accounting and the business environment

Completing the

Accounting Cycle

Chapter 4

4-1© 2015 Pearson Education, Limited.

Summary of the Accounting Cycle

© 2015 Pearson Education, Limited. 4-2

Analyze &

journalize

transactions

Post

journal

entries to

ledger

accounts Prepare

unadjusted

trial balance

Journalize

and post

adjusting

entries

Prepare

adjusted trial

balance

Prepare

financial

statements

Prepare

post-closing

trial balance

Journalize

and post

closing entries

Start with

beginning

account

balances

Prepare the

worksheet

(optional)

Learning Objective 1

Prepare the financial

statements including

the classified balance

sheet


Financial Statements are:

1. Income statement

2. Statement of Owner’s Equity

3. Balance sheet (Classified Balance sheet)

4. Statement of Cash flow


LO 1: Financial Statements

How to Prepare Financial Statements ?

The financial

statements come from

the Adjusted Trial

Balance.

Each account on the

Adjusted T/B has ONE

and only ONE home on

one of the financial

statements.

No account is EVER

used twice.


LO 1: Financial Statements

4-6

Revenues

Service Revenue 17,500$

Expenses

Rent Expense 3,000$

Salaries Expense 4,800

Supplies Expense 400

Utilities Expense 100

Depr Exp - Furniture 300

Depr Exp - Building 250

Interest Expense 100

Total expenses 8,950

Net income 8,550$

SMART TOUCH LEARNING

Income Statement

Two Months Ended December 31, 2014

Income Statement

Amounts© 2015 Pearson Education, Limited.

4-7

Revenues


Expenses

Rent Expense 3,000$








Net income 8,550$


Income Statement


Income Statement

Amounts© 2015 Pearson Education, Limited.

4-8


Statement of Owner's Equity


Bright Capital, Nov 1, 2014 -$

Owner Contribution 48,000

Net income for two months 8,550

56,550

Owner Withdrawal (5,000)

Bright Capital, Dec 31, 2014 51,550$

Revenues


Expenses

Rent Expense 3,000$








Net income 8,550$


Income Statement


© 2015 Pearson Education, Limited.

4-9







56,550



Revenues


Expenses

Rent Expense 3,000$








Net income 8,550$


Income Statement



4-10







56,550



Revenues


Expenses

Rent Expense 3,000$








Net income 8,550$


Income Statement




Balance Sheet

December 31, 2014

Cash 12,200$

Accounts Receivable 1,800

Office Supplies 100

Prepaid rent 2,000

Furniture 18,000

Less: Accum Depr - Furniture (300)

Building 60,000

Less: Accum Depr - Building (250)

Land 20,000

Total assets 113,550$

Accounts Payable 200$

Utilities Payable 100$

Salaries Payable 1,200$

Interest Payable 100$

Unearned Revenue 400$

Notes Payable 60,000$

Total Liabilities 62,000$

Bright Capital, December 31, 2014 51,550

Total Liabilities and Owner's Equity 113,550$

Assets

Liabilities

Owner's Equity

4-11






Net income for the month 8,550

56,550





Balance Sheet

December 31, 2014

Current Assets:

Cash 12,200$


Office Supplies 100

Prepaid rent 2,000

Total Current Assets 16,100

Plant Assets:

Furniture 18,000


Building 60,000


Land 20,000

Total Plant Assets 97,450


Assets

The Classified

Balance Sheet



Balance Sheet

December 31, 2014

Current Assets:

Cash 12,200$


Office Supplies 100

Prepaid rent 2,000


Plant Assets:

Furniture 18,000


Building 60,000


Land 20,000



Assets

The Classified

Balance Sheet



Use the worksheet to

prepare financial

statements



Explain the purpose of,

journalize, and post-

closing entries


Close these•Revenue accounts

•Expense accounts

•Withdrawal account

Temporary

Do not close these• Asset accounts

• Liability accounts

• Capital account

Permanent

At the end of each period Companies

must transfer the temporary account

balances to the permanent owner’s

equity account.

Closing Entries


24© 2015 Pearson Education, Limited.

Closing Entries

25© 2015 Pearson Education, Limited.

Closing Process


Prepare the post-

closing trial balance


• Only balance sheet

accounts are left

after the closing

entries are posted.

• The revenue and

expense accounts

now have a $0

balance.

• The books are

ready for the start of

the next fiscal

period.© 2015 Pearson Education, Limited. 4-27

Smart Touch Learning

Post-Closing Trial Balance

December 31, 2014

Debit Credit

Cash 12,200$


Office Supplies 100

Prepaid Rent 2,000

Furniture 18,000

Accum Depr - Furniture 300$

Building 60,000

Accum Depr - Building 250

Land 20,000

Accounts Payable 200

Utilities Payable 100

Salaries Payable 1,200

Interest Payable 100

Unearned Revenue 400

Notes Payable 60,000

Bright, Capital 51,550

114,100$ 114,100$


Describe the

accounting cycle


Summary of the Accounting Cycle


Analyze &

journalize

transactions

Post

journal

entries to

ledger

accounts Prepare

unadjusted

trial balance

Journalize

and post

adjusting

entries

Prepare

adjusted trial

balance

Prepare

financial

statements

Prepare

post-closing

trial balance

Journalize

and post

closing entries

Start with

beginning

account

balances

Prepare the

worksheet

(optional)


Use the current ratio to

evaluate business

performance


Current Ratio



Explain the purpose

of and journalize

reversing entries

(Appendix 4A)


Reversing Entries

• The opposite of

accrual entries

• Not required by

GAAP

• Used for

convenience and

to save time


1. Record the accrual

at the end of the

period

2. Reverse the accrual

at the beginning of

the next period

3. Record the cash

flow without

referring to the

earlier accrual

Accrued Expenses

• On December 31, record Smart Touch

Learning’s $1,200 salary accrual.


Date Accounts and Explanation Debit Credit

Dec. 31 Salaries Expense 1,200

Salaries Payable 1,200

To accrue salaries expense.

Accrued Expenses

• On January 1, after closing the previous

period’s accounts, reverse the previous

accrual.

• The payable is eliminated, and the

expense will now have a credit balance.



2015 Salaries Payable 1,200

Jan. 1 Salaries Expense 1,200

To reverse the salaries adjusting entry.

Accrued Expenses

• When the salaries are paid, simply debit

Salaries Expense and credit Cash.

•

• Salaries Expense will carry the proper

$1,200 balance after posting.© 2015 Pearson Education, Limited. 4-36


Jan. 15 Salaries Expense 2,400

Cash 2,400

To record payment of salaries.

End of Chapter 4


accounting and the business environment

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