Chapter 4 - Com Nting Cycle

Chapter
Completing the Accounting Cycle

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Cycle????
$1 par value
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
The McGraw-Hill Companies, Inc., 2007
Learning Objectives
Prepare a worksheet 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
Identify steps in the accounting cycle Explain and prepare a classified balance sheet Prepare reversing entries and explain their purpose
Benefits of a Work Sheet

Aids the preparation of financial statements.
Assists in planning and organizing an audit.
Reduces possibility of errors.
Not a required report.
Helps in preparing interim financial statements.
Links accounts and their adjustments.

Shows the effects of proposed transactions.

FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER 2006

Unadjusted Trial Balance Dr. Cr. 3,950 9,720 2,400 26,000 6,200 3,000 30,000 600 5,800 300 1,400 1,000 230 45,300 Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr.
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals
First, enter the unadjusted amounts to the worksheet.
45,300
Trial Balance Dr. Cr. 3.950 9.720 2.400 26.000
FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER Unadjusted 2006
Adjustments Dr. 1.800 b a c e d 250 Cr.
Next, enter the adjustments. 1.050

100 375 210
Adjusted Trial Balance Dr. Cr.
6.200 3.000 30.000 600 5.800 300 1.400 1.000 230 45.300
d f c e a b 375 210 100 1.050 3.785
250 1.800
45.300
3.785
Prepare adjusted trial balance.

FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER 2006

Unadjusted Trial Balance Dr. Cr. 3,950 9,720 2,400 26,000 Adjustments Dr. f 1,800 b a c e 250 600 d f c e a b 45,300 375 210 100 1,050 3,785 3,785 250 1,800 375 1,610 100 1,000 1,050 230 47,685 1,050 100 375 210 Cr. Adjusted Trial Balance Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 7,850 300
6,200 3,000 d 30,000 600 5,800 300 1,400 1,000 230 45,300
47,685
FastForward Sort adjusted trial balance Work Sheet amounts to Ended financial statements. For Month December 31, 2004
Adjusted Trial Balance Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 600 7,850 300 375 1,610 100 1,000 1,050 230 47,685 375 1,610 100 1,000 1,050 230 4,365 7,850 300 Income Statement Dr. Cr. Balance Sheet & Statement of Equity Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 600
47,685
8,150
43,320
39,535
FastForward Total statement columns, compute income or loss, and Work Sheet balance columns. For Month Ended December 31, 2004
Adjusted Trial Balance Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000 600 7,850 300 375 1,610 100 1,000 1,050 230 47,685 375 1,610 100 1,000 1,050 230 4,365 3,785 8,150 7,850 300 600 Income Statement Dr. Cr. Balance Sheet & Statement of Equity Dr. Cr. 3,950 1,800 8,670 2,300 26,000 375 6,200 210 2,750 30,000
Cash Accounts receivable Supplies Prepaid insurance Equipment Accum. depr. - Equip. Accounts payable Salaries payable Unearned revenue C. Taylor, Capital C. Taylor, Withdrawals Consulting revenue Rental revenue Depr. expense Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Totals Profit for the period
47,685
8,150 8,150
43,320 43,320
39,535 3,785 43,320
Prepare the Financial Statements

FASTFORWARD INCOME STATEMENT FOR THE MONTH ENDED 31 DECEMBER 2006 Revenues: Consulting revenue $7,850 Rental revenue 300 Total revenues 8,150 Less: 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 Larson, Wild, Ropidah, Haslinda, Aryati, Liana Profit for Chiapetta, the period $3,785
Prepare the Income Statement.
A work sheet does not substitute for financial statements.

FASTFORWARD INCOME STATEMENT FOR THE MONTH ENDED 31 DECEMBER 2006
Revenues Consulting revenue Rental revenue Total revenues Operating expenses Depr. expense - Equip. Salaries expense Insurance expense Rent expense Supplies expense Utilities expense Profit for the period
$7,850 300 8,150
(375) (1,610) (100) (1,000) (1,050) (230) $3,785
Prepare the Statement of Changes in Owners Equity.

FASTFORWARD STATEMENT OF OWNER'S EQUITY FOR THE MONTH ENDED 31 DECEMBER 2006 $ $ 3,785 30,000 -0$33,785 $33,785 (600) $33,185
C. Taylor, Capital 1/12/06 Profit for the period Investment by owner Withdrawal by owner C. Taylor, Capital 31/12/06
FASTFORWARD STATEMENT OF OWNER'S EQUITY FOR THE MONTH ENDED 31 DECEMBER 2006 C. Taylor, Capital 1/12/06 Add: Profit for the period Investment by owner Total Less: Withdrawal by owner C. Taylor, Capital 31/12/06 $ 3,785 30,000 -033,785 33,785 600 $33,185
Prepare the Balance Sheet.

