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Completing the Accounting Cycle
Chapter 4
4-1Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objectives
1. Prepare the financial statements including the classified balance sheet
2. Use the worksheet to prepare financial statements
3. Explain the purpose of, journalize, and post-closing entries
4. Prepare the post-closing trial balance
4-2Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objectives
5. Describe the accounting cycle
6. Use the current ratio to evaluate business performance
7. Explain the purpose of and journalize reversing entries (Appendix 4A)
4-3Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objective 1
Prepare the financial statements including the classified balance
sheet
4-4Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
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.
4-5Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-6
Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$
SMART TOUCH LEARNINGIncome Statement
Two Months Ended December 31, 2014
Income Statement Amounts
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-7
SMART TOUCH LEARNINGStatement of Retained Earnings
Two Months Ended December 31, 2014
Retained Earnings, 11/1/14 -$ Net income for two months 8,550
8,550 Dividends (5,000) Retained Earnings, 12/31/14 3,550$
Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$
SMART TOUCH LEARNINGIncome Statement
Two Months Ended December 31, 2014
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-8
SMART TOUCH LEARNINGStatement of Retained Earnings
Two Months Ended December 31, 2014
Retained Eanings, 11/1/14 -$ Net income for the month 8,550
8,550 Dividends (5,000) Retained Earnings, 12/31/14 3,550$
Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$
SMART TOUCH LEARNINGIncome Statement
Two Months Ended December 31, 2014
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-9
SMART TOUCH LEARNINGStatement of Retained Earnings
Two Months Ended December 31, 2014
Retained Earnings, 11/1/14 -$ Net income for two months 8,550
8,550 Dividends (5,000) Retained Earnings, 12/31/14 3,550$
Revenues Service Revenue 17,500$ Expenses Rent Expense 3,000$ Salaries Expense 4,800 Supplies Expense 400 Utilities Expense 100 Depr Exp - Furniture 300 Depr Exp - Building 250 Interest Expense 100 Total expenses 8,950 Net income 8,550$
SMART TOUCH LEARNINGIncome Statement
Two Months Ended December 31, 2014
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-10
SMART TOUCH LEARNINGStatement of Retained Earnings
Two Months Ended December 31, 2014
Retained Earnings, 11/1/14 -$ Net income for two months 8,550
8,550 Dividends (5,000) Retained Earnings, 12/31/14 3,550$
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-11
SMART TOUCH LEARNINGStatement of Retained Earnings
Two Months Ended December 31, 2014
Retained Earnings, 11/1/14 -$ Net income for the month 8,550
8,550 Dividends (5,000) Retained Earnings, 12/31/14 3,550$
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
The Classified Balance Sheet
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-12
4-13
The Asset section is sub-divided into current and
long-term groups.
Sometimes, there is also a sub-grouping for long-
term investments.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-14
Liabilities are also sub-divided into current and
long-term groups.
Equity is usually not sub-divided.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objective 2
Use the worksheet to prepare financial
statements
4-15Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-16Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-17Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-18Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Learning Objective 3
Explain the purpose of, journalize, and post-
closing entries
4-19Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Close these• Revenue accounts• Expense accounts• Dividends account
Do not close these• Asset accounts• Liability accounts• Common Stock and
Retained Earnings accounts
At the end of each period must transfer the temporary account balances to the permanent Retained Earnings account.
Closing Entries
4-20Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
4-21Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall
Closing Revenues
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Closing Expenses
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Closing Income Summary
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-24
Closing Withdrawals
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Learning Objective 4
Prepare the post-closing trial balance
4-26Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
• Only balance sheet accounts are left after the closing entries are posted.
• The revenue and expense accounts now have a $0 balance.
• The books are ready for the start of the next fiscal period.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-27
Smart Touch Learning
Post-Closing Trial Balance
December 31, 2014
Debit Credit
Cash 12,200$
Accounts Receivable 1,800
Office Supplies 100
Prepaid Rent 2,000
Furniture 18,000
Accum Depr - Furniture 300$
Building 60,000
Accum Depr - Building 250
Land 20,000
Accounts Payable 200
Utilities Payable 100
Salaries Payable 1,200
Interest Payable 100
Unearned Revenue 400
Notes Payable 60,000
Common Stock 48,000
Retained Earnings 3,550
114,100$ 114,100$
Learning Objective 5
Describe the accounting cycle
4-28Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-29
Start with beginning account balances
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-30
Analyze & journalize
transactions
Start with beginning account balances
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-31
Analyze & journalize
transactions
Post journal
entries to ledger
accounts
Start with beginning account balances
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-32
Analyze & journalize
transactions
Post journal
entries to ledger
accounts
Prepare unadjusted trial balance
Start with beginning account balances
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-33
Analyze & journalize
transactions
Post journal
entries to ledger
accounts
Prepare unadjusted trial balance
Start with beginning account balances
Prepare the worksheet (optional)
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-34
Analyze & journalize
transactions
Post journal
entries to ledger
accounts Prepare unadjusted trial balance
Journalize and post adjusting
entries
Start with beginning account balances
Prepare the worksheet (optional)
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-35
Analyze & journalize
transactions
Post journal
entries to ledger
accounts Prepare unadjusted trial balance
Journalize and post adjusting
entries
Prepare adjusted trial
balance
Start with beginning account balances
Prepare the worksheet (optional)
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-36
Analyze & journalize
transactions
Post journal
entries to ledger
accounts Prepare unadjusted trial balance
Journalize and post adjusting
entries
Prepare adjusted trial
balance
Prepare financial
statements
Start with beginning account balances
Prepare the worksheet (optional)
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-37
Analyze & journalize
transactions.
Post journal
entries to ledger
accounts Prepare unadjusted trial balance
Journalize and post adjusting
entries
Prepare adjusted trial
balance
Prepare financial
statements
Journalize and post
closing entries
Start with beginning account balances
Prepare the worksheet (optional)
Summary of the Accounting Cycle
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-38
Analyze & journalize
transactions
Post journal
entries to ledger
accounts Prepare unadjusted trial balance
Journalize and post adjusting
entries
Prepare adjusted trial
balance
Prepare financial
statements
Prepare post-closing trial
balance
Journalize and post
closing entries
Start with beginning account balances
Prepare the worksheet (optional)
Learning Objective 6
Use the current ratio to evaluate business
performance
4-39Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Current Ratio
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-40
Learning Objective 7
Explain the purpose of and journalize reversing entries
(Appendix 4A)
4-41Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
Reversing Entries
• The opposite of accrual entries
• Not required by GAAP
• Used for convenience and to save time
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-42
1. Record the accrual at the end of the period
2. Reverse the accrual at the beginning of the next period
3. Record the cash flow without referring to the earlier accrual
Accrued Expenses
• On December 31, record Smart Touch Learning’s $1,200 salary accrual.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-43
Date Accounts and Explanation Debit Credit
Dec. 31 Salaries Expense 1,200 Salaries Payable 1,200 To accrue salaries expense.
Accrued Expenses
• On January 1, after closing the previous period’s accounts, reverse the previous accrual.
• The payable is eliminated, and the expense will now have a credit balance.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-44
Date Accounts and Explanation Debit Credit
2015 Salaries Payable 1,200 Jan. 1 Salaries Expense 1,200
To reverse the salaries adjusting entry.
Accrued Expenses
• When the salaries are paid, simply debit Salaries Expense and credit Cash.
• Salaries Expense will carry the proper $1,200 balance after posting.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-45
Date Accounts and Explanation Debit Credit
Jan. 15 Salaries Expense 2,400 Cash 2,400 To record payment of salaries.
End of Chapter 4
4-46Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall