Presentation on theme: "Financial Accounting, 3e Weygandt, Kieso, & Kimmel"— Presentation transcript:
1 Financial Accounting, 3e Weygandt, Kieso, & Kimmel Prepared byGregory K. LowryMercer UniversityMarianne BradfordThe University of TennesseeJohn Wiley & Sons, Inc.
2 CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE After studying this chapter, you should be able to:1 Prepare a work sheet.2 Explain the process of closing the books.3 Describe the content and purpose of a post-closing trial balance.4 State the required steps in the accounting cycle.5 Explain the approaches to preparing correcting entries.6 Identify the sections of a classified balance sheet.
3 COMPLETION OF THE ACCOUNTING CYCLE Summary of Accounting Cycle PREVIEW OF CHAPTER 4COMPLETION OF THE ACCOUNTING CYCLEClosing the BooksPreparing closing entriesPosting closing entriesPreparing a post-closing trial balanceSummary of Accounting CycleReversing entries - an optional stepCorrecting entries-an avoidable stepClassifiedBalanceSheetUsing a Work SheetSteps in preparationPreparing financial statementsPreparing adjusting entriesStandard classificationBalance sheetillustration
4 WORK SHEETA work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements.It is a working tool or a supplementary device for the accountant and not a permanent accounting record.Use of a work sheet should make the preparation of adjusting entries and financial statements easier.
5 ILLUSTRATION 4-1 FORM AND PROCEDURE FOR A WORK SHEET
6 WORK SHEET The use of a work sheet is optional. When a work sheet is used, financial statements are prepared from the worksheet.Adjustments are journalized and posted from the work sheet after financial statements are prepared.
7 STEPS IN PREPARING A WORKSHEET 1 Prepare a trial balance on the worksheet2 Enter the adjustments in the adjustments columns3 Enter adjusted balances in the adjusted trial balance columns4 Extend adjusted trial balance amounts to appropriate financial statement columns5 Total the statement columns, compute net income (loss), and complete the worksheet
8 PREPARING A WORKSHEET 1 PREPARING A TRIAL BALANCE 15, , , , , , , , , , ,700
9 PREPARING A WORKSHEET 2 ENTER THE ADJUSTMENTS a 1, b d d e g 1, a 1, b c c f e f g 1,200
10 PREPARING A WORKSHEET 3 ENTER ADJUSTED BALANCES 15, , , , , , , , , ,200
14 PREPARATION OF FINANCIAL STATEMENTS INCOME STATEMENT PIONEER ADVERTISING AGENCYIncome StatementFor the Month Ended October 31, 2001Revenues$ 10, $ 5, , , $ 2,860Service RevenueExpensesSalaries expenseThe income statement is prepared from the income statement columns of the work sheet.Advertising supplies expenseRent expenseInsurance expenseInterest expenseDepreciation expenseTotal expensesNet income
15 PREPARATION OF FINANCIAL STATEMENTS RETAINED EARNINGS STATEMENT $ , , $ 2,360The Retained Earnings statement is prepared from the balance sheet columns of the work sheet.
16 PREPARATION OF FINANCIAL STATEMENTS BALANCE SHEET PIONEER ADVERTISING AGENCYBalance SheetOctober 31,2001AssetsLiabilities and Stockholders’ Equity$ 15, $ 5, , , $ 5, , , , , , $ 21, $ 21,910CashLiabilitiesAccounts receivableNotes payableAdvertising suppliesAccounts payablePrepaid insuranceInterest payableOffice equipmentUnearned RevenueLess: AccumulatedSalaries payabledepreciationTotal liabilitiesStockholders’ equityCommon StockRetained earningsTotal liabilities andTotal assetsstockholders’ equityThe balance sheet is prepared from the balance sheet columns of the work sheet.
17 ILLUSTRATION 4-5 TEMPORARY VERSUS PERMANENT ACCOUNTS TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closedAll revenue accounts All asset accountsAll expense accounts All liability accountsDividends Stockholders’ equity
18 CLOSING ENTRIESClosing entries formally recognize in the ledger the transfer of net income (loss) and dividends to retained earnings.Journalizing and posting closing entries is a required step in the accounting cycle.A temporary account, Income Summary, is used in closing revenue and expense accounts to minimize the amount of detail in the permanent retained earnings account.
19 ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS 121 Debit each revenue account for its balance, and credit Income Summary for total revenues.2 Debit Income Summary for total expenses, and credit each expense account for its balance.
20 ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS 33 Debit (credit) Income Summary and credit (debit) Retained Earnings for the amount of net income (loss).
21 ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS 4 Debit Retained Earnings for the balance in the Dividends account and credit Dividends for the same amount.
22 ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED GENERAL JOURNALDateAccount Titles and ExplanationRef.DebitCredit2001(1)10, ,60010, ,600Oct. 31Service Revenue50Income Summary49(To close revenue account)INCOME SUMMARYNO. 49FEES EARNEDNO. 50DateExplanationDebitCreditBalanceDateExplanationDebitCreditBalance20012001Oct. 3110,600Oct. 3110,6003131–0–31
26 CAUTIONS RELATING TO CLOSING ENTRIES A couple of cautions relating to closing entries:1 Avoid unintentionally doubling the revenue and expense balances rather than zeroing them.2 Do not close divdends through the Income Summary account. Dividends is not an expense, and it is not a factor in determining net income.
