Completing Completing the the
Accounting Accounting Cycle and Cycle and Classifying Classifying AccountsAccounts
PowerPoint Slides to accompanyFundamental Accounting Principles, 14ce
Prepared byJoe Pidutti, Durham College
CHAPTER
4
Learning ObjectivesLearning 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 ObjectivesLearning 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-closingtrial balance
Journalize
Close
Prepareunadjusted trial balance
Post
Analyzetransactions
Prepare adjusted
trial balance
Prepare statements
Adjust
2
3
4
6
8
19
The Accounting CycleThe Accounting Cycle
5
LO 1
7
© 2013 McGraw-Hill Ryerson Limited.4
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 WorksheetThe Worksheet
LO 15
AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Vertically Inclined Rock GymWork 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
For Month Ended March 31, 2014
Vertically Inclined Rock GymWork Sheet
Unadjusted Trial Balance Adjustments Adjusted Trial Balance
Step 1Prepare 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
For Month Ended March 31, 2014
Vertically Inclined Rock GymWork Sheet
Trial Balance Adjustments Adjusted Trial Balance
Step 2Enter Adjustments
© 2013 McGraw-Hill Ryerson Limited. 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
For Month Ended March 31, 2014
Work Sheet
Trial Balance Adjustments Adjusted Trial Balance
Step 3Prepare Adjusted Trial
Balance
© 2013 McGraw-Hill Ryerson Limited. LO 19
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070 8,070
Supplies 2,550 2,550
Prepaid insurance 2,300 2,300
Equipment 6,000 6,000
Accumulated depreciation, equipment 200 200
Accounts payable 200 200
Unearned teaching revenue 2,750 2,750
Notes payable 6,000 6,000
Virgil Klimb, capital 10,000 10,000
Virgil Klimb, withdrawals 600 600
Teaching revenue 5,850 5,850
Equipment rental revenue 300 300
Salaries expense 1,470 1,470
Rent expense 1000 1,000
Utilities expense 230 230
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 4Extend Adjusted Amounts to
Statement Columns© 2013 McGraw-Hill Ryerson Limited.
LO 110
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070 8,070
Supplies 2,550 2,550
Prepaid insurance 2,300 2,300
Equipment 6,000 6,000
Accumulated depreciation, equipment 200 200
Accounts payable 200 200
Unearned teaching revenue 2,750 2,750
Notes payable 6,000 6,000
Virgil Klimb, capital 10,000 10,000
Virgil Klimb, withdrawals 600 600
Teaching revenue 5,850 5,850
Equipment rental revenue 300 300
Salaries expense 1,470 1,470
Rent expense 1000 1,000
Utilities expense 230 230
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 2065Totals 6,150 6,150 21,320 21,320
Vertically Inclined Rock GymWork Sheet
For Month Ended March 31, 2014
Income Statement Balance Sheet and
Statement of Changes in Equity
Adjusted Trial Balance
Step 5Enter net income (or loss) and balance
financial statement columns.
© 2013 McGraw-Hill Ryerson Limited. LO 111
Account
Dr Cr Dr Cr Dr Cr
Cash 8,070 8,070
Supplies 2,550 2,550
Prepaid insurance 2,300 2,300
Equipment 6,000 6,000
Accumulated depreciation, equipment 200 200
Accounts payable 200 200
Unearned teaching revenue 2,750 2,750
Notes payable 6,000 6,000
Virgil Klimb, capital 10,000 10,000
Virgil Klimb, withdrawals 600 600
Teaching revenue 5,850 5,850
Equipment rental revenue 300 300
Salaries expense 1,470 1,470
Rent expense 1000 1,000
Utilities expense 230 230
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 2065Totals 6,150 6,150 21,320 21,320
Vertically Inclined Rock GymWork Sheet
For Month Ended March 31, 2014
Income Statement Balance Sheet and
Statement of Changes in Equity
Adjusted Trial Balance
Step 6Prepare financial statements from
worksheet information.
© 2013 McGraw-Hill Ryerson Limited.LO 112
The Closing ProcessThe 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.
© 2013 McGraw-Hill Ryerson Limited. LO 213
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.
© 2013 McGraw-Hill Ryerson Limited. LO 314
Four-Step Closing Process (REID)
Example
Please see the Adjusted Trial Balance illustration in the textbook.
© 2013 McGraw-Hill Ryerson Limited. LO 315
Income Summary6,150
6,150
Teaching Revenue5,850 5,850
-
Equip. Rental Revenue
300 300
-
Step 1: Close Revenue accounts to Income Summary
© 2013 McGraw-Hill Ryerson Limited.
Teaching Revenue 5,850Equip. Rental Revenue 300 Income Summary 66,150
LO 316
Insurance Expense100 100
-
Step 2: Close Expense Accounts to Income Summary
Income Summary4,085 6,150
2,065
Salaries Expense1,470 1,470
-
© 2013 McGraw-Hill Ryerson Limited.
