chapter 1 completing the accounting cycle
TRANSCRIPT
Chapter 1
Completing the
Accounting Cycle
• multiple-column form used for the adjustment process and preparing financial statements
• working tool for the accountant
• not a permanent accounting record
• Eases preparation of adjusting entries and financial statements
What is a Worksheet?
Example of a Work Sheet
Remember:
• A work sheet is not a permanent accounting record
• When it is used:
– financial statements are prepared from the work sheet
– adjustments are journalized and posted from the work sheet after financial statements, so management can receive the financial statements more quickly
To Prepare A Work Sheet:
1 Prepare the trial balance
2 Enter adjustments in the adjustments columns
3 Enter adjusted balances in adjusted trial balance columns
4 Extend adjusted trial balance amounts to the appropriate financial statement columns
5 Total the statement columns, compute net income (loss), and complete the work sheet
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable 6,200
Salaries payable -
Unearned revenue 3,000
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 5,800
Rental revenue 300
Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300
Adjusted
Trial BalanceAdjustments
Unadjusted
Trial Balance
FastForwardWork Sheet
For Month Ended December 31, 2011
First, enter the unadjusted
trial balance amounts to
the worksheet!
Here are our adjusting entries for December
a) Insurance expense 100
Prepaid insurance 100
b) Supplies expense 1050
Supplies 1050
c) Depreciation expense 375
Accum. Depr. – Equip. 375
Here Are More Adjusting Entries for December
d) Unearned revenue 250
Consulting Revenue 250
e) Salaries Expense 210
Salaries Payable 210
f) Accounts Receivable 1,800
Consulting Revenue 1,800
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Accum. depr. - Equip. - c 375
Accounts payable 6,200
Salaries payable - e 210
Unearned revenue 3,000 d 250
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals 45,300 45,300 3,785 3,785
Adjusted
Trial BalanceAdjustments
Unadjusted
Trial Balance
Next, enter the adjustments!
FastForwardWork Sheet
For Month Ended December 31, 2011
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned revenue 3,000 d 250 2,750
C. Taylor, Capital 30,000 - 30,000
C. Taylor, Withdrawals 600 600
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685
Adjusted
Trial BalanceAdjustments
Unadjusted
Trial Balance
Prepare the adjusted trial
balance!
FastForwardWork Sheet
For Month Ended December 31, 2011
FastForwardWork Sheet
For Month Ended December 31, 2004
Then, extend the adjusted trial balance amounts to the financial statements!
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 600 600
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
Balance Sheet &
Statement of EquityStatement
Adjusted
Trial Balance
Income
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 600 600
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
Net income 3,785 3,785
8,150 8,150 43,320 43,320
Balance Sheet &
Statement of EquityStatement
Adjusted
Trial Balance
Income
FastForwardWork Sheet
For Month Ended December 31, 2004
Total statement columns, compute income or loss, and balance columns.
FastForward
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue 7 850$
Rental revenue 300
Total revenues 8 150
Operating expenses:
Depr. expense - Equip. 375$
Salaries expense 1 610
Insurance expense 100
Rent expense 1 000
Supplies expense 1 050
Utilities expense 230
Total expenses 4 365
Net income 3 785$
Prepare the IncomeStatement.
Prepare the Financial Statements
A work sheet does not
substitute for financial
statements.
Prepare the Statement of Changes in Owner’s Equity.
FastForward
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue 7 850$
Rental revenue 300
Total revenues 8 150
Operating expenses:
Depr. expense - Equip. 375$
Salaries expense 1 610
Insurance expense 100
Rent expense 1 000
Supplies expense 1 050
Utilities expense 230
Total expenses 4 365
Net income 3 785$ FastForward
Statement of Changes in Owner's Equity
For the Month Ended December 31, 2011
C. Taylor, Capital 12/1/04 $ -0-
Add: Net income 3 785$
Investment by owner 30 000 33 785
Total 33 785
Less: Withdrawal by owner 600
C. Taylor, Capital 12/31/04 33 185$
FastForward
Balance Sheet
December 31, 2011
AssetsCash 3 950$
Accounts receivable 1 800
Supplies 8 670
Prepaid insurance 2 300
Equipment 26 000$
Less: accum. depr. (375) 25 625
Total assets 42 345$
LiabilitiesAccounts payable 6 200$
Salaries payable 210
Unearned consulting revenues 2 750
Total liabilities 9 160$
Owner's EquityC.Taylor, Capital 33 185
Total liabilities and equity 42 345$
Prepare the Balance Sheet.
FastForward
Statement of Changes in Owner's Equity
For the Month Ended December 31, 2011
C. Taylor, Capital 12/1/04 $ -0-
Add: Net income 3 785$
Investment by owner 30 000 33 785
Total 33 785
Less: Withdrawal by owner 600
C. Taylor, Capital 12/31/04 33 185$
Which of these characteristics are true about a work sheet?
– a permanent accounting record
– an optional device used by accountants
– a part of the general ledger
– a part of the journal
Answer!
– permanent accounting record
– optional device used by accountants
– part of the general ledger
– part of the journal
Although it’s optional, the work sheet is a very useful tool!
TEMPORARY VS.
PERMANENT ACCOUNTS
TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawing Owner’s capital account
Now, let’s talk about closing entries and income summary!
