Accounting Principles Second Canadian Edition Weygandt · Kieso · Kimmel · Trenholm Prepared by: Carole Bowman, Sheridan College CHAPTER COMPLETION OF THE ACCOUNTING CYCLE WORK SHEET A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements It is a working tool or a supplementary device for the accountant and not a permanent accounting record Use of a work sheet should make the preparation of adjusting entries and financial statements easier ILLUSTRATION 4-1 WORK SHEET Account Titles Trial Balance Debit Credit Prepare trial balance on the worksheet Adjustments Debit Credit Enter adjustment data Adjusted Trial Balance Debit Credit Enter adjusted balances Income Statement Debit Credit Balance Sheet Debit Credit Extend adjusted balance to appropriate columns Calculate income/loss and complete the worksheet PURPOSE OF CLOSING ENTRIES Updates the owner’s capital account in the ledger by transferring net income (loss) and owner’s drawings to owner’s capital Prepares the temporary accounts (revenue, expense, drawings) for the next period’s postings by reducing their balances to zero ILLUSTRATION 4-2 TEMPORARY VERSUS PERMANENT ACCOUNTS TEMPORARY (NOMINAL) closed PERMANENT (REAL) These accounts are not closed All revenue accounts All asset accounts All expense accounts All liability accounts Owner’s drawings Owner’s capital account (Income Statement / Drawings Accounts) These accounts are (Balance Sheet Accounts) ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS (INDIVIDUAL) REVENUES (INDIVIDUAL) EXPENSES Normal Dr Balance -0- Cr to close Dr to close Normal Cr Balance -0- OWNER’S CAPITAL Expenses Opening Balance Revenues 11 Debit Debit each each revenue revenue account account for for its its balance, balance, and and credit credit the the owner’s owner’s capital capital account account for for total total revenues revenues 22 Debit Debit the the owner’s owner’s capital capital account account for for total total expenses, expenses, and and credit credit each each expense expense account account for for its its balance balance ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS OWNER’S CAPITAL Expenses Drawings Opening Balance Revenues Ending Balance OWNER’S DRAWINGS Normal Dr Balance Cr to close -0- Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s drawings for the same amount CLOSING ENTRIES STOP AND CHECK Does the balance in your Owner’s Capital account equal the ending capital balance reported in the Balance Sheet and Statement of Owner’s Equity? Are all of your temporary account balances zero? POST-CLOSING TRIAL BALANCE After all closing entries have been journalized and posted, a post-closing trial balance is prepared The purpose of this trial balance is to prove the equality of the permanent (balance sheet) account balances that are carried forward into the next accounting period STEPS IN THE ACCOUNTING CYCLE Prepare post-closing trial balance Analyse transactions Post to ledger accounts Journalize and post closing entries Prepare financial statements Journalize the transactions Prepare a trial balance Prepare adjusted trial balance Journalize and post adjusting entries REVERSING ENTRIES (OPTIONAL STEP) A reversing entry is made at the beginning of the next accounting period A reversing entry reverses certain adjusting entries made in the previous period Opening balances can then be ignored when preparing year-end adjusting entries This topic is illustrated in Appendix 4A CORRECTING ENTRIES Errors that occur in recording transactions should be corrected as soon as they are discovered by preparing correcting entries Correcting entries are unnecessary if the records are free of errors; they can be journalized and posted whenever an error is discovered They involve any combination of balance sheet and income statement accounts ILLUSTRATION 4-10 STANDARD BALANCE SHEET CLASSIFICATIONS Financial statements become more useful when the elements are classified into significant subgroups A classified balance sheet generally has the following standard classifications: Assets Liabilities and Equity Current Assets Current Liabilities Long-Term Investments Long-Term Liabilities Capital Assets Owner’s/ Partners’/ Shareholders’ Equity CURRENT ASSETS Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company’s operating cycle, whichever is longer Listed in the order of liquidity Examples of current assets are cash, temporary investments, accounts receivable, inventory, and prepaids LONG-TERM INVESTMENTS Long-term investments are resources that can be realized in cash, but the conversion into cash is not expected within one year or the operating cycle, whichever is longer Examples include investments in shares or bonds of another company or investment in land held for resale 100 XYZ shares CAPITAL ASSETS Tangible resources of a relatively permanent nature that are used in the business and not intended for sale are classified as (1) property, plant, and equipment and (2) natural resources (1) Examples of property, plant, and equipment include land, buildings, and machinery (2) Examples of natural resources include tracts of timber, oil and gas reserves, and mineral deposits CAPITAL ASSETS Intangible assets are noncurrent resources that not have physical substance Examples include patents, copyrights, trademarks, or trade names that give the holder exclusive right of use for a specified period of time CURRENT LIABILITIES Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer Examples include accounts payable, unearned revenue, interest payable, and current maturities of long-term debt LONG-TERM LIABILITIES Obligations expected to be paid after one year are classified as long-term liabilities Examples include long-term notes payable, bonds payable, mortgages payable, and lease liabilities EQUITY The content of the equity section varies with the form of business organization In a proprietorship, there is a single owner’s equity account called (Owner’s Name), Capital In a partnership, there are separate capital accounts for each partner For a corporation, owners’ equity is called shareholders’ equity, and it consists of two accounts: Share Capital and Retained Earnings ILLUSTRATION 4-17 CLASSIFIED BALANCE SHEET IN REPORT FORM Pioneer Advertising Agency Balance Sheet October 31, 2002 Assets Current Assets Cash Accounts Receivable Advertising Supplies Prepaid Insurance Total Current Assets Capital Assets Office Equipment Less: Accumulated Amortization Total Assets $ $ 5,000 83 $ 15,200 200 1,000 550 16,950 4,917 21,867 Liabilities and Owner's Equity Current Liabilities Notes Payable Accounts Payable Unearned Revenue Salaries Payable Interest Payable Total Current Liabilities Long-term Liabilties Notes Payable Total Liabilities Owner's Equity C.R Byrd, Capital Total Liabilities and Owner's Equity $ 1,000 2,500 800 1,200 25 5,525 4,000 9,525 $ 12,342 21,867 A classified balance sheet helps the financial statement user determine: • The availability of assets to meet debts as they come due, and •The claims of shortand long-term creditors on total assets The balance sheet is most often presented in the report form, with the assets shown above the liabilities and owner’s equity LIQUIDITY Liquidity measures ability to pay shortterm obligations when they come due Working capital is one important measure of liquidity WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES CURRENT RATIO The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability It is calculated by dividing current assets by current liabilities and is a more dependable indicator of liquidity than working capital CURRENT ASSETS CURRENT RATIO = ——————————— COPYRIGHT Copyright © 2002 John Wiley & Sons Canada, Ltd All rights reserved Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd The purchaser may make back-up copies for his / her own use only and not for distribution or resale The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information .. .CHAPTER COMPLETION OF THE ACCOUNTING CYCLE WORK SHEET A work sheet is a multiple-column form that may be... statements It is a working tool or a supplementary device for the accountant and not a permanent accounting record Use of a work sheet should make the preparation of adjusting entries and financial... equality of the permanent (balance sheet) account balances that are carried forward into the next accounting period ILLUSTRATION 4-8 POST-CLOSING TRIAL BALANCE Pioneer Advertising Agency Post-Closing