2. 4-1 C OMPLETING T HE A CCOUNTING C YCLE CHAPTER 4

3. 4-2 Steps in Accounting Cycle Analyze source documents. Journalize transactions in the journal. Post entries to the accounts in the ledger. Prepare a trial balance. Prepare financial statements. Do post-closing trial balance Journalize and post closing entries Journalize and post adjusting entries 134

4. 4-3 Expanded Accounting Equation ASSETS + EXP. = LIAB. + S/H EQUITY + REV. A + E = L + S/E + R Dr. Cr. + - Bal. Dr. Cr. + - Bal. Permanent Temporary Permanent Permanent Temporary

5. 4-4 must Each revenue and expense must have a $0 balance at the beginning of the next year. Each revenue and expense account normally has a balance at year-end. How do we get the revenues and expenses to $0 balances for the beginning of the next year? A Norm, a Rule and a Question

6. 4-5 l Transferring (“pouring”) the balances in revenue and expense accounts into the Income Summary account. l Transferring the balance in Income Summary to Retained Earnings. l Transferring the balance in the Dividends account to Retained Earnings. The Closing Process.

7. 4-6 The Closing Process Close Revenues Close Expenses

8. 4-7 The Closing Process

9. 4-8 Income Summary u Temporary account u Exists only during the closing process u Does not appear on any financial statement Income Summary u Temporary account u Exists only during the closing process u Does not appear on any financial statement The Closing Process Close Income Summary

10. 4-9 The Closing Process

11. 4-10 The Closing Process Close Dividends Summary of Steps  Close Revenues to Income Summary  Close Expenses to Income Summary  Close Income Summary to Retained Earnings  Close Dividends to Retained Earnings Summary of Steps  Close Revenues to Income Summary  Close Expenses to Income Summary  Close Income Summary to Retained Earnings  Close Dividends to Retained Earnings

12. 4-11 Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year Revenues have a normal balance on the credit side. Revenues 25,000 Closing Journal Entries T- Account Example

13. 4-12 Revenues 25,000 How do we bring Revenues to a $0 balance? Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

14. 4-13 Remember: To reduce a credit balance account, debit the account. Revenues 25,000 How do we bring Revenues to a $0 balance? Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

15. 4-14 Revenues 25,000 We need to debit the account for $25,000 to reduce the account to $0. How do we bring Revenues to a $0 balance? Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

16. 4-15 Revenues 25,000 We need to debit the account for $25,000 to reduce the account to $0. 0 How do we bring Revenues to a $0 balance? 25,000 Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

17. 4-16 l In the previous example, a $25,000 debit was made to close out Revenues. Income Summary l A corresponding $25,000 credit must be made to Income Summary. Income SummaryRevenues 25,000 0 Closing Journal Entries T- Account Example

18. 4-17 l In the previous example, a $25,000 debit was made to close out Revenues. Income Summary l A corresponding $25,000 credit must be made to Income Summary. Revenues 25,000 0 Income Summary 25,000 Closing Journal Entries T- Account Example

19. 4-18 Closing Journal Entries use the same format as other journal entries: GENERAL JOURNAL Page: 1 DateDescriptionPRDebitCredit MM/DD Account Name###$$$ Account Name###$$$ To record closing entry Closing Journal Entries General Journal Example

20. 4-19 Closing Journal Entries General Journal Example GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit On 12/31/99, Revenues has a $25,000 balance at year-end. Prepare the journal entry to close the account.

21. 4-20 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRevenues25,000 Income Summary25,000 to close Revenues Closing Journal Entries General Journal Example On 12/31/99, Revenues has a $25,000 balance at year-end. Prepare the journal entry to close the account.

22. 4-21 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRevenues25,000 Income Summary25,000 to close Revenues Post the entry to the Revenue account. ACCOUNT NAME: REVENUESACCOUNT No.400 DateDescriptionPRDebitCreditBalance End of Year Balance25,000 Closing Journal Entries General Journal Example

23. 4-22 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRevenues40025,000 Income Summary25,000 to close Revenues Post the entry to the Revenue account. ACCOUNT NAME: REVENUESACCOUNT No.400 DateDescriptionPRDebitCreditBalance End of Year Balance25,000 31-DecClose to Income SummaryG9725,0000 Closing Journal Entries General Journal Example

24. 4-23 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRevenues40025,000 Income Summary60025,000 to close Revenues ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 Closing Journal Entries General Journal Example Also, post to the Income Summary account.

