chapter 04 · pdf filechapter 04 . c. ompleting the. a. ccounting. c. ycle. ... current...
TRANSCRIPT
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
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 04
COMPLETING THE ACCOUNTING CYCLE
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BENEFITS OF A WORK SHEET 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
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RECORDING CLOSING ENTRIES 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
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Temporary Accounts
Revenues
Income Summary
Expe
nses
Withdraw
als
Permanent Accounts
Assets
Liab
ilitie
s Ow
ner’s C
apital TEMPORARY AND
PERMANENT ACCOUNTS
The closing process applies only to
temporary accounts.
C 1
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Let’s see how the closing
process works!
RECORDING CLOSING ENTRIES
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
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Using the adjusted trial balance, let’s prepare the
closing entries for
FastForward.
P 2
FastForwardAdjusted Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$
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Close Credit Balances in
Revenue Accounts to
Income Summary.
FastForwardAdjusted Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$
P 2
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CLOSE CREDIT BALANCES IN REVENUE ACCOUNTS TO INCOME SUMMARY
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
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Consulting Revenue7,850 7,850
-
Rental Revenue300 300
-
Income Summary8,150
P 2
CLOSE CREDIT BALANCES IN REVENUE ACCOUNTS TO INCOME SUMMARY
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Close Debit Balances in
Expense Accounts to Income Summary.
P 2
FastForwardAdjusted Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$
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Now, let’s look at the ledger accounts after posting this closing entry.
CLOSE DEBIT BALANCES IN EXPENSE ACCOUNTS TO INCOME SUMMARY
Dr. Cr. Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230
P 2
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Income Summary4,365 8,150
3,785
Utilities Expense230 230
-
Rent Expense1,000 1,000
-
Net Income
CLOSE DEBIT BALANCES IN EXPENSE ACCOUNTS TO INCOME SUMMARY
Supplies Expense
1,050 1,050 -
Depreciation Expense- Eq.
375 375 -
Salaries Expense1,610 1,610
-
Insurance Expense100 100
-
P 2
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Close Income Summary to
Owner’s Capital.
P 2
FastForwardAdjusted Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$
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Now, let’s look at the ledger accounts after posting this closing entry.
CLOSE INCOME SUMMARY TO OWNER’S CAPITAL
Dr. Cr. Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785
P 2
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C. Taylor, Capital30,000 3,785
33,785
Income Summary4,365 8,150 3,785
-
P 2 CLOSE INCOME SUMMARY TO OWNER’S CAPITAL
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Close Withdrawals Account to Owner’s Capital.
FastForwardAdjusted Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$
P 2
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Now, let’s look at the ledger accounts after posting this closing entry.
CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL
Dr. Cr. Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200
P 2
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C. Taylor, Capital200 30,000
3,785
33,585
C. Taylor, Withdrawals
200 200
-
P 2 CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL
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SUMMARY OF THE CLOSING PROCESS 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.
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Let’s look at FastForward’s
post-closing trial balance.
POST-CLOSING TRIAL BALANCE
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.
P 3
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POST-CLOSING TRIAL BALANCE P 3
FastForwardPost-Closing Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 33,585 C. Taylor, Withdrawals - Consulting revenue - Rental revenue - Depreciation expense-Equipment - Salaries expense - Insurance expense - Rent expense - Supplies expense - Utilities expense - Totals 43,120$ 43,120$
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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.
CLASSIFIED BALANCE SHEET C 3
Categories of a Classified Balance SheetAssets Liabilities and Equity
Current assets Current liabilitiesNoncurrent assets Noncurrent liabilities
Long-term investments EquityPlant assetsIntangible assets
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Current assets are expected to be sold, collected, or used within one year or the
company’s operating cycle.
C 3
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Long-term investments are expected to be held for more than one year or the operating cycle.
C 3
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Plant assets are tangible long-lived assets used to produce or sell products and services.
C 3
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Intangible assets are long-term resources used to produce or sell products and services
and that lack physical form.
C 3
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Current liabilities are obligations due within the longer of one year or the company’s operating cycle.
C 3
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Long-term liabilities are obligations not due within the longer of one year or the company’s
operating cycle.
C 3
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GLOBAL VIEW
The definition of an asset is similar under U.S. GAAP and IFRS and involves three basic criteria: (1)the company owns or controls the right to use the item, (2)the right arises from a past transaction or event, and (3)the item can be reliably measured.
Both systems define the initial asset value as historical cost for nearly all assets.
The definition of a liability is similar under U.S. GAAP and IFRS and involves three basic criteria: (1) the item is a present obligation requiring a probable future resource outlay, (2) the obligation arises from a past transaction or event, and (3) the obligation can be reliably measured.
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CURRENT RATIO
Helps assess the company’s ability to pay its debts in the near future
Current Ratio = Current Assets
Current Liabilities
$ in millions 2009 2008 2007 2006
Current assets $ 2,867 $ 2,919 $ 2,771 $ 2,784
Current liabilities 1,225 1,374 1,709 1,575
Current ratio 2.3 2.1 1.6 1.8
Industry current ratlo 2.0 2.1 2.3 2.4
Limited Brands, Inc.
A 1
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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.