Ppt_04 Completion of Accounting Cycle

8/16/2019 Ppt_04 Completion of Accounting Cycle

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AccountingAccounting

PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition

Prepared by:

Carole Bowman, Sheridan College

Weygandt · Kieso · Kimmel ·Trenholm


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COMPLETION OF THECOMPLETION OF THE

ACCOUNTING CYCLEACCOUNTING CYCLE

CHAPTERCHAPTER

44


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A work sheet is a multiple-column form that

may be used in the adjustment process and in

preparing financial statements.

It is a working tool or a supplementary device

for the accountant and not a permanent

accounting record.

Use of a work sheet should makethe preparation of adjusting entries

and financial statements easier.

WORK SHEETWORK SHEET


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ILLUSTRATIONILLUSTRATION 4-14-1

WORK SHEETWORK SHEET

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Balance SheetTrial Balance Adjustments Adjusted Trial Balance Income Statement

1. Prepare

trial ala!"e

#! t$e

%#r&'$eet.

(. E!ter

a)*+'t,e!t

)ata.

. E!ter

a)*+'te)

ala!"e'

4. Ete!) a)*+'te)

ala!"e t# appr#priate

"#l+,!'.

/. Cal"+late i!"#,e0l#''

a!) "#,plete t$e

%#r&'$eet.


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PURPOSE OF CLOSING ENTRIESPURPOSE OF CLOSING ENTRIES

1. Updates the owner’s capital account

in the ledger by transferring net

income loss! and owner’s drawings

to owner’s capital.

". #repares the temporary accounts

revenue$ e%pense$ drawings! for the

ne%t period’s postings by reducing

their balances to &ero.


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ILLUSTRATIONILLUSTRATION 4-(4-(

TEMPORARY ERSUSTEMPORARY ERSUS

PERMANENT ACCOUNTSPERMANENT ACCOUNTS'()#*+A+, *)IA! #(+)A(' +(A!

'hese accounts areclosed 'hese accounts are not closed

All revenue accounts All asset accounts

All e%pense accounts All liability accounts

*wner’s drawings *wner’s capital account

/alance 0heet Accounts!Income 0tatement 2rawings Accounts!


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ILLUSTRATION 4-

2IAGRAM OF CLOSING PROCESS

3IN2I1I2UAL4

RE1ENUES

1

1 2ebit each revenue account for its balance$ and credit the owner’scapital account for total revenues.

" 2ebit the owner’s capital account for total e%penses$ and crediteach e%pense account for its balance.

1 2ebit each revenue account for its balance$ and credit the owner’scapital account for total revenues.

" 2ebit the owner’s capital account for total e%penses$ and crediteach e%pense account for its balance.

3IN2II2UALE5PENSES

N#r,al 2r.

6ala!"e

N#r,al Cr.

6ala!"eCr. t# "l#'e 2r. t# "l#'e

- 7 - - 7 -

OWNER8SCAPITAL

Epe!'e' Re9e!+e'

Ope!i!: 6ala!"e

(


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ILLUSTRATION 4-

2IAGRAM OF CLOSING PROCESS

3 2ebit owner’s capital for the balance in the owner’s drawings

account and credit owner’s drawings for the same amount.

3 2ebit owner’s capital for the balance in the owner’s drawings

account and credit owner’s drawings for the same amount.

OWNER8S

2RAWINGS

N#r,al 2r.

6ala!"e Cr. t# "l#'e

- 7 -

OWNER8SCAPITAL

Epe!'e'

Re9e!+e'

Ope!i!: 6ala!"e

2ra%i!:'

E!)i!: 6ala!"e


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CLOSING ENTRIESCLOSING ENTRIES

0'*# A2 45(46

1. 2oes the balance in your

*wner’s 4apital accounte7ual the ending capital

balance reported in the

/alance 0heet and

0tatement of *wner’s

(7uity8

". Are all of your temporary

account balances &ero8


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POST-CLOSING TRIAL 6ALANCEPOST-CLOSING TRIAL 6ALANCE

After all closing entries have been

journali&ed and posted$ a post-closing trial

balance is prepared.

