1. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version Completing the Accounting Cycle Chapter 4 These slides should be viewed using the presentation mode (click the icon to start presentation).

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Learning Objective 1 1.Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Flow of Accounting Information LO 1

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 End-of-Period Spreadsheet (Work Sheet) Unadjusted TB AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Flow of Accounting Information  Account balances are listed in the Trial Balance column using the ending balances found in the general ledger. LO 1 (continued)

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 End-of-Period Spreadsheet (Work Sheet) AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Flow of Accounting Information  Adjustments are entered here. Two possibilities:  Deferrals – Existing balances are changed  Accruals – New information is entered LO 1 (continued) Unadjusted TB

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB End-of-Period Spreadsheet (Work Sheet) Flow of Accounting Information  Adjustments are combined with the trial balance amounts. Account balances are now adjusted. LO 1 (continued) Unadjusted TB

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet End-of-Period Spreadsheet (Work Sheet) LO 1 Flow of Accounting Information  Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column. (continued)

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet End-of-Period Spreadsheet (Work Sheet) Flow of Accounting Information  Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column. LO 1 (concluded)

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Learning Objective 2 1.Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 2.Prepare financial statements from adjusted account balances.

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Income Statement  The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet) beginning with fees earned of $16,840. LO 2

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Statement of Owner’s Equity  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. LO 2

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Balance Sheet  The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065. LO 2

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Classified Balance Sheet  A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; current liabilities; and long-term liabilities. LO 2

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Current Assets  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 LO 2

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Notes Receivable  Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate. LO 2

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Fixed Assets  Property, plant, and equipment (also called fixed assets or plant 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 LO 2

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Current Liabilities  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  Unearned fees LO 2

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 Long-Term Liabilities  Liabilities not due for a long time (usually more than one year) are called long-term liabilities.  Short-term notes payable  Mortgages payable  Bonds payable LO 2

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 Owner’s Equity  Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and this total must be equal to the total assets. LO 2

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 Learning Objective 3 1.Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 2.Prepare financial statements from adjusted account balances. 3.Prepare closing entries.

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 Closing Entries  Accounts that are relatively permanent from year to year are called permanent accounts or real accounts. These accounts are carried forward from year to year. LO 3

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 Closing Entries  Accounts that report amounts for only one period are called temporary accounts or nominal accounts. Temporary accounts are not carried forward because they relate to only one period. LO 3

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 Closing Entries  To report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period.  To achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period. LO 3

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 Closing Entries  The balance of Income Summary (net income or net loss) is then transferred to the owner’s capital account.  The balance of the owner’s drawing account is also transferred to the owner’s capital account.  The entries that transfer these balances are called closing entries. LO 3

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 Closing Entries LO 3  Income Summary is a temporary account that is only used during the closing process.  At the end of the closing process, the Income Summary account will have a zero balance.  Income Summary is sometimes called a clearing account.

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 LO 3 Journalizing and Posting Closing Entries

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 LO 3 Journalizing and Posting Closing Entries

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 LO 3 Journalizing and Posting Closing Entries

29. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 LO 3 Journalizing and Posting Closing Entries

30. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 Step 1 Step 2 Step 3 LO 3 Closing Entries Step 4

31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Temporary Account Balances  After the closing entries are posted, all of the temporary accounts have zero balances. LO 3

32. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Post-Closing Trial Balance  A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance at the beginning of the next period. LO 3

33. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 4 1.Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 2.Prepare financial statements from adjusted account balances. 3.Prepare closing entries. 4.Describe the accounting cycle.

34. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Cycle  The accounting process that begins with 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. LO 4

35. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Cycle 1.Transactions are analyzed and recorded in the journal. 2.Transactions are posted to the ledger. 3.An unadjusted trial balance is prepared. 4.Adjustment data are assembled and analyzed. 5.An optional end-of-period spreadsheet (work sheet) is prepared. (continued) LO 4

36. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Cycle 6.Adjusting entries are journalized and posted to the ledger. 7.An adjusted trial balance is prepared. 8.Financial statements are prepared. 9.Closing entries are journalized and posted to the ledger. LO 4 10.A post-closing trial balance is prepared.

37. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 5 1.Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 2.Prepare financial statements from adjusted account balances. 3.Prepare closing entries. 4.Describe the accounting cycle. 5.Illustrate the accounting cycle for one period.

38. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38 Accounting Cycle LO 5 (continued)

39. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 39 Accounting Cycle LO 5 (continued)

40. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40 LO 5 Accounting Cycle (concluded)

41. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41 LO 5 Accounting Cycle

42. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42 LO 5 Unadjusted Trial Balance

43. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43 LO 5 Adjusting Entries

44. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44 LO 5 Adjusted Trial Balance

45. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45 Learning Objective 6 1.Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 2.Prepare financial statements from adjusted account balances. 3.Prepare closing entries. 4.Describe the accounting cycle. 5.Illustrate the accounting cycle for one period. 6.Explain what is meant by the fiscal year and the natural business year.

46. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46 Accounting Period  The annual accounting period adopted by a business is known as its fiscal year.  When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural business year. LO 6

47. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47 Learning Objective 7 6.Explain what is meant by the fiscal year and the natural business year. 7.Describe and illustrate the use of working capital and the current ratio in evaluating a company’s financial condition.

48. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48 Working Capital and Current Ratio  The ability to convert assets into cash is called liquidity.  The ability of a business to pay its debts is called solvency.  Working capital is the excess of the current assets of a business over its current liabilities. LO 7

49. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49 Working Capital and Current Ratio LO 7 Working Capital = Current Assets – Current liabilities = $7,745 – $1,390 = $6,355 NetSolutions’ working capital at the end of 2011 is $6,355 as computed below. This amount of working capital implies that NetSolutions is able to pay it current liabilities.

50. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50 Working Capital and Current Ratio  The current ratio is another means of expressing the relationship between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities. LO 7

51. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51 Working Capital and Current Ratio LO 7 The current ratio for NetSolutions at the end of 2011 is 5.6, computed as follows: Current Ratio = Current Assets Current Liabilities = $7,745 $1,390 = 5.6 (rounded)

52. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version Completing the Accounting Cycle The End