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Completing the

Accounting Cycle
Chapter 4

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-1
Objective 1

Prepare an accounting
work sheet.

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

 The accounting cycle is the process by


which accountants prepare financial
statements for an entity for a specific
period of time.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-3
The Accounting Cycle

 For a new business, begin by setting up


ledger accounts.
 For an established business, begin with
account balances carried over from the
previous period.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-4
The Accounting Cycle

Accounts Receivable Accounts Receivable 1,700


1,350 Service Revenue 1,700

Accounts Receivable
Accounts Receivable
1,350
1,350
1,700
1,700
3,050

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-5
The Accounting Cycle

Work Sheet
Cash 12,100
Accounts
receivable 3,050

Balance Income
Sheet Statement

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-6
The Accounting Cycle

Adjusting entries Closing entries

Cash Accounts Receivable


12,100 3,050

Postclosing Trial Balance


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

 What is the work sheet?


 A work sheet is a multi-columned document
used by accountants to help move data from
the trial balance to the financial statements.
 It is an internal document.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-8
The Accounting Work Sheet
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 12,100
Accounts receivable 1,350
Supplies 250
Equipment 15,500
Accum. depreciation 7,500
Accounts payable 1,200
Salary payable 1,100
Unearned revenue 1,500
Capital 7,200
Withdrawals 1,000
Revenue 23,700
Salary expense 12,000
Supplies expense
Depreciation expense
Totals 42,200 42,200

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-9
The Accounting Work Sheet

a The company has earned revenue of $1,700


which will be collected next month.
b Inventory of supplies at month end totaled
$150.
c Depreciation for the period was calculated
as $200.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 10


The Accounting Work Sheet
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 12,100 12,100
Accounts receivable 1,350 a) 1,700 3,050
Supplies 250 b) 100 150
Equipment 15,500 15,500
Accum. depreciation 7,500 c) 200 7,700
Accounts payable 1,200 1,200
Salary payable 1,100 1,100
Unearned revenue 1,500 1,500
Capital 7,200 7,200
Withdrawals 1,000 1,000
Revenue 23,700 a) 1,700 25,400
Salary expense 12,000 12,000
Supplies expense b) 100 100
Depreciation expense c) 200 200
Totals 42,200 42,200 2,000 2,000 44,100 44,100

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 11


The Accounting Work Sheet
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 12,10 12,10
Accounts receivable 0 0
Supplies 3,050 3,050
Equipment 150 150
Accum. depreciation 15,50 7,700 15,50 7,700
Accounts payable 0 1,200 0 1,200
Salary payable 1,100 1,100
Unearned revenue 1,500 1,500
Capital 7,200 7,200
Withdrawals
Revenue 25,400
Salary expense 1,000 1,000
Supplies expense
Depreciation expense 12,00
Totals 0 44,100 18,700
100
200 31,80
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0
The Accounting Work Sheet
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 12,10 12,10
Accounts receivable 0 0
Supplies 3,050 3,050
Equipment 150 150
Accum. depreciation 15,50 7,700 15,50 7,700
Accounts payable 0 1,200 0 1,200
Salary payable 1,100 1,100
Unearned revenue 1,500 1,500
Capital 7,200 7,200
Withdrawals
Revenue 25,400 25,400
Salary expense 1,000 12,000 1,000
Supplies expense 100
Depreciation expense 12,00 200
Totals 0 44,100 12,300 25,400 18,700
100
200 31,80
©2002 Prentice Hall, Inc. Business44,10
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0
The Accounting Work Sheet
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 12,10 12,10
Accounts receivable 0 0
Supplies 3,050 3,050
Equipment 150 150
Accum. depreciation 15,50 7,700 15,50 7,700
Accounts payable 0 1,200 0 1,200
Salary payable 1,100 1,100
Unearned revenue 1,500 1,500
Capital 7,200 7,200
Withdrawals
Revenue 25,400 25,400
Salary expense 1,000 12,000 1,000
Supplies expense 100
Depreciation expense 12,00 200
Totals 0 44,100 12,300 25,400 18,700
Net income 100 13,100 13,100
200 25,400 25,400 31,80 31,800
©2002 Prentice Hall, Inc. Business44,10
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0 4 - 14
Objective 2

Use the work sheet


to complete the
accounting cycle.

