1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Winston Kwok, Ph.D., CA Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. Chapter 4 C OMPLETING THE A CCOUNTING C YCLE

2. 4 - 2 B ENEFITS OF A W ORK S HEET Aids the preparation of financial statements. Reduces possibility of errors. Links accounts and their adjustments. Assists in planning and organizing an audit. Helps in preparing interim financial statements. Shows the effects of proposed transactions. Not a required report. P 1

3. 4 - 3 FastForward Worksheet For the Month Ended December 31, 2015 P 1 Unadjusted Trial Balance AdjustmentsAdjusted Trial Balance Income Statement Statement of Financial Position and Statement of Changes in Equity

4. 4 - 4 FastForward Worksheet For the Month Ended December 31, 2015 P 1 Unadjusted Trial Balance AdjustmentsAdjusted Trial Balance Income Statement Statement of Financial Position and Statement of Changes in Equity

5. 4 - 5 FastForward Worksheet For the Month Ended December 31, 2015 P 1 Unadjusted Trial Balance AdjustmentsAdjusted Trial Balance Income Statement Statement of Financial Position and Statement of Changes in Equity

6. 4 - 6 FastForward Worksheet For the Month Ended December 31, 2015 P 1 Unadjusted Trial Balance AdjustmentsAdjusted Trial Balance Income Statement Statement of Financial Position and Statement of Changes in Equity Net profit

7. 4 - 7 FastForward Worksheet For the Month Ended December 31, 2015 P 1 Unadjusted Trial Balance AdjustmentsAdjusted Trial Balance Income Statement Statement of Financial Position and Statement of Changes in Equity Net profit

8. 4 - 8 P REPARING THE F INANCIAL S TATEMENTS P 1

9. 4 - 9 R ECORDING C LOSING E NTRIES 1.Resets revenue, expense and withdrawal account balances to zero at the end of the period. 2.Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. C 1

10. 4 - 10 Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital T EMPORARY AND P ERMANENT A CCOUNTS The closing process applies only to temporary accounts. C 1

11. 4 - 11 Let’s see how the closing process works! R ECORDING C LOSING E NTRIES  Close Credit Balances in Revenue Accounts to Income Summary.  Close Debit Balances in Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital. P 2

12. 4 - 12 Using the adjusted trial balance, let’s prepare the closing entries for FastForward. P 2

13. 4 - 13 1. Close Credit Balances in Revenue Accounts to Income Summary. P 2

14. 4 - 14  C LOSE C REDIT B ALANCES IN R EVENUE A CCOUNTS TO I NCOME S UMMARY Now, let’s look at the ledger accounts after posting this closing entry. Dr. Cr. Dec. 31 Consulting revenue 7,850 Rental revenue 300 Income summary 8,150 P 2

15. 4 - 15 P 2  C LOSE C REDIT B ALANCES IN R EVENUE A CCOUNTS TO I NCOME S UMMARY

16. 4 - 16 2. Close Debit Balances in Expense Accounts to Income Summary. P 2

17. 4 - 17 Now, let’s look at the ledger accounts after posting this closing entry.  C LOSE D EBIT B ALANCES IN E XPENSE A CCOUNTS TO I NCOME S UMMARY P 2

18. 4 - 18 Net Profit  C LOSE D EBIT B ALANCES IN E XPENSE A CCOUNTS TO I NCOME S UMMARY P 2

19. 4 - 19 3. Close Income Summary to Owner’s Capital. P 2

20. 4 - 20 Now, let’s look at the ledger accounts after posting this closing entry.  CLOSE INCOME SUMMARY TO OWNER’S CAPITAL P 2

21. 4 - 21 P 2  CLOSE INCOME SUMMARY TO OWNER’S CAPITAL

22. 4 - 22 4. Close Withdrawals Account to Owner’s Capital. P 2

23. 4 - 23 Now, let’s look at the ledger accounts after posting this closing entry.  CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL P 2

24. 4 - 24 P 2  CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL

25. 4 - 25 S UMMARY OF THE C LOSING P ROCESS 1.Close Credit Balances in Revenue Accounts to Income Summary. 2.Close Debit Balances in Expense Accounts to Income Summary. 3.Close Income Summary to Owner’s Capital. 4.Close Withdrawals Account to Owner’s Capital.

26. 4 - 26 P OST -C LOSING T RIAL B ALANCE List of permanent accounts and their balances after posting closing entries. Total debits and credits must be equal. P 3

27. 4 - 27 P OST -C LOSING T RIAL B ALANCE P 3

28. 4 - 28 A CCOUNTING C YCLE C 2

29. 4 - 29 Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle. C LASSIFIED S TATEMENT OF F INANCIAL P OSITION C 3

30. 4 - 30 Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle. C 3

31. 4 - 31 Long-term financial assets or investments are expected to be held for more than one year or the operating cycle. C 3

32. 4 - 32 Property, plant and equipment are tangible long-term assets used to produce or sell products and services. C 3

33. 4 - 33 Intangible assets are long-term resources used to produce or sell products and services and that lack physical form. C 3

34. 4 - 34 Current liabilities are obligations due within the longer of one year or the company’s operating cycle. C 3

35. 4 - 35 Noncurrent liabilities are obligations not due within the longer of one year or the company’s operating cycle. C 3

36. 4 - 36 Equity is the owner’s claim on the assets. C 3

37. 4 - 37 C URRENT R ATIO Helps assess the company’s ability to pay its debts in the near future Current Ratio = Current Assets Current Liabilities Nestlé A 1

38. 4 - 38 P 4 4A – REVERSING ENTRIES Reversing entries are optional. They are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period. The purpose of reversing entries is to simplify a company’s recordkeeping. Let’s see how the accounting for our payroll accrual will be handled with and without reversing entries.

39. 4 - 39 P 4

40. 4 - 40 P 4 Without Reversing EntriesWith Reversing Entries

41. 4 - 41 END OF CHAPTER 4