FASTFORWARD BALANCE SHEET 31 DECEMBER 2006
Non-current assets
Equipment Less: accum. depr. Current assets Cash Accounts receivable Supplies Prepaid insurance $ 26,000 375 $25,625 3,950 1,800 8,670 2,300 $42,345 $33,185
Total assets Equity

C. Taylor, Capital
Current liabilities
Accounts payable Salaries payable Unearned consulting revenues Total equity and liabilities Total liabilities and equity $ 6,200 210 2,750 $42,345 33,185
Closing Process
Resets revenue, expense and withdrawal account balances to zero at the end of the period.
Identify accounts for closing.
Helps summarize a periods revenues and expenses in the Income Summary account.
Record and post closing entries.
Prepare post-closing trial balance.

Temporary and Permanent Accounts

Revenues
Withdrawals Expenses Liabilities
Assets Owners Capital
Temporary Accounts
Permanent Accounts
Income Summary
The closing process applies only to temporary accounts.

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.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana The McGraw-Hill Companies, Inc., 2007
Lets see how the closing process works!
Closing Process
Expense Accounts 10,000
Revenue Accounts 25,000
10,000
25,000
Income Summary
Owner's Capital 30,000
Withdrawals Account 5,000
30,000
Balances before closing.
5,000
Closing Process
Expense Accounts 10,000
Close Revenue accounts to Income Summary.

Income Summary 25,000
Revenue Accounts 25,000 25,000
10,000
25,000
30,000
5,000
Closing Process
Expense Accounts 10,000 10,000
Close Expense accounts to Income Summary.

Income Summary 10,000 25,000
15,000
30,000
The balance in Income Summary equals profit for the period
5,000
Closing Process
Close Income Summary to Owners Capital.

Income Summary 10,000 25,000 15,000
Owner's Capital 30,000 15,000 45,000
5,000
Closing Process
Income Summary 10,000 25,000 15,000

Owner's Capital 5,000 30,000 15,000 45,000 40,000
Withdrawals Account 5,000 5,000
Close Withdrawals account to Owners Capital.
5,000 -
FASTFORWARD ADJUSTED TRIAL BALANCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 600 Consulting revenue Rental revenue 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
$375 6,200 210 2,750 30,000 7,850 300
Using the adjusted trial balance, lets prepare the closing entries for FastForward.
$47,685
$375 6,200 210 2,750 30,000 7,850 300
Close Revenue accounts to Income Summary.
$47,685
Close Revenue Accounts to Income Summary

Dec. 31 Consulting revenue Rental revenue Income summary 7,850 300 8,150
Now, lets look at the ledger accounts after posting this closing entry.
Close Revenue Accounts to Income Summary

Consulting Revenue 7,850 7,850
Income Summary 7,850 300
Rental Revenue 300 300
FASTFORWARD ADJUSTED TRIAL BALNCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. Accounts payable Salaries payable Unearned consulting revenue C. Taylor, Capital C. Taylor, Withdrawals 600 Consulting revenue Rental revenue 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
$375 6,200 210 2,750 30,000 7,850 300
Close Expense accounts to Income Summary.
$47,685
Close Expense Accounts to Income Summary

Dec. 31 Income summary Depreciation expense-Equipment Salaries expense Insurance expense Rent expense Supplies expense Utilities expense 4,365 375 1,610 100 1,000 1,050 230
Close Expense Accounts toto Income Close Expense Accounts Income Summary Summary
Depreciation Expense- Eq. 375 375 -
Rent Expense 1,000 1,000 Income Summary 4,365 7,850 300 3,785
Salaries Expense 1,610 1,610 Insurance Expense 100 100 -
Supplies Expense 1,050 1,050 Utilities Expense 230 230 -
Profit for the period
$375 6,200 210 2,750 30000 7,850 300
Close Income Summary to Owners Capital.
$47,685
Close Income Summary to Owners Capital

Dec. 31 Income summary C. Taylor, Capital 3,785 3,785
Close Income Summary to to Owners Close Income Summary Owners Capital Capital
C. Taylor, Capital 30,000 3,785 33,785
Income Summary 4,365 7,850 3,785 300 -
$375 6,200 210 2,750 30,000 7,850 300
Close Withdrawals to Owners Capital.
$47,685
Close Withdrawals to Owners Capital
Dec.
31 C. Taylor, Capital 600 C. Taylor, Withdrawals
600
Close Withdrawals to Owners Capital

C. Taylor, Withdrawals 600 600
C. Taylor, Capital 600 30,000 3,785 33,185
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.
Post-Closing Trial Balance

