Electronic Presentations in Microsoft PowerPoint

Completing the Accounting Cycle and Classifying the Accounts

CHAPTER 5

2007 McGraw-Hill Ryerson Ltd.

Learning Objectives
1.

2.

3. 4.

Describe and prepare a worksheet and describe its usefulness. Describe the closing process and explain why temporary accounts are closed each period. Prepare closing entries. Explain and prepare a post-closing trial balance.
2007 McGraw-Hill Ryerson Ltd.

Learning Objectives
5. 6.

7.
8.

Describe the steps in the accounting cycle. Explain and prepare a classified balance sheet. Prepare reversing entries and explain their purpose. (Appendix 5A) Compute the current ratio and describe what it reveals about a companys financial condition. (Appendix 5B)
2007 McGraw-Hill Ryerson Ltd.

The Accounting Cycle

1 Analyze
transactions

9 Prepare

post-closing trial balance

2 2 Journalize

Close Accounts

Post

7 Prepare

4 Prepare

statements

unadjusted trial balance

Adjust

Prepare adjusted trial balance

2007 McGraw-Hill Ryerson Ltd.

The Worksheet
An optional working paper that can be used to simplify the preparation of financial statements. It is:
Prepared before adjusting entries are made. Not distributed to decision makers. Helpful in preventing errors. Often used by auditors.

2007 McGraw-Hill Ryerson Ltd.

A Blank Worksheet
Finlay Interiors Work Sheet For Month Ended January 31, 2011 Unadjusted Trial Balance Account
Dr Cr Dr Cr Dr Cr Dr Cr

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet and Statement of Owner's Equity

Dr Cr

Steps:
1. 2. 3. 4. 5.

6.

Enter unadjusted trial balance. Enter adjustments. Prepare adjusted trial balance. Extend adjusted trial balance columns. Enter net income and balance financial statement columns. Prepare financial statements.
2007 McGraw-Hill Ryerson Ltd.

Finlay Interiors Work Sheet For Month Ended January 31, 2011 Account Cash Supplies Prepaid insurance Furniture Accumulated amortization, furniture Accounts payable Unearned consulting revenue Notes payable Carol Finlay, capital Carol Finlay, withdrawals Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense 1,400 1,000 230 23,300 23,300 600 3,800 300 200 3,000 6,000 10,000 Unadjusted Trial Balance Dr 8,070 3,600 2,400 6,000 Cr Adjustments Dr Cr Adjusted Trial Balance Dr Cr

Step 1 Prepare Unadjusted Trial Balance

2007 McGraw-Hill Ryerson Ltd.

Finlay Interiors Work Sheet For Month Ended January 31, 2011 Account Cash Supplies Prepaid insurance Furniture Accumulated amortization, furniture Accounts payable Unearned consulting revenue Notes payable Carol Finlay, capital Carol Finlay, withdrawals 200 3,000 d) 6,000 10,000 600 3,800 300 1,400 1,000 230 23,300 23,300 a) b) c) f) g) 100 1,050 200 e) 35 f) 1,800 3,505 3,505 35 70 e) 70 d) g) 250 1,800 250 Trial Balance Dr 8,070 3,600 2,400 6,000 c) 200 b) a) 1,050 100 Cr Adjustments Dr Cr Adjusted Trial Balance Dr Cr

Step 2 Consulting revenue Enter Adjustments Rental revenue

Salaries expense Rent expense Utilities expense Totals Insurance expense Supplies expense Amortization expense, furniture Salaries payable Interest expense Interest payable Accounts receivable

2007 McGraw-Hill Ryerson Ltd.

Finlay Interiors Work Sheet For Month Ended January 31, 2011 Account Cash Supplies Prepaid insurance Furniture Accumulated amortization, furniture Accounts payable Unearned consulting revenue Notes payable Carol Finlay, capital Carol Finlay, withdrawals Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Totals Insurance expense Supplies expense Amortization expense Salaries payable Interest expense Interest payable Accounts receivable Totals g) 1,800 3,505 3,505 f) 35 f) 35 1,800 25,405 25,405 600 200 3,000 6,000 10,000 600 3,800 d) g) 250 1,800 300 1,470 1,000 230 100 1,050 200 e) 70 35 35 70 5,850 d) 250 Trial Balance Dr 8,070 3,600 2,400 6,000 c) 200 b) a) 1,050 100 Cr Adjustments Dr Cr Adjusted Trial Balance Dr 8,070 2,550 2,300 6,000 200 200 2,750 6,000 10,000 Cr

