CH 04

Completing the Accounting Cycle Chapter 4
2002 Prentice Hall, Inc.
Business Publishing
Accounting, 5/E
Horngren/Harrison/Bamber
4-1
Objective 1 Prepare an accounting work sheet.
Business Publishing
Accounting, 5/E
4-2
The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.
Business Publishing
Accounting, 5/E
4-3

For a new business, begin by setting up ledger accounts. For an established business, begin with account balances carried over from the previous period.
Business Publishing
Accounting, 5/E
4-4

Accounts Receivable 1,350
Accounts Receivable 1,700 Service Revenue 1,700
Accounts Receivable 1,350 1,700

2002 Prentice Hall, Inc. Business Publishing
Accounts Receivable 1,350 1,700 3,050

Accounting, 5/E Horngren/Harrison/Bamber 4-5

Work Sheet 12,100 3,050
Cash Accounts receivable
Balance Sheet
Income Statement
Business Publishing
Accounting, 5/E
4-6

Adjusting entries Cash 12,100 Closing entries Accounts Receivable 3,050
Postclosing Trial Balance

Cash 12,100 Accounts receivable 3,050
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-7
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.
Business Publishing
Accounting, 5/E
4-8

Account Title Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 42,200 42,200
2002 Prentice Hall, Inc. Business Publishing
Trial Balance Dr. Cr. 12,100 1,350 250 15,500 7,500 1,200 1,100 1,500 7,200 1,000 23,700 12,000
Adjustments Dr. Cr.
Adjusted Trial Balance Dr. Cr.
Accounting, 5/E
4-9

a The company has earned revenue of $1,700 which will be collected next month. b Inventory of supplies at month end totaled $150. c Depreciation for the period was calculated as $200.
Business Publishing
Accounting, 5/E
4 - 10

Trial Balance Adjustments Account Title Dr. Cr. Dr. Cr. Cash 12,100 Accounts receivable a) 1,700 1,350 Supplies b) 100 250 Equipment 15,500 Accum. depreciation 7,500 c) 200 Accounts payable 1,200 Salary payable 1,100 Unearned revenue 1,500 Capital 7,200 Withdrawals 1,000 Revenue 23,700 a) 1,700 Salary expense 12,000 Supplies expense b) 100 Depreciation expense c) 200 Totals 2,000 2,000 42,200 42,200
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E
Adjusted Trial Balance Dr. Cr. 12,100 3,050 150 15,500 7,700 1,200 1,100 1,500 7,200 1,000 25,400 12,000 100 200 44,100 44,100
4 - 11

Account Title Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals
Adjusted Trial Balance Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 25,400 1,000
Income Statement Dr. Cr.
Balance Sheet Dr. Cr. 12,10 0 3,050 150 15,50 7,700 0 1,200 1,100 1,500 7,200 1,000
12,00 0 44,100 100 200 Business44,10 Publishing Accounting, 5/E
18,700
31,80 0
4 - 12

Account Title Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals
25,400 12,000 100 200 12,300
12,00 0 44,100 25,400 18,700 100 200 31,80 Business44,10 Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 13 0

Account Title 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
25,400 12,000 100 200 12,300 13,100 25,400
12,00 0 44,100 25,400 18,700 100 13,100 200 25,400 31,80 31,800 Business44,10 Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 14 0
Objective 2
Use the work sheet to complete the accounting cycle.
Business Publishing
Accounting, 5/E
4 - 15
Recording the Adjusting Entries

The work sheet helps identify the accounts that need adjustments.
Actual adjustment of the accounts requires journalizing and posting the entries.
Business Publishing
Accounting, 5/E
4 - 16
Recording the Adjusting 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.
Business Publishing
Accounting, 5/E
4 - 17
Objective 3
Close the revenue, expense, and withdrawal accounts.
Business Publishing
Accounting, 5/E
4 - 18
Closing the Accounts
Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.
Business Publishing
Accounting, 5/E
4 - 19

Closing Entries
Revenues increase Owners Equity.
Expenses and Withdrawals decrease Owners Equity.

