Completing the Accounting Cycle 4 Completing the Accounting Cycle

1 Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 4-4

1 Exhibit 1 End-of-Period Spreadsheet (Work Sheet)

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. Dividends Utilities Expense Accumulated Depreciation—Equipment Unearned Rent Fees Earned Accounts Payable Rent Revenue Supplies 4-11

Prepare financial statements from adjusted account balances. 2 Prepare financial statements from adjusted account balances. 4-13

2 Balance Sheet A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

2 Cash 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. Cash Accounts Receivable Supplies

2 Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

2 Property, 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. Equipment Machinery Buildings Land

2 Liabilities 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 payable Wages payable Interest payable Unearned fees

2 Liabilities not due for a long time (usually more than one year) are long-term liabilities. Notes payable Mortgage payable Bond payable

2 Stockholders’ 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.

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. Cash Notes Receivable (due 6. Unearned Rent in 6 months) 7. Accumulated Depr.— 3. Notes Payable (due in Equipment 2011) 8. Accounts Payable 4. Land 4-31

Prepare closing entries. 3 Prepare closing entries. 4-33 4-33

3 Closing Entries Accounts 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.

3 Closing Entries To 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.

3 Closing Entries The 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.

3 Exhibit 3 The Closing Process

3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue. Step 1: Fees Earned Bal. 16,840 Income Summary 16,840 Step 1 16,960 Rent Revenue 120 Bal. 120

Miscellaneous Expense 3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 Wages Expense Bal. 4,525 Bal. 1,600 Bal. 50 Bal. 985 Bal. 2,040 455 200 2,040 985 50 1,600 4,525 Income Summary Rent Expense 9,855 16,960 Depreciation Expense Utilities Expense Step 2 Supplies Expense Debit Income Summary for the total expenses and credit each expense account for its balance. Insurance Expense Bal. 200 Miscellaneous Expense Bal. 455

3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 Income Summary 9,855 16,960 7,105 Debit Income Summary for the amount of its balance (in this case, the net income) and credit Retained Earnings. Step 3 Retained Earnings Bal. 0 Dividends Bal. 4,000 7,105

3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 Retained Earnings Bal. 25,000 7,105 Dividends Bal. 4,000 Debit Retained Earnings for the balance of the dividends account, and credit the dividends account. Step 4 4,000 4,000

3 Exhibit 4 Flowchart of Closing Entries for NetSolutions (summary) Stockholders’ Equity

3 Exhibit 5 Closing Entries for NetSolutions Step 1 Step 2 Step 3

3 Closing Entries After the closing entries are posted, all of the temporary accounts have zero balances.

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 $615,850 Dividends 25,000 Fees Earned 380,450 Wages Expense 250,000 Rent Expense 65,000 Supplies Expense 18,250 Miscellaneous Expense 6,200 Journalize the four entries required to close the accounts. 4-49

Post-Closing Trial Balance 3 Post-Closing Trial Balance A 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.

3 Exhibit 7 Post-Closing Trial Balance

Describe the accounting cycle. 4 Describe the accounting cycle. 4-53

4 The 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.

Transactions are analyzed and recorded in the journal. 4 Accounting Cycle Transactions 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)

Accounting Cycle (continued) 4 Accounting 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.

6 Explain what is meant by the fiscal year and the natural business year. 4-76

6 Fiscal Year The 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.