Step 3 300 Prepare Adjusted Trial 1,400 e) 70 1,000 Balance 230

23,300 23,300 a) b) c) 100 1,050 200

2007 McGraw-Hill Ryerson Ltd.

Account Cash Supplies Prepaid insurance Furniture Accumulated amortization, furniture Accounts payable Unearned consulting revenue Notes payable Carol Finlay, capital Carol Finlay, withdrawals Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Insurance expense Supplies expense Amortization expense, furniture Salaries payable Interest expense Interest payable Accounts receivable Totals Net Income

Adjusted Trial Balance Dr 8,070 2,550 2,300 6,000 200 200 2,750 6,000 10,000 600 5,850 300 1,470 1000 230 100 1,050 200 70 35 35 1,800 25,405 25,405 Cr

Income Statement Dr Cr

Balance Sheet and Statement of Owner's Equity

Dr 8,070 2,550 2,300 6,000

Cr

200 200 2,750 6,000 10,000 600 5,850 300 1,470 1,000 230 100 1,050 200 70 35 35 1,800 4,085

6,150 21,320 19,255 Step 4 2,065 2,065 Extend Adjusted Amounts to Statement Columns

2007 McGraw-Hill Ryerson Ltd.

Finlay Interiors Work Sheet For Month Ended January 31, 2011 Account Cash Supplies Prepaid insurance Furniture Accumulated amortization, furniture Accounts payable Unearned consulting revenue Notes payable Carol Finlay, capital Carol Finlay, withdrawals Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Insurance expense Supplies expense Amortization expense, furniture Salaries payable Interest expense Interest payable Accounts receivable Totals Net Income Totals 1,800 25,405 25,405 4,085 2,065 6,150 6,150 6,150 35 35 1,800 21,320 21,320 19,255 2065 21,320 1,470 600 5,850 300 5,850 300 Adjusted Trial Balance Dr 8,070 2,550 2,300 6,000 200 200 2,750 6,000 10,000 600 Cr Income Statement Dr Cr
Balance Sheet and Statement of Owner's Equity

Dr 8,070 2,550 2,300 6,000

Cr

200 200 2,750 6,000 10,000

1,470 Step 5 1000 1,000 230 Enter net230 income and balance financial 100 100 1,050 statement 1,050 columns. 200 70 35 35 200 70

2007 McGraw-Hill Ryerson Ltd.

Finlay Interiors Work Sheet For Month Ended January 31, 2011 Account Cash Supplies Prepaid insurance Furniture Accumulated amortization, furniture Accounts payable Adjusted Trial Balance Dr 8,070 2,550 2,300 6,000 200 Cr Income Statement Dr Cr
Balance Sheet and Statement of Owner's Equity

Dr 8,070 2,550 2,300 6,000

Cr

200 Step 6 Unearned consulting revenue 2,750 Prepare financial statements Notes payable 6,000from Carol Finlay, capital 10,000 worksheet information. Carol Finlay, withdrawals 600 Consulting revenue Rental revenue Salaries expense Rent expense Utilities expense Insurance expense Supplies expense Amortization expense, furniture Salaries payable Interest expense Interest payable Accounts receivable Totals Net Income Totals 1,800 25,405 25,405 4,085 2,065 6,150 6,150 6,150 35 35 1,470 1000 230 100 1,050 200 70 35 5,850 300 1,470 1,000 230 100 1,050 200 5,850 300

200 200 2,750 6,000 10,000 600

70 35 1,800 21,320 21,320 19,255 2065 21,320

2007 McGraw-Hill Ryerson Ltd.

The Closing Process

The closing process occurs at the end of an accounting period after financial statements are prepared.
Reasons for closing entries: 1. Resets revenue, expense and withdrawal account balances to zero at the end of the period. 2. Updates the capital account to reflect net income and drawings.
2007 McGraw-Hill Ryerson Ltd.

Four-Step Closing Process (REID)

1. 2.

3.

4.

Close Revenue accounts to Income Summary. Close Expense accounts to Income Summary. Close Income Summary account to Owners Capital. Close Drawings (Withdrawals) account to Owners Capital.
2007 McGraw-Hill Ryerson Ltd.

Four-Step Closing Process (REID)

Example Please see the Adjusted Trial Balance illustration in the textbook.

2007 McGraw-Hill Ryerson Ltd.

Step 1: Close Revenue accounts to Income Summary

Consulting Revenue 5,850 5,850

Consulting Revenue Rental Revenue Income Summary

5,850 300

66,150

Rental Revenue 300 300 -

Income Summary 6,150 6,150

2007 McGraw-Hill Ryerson Ltd.

Step 2: Close Expense Accounts to Income Summary

Income Summary Amortization Expense Salaries Expense Interest Expense Insurance Expense Rent Expense Supplies Expense Utilities Expense
Income Summary 4,085 6,150 2,065
Amortization Expense 200 200 -

4,085 200 1,470 35 100 1,000 1,050 230

Salaries Expense 1,470 1,470 -

Insurance Expense 100 100 Rent Expense 1,000 1,000 Supplies Expense 1,050 1,050 Utilities Expense 230 230 -

Interest Expense 35 35 2007 McGraw-Hill Ryerson Ltd.