27 POSTING CLOSING ENTRIES All temporary accounts have zero balances after posting the closing entries.The balance in Retained Earnings represents the accumulated undistributed earnings of the corporation at the end of the accounting period.The Income Summary account is used only in closing. No entries are journalized and posted to this account during the year.As part of the closing process, the temporary accounts (revenues, expenses and dividends) are totaled, balanced, and double ruled.The permanent accounts (assets, liabilities, and retained earnings) are not closed.
28 ILLUSTRATION 4-8 POSTING OF CLOSING ENTRIES Service Revenue50(1)10,60010,0004002001210,60010,600324
29 POST-CLOSING TRIAL BALANCE After all closing entries have been journalized and posted, a post-closing trial balance is prepared.The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.
30 ILLUSTRATION 4-9 POST-CLOSING TRIAL BALANCE PIONEER ADVERTISING AGENCYPost-Closing Trial BalanceOctober 31, 2001DebitCreditCashThe post-closing trial balance is prepared from the permanent accounts in the ledger.$ 15, , , $ , , , , ,360$ 21, $ 21,950Accounts ReceivableAdvertising SuppliesPrepaid InsuranceOffice EquipmentAccumulated Depreciation — Office EquipmentNotes PayableThe post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.Accounts PayableInterest PayableUnearned RevenueSalaries PayableCommon StockRetained Earnings
31 STEPS IN THE ACCOUNTING CYCLE 1 Analyze business transactions2 Journalize the transactions3 Post to ledger accounts4 Prepare a trial balance5 Journalize and post adjusting entries
32 STEPS IN THE ACCOUNTING CYCLE 6 Prepare an adjusted trial balance7 Prepare financial statements: Income Statement, Retained Earnings Statement, Balance Sheet8 Journalize and post closing entries9 Prepare a post-closing trial balance
33 REVERSING ENTRIESA reversing entry is made at the beginning of the next accounting period.The purpose of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting entry.Reversing entries are most often used to reverse two types of adjusting entries: accrued revenues and accrued expenses.
35 CORRECTING ENTRIESErrors that occur in recording transactions should be corrected as soon as they are discovered by preparing correcting entries.Correcting entries are unnecessary if the records are free of errors; they can be journalized and posted whenever an error is discovered.They involve any combination of balance sheet and income statement accounts
36 ILLUSTRATIVE EXAMPLE OF CORRECTING ENTRY 1 Cash Service RevenueCash Accounts ReceivableService Revenue Accounts Receivable
37 ILLUSTRATIVE EXAMPLE OF CORRECTING ENTRY 2 Delivery Equipment Accounts PayableOffice Equipment Accounts PayableOffice Equipment Delivery Equipment Accounts Payable
38 ILLUSTRATION 4-17 STANDARD BALANCE SHEET CLASSIFICATIONS Financial statements become more useful when the elements are classified into significant subgroups.A classified balance sheet generally has the following standard classifications:Current Assets Current LiabilitiesLong-Term Invesments Long-Term LiabilitiesProperty, Plant and Owner’s (Stockholders’) Equity EquipmentIntangible AssetsAssets Liabilities and Owner’s Equity
39 CURRENT ASSETSCurrent assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company’s operating cycle, whichever is longer.Current assets are listed in the order of their liquidity.The operating cycle of a company is the average time that is required to go from cash to cash in producing revenues.Examples of current assets are inventory, accounts receivable and cash.
40 LONG-TERM INVESTMENTS Long-term investments are resources that can be realized in cash, but the conversion into cash in not expected within one year or the operating cycle, whichever is longer.Examples include investments in bonds of another company or investment in land held for resale.10 sharesXYZ stock
41 PROPERTY, PLANT, AND EQUIPMENT Tangible resources of a relatively permanent nature that are used in the business and not intended for sale are classified as property, plant, and equipment.Examples include land, buildings and machinery.
42 INTANGIBLE ASSETSIntangible assets are noncurrent resources that do not have physical substance.Examples include patents, copyrights, trademarks, or trade names that give the holder exclusive right of used for a specified period of time.
43 CURRENT LIABILITIESCurrent liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer.Examples include accounts payable, wages payable, interest payable, and current maturities of long-term debt.
44 LONG-TERM LIABILITIES Obligations expected to be paid after one year are classified as long-term liabilities.Examples include long-term notes payable, bonds payable, mortgages payable, and lease liabilities.
45 STOCKHOLDERS’ (OWNERS’) EQUITY The content of the owner’s equity section varies with the form of business organization.In a proprietorship, there is one capital account.In a partnership, there are separate capital accounts for each partner.For a corporation, owners’ (stockholders’) equity is divided into two accounts:1 Common Stock and2 Retained Earnings.
46 ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN REPORT FORM $ 15, , , $ 5, , $ 21,910A classified balance sheet helps the financial statement user determine 1 the availability of assets to meet debts as they come due and 2 the claims of short- and long-term creditors on total assets.
47 ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN REPORT FORM $ 1, , , , , , , , $ 21,910The balance sheet is most often presented in the report form, with the assets shown above the liabilities and stockholders’ equity.