Completing the Accounting Cycle Chapter 4 4-1Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives 1.Prepare the financial statements including the classified balance sheet 2.Use the worksheet to prepare financial statements 3.Explain the purpose of, journalize, and post-closing entries 4.Prepare the post-closing trial balance 4-2Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives 5.Describe the accounting cycle 6.Use the current ratio to evaluate business performance 7.Explain the purpose of and journalize reversing entries (Appendix 4A) 4-3Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 1 Prepare the financial statements including the classified balance sheet 4-4Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

The financial statements come from the Adjusted Trial Balance. ONEONE Each account on the Adjusted T/B has ONE and only ONE home on one of the financial statements. EVER No account is EVER used twice. 4-5Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

4-6 Income Statement Amounts Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

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4-11 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

The Classified Balance Sheet Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-12

4-13 The Asset section is sub- divided into current and long-term groups. Sometimes, there is also a sub-grouping for long- term investments. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

4-14 Liabilities are also sub- divided into current and long-term groups. Equity is usually not sub- divided. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 2 Use the worksheet to prepare financial statements 4-15Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

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Learning Objective 3 Explain the purpose of, journalize, and post- closing entries 4-19Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Close these Revenue accounts Expense accounts Dividends account Do not close these Asset accounts Liability accounts Common Stock and Retained Earnings accounts At the end of each period must transfer the temporary account balances to the permanent Retained Earnings account. Closing Entries 4-20Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

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Closing Revenues Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-22

Closing Expenses Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-23

Closing Income Summary Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-24

Closing Withdrawals Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-25

Learning Objective 4 Prepare the post- closing trial balance 4-26Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Only balance sheet accounts are left after the closing entries are posted. The revenue and expense accounts now have a $0 balance. The books are ready for the start of the next fiscal period. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-27

Learning Objective 5 Describe the accounting cycle 4-28Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-29  Start with beginning account balances

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-30  Analyze & journalize transactions  Start with beginning account balances

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-31  Analyze & journalize transactions  Post journal entries to ledger accounts  Start with beginning account balances

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-32  Analyze & journalize transactions  Post journal entries to ledger accounts  Prepare unadjusted trial balance  Start with beginning account balances

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-33  Analyze & journalize transactions  Post journal entries to ledger accounts  Prepare unadjusted trial balance  Start with beginning account balances  Prepare the worksheet (optional)

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-34  Analyze & journalize transactions  Post journal entries to ledger accounts  Prepare unadjusted trial balance  Journalize and post adjusting entries  Start with beginning account balances  Prepare the worksheet (optional)

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-35  Analyze & journalize transactions  Post journal entries to ledger accounts  Prepare unadjusted trial balance  Journalize and post adjusting entries  Prepare adjusted trial balance  Start with beginning account balances  Prepare the worksheet (optional)

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-36  Analyze & journalize transactions  Post journal entries to ledger accounts  Prepare unadjusted trial balance  Journalize and post adjusting entries  Prepare adjusted trial balance  Prepare financial statements  Start with beginning account balances  Prepare the worksheet (optional)

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-37  Analyze & journalize transactions.  Post journal entries to ledger accounts  Prepare unadjusted trial balance  Journalize and post adjusting entries  Prepare adjusted trial balance  Prepare financial statements  Journalize and post closing entries  Start with beginning account balances  Prepare the worksheet (optional)

Summary of the Accounting Cycle Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 4-38  Analyze & journalize transactions  Post journal entries to ledger accounts  Prepare unadjusted trial balance  Journalize and post adjusting entries  Prepare adjusted trial balance  Prepare financial statements  Prepare post-closing trial balance  Journalize and post closing entries  Start with beginning account balances  Prepare the worksheet (optional)

Learning Objective 6 Use the current ratio to evaluate business performance 4-39 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Current Ratio Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-40

Learning Objective 7 Explain the purpose of and journalize reversing entries (Appendix 4A) 4-41Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Reversing Entries The opposite of accrual entries Not required by GAAP Used for convenience and to save time Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Record the accrual at the end of the period 2.Reverse the accrual at the beginning of the next period 3.Record the cash flow without referring to the earlier accrual

Accrued Expenses On December 31, record Smart Touch Learning’s $1,200 salary accrual. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-43

Accrued Expenses On January 1, after closing the previous period’s accounts, reverse the previous accrual. The payable is eliminated, and the expense will now have a credit balance. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-44

Accrued Expenses When the salaries are paid, simply debit Salaries Expense and credit Cash. Salaries Expense will carry the proper $1,200 balance after posting. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall4-45

End of Chapter Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall