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
Winston Kwok, Ph.D., CPA
McGraw-Hill/I rwin Copyright 2011 by The McGraw-Hill Companies, I nc. All rights reserved.
Chapter 4
COMPLETING THE ACCOUNTING CYCLE
4 - 2
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
4 - 3
FastForward
Worksheet
For the Month Ended December 31, 2011
P 1
Unadjusted Trial
Balance
Adjustments Adjusted Trial
Balance
Income
Statement
Balance Sheet
and Statement of
Changes in Equity
4 - 4
FastForward
Worksheet
For the Month Ended December 31, 2011
P 1
Unadjusted Trial
Balance
Adjustments Adjusted Trial
Balance
Income
Statement
Balance Sheet
and Statement of
Changes in Equity
4 - 5
FastForward
Worksheet
For the Month Ended December 31, 2011
P 1
Unadjusted Trial
Balance
Adjustments Adjusted Trial
Balance
Income
Statement
Balance Sheet
and Statement of
Changes in Equity
4 - 6
FastForward
Worksheet
For the Month Ended December 31, 2011
P 1
Unadjusted Trial
Balance
Adjustments Adjusted Trial
Balance
Income
Statement
Balance Sheet
and Statement of
Changes in Equity
4 - 7
FastForward
Worksheet
For the Month Ended December 31, 2011
P 1
Unadjusted Trial
Balance
Adjustments Adjusted Trial
Balance
Income
Statement
Balance Sheet
and Statement of
Changes in Equity
4 - 8
PREPARING THE FINANCIAL STATEMENTS
P 1
4 - 9
RECORDING CLOSING ENTRIES
1. Resets revenue,
expense and
withdrawal account
balances to zero at
the end of the
period.
2. Helps summarize a
periods revenues
and expenses in the
Income Summary
account.
Identify accounts
for closing.
Record and post
closing entries.
Prepare post-closing
trial balance.
C 1
4 - 10
Temporary
Accounts
Revenues
Income
Summary
E
x
p
e
n
s
e
s

W
i
t
h
d
r
a
w
a
l
s

Permanent
Accounts
Assets
L
i
a
b
i
l
i
t
i
e
s

O
w
n
e
r

s

C
a
p
i
t
a
l

TEMPORARY AND
PERMANENT ACCOUNTS
The closing process
applies only to
temporary accounts.
C 1
4 - 11
Lets 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 Owners Capital.
Close Withdrawals to Owners
Capital.
P 2
4 - 12
Using the
adjusted trial
balance, lets
prepare the
closing
entries for
FastForward.
P 2
FastForward
Adjusted Trial Balance
December 31, 2011
Debit 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 $
4 - 13
1. Close Credit
Balances in
Revenue
Accounts to
Income
Summary.
FastForward
Adjusted Trial Balance
December 31, 2011
Debit 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
4 - 14
CLOSE CREDIT BALANCES IN
REVENUE ACCOUNTS TO INCOME SUMMARY
Now, lets 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
4 - 15
Consulting Revenue
7,850 7,850
-
Rental Revenue
300 300
-
Income Summary
8,150
P 2
CLOSE CREDIT BALANCES IN
REVENUE ACCOUNTS TO INCOME SUMMARY
4 - 16
2. Close Debit
Balances in
Expense Accounts
to Income
Summary.
P 2
FastForward
Adjusted Trial Balance
December 31, 2011
Debit 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 $
4 - 17
Now, lets 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 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
P 2
4 - 18
Income Summary
4,365 8,150
3,785
Utilities Expense
230 230
-
Rent Expense
1,000 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 Expense
1,610 1,610
-
Insurance Expense
100 100
-
P 2
4 - 19
3. Close Income
Summary to
Owners Capital.
P 2
FastForward
Adjusted Trial Balance
December 31, 2011
Debit 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 $
4 - 20
Now, lets look at the ledger accounts
after posting this closing entry.
CLOSE INCOME SUMMARY
TO OWNERS CAPITAL
Dr. Cr.
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785
P 2
4 - 21
C. Taylor, Capital
30,000
3,785
33,785
Income Summary
4,365 8,150
3,785
-
P 2
CLOSE INCOME SUMMARY
TO OWNERS CAPITAL
4 - 22
4. Close
Withdrawals
Account to
Owners
Capital.
FastForward
Adjusted Trial Balance
December 31, 2011
Debit 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
4 - 23
Now, lets look at the ledger accounts
after posting this closing entry.
CLOSE WITHDRAWALS ACCOUNT
TO OWNERS CAPITAL
Dr. Cr.
Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200
P 2
4 - 24
C. Taylor, Capital
200 30,000
3,785
33,585
C. Taylor,
Withdrawals
200 200
-
P 2
CLOSE WITHDRAWALS ACCOUNT
TO OWNERS CAPITAL
4 - 25
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 Owners Capital.
4. Close Withdrawals Account to Owners
Capital.
4 - 26
POST-CLOSING TRIAL BALANCE
List of permanent accounts and
their balances after posting
closing entries.

Total debits and credits must be
equal.
P 3
4 - 27
POST-CLOSING TRIAL BALANCE
P 3
FastForward
Post-Closing Trial Balance
December 31, 2011
Debit 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 $
4 - 28
ACCOUNTING CYCLE
C 2
4 - 29
Current items are those expected to come due (both
collected and owed) within the longer of one year or the
companys normal operating cycle.
CLASSIFIED BALANCE SHEET
C 3
Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current assets Current liabilities
Noncurrent assets Noncurrent liabilities
Long-term investments Equity
Property, plant and equipment
Intangible assets
4 - 30
Current assets are expected to be sold,
collected, or used within one year or the
companys operating cycle.
C 3
4 - 31
Long-term financial assets or investments are
expected to be held for more than one year or
the operating cycle.
C 3
4 - 32
Property, plant and equipment are tangible
long-term assets used to produce or sell
products and services.
C 3
4 - 33
Intangible assets are long-term resources
used to produce or sell products and services
and that lack physical form.
C 3
4 - 34
Current liabilities are obligations due within the
longer of one year or the companys operating
cycle.
C 3
4 - 35
Long-term liabilities are obligations not due
within the longer of one year or the companys
operating cycle.
C 3
4 - 36
Equity is the owners claim on the assets.
C 3
4 - 37
CURRENT RATIO
Helps assess the companys 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
4 - 38
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 companys
recordkeeping.
Lets see how the accounting for our payroll
accrual will be handled with and without
reversing entries.
4 - 39
P 4
4 - 40
P 4
Without Reversing Entries With Reversing Entries
4 - 41
END OF CHAPTER 4