PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 04 C OMPLETING THE A CCOUNTING C YCLE

4 - 2 B ENEFITS OF A W ORK S HEET Aids the preparation of financial statements. Reduces possibility of errors. Links accounts and their adjustments. Assists in planning and organizing an audit. Helps in preparing interim financial statements. Shows the effects of proposed transactions. Not a required report. P 1

4 - 3 FastForward Worksheet For the Month Ended December 31, 2011 P 1

4 - 4 FastForward Worksheet For the Month Ended December 31, 2011 P 1

4 - 5 FastForward Worksheet For the Month Ended December 31, 2011 P 1

4 - 6 FastForward Worksheet For the Month Ended December 31, 2011 P 1

4 - 7 FastForward Worksheet For the Month Ended December 31, 2011 P 1

4 - 8 P REPARING THE F INANCIAL S TATEMENTS P 1

4 - 9 P REPARING THE F INANCIAL S TATEMENTS P 1

R ECORDING C LOSING E NTRIES 1.Resets revenue, expense and withdrawal account balances to zero at the end of the period. 2.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. C 1

Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital T EMPORARY AND P ERMANENT A CCOUNTS The closing process applies only to temporary accounts. C 1

Let’s see how the closing process works! R ECORDING C LOSING E NTRIES  Close Credit Balances in Revenue Accounts to Income Summary.  Close Debit Balances in Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital. P 2

Using the adjusted trial balance, let’s prepare the closing entries for FastForward. P 2

 Close Credit Balances in Revenue Accounts to Income Summary. P 2

 C LOSE C REDIT B ALANCES IN R EVENUE A CCOUNTS TO I NCOME S UMMARY Now, let’s look at the ledger accounts after posting this closing entry. Dr. Cr. Dec. 31 Consulting revenue 7,850 Rental revenue 300 Income summary 8,150 P 2

P 2  C LOSE C REDIT B ALANCES IN R EVENUE A CCOUNTS TO I NCOME S UMMARY

 Close Debit Balances in Expense Accounts to Income Summary. P 2

Now, let’s look at the ledger accounts after posting this closing entry.  C LOSE D EBIT B ALANCES IN E XPENSE A CCOUNTS TO I NCOME S UMMARY P 2

Net Income  C LOSE D EBIT B ALANCES IN E XPENSE A CCOUNTS TO I NCOME S UMMARY P 2

 Close Income Summary to Owner’s Capital. P 2

Now, let’s look at the ledger accounts after posting this closing entry.  C LOSE I NCOME S UMMARY TO O WNER ’ S C APITAL P 2

P 2  C LOSE I NCOME S UMMARY TO O WNER ’ S C APITAL

 Close Withdrawals Account to Owner’s Capital. P 2

Now, let’s look at the ledger accounts after posting this closing entry.  C LOSE W ITHDRAWALS A CCOUNT TO O WNER ’ S C APITAL P 2

P 2  C LOSE W ITHDRAWALS A CCOUNT TO O WNER ’ S C APITAL

S UMMARY OF THE C LOSING P ROCESS 1.Close Credit Balances in Revenue Accounts to Income Summary. 2.Close Debit Balances in Expense Accounts to Income Summary. 3.Close Income Summary to Owner’s Capital. 4.Close Withdrawals Account to Owner’s Capital.

Let’s look at FastForward’s post-closing trial balance. P OST -C LOSING T RIAL B ALANCE List of permanent accounts and their balances after posting closing entries. Total debits and credits must be equal. P 3

P OST -C LOSING T RIAL B ALANCE P 3

A CCOUNTING C YCLE C 2

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. C LASSIFIED B ALANCE S HEET C 3

Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle. C 3

Long-term investments are expected to be held for more than one year or the operating cycle. C 3

Plant assets are tangible long-lived assets used to produce or sell products and services. C 3

Intangible assets are long-term resources used to produce or sell products and services and that lack physical form. C 3

Current liabilities are obligations due within the longer of one year or the company’s operating cycle. C 3

Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle. C 3

Equity is the owner’s claim on the assets. C 3

G LOBAL V IEW The definition of an asset is similar under U.S. GAAP and IFRS and involves three basic criteria: (1)the company owns or controls the right to use the item, (2)the right arises from a past transaction or event, and (3)the item can be reliably measured. Both systems define the initial asset value as historical cost for nearly all assets. The definition of an asset is similar under U.S. GAAP and IFRS and involves three basic criteria: (1)the company owns or controls the right to use the item, (2)the right arises from a past transaction or event, and (3)the item can be reliably measured. Both systems define the initial asset value as historical cost for nearly all assets. The definition of a liability is similar under U.S. GAAP and IFRS and involves three basic criteria: (1) the item is a present obligation requiring a probable future resource outlay, (2) the obligation arises from a past transaction or event, and (3) the obligation can be reliably measured. The definition of a liability is similar under U.S. GAAP and IFRS and involves three basic criteria: (1) the item is a present obligation requiring a probable future resource outlay, (2) the obligation arises from a past transaction or event, and (3) the obligation can be reliably measured.

C URRENT R ATIO Helps assess the company’s ability to pay its debts in the near future Current Ratio = Current Assets Current Liabilities $ in millions Current assets $ 2,867 $ 2,919 $ 2,771 $ 2,784 Current liabilities 1,225 1,374 1,709 1,575 Current ratio Industry current ratlo Limited Brands, Inc. A 1

P 4 4A – R EVERSING E NTRIES Reversing entries are optional. They are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period. The purpose of reversing entries is to simplify a company’s recordkeeping. Let’s see how the accounting for our payroll accrual will be handled with and without reversing entries.

P 4

P 4 Without Reversing EntriesWith Reversing Entries

END OF CHAPTER 04