Chapter 4 power point ( BUAD 111 Financial Accounting I)

Completing the

Accounting

Cycle and

Classifying

Accounts

PowerPoint Slides to accompany

Fundamental Accounting Principles, 14ce

Prepared by

Joe Pidutti, Durham College

CHAPTER

4

Learning Objectives

1. Describe and prepare a worksheet and

explain its usefulness. (LO1)

2. Describe the closing process and explain

why temporary accounts are closed each

period. (LO2)

3. Prepare closing entries. (LO3)

4. Explain and prepare a post-closing trial

balance. (LO4)

© 2013 McGraw-Hill Ryerson Limited.2

Learning Objectives

5. Complete the steps in the accounting

cycle. (LO5)6. Explain and prepare a classified balance

sheet. (LO6)7. Prepare reversing entries and explain

their purpose. (Appendix 4A) (LO7)8. Calculate the current ratio and describe

what it reveals about a company’s

financial condition. (Appendix 4B) (LO8)© 2013 McGraw-Hill Ryerson Limited.3

Prepare

post-closing

trial balance

Journalize

Close

Prepare

unadjusted

trial balance

Post

Analyze

transactions

Prepare

adjusted

trial balance

Prepare

statements

Adjust

2

3

4

6

8

19

The Accounting Cycle

5

LO 1

7


An optional working paper that can be

used to simplify the preparation of financial

statements.

It is:

• Prepared before adjusting entries are made.

• Not distributed to decision makers.

• Helpful in preventing errors.

• Often used by auditors.

© 2013 McGraw-Hill Ryerson Limited.

The Worksheet

LO 15

Account

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Vertically Inclined Rock Gym

Work Sheet

For Month Ended March 31, 2014

Balance Sheet and

Statement of

Changes in Equity

Unadjusted Trial

Balance Adjustments

Adjusted Trial

Balance Income Statement

A Blank Worksheet

Steps:

1. Enter unadjusted trial balance.

2. Enter adjustments.

3. Prepare adjusted trial balance.

4. Extend adjusted trial balance columns.

5. Enter net income (or loss) and balance

financial statement columns.

6. Prepare financial statements.

© 2013 McGraw-Hill Ryerson Limited. LO 16

Account

Dr Cr Dr Cr Dr Cr

Cash 8,070

Supplies 3,600

Prepaid insurance 2,400

Equipment 6,000

Accumulated depreciation, equipment

Accounts payable 200

Unearned teachingrevenue 3,000

Notes payable 6,000

Virgil Klimb, capital 10,000

Virgil Klimb, withdrawals 600

Teaching revenue 3,800

Equipment rental revenue 300

Salaries expense 1,400

Rent expense 1,000

Utilities expense 230

23,300 23,300



Work Sheet

Unadjusted Trial Balance Adjustments Adjusted Trial Balance

Step 1

Prepare Unadjusted

Trial Balance© 2013 McGraw-Hill Ryerson Limited.

