Accounting

Principles
Second Canadian Edition
Weygandt · Kieso · Kimmel · Trenholm

Prepared by:
Carole Bowman, Sheridan College
 CHAPTER

COMPLETION OF THE
ACCOUNTING CYCLE
 WORK SHEET

 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 make
the preparation of adjusting entries
and financial statements easier.
 ILLUSTRATION 4-1
WORK SHEET
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

4. Extend adjusted
1. Prepare
2. Enter 3. Enter balance to appropriate
trial balance
adjustment adjusted columns.
on the
data. balances 5. Calculate income/loss
worksheet.
and complete the
worksheet.
 ILLUSTRATION 4-1
WORK SHEET
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

4. Extend adjusted
1. Prepare
2. Enter 3. Enter balance to appropriate
trial balance
adjustment adjusted columns.
on the
data. balances 5. Calculate income/loss
worksheet.
and complete the
worksheet.
August 20xx
Practice Questions
Practice Questions
Practice Questions
Practice Questions
Practice Questions
Practice Questions
PURPOSE 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.
2. Prepares the temporary accounts
(revenue, expense, drawings) for the
next period’s postings by reducing
their balances to zero.
PURPOSE 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.
2. Prepares the temporary accounts
(revenue, expense, drawings) for the
next period’s postings by reducing
their balances to zero.
 ILLUSTRATION 4-2
TEMPORARY VERSUS
PERMANENT ACCOUNTS
TEMPORARY (NOMINAL) PERMANENT (REAL)
These accounts are closed These accounts are not closed

All revenue accounts All asset accounts

All expense accounts All liability accounts

Owner’s drawings Owner’s capital account

(Income Statement /
(Balance Sheet Accounts)
Drawings Accounts)
 Closing Entries

1 – Close Revenues to Income Summary Account

2 – Close Expenses to Income Summary Account

3 - Close Income Summary to Capital Account

4 – Close Drawing to Capital Account

1 – Close Revenues to Income Summary Account
2 – Close Expenses to Income Summary Account
3 - Close Income Summary to Capital Account
4 – Close Drawing to Capital Account
4 – Close Drawing to Capital Account
 POST-CLOSING TRIAL BALANCE

 After all closing entries have been

journalized and posted, a post-closing trial
balance is prepared.
 The purpose of this trial balance is to prove
the equality of the permanent (balance
sheet) account balances that are carried
forward into the next accounting period.
 ILLUSTRATION 4-8
POST-CLOSING TRIAL BALANCE
Pioneer Advertising Agency
Post-Closing Trial Balance
October 31, 2002
After Adjustment
Debit Credit
Cash
The post-closing trial$ 15,200
Accounts Receivable 200
Advertising Supplies balance is prepared 1,000
Prepaid Insurance from the permanent 550
Office Equipment accounts in the ledger. 5,000
Accumulated Amortization $ 83
Notes Payable The post-closing trial 5,000
Accounts Payable 2,500
balance provides evidence
Unearned Revenue 800
Salaries Payable
that the journalizing and 1,200
Interest Payable posting of closing entries 25
C.R. Byrd, Capital has been properly 12,342
completed. $ 21,950 $ 21,950
 ACCOUNTING CYCLE

An accounting cycle is the collective process of

identifying, analyzing, and recording
the accounting events of a company. The series of
steps begins when a transaction occurs and end with
its inclusion in the financial statements.
STEPS IN THE ACCOUNTING CYCLE
1. Analyse
transactions 2. Journalize the
9. Prepare
post-closing transactions
trial balance
3. Post to ledger
accounts
8. Journalize
and post 4. Prepare a
closing entries trial balance

7. Prepare 5. Journalize
financial and post
statements adjusting
6. Prepare
adjusted trial entries
balance
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

 A reversing entry is made at the beginning

of the next accounting period.
 A reversing entry reverses certain adjusting
entries made in the previous period.
Opening balances can then be ignored
when preparing year-end adjusting entries.
 This topic is illustrated in Appendix 4A.
 REVERSING ENTRIES
(OPTIONAL STEP)

• Reversing entries help you make same entries

in the next year

Reversing entries help you make same entries in the next year
 CORRECTING ENTRIES