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Recording the
Adjusting Entries

The work sheet Actual adjustment


helps identify of the accounts
the accounts requires
that need journalizing
adjustments. and posting
the entries.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 16


Recording the
Adjusting Entries
 The adjusting entries may be recorded in the
journal when they are entered on the work
sheet.
 Many accountants journalize and post the
adjusting entries just before they make the
closing entries.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 17


Objective 3

Close the revenue,


expense, and
withdrawal accounts.

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Closing the Accounts

 Closing the accounts is the end of period


process that prepares the accounts for
recording transactions during the next
period.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 19


Closing the Accounts

Closing Entries

Expenses
Revenues and
increase Withdrawals
Owner’s decrease
Equity. Owner’s
Equity.

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Closing the Accounts

 Revenues and Expense accounts are closed


to Income Summary.
 Income Summary is closed to Capital.
 Withdrawals are closed to Capital.
 In a corporation, Dividends are closed to
Retained Earnings.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 21


Closing the Accounts

Income Summary

A debit A credit
balance balance
represents represents
net loss. net income.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 22


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

 The accounting cycle ends with the


postclosing trial balance.
 The postclosing trial balance is dated as
of the end of the period for which the
statements have been prepared.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 24


Permanent Accounts

 What accounts never close?


– Assets
– Liabilities
– Owner’s equity
 Balances of permanent accounts carry over
to the next period.

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Objective 4

Classify assets and liabilities


as current or long-term.

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Liquidity

 This is a measure of how quickly an item


can be converted into cash.
 On the balance sheet, assets and liabilities
are classified as either current or long-term
to indicate their relative liquidity.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 27


Current Assets

 Current assets are cash, or will be converted


to cash, in one year or within the normal
business operating cycle.
 What are some other examples?
– short-term receivables
– inventory
– prepaid expenses

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 28


Current Liabilities

 Current liabilities are debts or obligations


due within one year or within the operating
cycle.
 What are some examples?
– accounts and salary payables
– short-term notes payable
– unearned revenue

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 29


Long-term Assets and Liabilities

 Long-term assets include all other assets.


– property, equipment, and intangibles
 Long-term liabilities are all other debts due
in longer than one year or the entity’s
operating cycle.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 30


The Classified Balance Sheet

Debit side Credit side


Current assets Current liabilities
Long-term assets Long-term liabilities

Listed in the order Listed in the order


of decreasing of how soon they
liquidity must be paid

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 31


The Classified Balance Sheet
XYZ Services
January 31, 20XX
Assets Liabilities
Current assets: Current liabilities:
Cash 12,100 Accounts payable 1,200
Accounts receivable 3,050 Salary payable 1,100
Supplies 150 Unearned revenue 1,500
Total current assets 15,300 Total liabilities 3,800
Plant assets Owner’s equity
Equipment 15,500 Capital 19,300
Less Accum. deprec. 7,700 7,800
Total liabilities and
Total assets 23,100 owner’s equity 23,100

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 32


Different Formats of
the Balance Sheet

Report Format Account Format


Assets Assets = Liabilities +
Liabilities Owner’s Equity
Owner’s Equity

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 33


Objective 5

Use the current and debt


ratios to evaluate a business.

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Comparative Financial Statements

 They enhance the user’s ability to analyze


a company’s past performance.
 What are two common ratios used to
measure liquidity?
1 Current ratio
2 Debt ratio

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 35


Current Ratio

 This measures the ability of a business to


pay its current liabilities with its current
assets.

Current ratio = Current assets ÷ Current liabilities

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 36


Debt Ratio

 It indicates the proportion of a business’s


assets that are financed with debt.
 It measures their ability to pay both current
and long-term debt.

Total liabilities ÷ Total assets

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 37


Trend Analysis

 Decision makers compare various ratios


over a period of time.

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 38


End of Chapter 4

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

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