Completing the accounting cycle
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Completing the Accounting Cycle. Chapter 4. Prepare an accounting work sheet. Objective 1. 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 Cycle.

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Completing the accounting cycle

Completing theAccounting Cycle

Chapter 4


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

Income

Statement

Balance

Sheet


The accounting cycle4
The Accounting Cycle

Adjusting entries

Closing entries

Cash Accounts Receivable

12,100 3,050

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

Withdrawals

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

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 9


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

Withdrawals

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

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 11


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

Withdrawals

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

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 12


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

Withdrawals

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

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 13


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

Withdrawals

Revenue

Salary expense

Supplies expense

Depreciation expense

Totals

Net income

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

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 14


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

journalizing

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 journalize and post the adjusting entries just before they make the closing entries.


Objective 3

Close the revenue,

expense, and

withdrawal 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 Withdrawals

decrease

Owner’s Equity.

Revenues

increase

Owner’s Equity.


Closing the accounts2
Closing the Accounts

  • Revenues and Expense accounts are closed to Income Summary.

  • Income Summary is closed to Capital.

  • Withdrawals are closed to Capital.

  • In a corporation, Dividends are closed to Retained Earnings.


Closing the accounts3
Closing the Accounts

Income Summary

A creditbalance represents net income.

A debitbalance represents net loss.


Closing the accounts4
Closing the Accounts

(Close Revenue

Account)

Income

Summary

Revenue

28,500

12,000

7,500

9,000

(Close Expense

Accounts)

28,500

4,450

24,050

(Close Income

Summary)

Salary Exp

3,300

1,500

1,800

Capital

Account

Rent Exp

24,050

2,500

800 800

(Close

Withdrawals

Account)

Withdrawals

Supplies Exp

2,5002,500

350 350

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 23


Postclosing trial balance
Postclosing 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 long-term.

Objective 4


Liquidity
Liquidity

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

  • On the balance sheet, assets and liabilities are classified as either current or long-term 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 notes payable

  • unearned revenue


Long term assets and liabilities
Long-term Assets and Liabilities

  • Long-term assets include all other assets.

  • property, equipment, and intangibles

  • Long-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.


The classified balance sheet
The Classified Balance Sheet

Debit side

Current assets

Long-term assets

Credit side

Current liabilities

Long-term liabilities

Listed in the order

of decreasing

liquidity

Listed in the order

of how soon they

must be paid


The classified balance sheet1
The Classified Balance Sheet

XYZ Services

January 31, 20XX

AssetsLiabilities

Current assets: Current liabilities:

Cash 12,100 Accounts payable 1,200

Accounts receivable 3,050 Salary payable 1,100

Supplies 150 Unearned revenue 1,500

Total current assets 15,300 Total liabilities 3,800

Plant assets Owner’s equity

Equipment 15,500 Capital 19,300

Less Accum. deprec. 7,700 7,800

Total liabilities and

Total assets 23,100 owner’s equity 23,100


Different formats of the balance sheet
Different Formats ofthe Balance Sheet

Report Format

Account Format

Assets

Liabilities

Owner’s Equity

Assets = Liabilities +

Owner’s Equity


Objective 5

Use the current ratio and the debt

ratio to evaluate a company.

Objective 5


Comparative financial statements
Comparative Financial Statements

  • They enhance the user’s ability to analyze 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.



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