4 1 Example Exercise 4-1 Flow of Accounts into Financial Statements The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column.DividendsUtilities ExpenseAccumulated Depreciation—EquipmentUnearned RentFees EarnedAccounts PayableRent RevenueSupplies4-11
5 Prepare financial statements from adjusted account balances. 2Prepare financial statements from adjusted account balances.4-13
6 2Balance SheetA classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.
7 2Cash and other assets that are expected to be converted into cash, sold or used up usually within a year or less, through the normal operations of the business, are called current assets.CashAccounts ReceivableSupplies
8 2Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.
9 2Property, plant, and equipment (also called fixed assets) include assets that depreciate over a period of time. Land is an exception as it is not subject to depreciation.EquipmentMachineryBuildingsLand
10 2Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities.Accounts payableWages payableInterest payableUnearned fees
11 2Liabilities not due for a long time (usually more than one year) are long-term liabilities.Notes payableMortgage payableBond payable
12 2Stockholders’ equity is the stockholders’ right to the assets of the business. The stockholders’ equity consists of capital stock and retained earnings. The stockholders’ equity is added to the total liabilities, and the total must be equal to the total assets.
13 2 Example Exercise 4-4 Classified Balance Sheet The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability; (d) long-term liability; or (e) stockholders’ equity section of the December 31, 2009 balance sheet of Hindsight Consulting.Capital Stock 5. CashNotes Receivable (due 6. Unearned Rentin 6 months) 7. Accumulated Depr.—3. Notes Payable (due in Equipment2011) 8. Accounts Payable4. Land4-31
15 3Closing EntriesAccounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.
16 3Closing EntriesTo report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary.
17 3Closing EntriesThe balance of Income Summary is then transferred to Retained Earnings. The balance of the Dividends account is also transferred to Retained Earnings. The entries that transfer these balances are called closing entries.
19 3Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.Step 1:Fees EarnedBal. 16,840Income Summary16,840Step 116,960Rent Revenue120Bal
20 Miscellaneous Expense 3Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4Wages ExpenseBal. 4,525Bal ,600Bal. 50Bal. 985Bal. 2,0404552002,040985501,6004,525Income SummaryRent Expense9,85516,960Depreciation ExpenseUtilities ExpenseStep 2Supplies ExpenseDebit Income Summary for the total expenses and credit each expense account for its balance.Insurance ExpenseBalMiscellaneous ExpenseBal. 455
21 3Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4Income Summary9,85516,9607,105Debit Income Summary for the amount of its balance (in this case, the net income) and credit Retained Earnings.Step 3Retained EarningsBal. 0DividendsBal. 4,0007,105
22 3Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4Retained EarningsBal. 25,0007,105DividendsBal. 4,000Debit Retained Earnings for the balance of the dividends account, and credit the dividends account.Step 44,0004,000
23 3 Exhibit 4 Flowchart of Closing Entries for NetSolutions (summary) Stockholders’ Equity
25 3Closing EntriesAfter the closing entries are posted, all of the temporary accounts have zero balances.
26 3 Example Exercise 4-5 Closing Entries After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co.Retained Earnings $615,850Dividends 25,000Fees Earned 380,450Wages Expense 250,000Rent Expense 65,000Supplies Expense 18,250Miscellaneous Expense 6,200Journalize the four entries required to close the accounts.4-49
27 Post-Closing Trial Balance 3Post-Closing Trial BalanceA post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.
29 Describe the accounting cycle. 4Describe the accounting cycle.4-53
30 4The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle.
31 Transactions are analyzed and recorded in the journal. 4Accounting CycleTransactions are analyzed and recorded in the journal.Transactions are posted to the ledger.An unadjusted trial balance is prepared.Adjustment data are assembled and analyzed.An optional end-of-period spreadsheet (work sheet) is prepared.(continued)
32 Accounting Cycle (continued) 4Accounting Cycle (continued)Adjusting entries are journalized and posted to the ledger.An adjusted trial balance is prepared.Financial statements are prepared.Closing entries are journalized and posted to the ledger.A post-closing trial balance is prepared.
33 6Explain what is meant by the fiscal year and the natural business year.4-76
34 6Fiscal YearThe annual accounting period adopted by a business is known as its fiscal year. When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural year.