Completing the Accounting Cycle – Part I

Chapter 4

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Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

Objective 1

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End-of-Period Spreadsheet (Work Sheet)Exhibit 1

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Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Accounts are listed in the Trial Balance column using the ending balance found in the general ledger.

Flow of Accounting Information

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Flow of Accounting Information

Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Adjustments are entered here. Two possibilities:1. Deferrals – Existing balances are changed.2. Accruals – New information is entered.

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Adjustments are combined with the trial balance. Account balances are now

adjusted.

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)

Flow of Accounting Information

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Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income

Statement column.

Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Income State. Balance Sheet

Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)

Flow of Accounting Information

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Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the

Balance Sheet column.

Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Income State. Balance Sheet

Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)

Flow of Accounting Information

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The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column.

1. Amber Bablock, Drawing2. Utilities Expense3. Accumulated Depreciation—

Equipment4. Unearned Rent

5. Fees Earned6. Accounts Payable7. Rent Revenue8. Supplies

Example Exercise 4-1

Flow of Accounts into Financial Statements

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1. Balance Sheet column2. Income Statement column3. Balance Sheet column4. Balance Sheet column5. Income Statement column6. Balance Sheet column7. Income Statement column8. Balance Sheet column

Example Exercise 4-1 (continued)

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Prepare financial statements from adjusted account balances.

Objective 2

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The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the spreadsheet (work sheet).

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Financial Statements Prepared from Work SheetExhibit 2

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In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for Dimple Consulting Co. for the current year, the Debit column total is $678,450, and the Credit column total is $599,750 before the amount of net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet (work sheet), what is the amount of net income or net loss?

Example Exercise 4-2

Determining the Net Income from End-of-Period Spreadsheet

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Example Exercise 4-2 (continued)

A net income of $78,700 ($678,450 – $599,750) would be reported. When the Debit column of the Balance Sheet columns is more than the Credit column, net income is reported. If the Credit column exceeds the Debit column, a net loss is reported.

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The first item presented on the statement of owner’s equity is the balance of the owner’s capital account at the beginning of the period.

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from the income statement

to the balance sheet

Exhibit 2

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The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the spreadsheet (or worksheet).

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A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

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Cash and other assets that are expected to be converted into cash, sold or used up usually within a year or less, through the normal operations of the business, are called current assets.• Cash

• Accounts Receivable

• Supplies

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Property, plant, and equipment (also called fixed assets) include assets that depreciate over a period of time. Land is an exception as it is not subject to depreciation.• Equipment

• Machinery

• Buildings

• Land

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Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities.• Accounts payable

• Wages payable

• Interest payable

• Unearned fees

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Liabilities not due for a long time (usually more than one year) are long-term liabilities. • Notes payable

• Mortgage payable

• Bond payable

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Owner’s equity is the owner’s right to the assets of the business. Owner’s equity is added to the total liabilities, and the total must be equal to the total assets.

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from the statement of owner’s equity

Financial Statements Prepared from Work Sheet (continued)Exhibit 2

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The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2009 balance sheet of Hindsight Consulting.

1. Jason Corbin, Capital 5. Cash2. Notes Receivable (due 6. Unearned Rent

in 6 months) 7. Accumulated Depr.—3. Notes Payable (due in Equipment

2011) 8. Accounts Payable4. Land

Example Exercise 4-4

Classified Balance Sheet

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Example Exercise 4-4 (continued)

1. Stockholders’ equity2. Current asset3. Long-term liability4. Property, plant, and

equipment

5. Current asset6. Current liability7. Property, plant, and

equipment8. Current liability

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Prepare closing entries.

Objective 3

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Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.

Closing Entries

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To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary.

Closing Entries

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The balance of Income Summary is then transferred to the owner’s capital account. The balance of the owner’s drawing account is also transferred to the owner’s capital account. The entries that transfer these balances are called closing entries.

Closing Entries

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The Closing ProcessExhibit 3

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Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.

Fees Earned

Bal.16,840

Rent Revenue

Bal.120

Income Summary 16,840

120

16,960

Flowchart of Closing Entries for NetSolutions Exhibit 4

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Wages Expense

Rent Expense

Depreciation Expense

Utilities Expense

Supplies Expense

Insurance Expense

Bal.200

Miscellaneous Expense

Bal.455

Income Summary

Debit Income Summary for the total expenses and

credit each expense account for its balance.

16,960

Bal.4,525

Bal.1,600

Bal.50

Bal.985

Bal.2,040

9,855

455

200

2,040

985

50

1,600

4,525

Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4

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Chris Clark, Capital

Bal.25,000

Chris Clark, Drawing

Bal.4,000

Income Summary

16,9609,8557,105

7,105

Debit Income Summary for the amount of its balance (in this case, the net income) and

credit the capital account.

Flowchart of Closing Entries for NetSolutions (continued)

Exhibit 4

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Chris Clark, Capital

Bal.25,0007,105

Chris Clark, Drawing

Bal.4,000 4,000

4,000 Debit the capital account for the balance

of the drawing account, and credit

drawing for the same amount.

Flowchart of Closing Entries for NetSolutions (continued)

Exhibit 4

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Flowchart of Closing Entries for NetSolutions (summary)

Exhibit 4

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Closing Entries for NetSolutions

Step 2

Step 3

Step 1

Step 4

Exhibit 5

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After the closing entries are posted, all of the temporary accounts have zero balances.

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After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co.

Terry Lambert, Capital

$615,850Terry Lambert, Drawing

25,000Fees Earned

380,450Wages Expense

250,000Rent Expense

65,000Supplies Expense

18,250Miscellaneous Expense

6,200

Journalize the four entries required to close the accounts.

Example Exercise 4-5

Closing Entries

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Example Exercise 4-5 (continued)

July 31 Fees Earned…………………………….. 380,450Income Summary…………………. 380,450

31 Income Summary……………………… 339,450Wages Expense…………………… 250,000Rent Expense……………………… 65,000Supplies Expense………………… 18,250Miscellaneous Expense…………. 6,200

31 Income Summary………………………. 41,000Terry Lambert, Capital…………… 41,000

31 Terry Lambert, Capital………………… 25,000Terry Lambert, Drawing………….. 25,000

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A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.

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Post-Closing Trial BalanceExhibit 7

THE END

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