Step 3: Close Income Summary to Owners Capital

Income Summary Carol Finlay, Capital 2,065 2,065
Income Summary 4,085 6,150 bal. 2,065 2,065 -

Carol Finlay, Capital 10,000 2,065 bal. 12,065

2007 McGraw-Hill Ryerson Ltd.

Step 4: Close Drawings to Owners Capital

Carol Finlay, Capital 600 Carol Finlay, Withdrawals 600
Carol Finlay, Capital 10,000 600 2,065 balance 11,465

Carol Finlay, Withdrawals 600 600 balance

2007 McGraw-Hill Ryerson Ltd.

Post-Closing Trial Balance

A list of balances for all accounts not closed.
It verifies that: Total debits = total credits for permanent accounts. All temporary accounts have zero balances.

2007 McGraw-Hill Ryerson Ltd.

The Accounting Cycle

1 Analyze
transactions

9 Prepare

post-closing trial balance

2 2 Journalize

Close Accounts

Post

7 Prepare

4 Prepare

statements

unadjusted trial balance

Adjust

6 Prepare

adjusted trial balance

2007 McGraw-Hill Ryerson Ltd.

Mini-Quiz
Closing the temporary accounts at the end of each accounting period:
A) Serves to transfer the effects of these

accounts to the proper owner's equity account on the balance sheet. B)Prepares the withdrawals account for use in the next period. C)Gives the revenue and expense accounts zero balances. D)Both A and C. E)All of the above.
2007 McGraw-Hill Ryerson Ltd.

Mini-Quiz
Closing the temporary accounts at the end of each accounting period:
A) Serves to transfer the effects of these

accounts to the proper owner's equity account on the balance sheet. B)Prepares the withdrawals account for use in the next period. C)Gives the revenue and expense accounts zero balances. D)Both A and C. E)All of the above.
2007 McGraw-Hill Ryerson Ltd.

Classified Balance Sheet

A balance sheet that presents the assets and liabilities in relevant subgroups.
It provides users with more useful information for decision making.

2007 McGraw-Hill Ryerson Ltd.

Music Components Balance Sheet January 31, 2011 Assets Current Assets: Cash $ 6,500 Temporary investments 2,100 Accounts receivable 4,400 Merchandise inventory 29,000 Prepaid expenses 2,400 Total current assets 44,400 Long-term investments: Notes Receivable, due Mar. 31,2013 $ 18,000 Land not currently used in operations 48,000 Total investments 66,000 Property, Plant and Equipment: Plant and equipment: Land $ 73,200 Buildings $ 170,000 Less: Accumulated amortization 45,000 125,000 Store equipment $ 33,200 Less: Accumulated amortization 8,000 25,200 Total property, plant and equipment 223,400 Intangible assets: Trademark 10,000

Current assets are assets that are expected to be sold, collected, or used within the longer of one year or the companys operating cycle.

2007 McGrawHill Ryerson Ltd.

Music Components Balance Sheet January 31, 2011 Assets Current Assets: Cash $ 6,500 Temporary investments 2,100 Accounts receivable 4,400 Merchandise inventory 29,000 Prepaid expenses 2,400 Total current assets 44,400 Long-term investments: Notes Receivable, due Mar. 31,2013 $ 18,000 Land not currently used in operations 48,000 Total investments 66,000 Property, Plant and Equipment: Plant and equipment: Land $ 73,200 Buildings $ 170,000 Less: Accumulated amortization 45,000 125,000 Store equipment $ 33,200 Less: Accumulated amortization 8,000 25,200 Total property, plant and equipment 223,400 Intangible assets: Trademark 10,000

Long-term investments are assets not used in day-to-day operating activities and are expected to be held for more than one year or the operating cycle.

2007 McGrawHill Ryerson Ltd.

Music Components Balance Sheet January 31, 2011

Property, plant and equipment are tangible capital assets used in day-to day operating activities to produce or sell products and services and are used for more than one accounting period or operating cycle.

