1. NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 1 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila Elworthy and Tana Kristjanson Copyright © 2014 by Nelson Education Ltd.1

2. CHAPTER 4 Completing the Accounting Cycle Copyright © 2014 by Nelson Education Ltd.2

3. After studying this chapter, you should be able to: 1.Describe the accounting cycle. 2.Prepare financial statements from adjusted account balances. 3.Prepare closing entries. 4.Illustrate the accounting cycle for one period. Completing the Accounting Cycle Copyright © 2014 by Nelson Education Ltd.3

4. Describe the accounting cycle. 1 Copyright © 2014 by Nelson Education Ltd.4

5. Accounting Cycle The accounting process that begins with source documents requiring 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. Copyright © 2014 by Nelson Education Ltd.5

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7. Accounting Cycle 1.Source documents arrive. 2.Journal entries are recorded. 3.Transactions are posted to accounts. 4.Unadjusted trial balance is prepared. 5.Optional end-of-period spreadsheet (work sheet) is prepared. Copyright © 2014 by Nelson Education Ltd.7

8. Accounting Cycle (continued) 6.Adjusting entries are journalized and posted. 7.Adjusted trial balance is prepared. 8.Financial statements are prepared. 9.Closing entries are journalized and posted. 10.Post-closing trial balance is prepared. Copyright © 2014 by Nelson Education Ltd.8

9. EXAMPLE EXERCISE 4-1 Accounting Cycle From the following list of steps in the accounting cycle, identify which two steps are missing. a.Business transaction occurs, which results in a source document that is received by the accounting department. b.Transactions are analyzed and recorded in the journal. c.Transactions are posted to the ledger. Copyright © 2014 by Nelson Education Ltd.9

10. EXAMPLE EXERCISE 4-1 Accounting Cycle d.An optional end-of-period spreadsheet (work sheet) is prepared. e.Adjusting entries are journalized and posted to the ledger. f.Financial statements are prepared. g.Closing entries are journalized and posted to the ledger. h.A post-closing trial balance is prepared. Not required in a computerized system. Copyright © 2014 by Nelson Education Ltd.10

11. FOLLOW MY EXAMPLE 4-1 Accounting Cycle The following two steps are missing: (1) the preparation of an unadjusted trial balance and (2) the preparation of the adjusted trial balance. The unadjusted trial balance should be prepared after step (c). The adjusted trial balance should be prepared after step (e). For Practice: PE 4-1 Copyright © 2014 by Nelson Education Ltd.11

12. Prepare financial statements from adjusted account balances. 2 Copyright © 2014 by Nelson Education Ltd.12

13. Income Statement The income statement is prepared directly from the Adjusted Trial Balance beginning with revenue. Expenses are then generally listed in order of size or alphabetically. Copyright © 2014 by Nelson Education Ltd.13

14. Copyright © 2014 by Nelson Education Ltd.14 To statement of owner’s equity.

15. EXAMPLE EXERCISE 4-2 Determining Net Income from the Adjusted Trial Balance The adjusted trial balance of Randall Consulting Co. has fees earned of $790,200 and total expenses of $462,360. In preparing the income statement from the adjusted trial balance, what is the amount of net income or net loss? Copyright © 2014 by Nelson Education Ltd.15

16. FOLLOW MY EXAMPLE 4-2 Determining Net Income from the Adjusted Trial Balance A net income of $327,840 ($790,200 – $462,360) would be reported. When the revenues exceed expenses, net income is reported. If the expenses exceed revenues, a net loss is reported. Copyright © 2014 by Nelson Education Ltd.16 For Practice: PE 4-2

17. The first item presented on the statement of owner’s equity is the balance of the owner’s capital account at the beginning of the period. Copyright © 2014 by Nelson Education Ltd.17

18. Exhibit 3 (cont.) Copyright © 2014 by Nelson Education Ltd.18 From the income statement. To the balance sheet.

19. EXAMPLE EXERCISE 4-3 Statement of Owner’s Equity Zack Gaddis owns and operates Gaddis Employment Services. On January 1, 2014, Zack Gaddis, Capital had a balance of $186,000. During the year, Zack invested an additional $40,000 and withdrew $25,000. For the year ended December 31, 2014, Gaddis Employment Services reported a net income of $18,750. Prepare a statement of owner’s equity for the year ended December 31, 2014. Copyright © 2014 by Nelson Education Ltd.19

