ch04 - financial accounting
TRANSCRIPT
Slide 4-1
Financial Accounting
Instructor : Gustavo Tanaka
Chapter : 4
Completing the Accounting Cycle
Slide 4-2
1. Prepare a worksheet.
2. Explain the process of closing the books.
3. Describe the content and purpose of a post-closing trial
balance.
4. State the required steps in the accounting cycle.
5. Explain the approaches to preparing correcting entries.
6. Identify the sections of a classified statement of
financial position.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Slide 4-3
Using a Using a WorksheetWorksheet
Using a Using a WorksheetWorksheet
Steps in preparation
Preparing financial statements
Preparing adjusting entries
Intangible assets
Property, plant, and equipment
Long-term investments
Current assets
Equity
Non-current liabilities
Current liabilities
Reversing entries—An optional step
Correcting entries—An avoidable step
Preparing closing entries
Posting closing entries
Preparing a post-closing trial balance
Closing the Closing the BooksBooks
Closing the Closing the BooksBooks
Summary of Summary of Accounting Accounting
CycleCycle
Summary of Summary of Accounting Accounting
CycleCycle
Classified Classified Statement of Statement of
Financial Financial PositionPosition
Classified Classified Statement of Statement of
Financial Financial PositionPosition
Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle
Slide 4-4
Integral Case 1
Slide 4-5
1End-of-Period Spreadsheet (Work Sheet)Exhibit 1
Slide 4-6
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Accounts are listed in the Trial Balance column using the ending balance found in the general ledger.
Flow of Accounting Information
1
Slide 4-7
Flow of Accounting Information
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Adjustments are entered here. Two possibilities:
1. Deferrals – Existing balances are changed.2. Accruals – New information is entered.
1
Slide 4-8
Adjustments are combined with the trial balance. Account
balances are now adjusted.
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Flow of Accounting Information
1
Slide 4-9
Revenue and expense balances in the Adjusted Trial Balance column are extended
to the Income Statement column.
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Income State. Balance Sheet
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Flow of Accounting Information
1
Slide 4-10
Asset, liability, capital stock, and dividends balances in the Adjusted
Trial Balance column are extended to the Balance Sheet column.
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)
Flow of Accounting Information
1
Income State. Balance Sheet
Slide 4-11
The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column.
1. Dividends2. Utilities Expense3. Accumulated
Depreciation—Equipment4. Unearned Rent
5. Fees Earned6. Accounts Payable7. Rent Revenue8. Supplies
4-11
Example Exercise 4-11
Flow of Accounts into Financial Statements
Slide 4-12
1. Balance Sheet column2. Income Statement column3. Balance Sheet column4. Balance Sheet column5. Income Statement column6. Balance Sheet column7. Income Statement column8. Balance Sheet column
1Example Exercise 4-1 (continued)
4-12
For Practice: PE 4-1A, PE 4-1B
Follow My Example 4-1
Slide 4-13
The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the spreadsheet (work sheet).
2
Slide 4-14
to retained earnings statement
2
Financial Statements Prepared from Work SheetExhibit 2
Slide 4-15
In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for Dimple Consulting Co. for the current year, the Debit column total is $678,450, and the Credit column total is $599,750 before the amount of net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet (work sheet), what is the amount of net income or net loss?
4-16
Example Exercise 4-22
Determining the Net Income from End-of-Period Spreadsheet
Slide 4-16
2Example Exercise 4-2 (continued)
A net income of $78,700 ($678,450 – $599,750) would be reported. When the Debit column of the Balance Sheet columns is more than the Credit column, net income is reported. If the Credit column exceeds the Debit column, a net loss is reported.
4-17
For Practice: PE 4-2A, PE 4-2B
Follow My Example 4-2
Slide 4-17
The first item presented on the retained earnings statement is the balance of the Retained Earnings account at the beginning of the period.
