Completing the Accounting Cycle

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Completing the Accounting Cycle
Chapter
4
2
Learning objective

• Prepare a work sheet and explain its usefulness.
• Explain why temporary accounts are closed each
  period.
• Describe and prepare closing entries.
• Explain and prepare a post-closing trial balance.

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Learning objective

• Prepare a work sheet and explain its usefulness.

4
Benefits of a Work Sheet
Aids the preparation of financial statements.
Assists in planning and organizing an audit.
Not a required report.
Reduces possibility of errors.
Helps in preparing interim financial statements.
Shows the effects of proposed transactions.
Links accounts and their adjustments.
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FastForwardWork Sheet For Month Ended December
31, 2004
First, enter the unadjusted amounts to the
worksheet.
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FastForwardWork Sheet For Month Ended December
31, 2004
Next, enter the adjustments.
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FastForwardWork Sheet For Month Ended December
31, 2004
Prepare adjusted trial balance.
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Sort adjusted trial balance amounts to financial
statements.
FastForwardWork Sheet For Month Ended December
31, 2004
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Total statement columns, compute income or loss,
and balance columns.
FastForwardWork Sheet For Month Ended December
31, 2004
Total expenses
Total revenue
Profit
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Prepare the Financial Statements
?Prepare the Income Statement.
A work sheet does not substitute for financial
statements.
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?Prepare the Statement of Changes in Owners
Equity.


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?Prepare the Balance Sheet.


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Closing Process

• Resets revenue, expense and withdrawal account
  balances to zero at the end of the period.
• Helps summarize a periods revenues and expenses
  in the Income Summary account.

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Learning objective

• Explain why temporary accounts are closed each
  period.

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Temporary and Permanent Accounts

• Temporary accounts accumulate data related to one
  accounting period.
• Permanent accounts report on activities related
  to one or more future accounting periods.

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Temporary and Permanent Accounts
The closing process applies only to temporary
accounts.
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Learning objective

• Describe and prepare closing entries.

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Recording Closing Entries

• Close Revenue accounts to Income Summary.
• Close Expense accounts to Income Summary.
• Close Income Summary account to Owners Capital.
• Close Withdrawals to Owners Capital.

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Closing Process
Balances before closing.
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Closing Process

• Close Revenue accounts to Income Summary.

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Closing Process

• Close Expense accounts to Income Summary.

The balance in Income Summary equals net income.
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Closing Process

• Close Income Summary to Owners Capital.

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Closing Process

• Close Withdrawals account to Owners Capital.

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Using the adjusted trial balance, lets prepare
the closing entries for FastForward.
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• Close Revenue accounts to Income Summary.

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Close Revenue Accounts to Income Summary
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Revenue Accounts to Income Summary
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• Close Expense accounts to Income Summary.

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Close Expense Accounts to Income Summary
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Expense Accounts to Income Summary

• Close Expense Accounts to Income Summary

Net Income


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• Close Income Summary to Owners Capital.

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Close Income Summary to Owners Capital
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Income Summary to Owners Capital

• Close Income Summary to Owners Capital

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• Close Withdrawals to Owners Capital.

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Close Withdrawals to Owners Capital
Now, lets look at the ledger accounts after
posting this closing entry.
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Close Withdrawals to Owners Capital
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Learning objective

• Explain and prepare a post-closing trial balance.

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Post-Closing Trial Balance
Lets look at FastForwards post-closing trial
balance.

• List of permanent accounts and their balances
  after posting closing entries.
• Total debits and credits must be equal.

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Post-Closing Trial Balance
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Accounting cycle
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Lets discuss the components of a classified
balance sheet.
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Classified Balance Sheet
Current items are those expected to come due
(both collected and owed) within the longer of
one year or the companys normal operating cycle.
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Classified Balance Sheet

• Operating cycle is the time span from when cash
  is used to acquire goods and services until cash
  is received from the sale of those goods and
  services.
• Operating cycle of supermarket (a few weeks) vs.
  operating cycle of a construction company
  (several years).

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Current assets are expected to be sold,
collected, or used within one year or the
companys operating cycle.
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Long-term investments are expected to be held
for the longer of one year or the operating cycle.
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Plant assets are tangible long-lived assets used
to produce or sell products and services.
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Intangible assets are long-term resources used to
produce or sell products and services and that
lack physical form.
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Current liabilities are obligations due within
the longer of one year or the companys operating
cycle.
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Long-term liabilities are obligations not due
within the longer of one year or the companys
operating cycle.
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Equity is the owners claim on the assets.
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Current Ratio
Helps assess the companys ability to pay its
debts in the near future
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Homework for chapter 4

• Ex 4-3, 4-4, 4-7
• Problem 4-2A, 4-4A
• Due on June 19, 2006 Monday

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End of Chapter 4