20. FOLLOW MY EXAMPLE 4-3 Statement of Owner’s Equity Copyright © 2014 by Nelson Education Ltd.20 For Practice: PE 4-3

21. The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the spreadsheet (or work sheet). Copyright © 2014 by Nelson Education Ltd.21

22. A classified balance sheet is a balance sheet that was expanded by adding subsections for assets and liabilities. Copyright © 2014 by Nelson Education Ltd.22

23. 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 Notes receivable Supplies Prepaid expenses Copyright © 2014 by Nelson Education Ltd.23

24. Notes receivable are written promises from customers to pay the amount of the note and possibly interest at an agreed rate. If due within a year, notes receivable are current assets. Copyright © 2014 by Nelson Education Ltd.24

25. Property, plant, and equipment (also called capital assets or 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 Copyright © 2014 by Nelson Education Ltd.25

26. In addition, Other assets may be shown within the asset subsection. Two other assets are Long-Term Investments and Intangible Assets. Copyright © 2014 by Nelson Education Ltd.26

27. 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 Current portion of long-term debt Unearned fees Copyright © 2014 by Nelson Education Ltd.27

28. Liabilities not due for a long time (usually more than one year) are long-term liabilities. Notes payable Mortgage payable Bond payable Copyright © 2014 by Nelson Education Ltd.28

29. Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and the total must be equal to the total assets. Copyright © 2014 by Nelson Education Ltd.29

30. Exhibit 3 (cont.) Copyright © 2014 by Nelson Education Ltd.30 From the statement of owner’s equity.

31. EXAMPLE EXERCISE 4-4 Classified Balance Sheet The following accounts on the next slide appear in an adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) other assets; (d) current liability; (e) long- term liability; or (f) owner’s equity section of the December 31, 2014, balance sheet of Hindsight Consulting. Copyright © 2014 by Nelson Education Ltd.31

32. EXAMPLE EXERCISE 4-4 Classified Balance Sheet 1. Jason Corbin, Capital 2. Notes Receivable (due in 6 months) 3. Notes Payable (due in 2016) 4. Land 5. Cash 6. Unearned Rent (3 months) 7. Accumulated Depreciation—Equipment 8. Accounts Payable Copyright © 2014 by Nelson Education Ltd.32

33. FOLLOW MY EXAMPLE 4-4 Classified Balance Sheet 1. (f) Owner’s equity 2. (a) Current asset 3. (e) Long-term liability 4. (b) Property, plant, and equipment 5. (a) Current asset 6. (d) Current liability 7. (b) Property, plant, and equipment 8. (d) Current liability Copyright © 2014 by Nelson Education Ltd.33 For Practice: PE 4-4

34. Prepare closing entries. 3 Copyright © 2014 by Nelson Education Ltd.34

35. Closing Entries Accounts that are relatively permanent from year to year are called permanent accounts. Accounts that report amounts for only one period are called temporary accounts. Copyright © 2014 by Nelson Education Ltd.35

36. Closing Entries To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. The entries that transfer these balances are called closing entries. The transfer process is called the closing process or closing the books. Copyright © 2014 by Nelson Education Ltd.36

37. Closing Entries At the end of the period: 1.Revenue account balances are transferred to an account called Income Summary. 2.Expense account balances are transferred to an account called Income Summary. Copyright © 2014 by Nelson Education Ltd.37

38. Closing Entries 3.The balance of Income Summary is transferred to the owner’s capital account. 4.The balance of the owner’s withdrawals account is transferred to the owner’s capital account. Copyright © 2014 by Nelson Education Ltd.38

39. Closing Entries—Owner’s Capital At the end of the period: 1.Revenue account balances are transferred to the owner’s capital account. 2.Expense account balances are transferred to the owner’s capital account. Copyright © 2014 by Nelson Education Ltd.39

40. Closing Entries—Owner’s Capital 3.The balance of the owner’s withdrawals account is transferred to the owner’s capital account. Copyright © 2014 by Nelson Education Ltd.40

41. Copyright © 2014 by Nelson Education Ltd.41

42. Exhibit 5 Copyright © 2014 by Nelson Education Ltd.42 Flowchart of Closing Entries for NetSolutions Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue. Step 1:

43. Exhibit 5 (cont.) Copyright © 2014 by Nelson Education Ltd.43 Flowchart of Closing Entries for NetSolutions Debit Income Summary for the total expenses and credit each expense account for its balance. Step 2:

44. Exhibit 5 (cont.) 44 Flowchart of Closing Entries for NetSolutions Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account. (The accounts debited and credited are reversed if there is a net loss.) Step 3: Copyright © 2014 by Nelson Education Ltd.

