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Completing the Accounting Cycle. Chapter 4. HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT. Objectives. 1.Prepare an accounting work sheet. 2.Use the work sheet to complete the accounting cycle. 3.Close the revenue, expense and drawings accounts.

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Completing the accounting cycle

Completing theAccounting Cycle

Chapter 4

HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT


Objectives

Objectives

1.Prepare an accounting work sheet.

2.Use the work sheet to complete the accounting cycle.

3.Close the revenue, expense and drawings accounts.

4.Classify assets and liabilities as current or non-current.

5.Use the current and debt ratios to evaluate a business’s ability to pay its debts


Objective 1

Prepare an accounting

work sheet.

Objective 1


The accounting cycle

The Accounting Cycle

  • The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.


The accounting cycle1

The Accounting Cycle

  • For a new business, begin by setting up ledger accounts..

  • For an established business, begin with account balances carried over from the previous period.


The accounting cycle2

The Accounting Cycle

Accounts Receivable

1,350

Accounts Receivable 1,700

Service Revenue 1,700

Accounts Receivable

1,350

1,700

3,050

Accounts Receivable

1,350

1,700


The accounting cycle3

The Accounting Cycle

Work Sheet

12,100

3,050

Cash

Accounts

receivable

Statement of

Financial

Performance

Statement of

Financial

Position


The accounting cycle4

The Accounting Cycle

Adjusting entries

Closing entries

Cash Accounts Receivable

12,1003,050

Postclosing Trial Balance

Cash

Accounts

receivable

12,100

3,050


The accounting work sheet

The Accounting Work Sheet

  • What is the work sheet?

  • A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements.

  • It is an internal document.


The accounting work sheet1

The Accounting Work Sheet

Adjusted

Trial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.

Cash

Accounts receivable

Supplies

Equipment

Accum. depreciation

Accounts payable

Salary payable

Unearned revenue

Capital

Drawings

Revenue

Salary expense

Supplies expense

Depreciation expense

Totals

12,100

1,350

250

15,500

1,000

12,000

42,200

7,500

1,200

1,100

1,500

7,200

23,700

42,200


The accounting work sheet2

The Accounting Work Sheet

  • The company has earned revenue of $1,700 which will be collected next month.

  • Inventory of supplies at month end totaled $150.

  • Depreciation for the period was calculated as $200.


The accounting work sheet3

The Accounting Work Sheet

Adjusted

Trial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.

Cash

Accounts receivable

Supplies

Equipment

Accum. depreciation

Accounts payable

Salary payable

Unearned revenue

Capital

Drawings

Revenue

Salary expense

Supplies expense

Depreciation expense

Totals

12,100

3,050

150

15,500

1,000

12,000

100

200

44,100

12,100

1,350

250

15,500

1,000

12,000

42,200

a) 1,700

b) 100

c) 200

2,000

b) 100

c) 200

a) 1,700

2,000

7,700

1,200

1,100

1,500

7,200

25,400

44,100

7,500

1,200

1,100

1,500

7,200

23,700

42,200


The accounting work sheet4

The Accounting Work Sheet

Adjusted Income Balance

Trial Balance Statement Sheet

Account Title Dr. Cr. Dr. Cr. Dr. Cr.

Cash

Accounts receivable

Supplies

Equipment

Accum. depreciation

Accounts payable

Salary payable

Unearned revenue

Capital

Drawings

Revenue

Salary expense

Supplies expense

Depreciation expense

Totals

12,100

3,050

150

15,500

1,000

12,000

100

200

44,100

12,100

3,050

150

15,500

1,000

31,800

7,700

1,200

1,100

1,500

7,200

25,400

44,100

7,700

1,200

1,100

1,500

7,200

18,700


The accounting work sheet5

The Accounting Work Sheet

Adjusted Income Balance

Trial Balance Statement Sheet

Account Title Dr. Cr. Dr. Cr. Dr. Cr.

Cash

Accounts receivable

Supplies

Equipment

Accum. depreciation

Accounts payable

Salary payable

Unearned revenue

Capital

Drawings

Revenue

Salary expense

Supplies expense

Depreciation expense

Totals

12,100

3,050

150

15,500

1,000

12,000

100

200

44,100

12,100

3,050

150

15,500

1,000

31,800

7,700

1,200

1,100

1,500

7,200

25,400

44,100

7,700

1,200

1,100

1,500

7,200

18,700

25,400

25,400

12,000

100

200

12,300


The accounting work sheet6

The Accounting Work Sheet

Adjusted Income Balance

Trial Balance Statement Sheet

Account Title Dr. Cr. Dr. Cr. Dr. Cr.

Cash

Accounts receivable

Supplies

Equipment

Accum. depreciation

Accounts payable

Salary payable

Unearned revenue

Capital

Drawings

Revenue

Salary expense

Supplies expense

Depreciation expense

Totals

Net profit

12,100

3,050

150

15,500

1,000

12,000

100

200

44,100

12,100

3,050

150

15,500

1,000

31,800

31,800

7,700

1,200

1,100

1,500

7,200

25,400

44,100

7,700

1,200

1,100

1,500

7,200

18,700

13,100

31,800

25,400

25,400

25,400

12,000

100

200

12,300

13,100

25,400


Objective 2

Use the work sheet

to complete the

accounting cycle.