25. 4-24 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit Closing Journal Entries General Journal Example On 12/31/99, Rent Expense was $8,000 and Salaries Expense was $15,000. Prepare the closing journal entry.

26. 4-25 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecIncome Summary23,000 Rent Expense8,000 Salaries Expense15,000 to close expenses Closing Journal Entries General Journal Example On 12/31/99, Rent Expense was $8,000 and Salaries Expense was $15,000. Prepare the closing journal entry.

27. 4-26 ACCOUNT NAME: RENT EXPENSEACCOUNT No.515 DateDescriptionPRDebitCreditBalance 31-DecBalance8,000 31-DecIncome SummaryG978,0000 Closing Journal Entries General Journal Example After posting, the Rent Expense and Salaries Expense accounts have $0 balances. ACCOUNT NAME: SALARIES EXPENSEACCOUNT No.507 DateDescriptionPRDebitCreditBalance 31-DecBalance15,000 31-DecIncome SummaryG9715,0000

28. 4-27 Closing Journal Entries General Journal Example ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 31-DecTo close ExpensesG9723,0002,000 Page: GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings.

29. 4-28 Closing Journal Entries General Journal Example ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 31-DecTo close ExpensesG9723,0002,000 Page: 97 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecIncome Summary6002,000 Retained Earnings2,000 After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings.

30. 4-29 Closing Journal Entries General Journal Example ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 31-DecTo close ExpensesG9723,0002,000 31-DecTo close R/EG972,0000 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecIncome Summary6002,000 Retained Earnings2,000 After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings.

31. 4-30 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit Closing Journal Entries General Journal Example On 12/31/99, the Dividends account has a $1,300 balance. Prepare the closing entry.

32. 4-31 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRetained Earnings1,300 Dividends1,300 to close dividends Closing Journal Entries General Journal Example On 12/31/99, the Dividends account has a $1,300 balance. Prepare the closing entry.

33. 4-32 Closing Journal Entries General Journal Example Assuming Retained Earnings had a pre-closing ending balance of $7,000,... ACCOUNT NAME: Retained EarningsACCOUNT No.310 DateDescriptionPRDebitCreditBalance 31-DecBalance7,000 31-DecTo close Income SummaryG972,0009,000 31-DecTo close DividendsG971,3007,700 … after posting the closing of the Income Summary and Dividends accounts, the ending balance is $7,700.

34. 4-33 Income Summary ExpensesRevenues 7,000 Beg. bal. Overview of accounts affected. Retained Earnings Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

35. 4-34 Income Summary ExpensesRevenues Owner’s Capital $ 7,000 Once more, close out Revenues with a debit to Revenues and a credit to Income Summary. Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

36. 4-35 Income Summary ExpensesRevenues $ 7,000 Owner’s Capital 25,000 Once more, close out Revenues with a debit to Revenues and a credit to Income Summary. 25,000 Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

37. 4-36 Income Summary ExpensesRevenues $ 7,000 Owner’s Capital 25,000 In effect, you have “poured” the Revenues credit balance into the Income Summary. 25,000 Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

38. 4-37 Income Summary ExpensesRevenues 25,000 Bal. 18,100 25,000 Bal. Closing Journal Entries Once More! Close out Expenses with a credit to Expenses and a debit to Income Summary.

39. 4-38 Income Summary ExpensesRevenues 25,000 $ 7,000 Owner’s Capital 25,000 Close out Expenses with a credit to Expenses and a debit to Income Summary. Bal. 18,100 25,000 Bal. Closing Journal Entries Once More! 18,100

40. 4-39 Income Summary ExpensesRevenues $ 7,000 Owner’s Capital 25,000 18,100 Bal. 18,100 25,000 Bal. In effect, you have “poured” the Expenses debit balance into the Income Summary. Closing Journal Entries Once More!

41. 4-40 Income Summary ExpensesRevenues $ 7,000 Owner’s Capital Determine the ending balance in Income Summary. 25,000 18,100 Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

42. 4-41 Income Summary ExpensesRevenues $ 7,000 Owner’s Capital Determine the ending balance in Income Summary. 25,000 18,100 6,900 Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

43. 4-42 Income Summary ExpensesRevenues 7,000 Beg. bal.25,000 18,100 6,900 bal. Then, close Income Summary to Retained Earnings. Retained Earnings Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

44. 4-43 Income Summary ExpensesRevenues $ 25,000 6,900 25,000 18,100 6,900 Retained Earnings 6,900 bal. 7,000 Beg. bal. Then, close Income Summary to Retained Earnings. Bal. 18,100 25,000 Bal. Closing Journal Entries Once More!

