254,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense2,0402,040 Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense200200 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation5050 43,40043,400 73

56. 56 Cash2,0652,065 Accounts Receivable2,7202,720 Supplies760760 Prepaid Insurance2,2002,200 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent240240 Chris Clark, Capital25,00025,000 Chris Clark, Drawing4,0004,000 Fees Earned16,84016,840 Wages Expense4,5254,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense2,0402,040 Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense200200 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation5050 43,40043,4009,85516,96033,54526,440 74

57. 57 The net income or net loss is determined. Then the Income Statement and Balance Sheet columns are totaled and double-ruled.

58. 58 Cash2,0652,065 Accounts Receivable2,7202,720 Supplies760760 Prepaid Insurance2,2002,200 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent240240 Chris Clark, Capital25,00025,000 Chris Clark, Drawing4,0004,000 Fees Earned16,84016,840 Wages Expense4,5254,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense2,0402,040 Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense200200 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation5050 43,40043,4009,85516,96033,54526,440 76

59. 59 Cash2,0652,065 Accounts Receivable2,7202,720 Supplies760760 Prepaid Insurance2,2002,200 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent240240 Chris Clark, Capital25,00025,000 Chris Clark, Drawing4,0004,000 Fees Earned16,84016,840 Wages Expense4,5254,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense2,0402,040 Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense200200 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation5050 43,40043,4009,85516,96033,54526,440 77 Net income7,1057,105 16,96016,96033,54533,545

60. 60 78 9,85516,96033,54526,4407,105 16,96016,96033,54533,545 Income Statement Balance Sheet Net Income The difference between the Income Statement column totals is the net income (or net loss) for the period.