FASTFORWARD POST-CLOSING TRIAL BALANCE 31 DECEMBER 2006 Cash $3,950 Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equipment Accounts payable Salaries payable Unearned consulting revenue C.Taylor, Capital Totals $42,720
$375 6,200 210 2,750 33,185 $42,720
Lets discuss the components of a classified balance sheet.
Classified Balance Sheet

Categories of a Classified Balance Sheet Assets Liabilities and Equity Current Assets Current Liabilities Noncurrent Assets Noncurrent Liabilities Long-Term Investments Equity Fixed Assets Intangible Assets
Current items are those expected to come due (both collected and owed) within the longer of one year or the companys normal operating cycle.
SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $ Long-term investments Notes receivable Investments in stocks and bonds Land held for future expansion Total investments Intangible assets Total non-current assets Current Assets Cash Short-term investments Accounts receivable Merchandise inventory Prepaid expenses
223.400
Current assets are expected to be 1.500 18.000 sold, collected, or used within one 48.000 year or the companys operating 67.500 10.000 cycle. $ 300.900
$6,500 2,100 4,400 27,500 2,400 $42,900
SNOWBOARDING COMPONENTS BALANCE SHEET 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $223,400 Long-term investments Notes receivable Investments in stocks and bonds Land held for future expansion Total investments Intangible assets Total assets 1,500 18,000 48,000 67,500 10.000 $300.900
Long-term investments are expected to be held for the longer Current Assets Cash 6.500 of one year or the operating cycle. Short-term investments 2.100
Accounts receivable Merchandise inventory
4,400 27,500
SNOWBOARDING COMPONENTS BALANCE SHEET 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $223,400 Long-term investments Fixed assets are tangible long-lived Notes receivable 1.500 Investments in stocks and bonds 18.000 assets used to produce or sell Land held for future expansion 48.000 products and services. 67.500 Total investments Intangible assets Current assets Cash Short-term investments Accounts receivable 10.000 $300,900 $6,500 2,100 4,400
SNOWBOARDING COMPONENTS BALANCE SHEET 31 JANUARY 2006 Non-current assets Store equipment $33,200 Less accumulated depreciation 8,000 $25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 $223,400 Long-term investments Notes receivable Investments in stocks and bonds Land held for future expansion Intangible assets $1,500 18,000 48,000 $67,500 10.000 $300.900
Intangible assets are long-term resources used to produce or sell Current Assets Cash 6.500 that products and services and lack physical form.
SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006 Current liabilities Accounts payable $ 15.300 Wages payable 3.200 Notes payable 3.000 Current portion of long-term liabilities 7.500 Total current liabilities $29,000
Current liabilities are obligations due within the longer of one year or the companys operating cycle.
SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006
Equity and liabilities T.Hawk, Capital Non-current liabilities Notes payable (net of current portion) Current liabilities
$164,800
$150,000
Long-term liabilities are obligations not due within the longer of one year or the companys operating cycle.
SNOWBOARDING COMPONENTS BALANCE SHEET AS AT 31 JANUARY 2006
Equity and liabilities T.Hawk, Capital Non-current liabilities Notes payable (net of current portion) Current liabilities
$164,800
$150,000
Equity is the owners claim on the assets.

End of Chapter 4

Chapter 4 - Com Nting Cycle

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Chapter

Completing the Accounting Cycle

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Benefits of a Work Sheet

Reduces possibility of errors.

Not a required report.

Helps in preparing interim financial statements.

Links accounts and their adjustments.

Shows the effects of proposed transactions.

FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER 2006

First, enter the unadjusted amounts to the worksheet.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Trial Balance Dr. Cr. 3.950 9.720 2.400 26.000

Next, enter the adjustments. 1.050

Adjusted Trial Balance Dr. Cr.

d f c e a b 375 210 100 1.050 3.785

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Prepare adjusted trial balance.

FASTFORWARD WORK SHEET FOR THE MONTH ENDED 31 DECEMBER 2006

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

39,535 3,785 43,320

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Prepare the Financial Statements

Prepare the Income Statement.

A work sheet does not substitute for financial statements.

FASTFORWARD INCOME STATEMENT FOR THE MONTH ENDED 31 DECEMBER 2006

$7,850 300 8,150

(375) (1,610) (100) (1,000) (1,050) (230) $3,785

Prepare the Statement of Changes in Owners Equity.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Prepare the Balance Sheet.

Total assets Equity

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Record and post closing entries.

Prepare post-closing trial balance.

Temporary and Permanent Accounts

Assets Owners Capital

The closing process applies only to temporary accounts.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Recording Closing Entries

Lets see how the closing process works!

Revenue Accounts 25,000

Owner's Capital 30,000

Withdrawals Account 5,000

Balances before closing.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Close Revenue accounts to Income Summary.

Revenue Accounts 25,000 25,000

Owner's Capital 30,000

Withdrawals Account 5,000

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Close Expense accounts to Income Summary.