45. 4-44 Income Summary ExpensesRevenues 25,000 18,100 6,900 Retained Earnings 6,900 bal. 7,000 Beg. bal. 25,000 The $6,900 credit to Retained Earnings represents what? Bal. 18,100 25,000 Bal. Closing Journal Entries Once More! 6,900

46. 4-45 Income Summary ExpensesRevenues 25,000 18,100 6,900 Retained Earnings 6,900 bal. 7,000 Beg. bal. 25,000 Bal. 18,100 25,000 Bal. Closing Journal Entries Once More! Net Income! 6,900

47. 4-46 7,000 B. bal. 6,900 N.I. Dividends 2,000 Retained Earnings also l Dividends must also be closed to Retained Earnings at the end of the year. Closing Journal Entries Once More!

48. 4-47 2,000 credit debit Close Dividends with a credit to Dividends and a debit to Retained Earnings. DividendsRetained Earnings 7,000 B. bal. 6,900 N.I. also l Dividends must also be closed to Retained Earnings at the end of the year. Closing Journal Entries Once More!

49. 4-48 2,000 DividendsRetained Earnings 7,000 B. bal. 6,900 N.I. credit debit Close Dividends with a credit to Dividends and a debit to Retained Earnings. also l Dividends must also be closed to Retained Earnings at the end of the year. Closing Journal Entries Once More!

50. 4-49 2,000 Div. 2,000 Determine the ending balance in Retained Earnings. DividendsRetained Earnings 7,000 B. bal. 6,900 N.I. also l Dividends must also be closed to Retained Earnings at the end of the year. Closing Journal Entries Once More!

51. 4-50 2,000 11,900 E. bal. DividendsRetained Earnings 7,000 B. bal. 6,900 N.I. Determine the ending balance in Retained Earnings. Div. 2,000 also l Dividends must also be closed to Retained Earnings at the end of the year. Closing Journal Entries Once More!

52. 4-51 Maybe I’ll just do a little account closing of my own!

53. 4-52 The Work Sheet l It is a columnar spreadsheet for summarizing information needed to adjust and close the books. l It is only an accounting tool and not part of the formal accounting records. l When completed, information for preparing financial statements can be taken directly from the Work Sheet. l It is a columnar spreadsheet for summarizing information needed to adjust and close the books. l It is only an accounting tool and not part of the formal accounting records. l When completed, information for preparing financial statements can be taken directly from the Work Sheet.

54. 4-53 The Work Sheet The work sheet format is illustrated below: COMPANY NAME Work Sheet For the Year Ended December 31, 1999 Account TitleTrial BalanceAdjustmentsAdjusted T/B DebitCreditDebitCreditDebitCredit

55. 4-54 The Work Sheet The information in these columns comes from the general ledger. The work sheet format is illustrated below:

56. 4-55 The Work Sheet The adjustments are entered initially here and are journalized and posted later. The work sheet format is illustrated below:

57. 4-56 The Work Sheet This information is determined mathematically from the previous two sets of columns. The work sheet format is illustrated below:

58. 4-57 The Work Sheet There are three additional sets of columns that are normally present on the work sheet for a corporation.

59. 4-58 There are three additional sets of columns that are normally present on the work sheet for a corporation. The Work Sheet The Income Statement columns are used to facilitate preparation of the formal Income Statement.

60. 4-59 There are three additional sets of columns that are normally present on the work sheet for a corporation. The Work Sheet The Statement of Retained Earnings columns are used to facilitate preparation of the formal Statement of Retained Earnings.

61. 4-60 There are three additional sets of columns that are normally present on the work sheet for a corporation. The Work Sheet The Balance Sheet columns are used to facilitate preparation of the formal Balance Sheet.

62. 4-61 There are three additional sets of columns that are normally present on the work sheet for a corporation. The Work Sheet Are work sheets used when accounting is computerized?

63. 4-62 There are three additional sets of columns that are normally present on the work sheet for a corporation. The Work Sheet Are work sheets used when accounting is computerized? (Listen for the answer on the video.)

64. 4-63 ROLL ‘EM ! Video #1 (Approx. 7 min.) Video #2 (Approx. 7 min.)

65. 4-64 Accounting Systems: Manual to Computerized 144 to 148

66. 4-65 Let’s move on to a discussion of the Classified Balance Sheet.