45. Exhibit 5 (cont.) 45 Flowchart of Closing Entries for NetSolutions Debit the capital account for the balance of the withdrawals account, and credit withdrawals for the same amount. Step 4: Copyright © 2014 by Nelson Education Ltd.

46. 46 (Summary)

47. Copyright © 2014 by Nelson Education Ltd.47

48. Copyright © 2014 by Nelson Education Ltd.48

49. After the closing entries are posted, all of the temporary accounts have zero balances. Copyright © 2014 by Nelson Education Ltd.49

50. EXAMPLE EXERCISE 4-5 Closing Entries After the accounts have been adjusted at December 31, the balances given on the next slide are taken from the ledger of Rio Services Co. Journalize the four entries required to close the accounts. Copyright © 2014 by Nelson Education Ltd.50

51. EXAMPLE EXERCISE 4-5 Closing Entries Lisa Banks, Capital $732,840 Lisa Banks, Withdrawals 30,000 Fees Earned 572,400 Wages Expense 300,000 Rent Expense 75,000 Supplies Expense 16,290 Miscellaneous Expense 7,200 Copyright © 2014 by Nelson Education Ltd.51

52. FOLLOW MY EXAMPLE 4-5 Closing Entries Copyright © 2014 by Nelson Education Ltd.52 For Practice: PE 4-5

53. A post-closing trial balance is prepared after the closing entries have been posted to verify that the ledger is in balance at the beginning of the next period. The post-closing trial balance is not required in a computerized system, as the computer program ensures that debits equal credits at the time of entry. Copyright © 2014 by Nelson Education Ltd.53

54. Copyright © 2014 by Nelson Education Ltd.54

55. Illustrate the accounting cycle for one period. 4 Copyright © 2014 by Nelson Education Ltd.55

56. Copyright © 2014 by Nelson Education Ltd.56

57. The fiscal year for sole proprietors and partnerships is the same as the calendar year. The calendar year ends December 31. The annual accounting period adopted by a business is known as its fiscal year. Because corporations file a corporate tax return, they may select year-ends other than December 31. Copyright © 2014 by Nelson Education Ltd.57

58. Financial Analysis and Interpretation Copyright © 2014 by Nelson Education Ltd.58 Working Capital = Current Assets – Current Liabilities Current ratio = Current Assets Current Liabilities

59. EXAMPLE EXERCISE 4-6 Working Capital and Current Ratio Bentley Excavating’s current assets and current liabilities are detailed below: 2015 2014 Current Assets $650,000 $580,000 Current Liabilities 225,000 250,000 Calculate the working capital and the current ratio for Bentley Excavating. Note whether these amounts have increased or decreased from the previous year. Copyright © 2014 by Nelson Education Ltd.59

60. FOLLOW MY EXAMPLE 4-6 Working Capital and Current Ratio 2014 Working capital = $580,000 – $250,000 = $330,000 Current ratio = $580,000 / $250,000 = 2.3 2015 Working capital = $650,000 – $225,000 = $425,000 Current ratio = $650,000 / $225,000 = 2.9 Copyright © 2014 by Nelson Education Ltd.60

61. FOLLOW MY EXAMPLE 4-6 Working Capital and Current Ratio The amount of working capital has improved for Bentley Excavating. Its current asset amount improved by increasing, and its current liabilities amount improved by decreasing. This improvement can also be seen in the increase in the current ratio, from 2.3 to 2.9. The company can now cover its current liabilities 2.9 times, compared with 2.3 times in 2014. For Practice: PE 4-6 Copyright © 2014 by Nelson Education Ltd.61

62. The End Copyright © 2014 by Nelson Education Ltd.62