LO 17

Account

Dr Cr Dr Cr Dr Cr

Cash 8,070

Supplies 3,600 b) 1,050

Prepaid insurance 2,400 a) 100

Equipment 6,000

Accumulated depreciation, equipment c) 200

Accounts payable 200

Unearned teaching revenue 3,000 d) 250

Notes payable 6,000

Virgil Klimb, capital 10,000

Virgil Klimb, withdrawals 600

Teaching revenue 3,800 d) 250

g) 1,800

Equipment rental revenue 300

Salaries expense 1,400 e) 70

Rent expense 1,000

Utilities expense 230

Totals 23,300 23,300

Insurance expense a) 100

Supplies expense b) 1,050

Depreciation expense, equipment c) 200

Salaries payable e) 70

Interest expense f) 35

Interest payable f) 35

Accounts receivable g) 1,800

3,505 3,505



Work Sheet

Trial Balance Adjustments Adjusted Trial Balance

Step 2

Enter Adjustments


LO 18

Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

Supplies 3,600 b) 1,050 2,550

Prepaid insurance 2,400 a) 100 2,300

Equipment 6,000 6,000

Accumulated depreciation, equipment c) 200 200

Accounts payable 200 200

Unearned teaching revenue 3,000 d) 250 2,750

Notes payable 6,000 6,000

Virgil Klimb, capital 10,000 10,000

Virgil Klimb, withdrawals 600 600

Teaching revenue 3,800 d) 250 5,850

g) 1,800

Equipment rental revenue 300 300

Salaries expense 1,400 e) 70 1,470

Rent expense 1,000 1,000

Utilities expense 230 230

Totals 23,300 23,300

Insurance expense a) 100 100

Supplies expense b) 1,050 1,050

Depreciation expense ,equipment c) 200 200

Salaries payable e) 70 70

Interest expense f) 35 35

Interest payable f) 35 35

Accounts receivable g) 1,800 1,800

Totals 3,505 3,505 25,405 25,405


Work Sheet

Trial Balance Adjustments Adjusted Trial Balance

Step 3

Prepare Adjusted Trial

Balance


Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

Supplies 2,550 2,550

Prepaid insurance 2,300 2,300


Accumulated depreciation, equipment 200 200


Unearned teaching revenue 2,750 2,750




Teaching revenue 5,850 5,850


Salaries expense 1,470 1,470

Rent expense 1000 1,000


Insurance expense 100 100

Supplies expense 1,050 1,050

Depreciation expense ,equipment 200 200

Salaries payable 70 70

Interest expense 35 35

Interest payable 35 35

Accounts receivable 1,800 1,800

Totals 25,405 25,405 4,085 6,150 21,320 19,255

Net Income 2,065 2,065

Income Statement

Balance Sheet and

Statement of Changes in

Equity

Adjusted Trial Balance

Step 4

Extend Adjusted Amounts to

Statement Columns© 2013 McGraw-Hill Ryerson Limited.

LO 110

Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

















Depreciation expense, equipment 200 200





Totals 25,405 25,405 4,085 6,150 21,320 19,255

Net Income 2,065 2065

Totals 6,150 6,150 21,320 21,320


Work Sheet


Income Statement

Balance Sheet and


Equity


Step 5

Enter net income (or loss) and balance

financial statement columns.


Account

Dr Cr Dr Cr Dr Cr

Cash 8,070 8,070

















Depreciation expense, equipment 200 200





Totals 25,405 25,405 4,085 6,150 21,320 19,255

Net Income 2,065 2065

Totals 6,150 6,150 21,320 21,320


Work Sheet


Income Statement

Balance Sheet and


Equity


Step 6

Prepare financial statements from

worksheet information.


LO 112

The Closing Process

The closing process occurs at the end of an accounting period after financial statements are prepared.

Closing entries:

1. Reset revenue, expense and withdrawal account balances to zero at the end of the period.

2. Update the capital account to reflect net income (or loss) and drawings from the period just ending.


Four-Step Closing Process

(REID)1. Close Revenue accounts to Income

Summary account.

2. Close Expense accounts to Income Summary account.

3. Close Income Summary account to Owner’s Capital account.

4. Close Drawings (Withdrawals) account to the Capital account.


Four-Step Closing Process

(REID)Example

Please see the Adjusted Trial Balance

illustration in the textbook.


Income Summary

6,150

6,150

Teaching Revenue

5,850 5,850

-

Equip. Rental Revenue

300 300

-

Step 1: Close Revenue accounts to Income

Summary


Teaching Revenue 5,850

Equip. Rental Revenue 300Income Summary 66,150

LO 316

Insurance Expense

100 100

-

Step 2: Close Expense Accounts to Income

Summary

Income Summary

4,085 6,150

2,065

Salaries Expense

1,470 1,470

-


Income Summary 4,085

Depreciation Expense 200

Salaries Expense 1,470

Interest Expense 35

Insurance Expense 100

Rent Expense 1,000

Supplies Expense 1,050

Utilities Expense 230

Interest Expense

35 35

-

Depreciation

Expense

200 200

-

Utilities Expense

230 230

-

Supplies Expense

1,050 1,050

-

Rent Expense

1,000 1,000

-

LO 317

Virgil Klimb,

Capital

10,000

2,065

bal. 12,065

Income Summary

4,085 6,150

bal. 2,065

2,065 -

Step 3: Close Income Summary to Capital


Income Summary 2,065

Virgil Klimb, Capital 2,065

LO 318

Virgil Klimb,

Capital

10,000

600 2,065

balance 11,465

Step 4: Close Drawings to Capital

Virgil Klimb,

Withdrawals

600 600

balance -


Virgil Klimb, Capital 600

Virgil Klimb, Withdrawals 600

LO 319

After closing:

1. All temporary accounts (revenue, expense, and withdrawal accounts will have zero balances.

2. The capital account will be updated to reflect net income (or loss) and withdrawals from the period just ending.

3. All other accounts will be unchanged.


Account Balances after Closing

LO 420

A list of permanent accounts and their balances after closing entries are journalized and posted.