67. 4-66 Classified Balance Sheet l Contains the same three major categories as before: u Assets u Liabilities u Stockholders’ Equity subdivided l However, the major categories are subdivided to provide more useful information.

68. 4-67 Classified Balance Sheet Subdivisions of Assets l Current Assets l Property, Plant, and Equipment l Long-Term Investments l Intangibles

69. 4-68 Cash and other assets that a business can convert to cash or use up within one year (or one operating cycle, whichever is longer). Classified Balance Sheet Current Assets Cash Accounts Receivable Inventory Prepaid Expenses Short-term Investments Examples ? Shown in what order on the Balance Sheet?

70. 4-69 Assets with useful lives of more than one year acquired for use in the business rather than for resale. Classified Balance Sheet Property, Plant & Equipment Land Natural Resources Buildings Equipment Leasehold Improvements Examples ? Alternative, informal term used for Property, Plant & Equipment? “Fixed Assets”

71. 4-70 Classified Balance Sheet Long-Term Investments Consists of securities of another company held with the intention of holding the securities for more than one year.

72. 4-71 Rights or economic benefits that are not physical in nature. Classified Balance Sheet Intangible Assets Patents Goodwill Copyrights Trademarks Examples ?

73. 4-72 ASSETS Current Assets Cash75,000$ Accounts Receivable (net)100,000 Merchandise Inventories80,000 Total Current Assets255,000$ Property and Equipment Land200,000$ Buildings300,000 Less: Accumulated Depreciation(150,000) Net Property and Equipment350,000$ Investment in Other Company250,000 Patents10,000 Total Assets865,000$ Classified Balance Sheet Assets Section Example Similar p.149

74. 4-73 l Current Liabilities l Long-Term Liabilities Bills Classified Balance Sheet Liabilities

75. 4-74 Debts due within one year (or one operating cycle, whichever is longer). Usually paid with current assets. Debts due within one year (or one operating cycle, whichever is longer). Usually paid with current assets. Classified Balance Sheet Current Liabilities Wages Payable Taxes Payable Unearned Revenues Short-term Notes Payable Accounts Payable Examples ? Shown in what order on the Balance Sheet? (p. 152)

76. 4-75 Debts that are due more than one year after the Balance Sheet date. Due dates should appear on the Balance Sheet. Debts that are due more than one year after the Balance Sheet date. Due dates should appear on the Balance Sheet. Mortgages Payable Bonds Payable Long-term Notes Payable Classified Balance Sheet Long-Term Liabilities Examples ?

77. 4-76 LIABILITIES Current Liabilities Accounts Payable125,000$ Unearned Revenues1,000 Wages Payable10,000 Total Current Liabilities136,000$ Long-Term Liabilities Notes Payable (Due 12/31/99)90,000$ Bonds Payable (Due 12/31/2021)200,000 Total Long-Term Liabilities290,000$ Total Liabilities426,000$ Classified Balance Sheet Liabilities Section Example Similar p.149

78. 4-77 l Paid-In Capital u Amounts paid into the company by the owners as investments. u Includes: Common Stock and Preferred Stock. l Retained Earnings u The cumulative income of the company since its inception less the amounts distributed to the owners in the form of dividends since its inception. Classified Balance Sheet Stockholders’ Equity

79. 4-78 STOCKHOLDERS' EQUITY Common Stock300,000$ Additional Paid-In Capital95,000 Retained Earnings44,000 Total Stockholders' Equity439,000$ Classified Balance Sheet Stockholders’ Equity Section Example Similar p.149

80. 4-79 A = L + SE 865,000 = 426,000 + 439,000 Classified Balance Sheet Stockholders’ Equity Section Example STOCKHOLDERS' EQUITY Common Stock300,000$ Additional Paid-In Capital95,000 Retained Earnings44,000 Total Stockholders' Equity439,000$

81. 4-80 About Test #1 l Will be challenging because the material covered is challenging l Most questions are T/F or M/C Questions are 5-pt., 3-pt. & 1-pt. l No tricks such as patterns in answers Order of answers is random l Coverage is even over the 4 chapters and introduction l Time allowed: 75 minutes

82. 4-81 l Best way to study u Notes first u Study guide and/or Hermanson tutorials l Calculators will be provided l Must wait outside classroom l Have your questions ready for next actual class l See course home page for office hours About Test #1

83. 4-82 Let’s wrap up Chapter 4 with some virtual keypad questions. Click the keypad! Chapter 4 Wrap Up