Objective 2


Recording the adjusting entries

Recording theAdjusting Entries

Actual adjustment

of the accounts

requires

journalising

and posting

the entries.

The work sheet

helps identify

the accounts

that need

adjustments.


Recording the adjusting entries1

Recording theAdjusting Entries

  • The adjusting entries may be recorded in the journal when they are entered on the work sheet.

  • Many accountants journalise and post the adjusting entries just before they make the closing entries.


Objective 3

Close the revenue,

expense, and

drawings accounts.

Objective 3


Closing the accounts

Closing the Accounts

  • Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.


Closing the accounts1

Closing the Accounts

Closing Entries

Expenses and Drawings

decrease

Owner’s Equity.

Revenues

increase

Owner’s Equity.


Closing the accounts2

Closing the Accounts

  • Revenues and Expense accounts are closed to Profit and Loss Summary.

  • Profit and Loss Summary is closed to Capital.

  • Drawings are closed to Capital.

  • In a company, Dividends are closed to Retained Profits.


Closing the accounts3

Closing the Accounts

Profit and Loss Summary

A credit balance represents net profit.

A debit balance represents net loss.


Closing the accounts4

Closing the Accounts

(Close Revenue

Account)

P & L

Summary

Revenue

28,500

12,000

7,500

9,000

(Close Expense

Accounts)

28,500

4,450

24,050

(Close P & L

Summary)

Salary Exp

3,300

1,500

1,800

Capital

Account

Rent Exp

24,050

2,500

800 800

(Close

Drawings

Account)

Drawings

Supplies Exp

2,5002,500

350 350


Post closing trial balance

Post-closing Trial Balance

  • The accounting cycle ends with the postclosing trial balance.

  • The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.


Permanent accounts

Permanent Accounts

  • What accounts never close?

  • Assets

  • Liabilities

  • Owner’s equity

  • Balances of permanent accounts carry over to the next period.


Objective 4

Classify assets and liabilities

as current or non-current.

Objective 4


Liquidity

Liquidity

  • This is a measure of how quickly an item can be converted into cash.

  • On the statement of financial position, assets and liabilities are classified as either current or non-current to indicate their relative liquidity.


Current assets

Current Assets

  • Current assets are cash, or will be converted to cash, in one year (or within the normal business operating cycle).

  • What are some other examples?

  • short-term receivables

  • inventory

  • prepaid expenses


Current liabilities

Current Liabilities

  • Current liabilities are debts or obligations due within one year or within the operating cycle.

  • What are some examples?

  • accounts and salary payables

  • short-term bills payable

  • unearned revenue


Non current assets and liabilities

Non-current Assets and Liabilities

  • Non-current assets include all other assets.

  • property, equipment, and intangibles

  • Non-current liabilities are all other debts due in longer than one year (or the entity’s operating cycle).


The classified statement of financial position

The Classified Statement of Financial Position

Debit side

Current assets

Non-current assets

Credit side

Current liabilities

Non-current liabilities

Listed in the order

of decreasing

liquidity

Listed in the order

of how soon they

must be paid


The classified statement of financial position1

The Classified Statement of Financial Position

XYZ Services

June 30, 2005

AssetsLiabilities

Current assets: Current liabilities:

Cash12,100Accounts payable 1,200

Accounts receivable 3,050Salary payable 1,100

Supplies 150Unearned revenue 1,500

Total current assets15,300 Total liabilities 3,800

Non-current assets Owner’s equity

Equipment15,500 Capital19,300

Less Accum. deprec. 7,700 7,800

Total liabilities and

Total assets23,100owner’s equity23,100

See exhibit 4-12 (MYOB) page 151 of the textbook


Different formats of statements of financial position

Different Formats ofStatements of Financial Position

Report Format

Account Format

Assets =

Liabilities +

Owner’s Equity

Assets = Liabilities +

Owner’s Equity


Objective 5

Use the current and debt

ratios to evaluate a business’s

ability to pay its debts.

Objective 5


Comparative financial statements

Comparative Financial Statements

  • They enhance the user’s ability to analyse a company’s past performance.

  • What are two common ratios used to measure liquidity?

  • Current ratio

  • Debt ratio


Current ratio

Current Ratio

  • This measures the ability of a business to pay its current liabilities with its current assets.

Current ratio = Current assets ÷ Current liabilities


Debt ratio

Debt Ratio

  • It indicates the proportion of a business’s assets that are financed with debt.

  • It measures their ability to pay both current and long-term debt.

Total liabilities ÷ Total assets


Trend analysis

Trend Analysis

  • Decision makers compare various ratios over a period of time.


End of chapter 4

End of Chapter 4


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