 Errors that occur in recording transactions

should be corrected as soon as they are
discovered by preparing correcting entries.
 Correcting entries are unnecessary if the
records are free of errors; they can be
journalized and posted whenever an error
is discovered.
 They involve any combination of balance
sheet and income statement accounts.
 ILLUSTRATION 4-10
STANDARD BALANCE SHEET
CLASSIFICATIONS
 Financial statements become more useful when the
elements are classified into significant subgroups.
 A classified balance sheet generally has the following
standard classifications:

Assets Liabilities and Equity

Current Assets Current Liabilities
Long-Term Investments Long-Term Liabilities
Capital Assets Owner’s/ Partners’/ Shareholders’ Equity
 CURRENT ASSETS
 Current assets are cash and other resources
that are reasonably expected to be realized in
cash or sold or consumed in the business
within one year of the balance sheet date or
the company’s operating cycle, whichever is
longer.
 Listed in the order of liquidity.
 Examples of current assets are cash,
temporary investments, accounts receivable,
inventory, and prepaids.
 LONG-TERM
INVESTMENTS

 Long-term investments are resources that can

be realized in cash, but the conversion into
cash is not expected within one year or the
operating cycle, whichever is longer.
 Examples include investments in shares or
bonds of another company or investment in
land held for resale.

100
XYZ shares
 CAPITAL ASSETS
 Tangible resources of a relatively permanent nature
that are used in the business and not intended for sale
are classified as (1) property, plant, and equipment
and (2) natural resources.
(1) Examples of property, plant, and equipment include land,
buildings, and machinery.
(2) Examples of natural resources include tracts of timber, oil
and gas reserves, and mineral deposits.
 CAPITAL ASSETS

 Intangible assets are noncurrent resources

that do not have physical substance.
 Examples include patents, copyrights,
trademarks, or trade names that give the
holder exclusive right of use for
a specified period of time.
 CURRENT LIABILITIES

 Current liabilities are obligations that are

reasonably expected to be paid from
existing current assets or through the
creation of other current liabilities within
one year or the operating cycle, whichever
is longer.
 Examples include accounts payable,
unearned revenue, interest payable, and
current maturities of long-term debt.
 LONG-TERM LIABILITIES

 Obligations expected to be paid after one

year are classified as long-term liabilities.
 Examples include long-term notes payable,
bonds payable, mortgages payable, and
lease liabilities.
 EQUITY

 The content of the equity section varies with the

form of business organization.
 In a proprietorship, there is a single owner’s
equity account called (Owner’s Name), Capital.
 In a partnership, there are separate capital
accounts for each partner.
 For a corporation, owners’ equity is called
shareholders’ equity, and it consists of two
accounts: Share Capital and Retained Earnings.
 ILLUSTRATION 4-17
CLASSIFIED BALANCE SHEET IN REPORT FORM
Pioneer Advertising Agency
Balance Sheet
A classified balance
October 31, 2002 sheet helps the
Assets
Current Assets
financial statement
Cash $ 15,200 user determine:
Accounts Receivable 200
Advertising Supplies 1,000
• The availability of
Prepaid Insurance 550 assets to meet debts as
Total Current Assets 16,950
Capital Assets
they come due, and
Office Equipment $ 5,000 •The claims of short-
Less: Accumulated Amortization 83 4,917
Total Assets $ 21,867
and long-term
creditors on total
Liabilities and Owner's Equity
Current Liabilities
assets.
Notes Payable $ 1,000
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
The balance sheet is
Interest Payable 25 most often presented in
Total Current Liabilities 5,525
Long-term Liabilties the report form, with
Notes Payable 4,000
Total Liabilities 9,525
the assets shown above
Owner's Equity the liabilities and
C.R. Byrd, Capital 12,342
Total Liabilities and Owner's Equity $ 21,867 owner’s equity.
 LIQUIDITY

 Liquidity measures ability to pay short-

term obligations when they come due.
 Working capital is one important measure
of liquidity.

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

 CURRENT RATIO
The current ratio (working capital ratio) is
a widely used measure for evaluating a
company’s liquidity and short-term debt-
paying ability. It is calculated by dividing
current assets by current liabilities and is a
more dependable indicator of liquidity than
working capital.

CURRENT ASSETS
CURRENT RATIO = ———————————
CURRENT LIABILITIES