Lecture 4

COMPLETING THE ACCOUNTING CYCLE

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LEARNING OBJECTIVES
1. Prepare an adjusted trial balance.
2. Prepare financial statements from an adjusted
trial balance.
3. Compute profit margin and describe its use in
analyzing company performance.
4. Explain a classified statement of financial
position.
5. Compute the current ratio and describe what it
reveals about a company’s financial condition.
6. Describe and prepare closing entries.
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FastForward - Trial Balance - December 31, 2016

 4-4

BENEFITS OF A WORK SHEET

Aids the Assists in
preparation of planning and
financial organizing an
statements. audit.

Helps in
Reduces Not a
preparing
possibility of required interim financial
errors.
report. statements.
Shows the
Links accounts
effects of
and their
proposed
adjustments.
transactions.
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PREPARING FINANCIAL STATEMENTS

Let’s use FastForward’s adjusted trial balance to
prepare the company’s financial statements.
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1. PREPARE THE INCOME STATEMENT

Adjusted
Trial Balance FastForward
December 31, 2016
Dr. Cr.
Income Statement
Cash $ 4,350 For Month Ended December 31, 2016
Accounts receivable 1,800
Supplies 8,670 Revenues:
Prepaid insurance 2,300 Consulting revenue $ 7,850
Equipment 26,000
Accum. depr. - Equip. $ 375 Rental revenue 300
Accounts payable 6,200
Salaries payable 210 Operating expenses:
Unearned revenue 2,750 Depr. expense - Equip. $ 375
Share capital 30,000
Retained earnings 0 Salaries expense 1,610
Dividends 200
Consulting revenue 7,850
Insurance expense 100
Rental revenue 300 Rent expense 1,000
Depr. expense 375
Salaries expense 1,610 Supplies expense 1,050
Insurance expense 100
Rent expense 1,000
Utilities expense 230
Supplies expense 1,050 Total expenses 4,365
Utilities expense 230
Totals $ 47,685 $ 47,685 Net profit $ 3,785
 4-7

2. PREPARE THE STATEMENT

OF CHANGES IN EQUITY
FastForward
Income Statement
For Month Ended December 31, 2016 Note: Net profit from the Income
Revenues: Statement carries to the Statement of
Consulting revenue $ 7,850
Rental revenue 300
Changes in Equity.
Operating expenses:
Depr. expense - Equip. $ 375
Salaries expense 1,610
Insurance expense 100 FastForward
Rent expense 1,000 Statement of Changes in Equity
Supplies expense 1,050 For Month Ended December 31, 2016
Utilities expense 230
Share Retained
Total expenses 4,365
Capital Earnings Total Equity
Net profit $ 3,785
Balance at December 1 $ -0- $ -0- $ -0-
Plus: Issuance of shares $ 30,000
Net profit 3,785 3,785
Less: Dividends 200 200
Balance at December 31 30,000 $3,585 $ 33,585
 4-8

3. PREPARE THE STATEMENT OF FINANCIAL

POSITION
FastForward
FastForward Statement of Changes in Equity
Statement of Financial Position For Month Ended December 31, 2016
December 31, 2016 Share Retained
Assets Capital Earnings Total Equity
Cash $ 4,350
Accounts Receivable
Balance
1,800
at December 1 $ -0- $ -0- $ -0-
Supplies Plus: Issuance of shares
8,670 $ 30,000
Prepaid Insurance Net2,300
profit 3,785 3,785
Equipment $ 26,000 Less: Dividends 200 200
Accumulated Depreciation 375 25,625
Total assets $
Balance
42,745
at December 31 30,000 $3,585 $ 33,585

Liabilities and Equity

Accounts Payable 6,200
Salaries Payable 210
Unearned Revenue 2,750
Total Liabilities 9,160

Share Capital $ 30,000

Retained earnings 3,585
Total equity 33,585
Total liabilities and Equity $ 42,745
 4-9

PREPARING THE FINANCIAL STATEMENTS

 4 - 10

NET PROFIT MARGIN

The profit margin ratio measures the company’s
net profit to net sales.
Profit Net Profit
=
Margin Net Sales
adidas
 4 - 11

CLASSIFIED STATEMENT OF FINANCIAL POSITION

Categories of a Classified Statement of Financial Position
Assets Liabilities and Equity
Current assets Current liabilities
Noncurrent assets Noncurrent liabilities
Long-term financial assets Equity
Property, plant and equipment
Intangible assets

Current or short-term items are those expected to come

due (both collected and owed) within the longer of one
year or the company’s normal operating cycle.
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Current assets are expected to be sold,

collected, or used within one year or the
company’s operating cycle, whichever is longer.
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Noncurrent assets are assets not used up

within one year or the operating cycle,
whichever is longer.
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Current liabilities are obligations due within one year or

the company’s operating cycle, whichever is longer.
 4 - 15

Noncurrent liabilities are obligations not due

within one year or the company’s operating
cycle, whichever is longer.
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Equity is the owner’s claim on the assets.

