© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Completing the Accounting Cycle Chapter 4 4

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Benefits of a Work Sheet Aids the preparation of financial statements. Reduces possibility of errors. Assists in planning and organizing an audit. Helps in preparing interim financial statements. Shows the effects of proposed transactions. Not a required report. Links accounts and their adjustments.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward Work Sheet For Month Ended December 31, 2004 First, enter the unadjusted amounts to the worksheet.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Next, enter the adjustments. FastForward Work Sheet For Month Ended December 31, 2004

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Prepare adjusted trial balance. FastForward Work Sheet For Month Ended December 31, 2004

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward Work Sheet For Month Ended December 31, 2004 Sort adjusted trial balance amounts to financial statements.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin FastForward Work Sheet For Month Ended December 31, 2004 Total statement columns, compute income or loss, and balance columns.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Prepare the Income Statement. Prepare the Financial Statements A work sheet does not substitute for financial statements.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Prepare the Statement of Changes in Owner’s Equity.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Prepare the Balance Sheet.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Resets revenue, expense and withdrawal account balances to zero at the end of the period.  Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. Closing Process

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital The closing process applies only to temporary accounts. Temporary and Permanent Accounts

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Let’s see how the closing process works! Recording Closing Entries  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital.  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Balances before closing. Closing Process

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Revenue accounts to Income Summary. Closing Process

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Expense accounts to Income Summary. Closing Process The balance in Income Summary equals net income.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Income Summary to Owner’s Capital. Closing Process

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Closing Process  Close Withdrawals account to Owner’s Capital.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Using the adjusted trial balance, let’s prepare the closing entries for FastForward.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Revenue accounts to Income Summary.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Revenue Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Revenue Accounts to Income Summary

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Expense accounts to Income Summary.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now, let’s look at the ledger accounts after posting this closing entry.  Close Expense Accounts to Income Summary

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Net Income  Close Expense Accounts to Income Summary

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Income Summary to Owner’s Capital.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now, let’s look at the ledger accounts after posting this closing entry.  Close Income Summary to Owner’s Capital

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Income Summary to Owner’s Capital

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Withdrawals to Owner’s Capital.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Now, let’s look at the ledger accounts after posting this closing entry.  Close Withdrawals to Owner’s Capital

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Close Withdrawals to Owner’s Capital

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Let’s look at FastForward’s post-closing trial balance. Post-Closing Trial Balance  List of permanent accounts and their balances after posting closing entries.  Total debits and credits must be equal.  List of permanent accounts and their balances after posting closing entries.  Total debits and credits must be equal.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Post-Closing Trial Balance

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Let’s discuss the components of a classified balance sheet.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle. Classified Balance Sheet

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Long-term investments are expected to be held for the longer of one year or the operating cycle.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Plant assets are tangible long-lived assets used to produce or sell products and services.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Equity is the owner’s claim on the assets.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Current Ratio Helps assess the company’s ability to pay its debts in the near future

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin End of Chapter 4