Accounting, 5/E Horngren/Harrison/Bamber 4 - 20
Business Publishing

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.
Business Publishing
Accounting, 5/E
4 - 21

Income Summary
A debit balance represents net loss. A credit balance represents net income.
Business Publishing
Accounting, 5/E
4 - 22

Revenue 28,500 12,000 7,500 9,000 Salary Exp 1,500 3,300 1,800 Rent Exp 800 800 Supplies Exp 350 350
(Close Revenue Account)
Income Summary (Close Expense 4,450 28,500 Accounts) 24,050 (Close Income Summary) Capital Account 24,050 2,500 (Close Withdrawals Withdrawals Account) 2,500 2,500
Accounting, 5/E Horngren/Harrison/Bamber 4 - 23
Business Publishing
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.
Business Publishing
Accounting, 5/E
4 - 24
Permanent Accounts
What accounts never close? Assets Liabilities Owners equity Balances of permanent accounts carry over to the next period.
Business Publishing
Accounting, 5/E
4 - 25
Objective 4
Classify assets and liabilities as current or long-term.
Business Publishing
Accounting, 5/E
4 - 26
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.
Business Publishing
Accounting, 5/E
4 - 27
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
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 28
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
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 29
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 entitys operating cycle.
Business Publishing
Accounting, 5/E
4 - 30
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
Business Publishing
Accounting, 5/E
4 - 31
The Classified Balance Sheet

XYZ Services January 31, 20XX
Assets Current assets: Cash 12,100 Accounts receivable 3,050 Supplies 150 Total current assets 15,300 Plant assets Equipment 15,500 Less Accum. deprec. 7,700 7,800 Total assets
Liabilities Current liabilities: Accounts payable Salary payable Unearned revenue Total liabilities Owners equity Capital Total liabilities and owners equity
1,200 1,100 1,500 3,800 19,300
23,100
Business Publishing
23,100
4 - 32
Accounting, 5/E
Different Formats of the Balance Sheet

Report Format Assets Liabilities Owners Equity Account Format Assets = Liabilities + Owners Equity
Business Publishing
Accounting, 5/E
4 - 33
Objective 5
Use the current and debt ratios to evaluate a business.
Business Publishing
Accounting, 5/E
4 - 34
Comparative Financial Statements

They enhance the users ability to analyze a companys past performance. What are two common ratios used to measure liquidity? 1 Current ratio 2 Debt ratio
Business Publishing
Accounting, 5/E
4 - 35
Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.
Current ratio = Current assets Current liabilities
Business Publishing
Accounting, 5/E
4 - 36
Debt Ratio
It indicates the proportion of a businesss assets that are financed with debt. It measures their ability to pay both current and long-term debt.
Total liabilities Total assets
Business Publishing
Accounting, 5/E
4 - 37
Trend Analysis
Decision makers compare various ratios over a period of time.
Business Publishing
Accounting, 5/E
4 - 38
End of Chapter 4
Business Publishing
Accounting, 5/E
4 - 39

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Completing the Accounting Cycle Chapter 4

2002 Prentice Hall, Inc.

Objective 1 Prepare an accounting work sheet.

2002 Prentice Hall, Inc.

The Accounting Cycle

2002 Prentice Hall, Inc.

The Accounting Cycle

2002 Prentice Hall, Inc.

The Accounting Cycle

Accounts Receivable 1,350 1,700

Accounts Receivable 1,350 1,700 3,050

The Accounting Cycle

Cash Accounts receivable

2002 Prentice Hall, Inc.

The Accounting Cycle

Postclosing Trial Balance

The Accounting Work Sheet

2002 Prentice Hall, Inc.

The Accounting Work Sheet

Adjustments Dr. Cr.

Adjusted Trial Balance Dr. Cr.

The Accounting Work Sheet

2002 Prentice Hall, Inc.

The Accounting Work Sheet

The Accounting Work Sheet

Income Statement Dr. Cr.

12,00 0 44,100 100 200 Business44,10 Publishing Accounting, 5/E

The Accounting Work Sheet

Income Statement Dr. Cr.

25,400 12,000 100 200 12,300

The Accounting Work Sheet

Income Statement Dr. Cr.

25,400 12,000 100 200 12,300 13,100 25,400

2002 Prentice Hall, Inc.

Recording the Adjusting Entries

2002 Prentice Hall, Inc.

Recording the Adjusting Entries

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

Closing the Accounts

2002 Prentice Hall, Inc.

Closing the Accounts

Revenues increase Owners Equity.

Expenses and Withdrawals decrease Owners Equity.

2002 Prentice Hall, Inc.

Closing the Accounts

2002 Prentice Hall, Inc.

Closing the Accounts

2002 Prentice Hall, Inc.

Closing the Accounts

(Close Revenue Account)

Postclosing Trial Balance

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

Classify assets and liabilities as current or long-term.

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 28

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 29

Long-term Assets and Liabilities

2002 Prentice Hall, Inc.

The Classified Balance Sheet

Listed in the order of decreasing liquidity