CLOSING ENTRIES
• Closing entries– Transfer net income (loss) and owner’s drawings to
owner’s capital
– Journalizing and posting is a required step in the accounting cycle
• Income Summary– A temporary account
– Used in closing revenue and expense accounts
– Minimizes the details in the permanent owner’s capital account
Closing Process
• Resets revenue, expense and withdrawal account balances to zero at the end of the period.
• 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.
Temporary Accounts
Revenues
Income Summary
Exp
en
ses
With
draw
als
Permanent Accounts
Assets
Liab
iliti
es O
wn
er’s
Cap
ital
The closing process applies only to
temporary accounts.
Temporary and Permanent Accounts
Recording Closing Entries
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Owner’s Capital.
Close Withdrawals to Owner’s Capital.
Balances before closing.
Income Summary
Owner's Capital
30,000
30,000
Revenue Accounts
25,000
25,000
Withdrawals Account
5,000
5,000
Expense Accounts
10,000
10,000
Closing Process
Income Summary
25,000
25,000
Close Revenue accounts to Income
Summary.
Owner's Capital
30,000
30,000
Revenue Accounts
25,000 25,000
-
Withdrawals Account
5,000
5,000
Expense Accounts
10,000
10,000
Closing Process
Income Summary
10,000 25,000
15,000 Owner's Capital
30,000
30,000
Revenue Accounts
25,000 25,000
-
Withdrawals Account
5,000
5,000
Close Expense accounts to Income
Summary.
Expense Accounts
10,000 10,000
-
Closing Process
The balance in Income Summary equals net
income.
Owner's Capital
30,000
15,000
45,000
Owner's Capital
30,000
15,000
45,000
Withdrawals Account
5,000
5,000
Withdrawals Account
5,000
5,000
Close Income Summary to Owner’s
Capital.
Revenue Accounts
25,000 25,000
-
Expense Accounts
10,000 10,000
-
Income Summary
10,000 25,000
15,000
-
Closing Process
Owner's Capital
30,000
15,000
45,000
Owner's Capital
5,000 30,000
15,000
40,000
Withdrawals Account
5,000
5,000
Withdrawals Account
5,000 5,000
-
Revenue Accounts
25,000 25,000
-
Expense Accounts
10,000 10,000
-
Income Summary
10,000 25,000
15,000
-
Closing Process
Close Withdrawals account to Owner’s
Capital.
FastForward
Adjusted Trial Balance
December 31, 2011
Cash 3 950$
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 600
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$
Using the adjusted trial balance, let’s prepare the
closing entries for
FastForward.
Close Revenue accounts to Income
Summary.
FastForward
Adjusted Trial Balance
December 31, 2011
Cash 3 950$
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 600
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$
Close Revenue Accounts to Income Summary
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150
Now, let’s look at the ledger accounts after posting this closing entry.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Expense Accounts to Income Summary
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Income Summary
4,365 7,850
300
3,785
Utilities Expense
230 230
-
Rent Expense
1,000 1,000
-
Net Income
Close Expense Accounts to Income Summary
Supplies Expense
1,050 1,050
-
Depreciation
Expense- Eq.
375 375
-
Salaries Expense
1,610 1,610
-
Insurance Expense
100 100
-
Close Income Summary to Owner’s
Capital.
FastForward
Adjusted Trial Balance
December 31, 2011
Cash 3 950$
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 600
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$
Now, let’s look at the ledger accounts after posting this closing entry.
Close Income Summary to Owner’s Capital
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785
C. Taylor, Capital
30,000
3,785
33,785
Close Income Summary to Owner’s Capital
Close Income Summary to Owner’s Capital
Income Summary
4,365 7,850
3,785 300
-
Close Withdrawals to Owner’s Capital.
FastForward
Adjusted Trial Balance
December 31, 2011
Cash 3 950$
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 600
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$
Now, let’s look at the ledger accounts after posting this closing entry.
Close Withdrawals to Owner’s Capital
Dec. 31 C. Taylor, Capital 600
C. Taylor, Withdrawals 600
C. Taylor, Capital
600 30,000
3,785
33,185
C. Taylor,
Withdrawals
600 600
-
Close Withdrawals to Owner’s Capital
ABOUT CLOSING ENTRIES
Be Careful!
•Avoid doubling revenue and expense balances – watch debits and credits
•Remember: owner’s drawing does not move to the Income Summary account. Owner’s drawing is not an expense and it is not a factor in determining net income.
RESULTS OF POSTING
CLOSING ENTRIES
• Temporary accounts– All temporary accounts will have zero balances after
posting the closing entries– Temporary accounts (revenues and expenses) are
totaled, balanced and double ruled• Owner’s capital
– Total equity of the owner at the end of the accounting period
– No entries are journalized and posted to owner’s capital during the year
• Permanent accounts (assets, liabilities, and owner’s capital) are not closed
POST-CLOSING TRIAL BALANCE
After all closing entries have been journalized the post-closing trial balance is prepared from the ledger.
The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.
Post-Closing Trial Balance
• List of permanent accounts and their balances after posting closing entries.
• Total debits and credits must be equal.
FastForward
Post-Closing Trial Balance
December 31, 2011
Cash 3 950$
Accounts receivable 1 800
Supplies 8 670
Prepaid insurance 2 300
Equipment 26 000
Accumulated depreciation-Equipment 375$
Accounts payable 6 200
Salaries payable 210
Unearned consulting revenue 2 750
C.Taylor, Capital 33 185
Totals 42 720$ 42 720$
Post-Closing Trial Balance
Post-closing Trial Balance