 4 - 17

ASSESSING THE ABILITY TO PAY

Current Current Assets

=
Ratio Current Liabilities

$ 21,300
=
$ 10,200

= 2.09

A higher current ratio generally

means a better ability to pay.
 4 - 18

CURRENT RATIO
Helps assess the company’s ability to pay
its debts in the near future

Current Assets
Current Ratio =
Current Liabilities

Nestlé
 4 - 19

ACCOUNTING CYCLE
 4 - 20

RECORDING CLOSING ENTRIES

1. Resets revenue,
expense and Identify accounts
dividend account for closing.
balances to zero at
the end of the
Record and post
period.
closing entries.
2. Helps summarize a
period’s revenues
and expenses in the Prepare post-closing
Income Summary trial balance.
account.
 4 - 21

CLOSING TEMPORARY ACCOUNTS

Revenues Assets

Liabilities
Dividends
Expenses

Equity
Temporary Permanent
Accounts Accounts

Temporary accounts Permanent accounts

track financial track financial
results for a limited results from year to
period of time. year.
 4 - 22

TEMPORARY AND
PERMANENT ACCOUNTS
Revenues Assets

Liabilities
Dividends
Expenses

Equity
Temporary Permanent
Accounts Accounts

Income
Summary The closing process
applies only to
temporary accounts.
 4 - 23

RECORDING CLOSING ENTRIES

Close Credit Balances in
Let’s see how
Revenue Accounts to Income
Summary. the closing
process works!
Close Debit Balances in Expense
accounts to Income Summary.
Close Income Summary to
Retained Earnings.
Close Dividends Account to
Retained Earnings.
 4 - 24

FastForward
Adjusted Trial Balance
December 31, 2016
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance
Equipment
2,300
26,000
Using the
Accumulated depreciation-Equipment $ 375 adjusted trial
Accounts payable 6,200
Salaries payable 210 balance, let
Unearned consulting revenue 2,750
Share capital 30,000 us prepare
Retained earnings 0
Dividends 200
the closing
Consulting revenue
Rental revenue
7,850
300
entries for
Depreciation expense-Equipment 375 FastForward.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 4 - 25

FastForward
Adjusted Trial Balance
December 31, 2016
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment $ 375 1. Close Credit
Accounts payable 6,200
Salaries payable 210 Balances in
Unearned consulting revenue 2,750 Revenue
Share capital 30,000
Retained earnings 0 Accounts to
Dividends 200
Consulting revenue 7,850
Income
Rental revenue 300 Summary.
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 - 26

 CLOSE CREDIT BALANCES IN

REVENUE ACCOUNTS TO INCOME SUMMARY
Dr. Cr.
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150

We will now look at the ledger accounts after

posting this closing entry.
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 CLOSE CREDIT BALANCES IN

REVENUE ACCOUNTS TO INCOME SUMMARY
Consulting Revenue
7,850 7,850

Income Summary
8,150
Rental Revenue
300 300

-
 4 - 28

FastForward
Adjusted Trial Balance
December 31, 2016
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment $ 375
Accounts payable 6,200
2. Close Debit
Salaries payable 210 Balances in
Unearned consulting revenue 2,750
Share capital 30,000 Expense Accounts
Retained earnings 0 to Income
Dividends 200
Consulting revenue 7,850 Summary.
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 - 29

 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

We will now look at the ledger accounts

after posting this closing entry.
 4 - 30

 CLOSE DEBIT BALANCES IN EXPENSE

ACCOUNTS TO INCOME SUMMARY
Depreciation Expense-
Equipment Rent Expense
375 375 1,000 1,000
- -

Income Summary
Salaries Expense Supplies Expense
4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Profit

100 100 230 230
- -
 4 - 31

FastForward
Adjusted Trial Balance
December 31, 2016
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment $ 375 3. Close Income
Accounts payable 6,200
Salaries payable 210 Summary to
Unearned consulting revenue 2,750 Retained Earnings.
Share capital 30,000
Retained earnings 0
Dividends 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 - 32

 CLOSE INCOME SUMMARY

TO RETAINED EARNINGS

Dr. Cr.
Dec. 31 Income summary 3,785
Retained earnings 3,785

We will now look at the ledger accounts

after posting this closing entry.
 4 - 33

 CLOSE INCOME SUMMARY

TO RETAINED EARNINGS

Retained Earnings Income Summary

- 4,365 8,150
3,785 3,785
-
3,785
 4 - 34

FastForward
Adjusted Trial Balance
December 31, 2016
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment $ 375 4. Close
Accounts payable 6,200
Salaries payable 210 Dividends
Unearned consulting revenue 2,750
Share capital 30,000 Account to
Retained earnings 0
Dividends 200
Retained
Consulting revenue
Rental revenue
7,850
300
Earnings.
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 - 35

 CLOSE DIVIDENDS ACCOUNT

TO RETAINED EARNINGS

Dr. Cr.
Dec. 31 Retained earnings 200
Dividends 200

We will now look at the ledger accounts

after posting this closing entry.
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 CLOSE DIVIDENDS ACCOUNT

TO RETAINED EARNINGS

Dividends Retained Earnings

200 200 200 0
3,785

- 3,585
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SUMMARY OF THE CLOSING PROCESS

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POST-CLOSING TRIAL BALANCE

List of permanent accounts and

their balances after posting
closing entries.

Totaldebits and credits must be

equal.
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POST-CLOSING TRIAL BALANCE