# Chapter 4.

## Presentation on theme: "Chapter 4."— Presentation transcript:

Chapter 4

The Accounting Cycle List in correct order:
(A) Financial statements prepared (B) Transactions posted to ledger (C) Closing entries journalized and posted to ledger (D) Transactions analyzed and recorded in journal (E) Trial balance prepared (unnecessary if worksheet completed); adjustment data assembled; worksheet completed (F) Post-closing trial balance prepared (G) Adjusting entries journalized and posted to ledger

Answer D; B; E; A; G; C; F Exhibit 1, p.141

Purpose of Worksheet Facilitates End-of-the-Accounting-Period
Easy-to-use/All-in-one-sheet containing data needed for adjusting entries as well as financial statements Excel adaptation

The Worksheet Exhibit 2; p. 144B; 5 columns
“Trial Balance” Transferred from Ledger; debits = credits “Adjustments” Record adjusting entries (p. 142: a-f); debits = credits “Adjusted Trial Balance” Compute the new balance after considering adjusting entries; check for accuracy as debits = credits “Income Statement” Enter the balance in the revenue and expense accounts; total debits and credits; difference between debits and credits is Net Income (Net Loss) “Balance Sheet” Enter the balance of assets, liabilities, capital, and drawings; total debit and credits; difference is Net Income (Net Loss)

Class Exercise: Dixie Machinery
Adjusting entries: Record the following and prepare an Adjusted Trial Balance \$375 of prepaid insurance has expired \$400 of Office Equipment Depreciation \$350 in salaries are owed to employees Note: While you must journalize and post adjusting entries on the books, we will ignore for now.

Now prepare Income Statement What was the Net Income (Loss)? Balance Sheet

Answer: Net Income Income Statement Balance Sheet:
Total credits (revenues): 15140 Total debits (expenses): 11290 Difference = Net income: \$3850 Balance Sheet: Total debits (assets): \$7400 Total credits (liabilities & Owners’ Equity): \$3550 Difference = Net Income: \$3850

Balance Sheet Prepare a formal (classified) balance sheet (bottom p. 144; 144C).

Closing Entries Why? (1) Revenues and Expenses are recorded for the year to determine net for each year. But to record each year, at EOY the balance must be reset to zero in each revenue, expenses, and drawing accounts. Since each year they start at zero balance they are known as temporary accounts. All other accounts are known as real accounts. (2) Need to move the balance of the 3 accounts to the owner’s capital account. To show effect on Owner’s Equity.

Income Summary Why? To move the balances from the temporary accounts. The difference between revenues and expenses = Net Income (Loss) How? Close Revenues to Income Summary Close Expenses to Income Summary Confirm that balance in Income Summary = Net Income (Loss) Close balance in Income Summary to Capital Close drawing account to Capital (NOT IN INCOME SUMMARY) Balance in Income Summary is closed to the owner’s capital account

Class Exercise: Closing Entries

Post-Closing Trial Balance
Why? To make sure the Ledger accounts are at zero balance for next period. Example: Exhibit 12

Questions: (1) Which type of accounts do not appear in the post-closing trial balance? (2) Which accounts appear in the post-closing trial balance? (3) If an account was overlooked in the closing process, would the post-closing trial balance still balance?

Answers: (1) Temporary accounts: Revenues, Expenses, Drawings
(2) Real accounts: Assets, Liabilities, and Capital (3) Yes. However, the Owner’s Capital Account will not be the same as the one in the Balance Sheet

Fiscal v. Calendar Year

Financial Analysis Working Capital Current Ratio