Presentation on theme: "Accounting Principles, 6e Weygandt, Kieso, & Kimmel"— Presentation transcript:
1 Accounting Principles, 6e Weygandt, Kieso, & Kimmel Prepared byMarianne Bradford, Ph. D.Bryant CollegeJohn Wiley & Sons, Inc.
2 CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE After studying this chapter, you should be able to:1 Prepare a work sheet.2 Explain the process of closing the books.3 Describe the content and purpose of a post-closing trial balance.4 State the required steps in the accounting cycle.5 Explain the approaches to preparing correcting entries.6 Identify the sections of a classified balance sheet.
3 Completion of the Accounting Cycle PREVIEW OF CHAPTER 4Completion of the Accounting CycleUsing a Work SheetSteps in preparationPreparing financial statementsPreparing adjusting entriesClosing the BooksPreparing closing entriesPosting closing entriesPost-closing trial balance
4 PREVIEW OF CHAPTER 4 Completion of the Accounting Cycle Summary of Accounting CycleReversing entries –an optional stepCorrecting entries-an avoidable stepClassified Financial StatementsStandard classificationBalance sheet illustration
6 WORK SHEETA 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 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.
7 ILLUSTRATION 4-1 FORM AND PROCEDURE FOR A WORK SHEET
8 WORK SHEET The use of a work sheet is optional. When one is used, financial statements are prepared from the worksheet.Adjustments are journalized and posted from the work sheet after financial statements are prepared.
9 STEPS IN PREPARING A WORKSHEET 1 Prepare a trial balance on the worksheet2 Enter the adjustments in the adjustments columns3 Enter adjusted balances in the adjusted trial balance columns4 Extend adjusted trial balance amounts to appropriate financial statement columns5 Total the statement columns, compute net income (loss), and complete the worksheet
10 PREPARING A WORKSHEET 1 PREPARING A TRIAL BALANCE 15, , , , , , , , ,28, ,700
11 PREPARING A WORKSHEET 2 ENTER THE ADJUSTMENTS a 1, bdd eg 1,200a 1, b c c f e f g 1,200
12 PREPARING A WORKSHEET 3 ENTER ADJUSTED BALANCES 15, , , , , , , ,1, ,200
16 PREPARATION OF FINANCIAL STATEMENTS INCOME STATEMENT The income statement is prepared from the income statement columns of the work sheet.$10,600$5,2001,50090050407,740$ 2,860
17 PREPARATION OF FINANCIAL STATEMENTS OWNER’S EQUITY STATEMENT $$10,0002, ,86012,806500$12,360The owner’s equity statement is prepared from the balance sheet columns of the work sheet.
18 PREPARATION OF FINANCIAL STATEMENTS BALANCE SHEET $ 15,2002001,000550$5,000, $21,910$ 5,0002,500508001,2009,55012,360$21,910The balance sheet is prepared from the balance sheet columns of the work sheet.
19 STUDY OBJECTIVE 2Explain the process of closing the books.
20 ILLUSTRATION 4-5 TEMPORARY VERSUS PERMANENT ACCOUNTS TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closedAll revenue accounts All asset accountsAll expense accounts All liability accountsOwner’s drawing Owner’s capital account
21 CLOSING ENTRIESClosing entries formally recognize in the ledger the transfer of net income (loss) and owner’s drawings to owner’s capital.Journalizing and posting closing entries is a required step in the accounting cycle.A temporary account, Income Summary, is used in closing revenue and expense accounts to minimize the amount of detail in the permanent owner’s capital account.
22 ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS PROPRIETORSHIP 211 Debit each revenue account for its balance, and credit Income Summary for total revenues.2 Debit Income Summary for total expenses, and credit each expense account for its balance.
23 ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS 33 Debit (credit) Income Summary and credit (debit) owner’s capital for the amount of net income (loss).
24 ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS 4 Debit owner’s capital for the balance in the owner’s drawing account and credit owner’s drawing for the same amount.