Assets Current Assets: Cash $ 6,500 Temporary investments 2,100 Accounts receivable 4,400 Merchandise inventory 29,000 Prepaid expenses 2,400 Total current assets 44,400 Long-term investments: Notes Receivable, due Mar. 31,2013 $ 18,000 Land not currently used in operations 48,000 Total investments 66,000 Property, Plant and Equipment: Plant and equipment: Land $ 73,200 Buildings $ 170,000 Less: Accumulated amortization 45,000 125,000 Store equipment $ 33,200 Less: Accumulated amortization 8,000 25,200 Total property, plant and equipment 223,400 Intangible assets: Trademark 10,000

2007 McGrawHill Ryerson Ltd.

Music Components Balance Sheet January 31, 2011 Assets Current Assets: Cash $ 6,500 Temporary investments 2,100 Accounts receivable 4,400 Merchandise inventory 29,000 Prepaid expenses 2,400 Total current assets 44,400 Long-term investments: Notes Receivable, due Mar. 31,2013 $ 18,000 Land not currently used in operations 48,000 Total investments 66,000 Property, Plant and Equipment: Plant and equipment: Land $ 73,200 Buildings $ 170,000 Less: Accumulated amortization 45,000 125,000 Store equipment $ 33,200 Less: Accumulated amortization 8,000 25,200 Total property, plant and equipment 223,400 Intangible assets: Trademark 10,000

Intangible assets are long-term resources used to produce or sell products and services. They lack physical form and their benefits are uncertain.

2007 McGrawHill Ryerson Ltd.

Music Components Balance Sheet January 31, 2011

Liabilities Current liabilities: Accounts payable $ 15,300 Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities $ 29,000 Long-term liabilities: Current liabilities are obligations due within Notes payable (net of current portion) 150,000 Totalyear liabiltiiesor the companys operating 179,000 one cycle, Owner's Equity whichever is longer. Donald Bowie, capital 164,800 Total liabilities and owner's equity $ 343,800
2007 McGraw-Hill Ryerson Ltd.

Music Components Balance Sheet January 31, 2011

Liabilities Current liabilities: Accounts payable Wages payable Notes payable Current portion of long-term liabilities Total current liabilities Long-term liabilities: Notes payable (net of current portion) Total liabiltiies Owner's Equity Donald Bowie, capital Total liabilities and owner's equity

$ 15,300 not due Long-term liabilities are obligations 3,200 within the longer of one year or the 3,000 7,500 companys operating cycle. $ 29,000 150,000 179,000 164,800 $ 343,800

2007 McGraw-Hill Ryerson Ltd.

Music Components Balance Sheet January 31, 2011

Liabilities Current liabilities: Accounts payable $ 15,300 Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities $ 29,000 Long-term liabilities: Owners equity is the owners claim on the Notes payable (net of current portion) 150,000 Total liabiltiies assets of a company. 179,000 Owner's Equity Donald Bowie, capital 164,800 Total liabilities and owner's equity $ 343,800
2007 McGraw-Hill Ryerson Ltd.

Review
Q What classes of assets and liabilities are
shown on a typical classified balance sheet? A Current assets, long-term investments, PP&E, intangible assets, current liabilities, long-term liabilities

2007 McGraw-Hill Ryerson Ltd.

Appendix 5A Reversing Entries

Optional entries used to simplify record keeping.
They are:

Prepared on the first day of the new accounting period.

Prepared for entries that created accrued assets and liabilities.
2007 McGraw-Hill Ryerson Ltd.

Reversing Entries Example

DP Company rents unused office space to a tenant for $2,400 per month. The company had not received Octobers rent payment from the tenant by October 31. Payment is expected on November 3. The entry to record the accrued revenue would be: Oct.31 Accounts Receivable Rent Revenue 2,400 2,400

2007 McGraw-Hill Ryerson Ltd.

Appendix 5A
Reversing Entries are Not used Oct.31 Accounts Receivable Rent Revenue Reversing Entries are Used 2,400 Accounts Receivable 2,400 Rent Revenue 2,400 2,400

Accounts Receivable 2,400

Oct.31

Accounts Receivable 2,400

Rent Revenue 2,400

Oct.31

Rent Revenue 2,400

2007 McGraw-Hill Ryerson Ltd.

Appendix 5A
Reversing Entries are Not used Nov. 1 No entry Reversing Entries are Used Rent Revenue 2,400 Accounts Receivable 2,400 Cash Rent Revenue
Accounts Receivable 2,400 2,400 0 Rent Revenue 2,400 2,400 0

Nov.3 Cash 2,400 Accounts Receivable 2,400

Accounts Receivable 2,400 2,400 0 Rent Revenue Nov.1 Nov.3 balance Oct.31 Nov.1 Nov.3 balance

2,400 2,400

2007 McGraw-Hill Ryerson Ltd.

Appendix 5B Using the Information

Current ratio: A ratio that is used to evaluate a companys ability to pay its short-term obligations.

Current ratio

Current assets Current liabilities

2007 McGraw-Hill Ryerson Ltd.

Appendix 5B Using the Information

Current ratio
=

Current assets Current liabilities

This ratio:
Should not be used in isolation as a measure of liquidity. Will vary from industry to industry. May be tracked over time to spot trends. May be used to compare to industry norms.
2007 McGraw-Hill Ryerson Ltd.

End of Chapter

2007 McGraw-Hill Ryerson Ltd.