'he purpose of this trial balance is to prove

the e7uality of the permanent balance

sheet! account balances that are carried

forward into the ne%t accounting period.


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Debit Credit

Cash 15,200$ Accounts Receiable 200

Adertisin! Su""lies 1,000

#re"aid Insurance 550

%%ice &'ui"ment 5,000

Accumulated Amorti(ation )*$

+otes #aable 5,000 Accounts #aable 2,500

-nearned Reenue )00

Salaries #aable 1,200

Interest #aable 25

C.R. Brd, Ca"ital 12,*/2

21,50$ 21,50$

A%ter Adjustment

#ioneer Adertisin! A!enc

#ostClosin! Trial Balance

ctober *1, 2002

ILLUSTRATIONILLUSTRATION 4-;4-;

POST-CLOSING TRIAL 6ALANCEPOST-CLOSING TRIAL 6ALANCE

'he post-closing trialbalance is prepared

from the permanent

accounts in the ledger.

'he post-closing trialbalance is prepared

from the permanent

accounts in the ledger.

'he post-closing trialbalance provides evidence

that the journali&ing and

posting of closing entries

has been properly

completed.

'he post-closing trialbalance provides evidence

that the journali&ing and

posting of closing entries

has been properly

completed.


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1. Anal,se

transactions 2. ournali(e the

transactions

*. #ost to led!eraccounts

/. #re"are a

trial balance

5. ournali(e

and "ost

adjustin!

entries3. #re"are

adjusted trial

balance

4. #re"are

%inancial

statements

). ournali(e

and "ost

closin! entries

0. #re"are

"ostclosin!

trial balance

STEPS IN THE ACCOUNTING CYCLESTEPS IN THE ACCOUNTING CYCLE


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A reversing entry is made at the beginning

of the ne%t accounting period.

A reversing entry reverses certain adjustingentries made in the previous period.

*pening balances can then be ignored

when preparing year-end adjusting entries.'his topic is illustrated in Appendi% 9A.

REERSING ENTRIESREERSING ENTRIES

3OPTIONAL STEP3OPTIONAL STEP


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CORRECTING ENTRIESCORRECTING ENTRIES

(rrors that occur in recording transactions

should be corrected as soon as they are

discovered by preparing correcting entries.4orrecting entries are unnecessary if the

records are free of errors: they can be

journali&ed and posted whenever an erroris discovered.

'hey involve any combination of balance

sheet and income statement accounts.


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ILLUSTRATIONILLUSTRATION 4-174-17

STAN2AR2 6ALANCE SHEETSTAN2AR2 6ALANCE SHEET

CLASSIFICATIONSCLASSIFICATIONS

A''et' Liailitie' a!) E


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4urrent assets are cash and other resources

that are reasonably e%pected to be reali&ed in

cash or sold or consumed in the business

within one year of the balance sheet date orthe company’s operating cycle$ whichever is

longer.

isted in the order of li7uidity.

(%amples of current assets are cash$

temporary investments$ accounts receivable$

inventory$ and prepaids.

CURRENT ASSETSCURRENT ASSETS


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177 5Y> '$are'

LONG-TERMLONG-TERM

INESTMENTSINESTMENTS

ong-term investments are resources that can

be reali&ed in cash$ but the conversion into

cash is not e%pected within one year or theoperating cycle$ whichever is longer.

(%amples include investments in shares or

bonds of another company or investment in

land held for resale.


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CAPITAL ASSETSCAPITAL ASSETS

'angible resources of a relatively permanent nature thatare used in the business and not intended for sale areclassified as 1! property$ plant$ and e7uipment and "! natural resources.

1! (%amples of property$ plant$ and e7uipment include land$buildings$ and machinery.

"! (%amples of natural resources include tracts of timber$ oil andgas reserves$ and mineral deposits.


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Intangible assets are noncurrent resources that

do not have physical substance.

(%amples include patents$ copyrights$trademarks$ or trade names that give the

holder e%clusive right of use for a

specified period of time.

