Chapter Completing the Accounting Cycle Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Review the seven basic steps of the accounting cycle Prepare a work After sheet studying this After studying this Prepare financial statements from a work sheet chapter, you should chapter, you should Prepare adjusting and closing entries from a work sheet to: be able to: year and the natural Explain what is meantbe byable the fiscal business year Analyze and interpret the financial solvency of a business by computing working capital and the current ratio Seven Seven Basic Basic Steps Steps of of the the Accounting Accounting Cycle Cycle Transactions are analyzed and recorded in the journal Transactions are posted to the ledger A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed Financial statements are prepared Adjusting entries are journalized and posted Closing entries are journalized and posted A post-closing trial balance is prepared Assets Assets are are commonly commonly divided divided into into classes classes and and that that two two of of these these classes classes are are current current assets assets and and property, property, plant, plant, and and equipment equipment That’s That’s correct correct Cash Cash and and other other assets assets that that are are expected expected to to be be converted converted into into cash, cash, sold, sold, or or used used up up usually usually in in less less than than aa year year are are current current assets assets For For example? example? Well… Well… besides besidescash, cash, there’s there’s notes notes receivable, receivable, accounts accounts receivable, receivable, supplies, supplies, and and other other prepaid prepaid items items There There are are some some exceptions, exceptions, but but that’s that’s basically basically correct correct Assets Assets So, assets that have a life So, assets that have a life such as office equipment, such as office equipment, over a year are listed under over a year are listed under machinery, buildings, and land machinery, buildings, and land property, plant, and property, plant, and would appear under that heading would appear under that heading equipment equipment Liabilities Liabilities due due usually usually within within one one year year or or less less and and that that are are to to be be paid paid out out of of current current assets assets are are called called current current liabilities liabilities √ Accounts payable √ Wages payable √ Interest payable √ Unearned fees Liabilities Liabilities not not due due for for more more than than aa year year usually usually are are long-term long-term liabilities liabilities Mortgage note payable Mortgage payable Bond payable Adjusting Adjusting and and Closing Closing Entries Entries Income Summary Expenses are transferred to Income Summary Revenues are transferred to Income Summary The Summary NetIncome Income Net Loss is The Incomeor Summary transferred to Owner’s account does appear on account doesnot not appearCapital on the the financial financial statements statements OWNER’S CAPITAL Drawings are transferred to Owner’s Capital The The Closing Closing Process Process Fees Earned Wages Expense Bal 4,525 Income Summary Rent Expense Bal 1,600 Depreciation Expense Bal 120 Bal 50 Utilities Expense Bal 985 Chris Clark, Capital Bal 25,000 Supplies Expense Bal 2,040 Insurance Expense Bal 100 Miscellaneous Expense Bal 455 Bal 16,840 Rent Revenue Chris Clark, Drawing Bal 4,000 Note: The balances shown are adjusted balances before closing The following sequence demonstrates the closing process The The Closing Closing Process Process Fees Earned Wages Expense Bal 4,525 Income Summary 16,960 Rent Expense Bal 1,600 Depreciation Expense 120 Bal 120 Bal 50 Utilities Expense Bal 985 Chris Clark, Capital Bal 25,000 Supplies Expense Bal 2,040 Insurance Expense Bal 100 Miscellaneous Expense Bal 455 16,840 Bal 16,840 Rent Revenue Chris Clark, Drawing Bal 4,000 Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue The The Closing Closing Process Process Fees Earned Wages Expense Bal 4,525 4,525 