29 CAUTIONS RELATING TO CLOSING ENTRIES A couple of cautions relating to closing entries:1 Avoid unintentionally doubling the revenue and expense balances rather than zeroing them.2 Do not close owner’s drawing through the Income Summary account. Owner’s drawing is not an expense, and it is not a factor in determining net income.
30 POSTING CLOSING ENTRIES All temporary accounts have zero balances after posting the closing entries.The balance in owner’s capital represents the total equity of the owner at the end of the accounting period.No entries are journalized and posted to owner’s capital during the year.As part of the closing process, the temporary accounts (revenues and expenses) are totaled, balanced, and double ruled.The permanent accounts (assets, liabilities, and owner’s capital) are not closed.
31 ILLUSTRATION 4-8 POSTING OF CLOSING ENTRIES 2134
32 STUDY OBJECTIVE 3Describe the content and purpose of a post-closing trial balance.
33 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 account balances that are carried forward into the next accounting period.
34 ILLUSTRATION 4-9 POST-CLOSING TRIAL BALANCE The post-closing trial balance is prepared from the permanent accounts in the ledger.$ 15,1,0005505,000$ 402,5008001,2005012,360The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.$ 21,950 $ 21,950
35 STUDY OBJECTIVE 4State the required steps in the accounting cycle.
36 STEPS IN THE ACCOUNTING CYCLE 1 Analyze business transactions2 Journalize the transactions3 Post to ledger accounts4 Prepare a trial balance5 Journalize and post adjusting entries
37 STEPS IN THE ACCOUNTING CYCLE 6 Prepare an adjusted trial balance7 Prepare financial statements: Income statement, Owner’s Equity Statement, Balance Sheet8 Journalize and post closing entries9 Prepare a post-closing trial balance
38 REVERSING ENTRIESA reversing entry is made at the beginning of the next accounting period.The purpose of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting entry.Reversing entries are most often used to reverse two types of adjusting entries: accrued revenues and accrued expenses.
40 STUDY OBJECTIVE 5Explain the approaches to preparing correcting entries.
41 CORRECTING ENTRIESErrors 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
42 ILLUSTRATIVE EXAMPLE OF CORRECTING ENTRY 1 CashService RevenueAccounts ReceivableService Revenue
43 ILLUSTRATIVE EXAMPLE OF CORRECTING ENTRY 2 Delivery Equipment 45Accounts Payable 45Office EquipmentAccounts PayableDelivery EquipmentAccounts Payable
44 STUDY OBJECTIVE 6Identify the sections of a classified balance sheet.
45 ILLUSTRATION 4-17 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:Current Assets Current LiabilitiesLong-Term Investments Long-Term LiabilitiesProperty, Plant and Owner’s (Stockholders’) Equity EquipmentIntangible AssetsAssets Liabilities and Owner’s Equity
46 CURRENT ASSETSCurrent 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.Current assets are listed in the order of their liquidity.The operating cycle of a company is the average time that is required to go from cash to cash in producing revenues.Examples of current assets are inventory, accounts receivable and cash.
47 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 bonds of another company or investment in land held for resale.10 sharesXYZ stock
48 PROPERTY, PLANT, AND EQUIPMENT Tangible resources of a relatively permanent nature that are used in the business and not intended for sale are classified as property, plant, and equipment.Examples include land, buildings and machinery.
49 INTANGIBLE ASSETSIntangible assets are noncurrent resources that do 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.
50 CURRENT LIABILITIESCurrent 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, wages payable, interest payable, and current maturities of long-term debt.
51 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.
52 OWNER’S EQUITYThe content of the owner’s 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 stockholders’ equity, and it consists of two accounts: Capital Stock and Retained Earnings.
53 ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN ACCOUNT FORM $ 15,2002001,00055016,950$5,000,960$21,910A classified balance sheet helps the financial statement user determine 1 the availability of assets to meet debts as they come due and 2 the claims of short- and long-term creditors on total assets.
54 ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN REPORT FORM $ 1,0002,500508001,2005,5504,0009,55012,360$21,910The balance sheet is most often presented in the report form, with the assets above liabilities and owner’s equity.