It verifies that:

• Total debits = total credits for permanent accounts.

• All temporary accounts have zero balances.


Post-Closing Trial Balance

LO 421

Prepare

post-closing

trial balance

Journalize

Close

Prepare

unadjusted

trial balance

Post

Analyze

transactions

Prepare

adjusted

trial balance

Prepare

statements

Adjust

2

3

4

6

8

19

The Accounting Cycle

5

LO 2

7


Closing the temporary accounts at the end of each accounting period:A)Serves to transfer the effects of these

accounts to the proper equity account on the balance sheet.

B)Prepares the withdrawals account for use in the next period.

C)Gives the revenue and expense accounts zero balances.

D)Both A and C.

E)All of the above.


Mini-Quiz

23

Closing the temporary accounts at the end of each accounting period:A)Serves to transfer the effects of these

accounts to the proper equity account on the balance sheet.

B)Prepares the withdrawals account for use in the next period.

C)Gives the revenue and expense accounts zero balances.

D)Both A and C.

E)All of the above.


Mini-Quiz

24

A classified balance sheet:

• Organizes assets and liabilities into important subgroups.

• Provides users with more useful information for decision making.


Classified Balance Sheet

LO 625

Assets

Current Assets:

Cash 6,500$

Short -term investments 2,100

Accounts receivable 4,400

Merchandise inventory 29,000

Prepaid expenses 2,400

Total current assets 44,400$

Long-term investments:

Notes Receivable, due Mar. 31,2016 18,000$

Land not currently used in operations 48,000

Total investments 66,000

Property, plant and equipment:

Land 73,200$

Buildings 170,000$

Less: Accumulated depreciation 45,000 125,000

Store equipment 33,200$


Total property, plant and equipment 223,400

Intangible assets:

Trademark 10,000

Total assets 343,800$

Music Components

Balance Sheet

January 31, 2014

Current assets are assets that are

expected to be sold, collected, or

used within the longer of one year

or the company’s operating cycle.


Assets

Current Assets:

Cash 6,500$










Property, plant and equipment:

Land 73,200$

Buildings 170,000$





Intangible assets:

Trademark 10,000


Music Components

Balance Sheet

January 31, 2014

Long-term investments are held for

more than one year or the operating

cycle.


Assets

Current Assets:

Cash 6,500$










Property, Plant and Equipment:

Land 73,200$

Buildings 170,000$





Intangible assets:

Trademark 10,000


Music Components

Balance Sheet

January 31, 2014

Property, plant and equipment are

tangible assets used for more than one

accounting period to produce or sell

products and services.


Assets

Current Assets:

Cash 6,500$

Short-term investments 2,100









Property, Plant and Equipment:

Land 73,200$

Buildings 170,000$



Less: Accumulated depreciaton 8,000 25,200


Intangible assets:

Trademark 10,000


Music Components

Balance Sheet

January 31, 2014

Intangible assets are long-term

resources used to produce or sell

products and services. They lack

physical form.


Liabilities

Current liabilities:

Accounts payable 15,300$

Wages payable 3,200

Notes payable 3,000

Current portion of long-term liabilities 7,500

Total current liabilities 29,000$

Long-term liabilities:

Notes payable (less current portion) 150,000

Total liabiltiies 179,000

Equity

Donald Bowie, capital 164,800

Total liabilities and equity 343,800$

Music Components

Balance Sheet

January 31, 2014

Current liabilities are obligations due to be

paid or settled within the longer of one year

or the company’s operating cycle.


Liabilities



Wages payable 3,200

Notes payable 3,000






Equity



Long-term liabilities are obligations due

beyond the longer of one year or the

company’s operating cycle.


Music Components

Balance Sheet

January 31, 2014

Liabilities



Wages payable 3,200

Notes payable 3,000






Equity



Music Components

Balance Sheet

January 31, 2014

Equity is the owner’s claim on the assets

of a company.


Q What classes of assets and liabilities are

shown on a typical classified balance

sheet?

A Current assets, long-term investments,

PP&E, intangible assets, current

liabilities, long-term liabilities


Review

LO 633

End of Chapter


Business

Chapter 4 power point ( BUAD 111 Financial Accounting I)