CAPITAL ASSETSCAPITAL ASSETS


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4urrent liabilities are obligations that are

reasonably e%pected to be paid from

e%isting current assets or through the

creation of other current liabilities within

one year or the operating cycle$ whichever

is longer.

(%amples include accounts payable$unearned revenue$ interest payable$ and

current maturities of long-term debt.

CURRENT LIA6ILITIESCURRENT LIA6ILITIES


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*bligations e%pected to be paid after one

year are classified as long-term liabilities.

(%amples include long-term notes payable$

bonds payable$ mortgages payable$ and

lease liabilities.

LONG-TERM LIA6ILITIESLONG-TERM LIA6ILITIES


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'he content of the e7uity section varies with theform of business organi&ation.

In a proprietorship$ there is a single owner’se7uity account called *wner’s ame!$ 4apital.

In a partnership$ there are separate capitalaccounts for each partner.

;or a corporation$ owners’ e7uity is calledshareholders’ e7uity$ and it consists of twoaccounts< 0hare 4apital and +etained (arnings.

E?UITYE?UITY

ILLUSTRATIONILLUSTRATION 4 1@4 1@


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Current Assets

Cash 15,200$

Accounts Receiable 200

Adertisin! Su""lies 1,000

#re"aid Insurance 550

Total Current Assets 13,50

Ca"ital Assets

%%ice &'ui"ment 5,000$ess6 Accumulated Amorti(ation )* /,14

Total Assets 21,)34$

Current iabilities

+otes #aable 1,000$

Accounts #aable 2,500

-nearned Reenue )00 Salaries #aable 1,200

Interest #aable 25

Total Current iabilities 5,525

on!term iabilties

+otes #aable /,000

Total iabilities ,525

7ner8s &'uit

C.R. Brd, Ca"ital 12,*/2 Total iabilities and 7ner8s &'uit 21,)34$

#ioneer Adertisin! A!enc

Balance Sheet

iabilities and 7ner8s &'uit

ctober *1, 2002 Assets

ILLUSTRATIONILLUSTRATION 4-1@4-1@ CLASSIFIE2 6ALANCE SHEET IN REPORT FORMCLASSIFIE2 6ALANCE SHEET IN REPORT FORM

A classified balance

sheet helps thefinancial statementuser determine<= 'he availability ofassets to meet debts asthey come due$ and•'he claims of short-and long-term creditorson total assets.

A classified balance

sheet helps thefinancial statementuser determine<= 'he availability ofassets to meet debts asthey come due$ and•'he claims of short-and long-term creditorson total assets.

'he balance sheet is

most often presented in

the report form$ with

the assets shown above

the liabilities and

owner’s e7uity.

'he balance sheet is

most often presented in

the report form$ with

the assets shown above

the liabilities and

owner’s e7uity.


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LI?UI2ITYLI?UI2ITY

i7uidity measures ability to pay short-

term obligations when they come due.

>orking capital is one important measureof li7uidity.

WORKING CAPITAL CURRENT ASSETS - CURRENT LIA6ILITIES


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CURRENT RATIOCURRENT RATIO

'he current ratio working capital ratio! is awidely used measure for evaluating a company’s

li7uidity and short-term debt-paying ability. It is

calculated by dividing current assets by current

liabilities and is a more dependable indicator of

li7uidity than working capital.

CURRENT ASSETS

CURRENT RATIO

BBBBBBBBBBB


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COPYRIGHTCOPYRIGHT

Copyright © 2002 John Wiley Sons Canada! "td# All rightsreser$ed# %eproduction or translation o& this 'or( )eyond

that permitted )y CA*C+P, -Canadian %eprographyCollecti$e. is unla'&ul# %e/uest &or &urther in&ormationshould )e addressed to the Permissions epartment! JohnWiley Sons Canada! "td# The purchaser may ma(e )ac(1upcopies &or his her o'n use only and not &or distri)ution orresale# The author and the pu)lisher assume no responsi)ility

&or errors! omissions! or damages! caused )y the use o& these& th & th i & ti t i d h i

Ppt_04 Completion of Accounting Cycle

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