Income Summary 9,775 Rent Expense 16,960 1,600 Bal 1,600 Depreciation Expense 120 Bal 120 Bal 50 50 Utilities Expense Bal 985 985 Chris Clark, Capital Bal 25,000 Supplies Expense 2,040 Bal 2,040 Insurance Expense Bal 100 100 Miscellaneous Expense Bal 455 455 16,840 Bal 16,840 Rent Revenue Chris Clark, Drawing Bal 4,000 Debit Income Summary for the total expenses and credit each expense account for its balance The The Closing Closing Process Process Fees Earned Wages Expense Bal 4,525 4,525 Income Summary 9,775 7,205 Rent Expense 1,600 Bal 1,600 Depreciation Expense 16,960 120 Bal 120 Bal 50 50 Utilities Expense Bal 985 985 Chris Clark, Capital Bal 25,000 7,205 Supplies Expense 2,040 Bal 2,040 Insurance Expense Bal 100 100 Miscellaneous Expense Bal 455 455 Chris Clark, Drawing Bal 4,000 16,840 Bal 16,840 Rent Revenue Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account The The Closing Closing Process Process Fees Earned Wages Expense Bal 4,525 4,525 Income Summary 9,775 7,205 Rent Expense 1,600 Bal 1,600 Depreciation Expense 16,960 120 Bal 120 Bal 50 50 Utilities Expense Bal 985 985 Chris Clark, Capital 4,000 Bal 25,000 7,205 Supplies Expense 2,040 Bal 2,040 Insurance Expense Bal 100 100 Miscellaneous Expense Bal 455 455 Chris Clark, Drawing Bal 4,000 16,840 Bal 16,840 Rent Revenue 4,000 Debit the capital account for the balance of the drawing account, and credit drawing for the same amount Review Review of of the the Closing Closing Process Process Fees Earned Wages Expense Bal 4,525 4,525 4,525 Income Summary 9,775 7,205 Rent Expense 1,600 Bal 1,600 1,600 Depreciation Expense 16,960 16,960 120 Bal 120 120 Bal 50 50 50 Utilities Expense Bal 985 985 985 Chris Clark, Capital 4,000 Bal 4,000 25,000 7,205 7,205 Supplies Expense 2,040 Bal 2,040 2,040 Insurance Expense Bal 100 100 100 Miscellaneous Expense Bal 455 455 445 16,480 Bal 16,840 16,840 Rent Revenue Close Revenues Close Expenses Close Income Summary Close Drawing Chris Clark, Drawing Bal 4,000 4,000 After After the the closing closing entries entries are are posted, posted, all all of of the the temporary temporary accounts accounts have have zero zero balances balances Post-closing Trial Trial Balance Balance Post-closing NetSolutions Post-Closing Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depreciation 50 00 Accounts Payable 900 00 Wages Payable 250 00 Unearned Rent 240 00 065 00 720 00 760 00 300 00 20 000 00 800 00 Financial Financial Analysis Analysis for for NetSolutions NetSolutions Working Capital Working Capital Working Capital Current Current = Assets – Liabilities = $7,845 – $1,390 = $6,455 Financial Financial Analysis Analysis for for NetSolutions NetSolutions Current Ratio Current Ratio Current Ratio Current Current = Assets ÷ Liabilities = $7,845 ÷ = 5.6 $1,390 Financial Financial Analysis Analysis for for NetSolutions NetSolutions This This ratio ratio implies implies that that NetSolutions NetSolutions isis able able to to pay pay its its current current liabilities liabilities Financial Financial Analysis Analysis for for NetSolutions NetSolutions Current ratio Current ratio Current ratio Current Current = Assets ÷ Liabilities = $7,845 ÷ $1,390 = 5.6 Financial Financial Analysis Analysis for for NetSolutions NetSolutions NetSolutions NetSolutions can can use use the the current current ratio ratio to to make make comparisons comparisons across across companies companies and and with with industry industry averages averages Chapter The The End End ... seven basic steps of the accounting cycle Prepare a work After sheet studying this After studying this Prepare financial statements from a work sheet chapter, you should chapter, you should Prepare... computing working capital and the current ratio Seven Seven Basic Basic Steps Steps of of the the Accounting Accounting Cycle Cycle Transactions are analyzed and recorded in the journal Transactions... aa useful useful device device for for understanding understanding the the flow flow of of accounting accounting data data from from the the unadjusted unadjusted trial trial balance balance to