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 Expense35 35
-
Depreciation Expense200 200
-
Utilities Expense230 230
-
Supplies Expense1,050 1,050
-
Rent Expense1,000 1,000
-
LO 317
Virgil Klimb, Capital
10,000 2,065
bal. 12,065
Income Summary4,085 6,150
bal. 2,065 2,065 -
Step 3: Close Income Summary to Capital
© 2013 McGraw-Hill Ryerson Limited.
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 -
© 2013 McGraw-Hill Ryerson Limited.
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.
© 2013 McGraw-Hill Ryerson Limited.
Account Balances after ClosingAccount 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.
© 2013 McGraw-Hill Ryerson Limited.
Post-Closing Trial BalancePost-Closing Trial Balance
LO 421
Prepare post-closingtrial balance
Journalize
Close
Prepareunadjusted trial balance
Post
Analyzetransactions
Prepare adjusted
trial balance
Prepare statements
Adjust
2
3
4
6
8
19
The Accounting CycleThe Accounting Cycle
5
LO 2
7
© 2013 McGraw-Hill Ryerson Limited.22
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.
© 2013 McGraw-Hill Ryerson Limited.
Mini-QuizMini-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.
© 2013 McGraw-Hill Ryerson Limited.
Mini-QuizMini-Quiz
24
A classified balance sheet:• Organizes assets and liabilities into
important subgroups.• Provides users with more useful
information for decision making.
© 2013 McGraw-Hill Ryerson Limited.
Classified Balance SheetClassified Balance Sheet
LO 625
AssetsCurrent 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$ Less: Accumulated depreciation 8,000 25,200
Total property, plant and equipment 223,400 Intangible assets:
Trademark 10,000
Total assets 343,800$
Music ComponentsBalance 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.
© 2013 McGraw-Hill Ryerson Limited. LO 626
AssetsCurrent 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$ Less: Accumulated depreciation 8,000 25,200
Total property, plant and equipment 223,400 Intangible assets:
Trademark 10,000
Total assets 343,800$
Music ComponentsBalance Sheet
January 31, 2014
Long-term investments are held for more than one year or the operating
cycle.
© 2013 McGraw-Hill Ryerson Limited. LO 627
AssetsCurrent 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$ Less: Accumulated depreciation 8,000 25,200
Total property, plant and equipment 223,400 Intangible assets:
Trademark 10,000
Total assets 343,800$
Music ComponentsBalance 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.
© 2013 McGraw-Hill Ryerson Limited. LO 628
AssetsCurrent 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$ Less: Accumulated depreciaton 8,000 25,200
Total property, plant and equipment 223,400 Intangible assets:
Trademark 10,000
Total assets 343,800$
Music ComponentsBalance Sheet
January 31, 2014
Intangible assets are long-term resources used to produce or sell products and services. They lack
physical form.
© 2013 McGraw-Hill Ryerson Limited. LO 629
LiabilitiesCurrent 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 ComponentsBalance 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.
© 2013 McGraw-Hill Ryerson Limited. LO 630
LiabilitiesCurrent 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$
Long-term liabilities are obligations due beyond the longer of one year or the
company’s operating cycle.
© 2013 McGraw-Hill Ryerson Limited. LO 631
Music ComponentsBalance Sheet
January 31, 2014
LiabilitiesCurrent 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 ComponentsBalance Sheet
January 31, 2014
Equity is the owner’s claim on the assets of a company.
© 2013 McGraw-Hill Ryerson Limited. LO 632
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
© 2013 McGraw-Hill Ryerson Limited.
ReviewReview
LO 633
Optional entries used to simplify record keeping.
They are:
• Prepared on the first day of the new accounting period.
• Prepared for adjusting entries that created accrued assets and liabilities.
Appendix 4AAppendix 4AReversing EntriesReversing Entries
© 2013 McGraw-Hill Ryerson Limited. LO 734
Reversing Entries - Example
© 2013 McGraw-Hill Ryerson Limited.
DP Company rents unused office space to a tenant for $2,400 per month. The company had not received October’s rent payment from the tenant by October 31. Payment is expected on November 3.
The entry to record the accrued revenue would be:Oct.31 Accounts Receivable 2,400 Rent Revenue 2,400
LO 735
Current ratio: A ratio that is used to evaluate a company’s ability to pay its short-term obligations.
Current ratio = Current assets
Current liabilities
Appendix 4BAppendix 4BUsing the InformationUsing the Information
© 2013 McGraw-Hill Ryerson Limited. LO 836
Current ratio = Current assets
Current liabilities
This ratio:• Should not be used in isolation as a
measure of liquidity.• Will vary from industry to industry.• May be tracked over time to spot trends.• May be used to compare to industry norms.
Appendix 4BAppendix 4BUsing the InformationUsing the Information
© 2013 McGraw-Hill Ryerson Limited. LO 837
End of ChapterEnd of Chapter
© 2013 McGraw-Hill Ryerson Limited.38