2. 4 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Completing the Accounting Cycle Chapter 4

3. 4 - 2 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Prepare an accounting work sheet. Objective 1

4. 4 - 3 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The Accounting Cycle l The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.

5. 4 - 4 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The Accounting Cycle l For a new business, begin by setting up ledger accounts. l For an established business, begin with account balances carried over from the previous period.

6. 4 - 5 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Accounts Receivable 1,350 Accounts Receivable 1,700 Service Revenue 1,700 Accounts Receivable 1,350 1,700 3,050 Accounts Receivable 1,350 1,700 The Accounting Cycle

7. 4 - 6 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Work Sheet Cash Accounts receivable 12,100 3,050 Balance Sheet Income Statement The Accounting Cycle

8. 4 - 7 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Postclosing Trial Balance Cash Accounts receivable 12,100 3,050 Adjusting entriesClosing entries Cash Accounts Receivable 12,1003,050 The Accounting Cycle

9. 4 - 8 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The Accounting Work Sheet l What is the work sheet? l A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements. l It is an internal document.

10. Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 12,100 1,350 250 15,500 1,000 12,000 42,200 7,500 1,200 1,100 1,500 7,200 23,700 42,200 The Accounting Work Sheet ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 9

11. 4 - 10 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The Accounting Work Sheet aThe company has earned revenue of $1,700 which will be collected next month. bInventory of supplies at month end totaled $150. cDepreciation for the period was calculated as $200.

12. Adjusted Trial Balance Adjustments Trial Balance Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 12,100 1,350 250 15,500 1,000 12,000 42,200 7,500 1,200 1,100 1,500 7,200 23,700 42,200 a) 1,700 b) 100 c) 200 2,000 b) 100 c) 200 a) 1,700 2,000 12,100 3,050 150 15,500 1,000 12,000 100 200 44,100 7,700 1,200 1,100 1,500 7,200 25,400 44,100 The Accounting Work Sheet ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 11

13. Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 7,700 1,200 1,100 1,500 7,200 25,400 44,100 12,10 0 3,050 150 15,50 0 1,000 12,00 0 100 200 44,10 0 12,10 0 3,050 150 15,50 0 1,000 31,80 0 7,700 1,200 1,100 1,500 7,200 18,700 The Accounting Work Sheet ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 12

14. Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals 7,700 1,200 1,100 1,500 7,200 25,400 44,100 12,10 0 3,050 150 15,50 0 1,000 12,00 0 100 200 44,10 0 12,10 0 3,050 150 15,50 0 1,000 31,80 0 7,700 1,200 1,100 1,500 7,200 18,700 12,000 100 200 12,300 25,400 The Accounting Work Sheet ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 13

15. Adjusted Income Balance Trial Balance Statement Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts receivable Supplies Equipment Accum. depreciation Accounts payable Salary payable Unearned revenue Capital Withdrawals Revenue Salary expense Supplies expense Depreciation expense Totals Net income 7,700 1,200 1,100 1,500 7,200 25,400 44,100 12,10 0 3,050 150 15,50 0 1,000 12,00 0 100 200 44,10 0 12,10 0 3,050 150 15,50 0 1,000 31,80 0 7,700 1,200 1,100 1,500 7,200 18,700 13,100 31,800 12,000 100 200 12,300 13,100 25,400 The Accounting Work Sheet ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 14

16. 4 - 15 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Use the work sheet to complete the accounting cycle. Objective 2

17. 4 - 16 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber The work sheet helps identify the accounts that need adjustments. Actual adjustment of the accounts requires journalizing and posting the entries. Recording the Adjusting Entries

18. 4 - 17 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Recording the Adjusting Entries l The adjusting entries may be recorded in the journal when they are entered on the work sheet. l Many accountants journalize and post the adjusting entries just before they make the closing entries.

19. 4 - 18 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Close the revenue, expense, and withdrawal accounts. Objective 3

20. 4 - 19 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Closing the Accounts l Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.

21. 4 - 20 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Closing Entries Revenues increase Owner’s Equity. Revenues increase Owner’s Equity. Expenses and Withdrawals decrease Owner’s Equity. Expenses and Withdrawals decrease Owner’s Equity. Closing the Accounts

22. 4 - 21 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Closing the Accounts l Revenues and Expense accounts are closed to Income Summary. l Income Summary is closed to Capital. l Withdrawals are closed to Capital. l In a corporation, Dividends are closed to Retained Earnings.

23. 4 - 22 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Income Summary A credit balance represents net income. A debit balance represents net loss. Closing the Accounts

24. Revenue Income Summary 12,000 7,500 9,000 Salary Exp 3,300 28,500 1,500 1,800 4,450 28,500 Rent Exp 800 Supplies Exp 350 24,050 (Close Revenue Account) (Close Expense Accounts) (Close Income Summary) Withdrawals 2,500 Capital Account (Close Withdrawals Account) Closing the Accounts ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 23

25. 4 - 24 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Postclosing Trial Balance l The accounting cycle ends with the postclosing trial balance. l The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.

26. 4 - 25 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Permanent Accounts l What accounts never close? – Assets – Liabilities – Owner’s equity l Balances of permanent accounts carry over to the next period.

27. 4 - 26 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Classify assets and liabilities as current or long-term. Objective 4

28. 4 - 27 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Liquidity l This is a measure of how quickly an item can be converted into cash. l On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their relative liquidity.

29. 4 - 28 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Current Assets l Current assets are cash, or will be converted to cash, in one year or within the normal business operating cycle. l What are some other examples? – short-term receivables – inventory – prepaid expenses

30. 4 - 29 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Current Liabilities l Current liabilities are debts or obligations due within one year or within the operating cycle. l What are some examples? – accounts and salary payables – short-term notes payable – unearned revenue

31. 4 - 30 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Long-term Assets and Liabilities l Long-term assets include all other assets. – property, equipment, and intangibles l Long-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.

32. 4 - 31 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Debit side Current assets Long-term assets Credit side Current liabilities Long-term liabilities Listed in the order of decreasing liquidity Listed in the order of decreasing liquidity Listed in the order of how soon they must be paid Listed in the order of how soon they must be paid The Classified Balance Sheet

33. 4 - 32 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Assets Liabilities Current assets: Current liabilities: Cash12,100Accounts payable 1,200 Accounts receivable 3,050Salary payable 1,100 Supplies 150Unearned revenue 1,500 Total current assets15,300 Total liabilities 3,800 Plant assets Owner’s equity Equipment15,500 Capital19,300 Less Accum. deprec. 7,700 7,800 Total liabilities and Total assets23,100owner’s equity23,100 XYZ Services January 31, 20XX The Classified Balance Sheet

34. 4 - 33 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Report Format Assets Liabilities Owner’s Equity Account Format Assets = Liabilities + Owner’s Equity Different Formats of the Balance Sheet

35. 4 - 34 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Use the current and debt ratios to evaluate a business. Objective 5

36. 4 - 35 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Comparative Financial Statements l They enhance the user’s ability to analyze a company’s past performance. l What are two common ratios used to measure liquidity? 1 Current ratio 2 Debt ratio

37. 4 - 36 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Current ratio = Current assets ÷ Current liabilities Current Ratio l This measures the ability of a business to pay its current liabilities with its current assets.

38. 4 - 37 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Total liabilities ÷ Total assets Debt Ratio l It indicates the proportion of a business’s assets that are financed with debt. l It measures their ability to pay both current and long-term debt.

39. 4 - 38 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber Trend Analysis l Decision makers compare various ratios over a period of time.

40. 4 - 39 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber End of Chapter 4