2
Retained Earnings Statement
Slide 4-18
from the income statement
to the balance sheet
2Financial Statements Prepared from Work Sheet (continued)
Exhibit 2
Slide 4-19
Zack Gaddis owns and operates Gaddis Employment Services. On January 1, 2009, Retained Earnings had a balance of $186,000. During the year, an additional $40,000 of capital stock was issued for cash and dividends of $25,000 were paid. For the year ended December 31, 2009, Gaddis Employment Services reported a net income of $18,750. Prepare a retained earnings statement for the year ended December 31, 2009.
Example Exercise 4-32
4-20
Retained Earnings Statement
Slide 4-20
2Example Exercise 4-3 (continued)
Retained earnings, January 1, 2009 $186,000Dividends $ 25,000Less net income 18,750Decrease in retained earnings 6,250Retained earnings, December 31, 2009 $179,750
4-21
For Practice: PE 4-3A, PE 4-3B
GADDIS EMPLOYMENT SERVICESRETAINED EARNINGS STATEMENT
For the Year Ended December 31, 2009
Follow My Example 4-3
Slide 4-21
The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the spreadsheet (or work sheet).
2
Slide 4-22
A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.
2
Balance Sheet
Slide 4-23
Cash and other assets that are expected to be converted into cash, sold or used up usually within a year or less, through the normal operations of the business, are called current assets.
• Cash
• Accounts Receivable
• Supplies
2
Slide 4-24
Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.
2
Slide 4-25
Property, plant, and equipment (also called fixed assets) include assets that depreciate over a period of time. Land is an exception as it is not subject to depreciation.• Equipment
• Machinery
• Buildings
• Land
2
Slide 4-26
Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities.• Accounts payable
• Wages payable
• Interest payable
• Unearned fees
2
Slide 4-27
Liabilities not due for a long time (usually more than one year) are long-term liabilities. • Notes payable
• Mortgage payable
• Bond payable
2
Slide 4-28
Stockholders’ equity is the stockholders’ right to the assets of the business. The stockholders’ equity consists of capital stock and retained earnings. The stockholders’ equity is added to the total liabilities, and the total must be equal to the total assets.
2
Slide 4-29
from the retained earnings statement
2Financial Statements Prepared from Work Sheet (continued)Exhibit 2
Slide 4-30
The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability; (d) long-term liability; or (e) stockholders’ equity section of the December 31, 2009 balance sheet of Hindsight Consulting.
1. Capital Stock 5. Cash2. Notes Receivable (due 6. Unearned Rent
in 6 months) 7. Accumulated Depr.—
3. Notes Payable (due in Equipment2011) 8. Accounts Payable
4. Land
Example Exercise 4-42
4-31
Classified Balance Sheet
Slide 4-31
2Example Exercise 4-4 (continued)
Follow My Example 4-4
1. Stockholders’ equity2. Current asset3. Long-term liability4. Property, plant, and
equipment
5. Current asset6. Current liability7. Property, plant, and
equipment
8. Current liability
4-32
For Practice: PE 4-4A, PE 4-4B
Follow My Example 4-4
Slide 4-32
Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.
3
Closing Entries
Slide 4-33
To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary.
3
Closing Entries
Slide 4-34
The balance of Income Summary is then transferred to Retained Earnings. The balance of the Dividends account is also transferred to Retained Earnings. The entries that transfer these balances are called closing entries.
3
Closing Entries
Slide 4-35
3
The Closing ProcessExhibit 3
Slide 4-36
Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
Income Summary 16,840
120
16,960
3Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4
Slide 4-37
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Bal. 200
Miscellaneous Expense
Bal. 455
Income Summary
Debit Income Summary for the total expenses and
credit each expense account for its balance.
16,960
Bal. 4,525
Bal. 1,600
Bal. 50
Bal. 985
Bal. 2,040
9,855
455
200
2,040
985
50
1,600
4,525
3Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4
Slide 4-38
Retained Earnings
Bal. 0
Dividends
Bal. 4,000
Income Summary
16,9609,8557,105
7,105
Debit Income Summary for the
amount of its balance (in this case, the net income) and credit Retained Earnings.
3Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
Slide 4-39
Retained Earnings
Bal. 25,0007,105
Dividends
Bal. 4,000 4,000
4,000 Debit Retained Earnings for the
balance of the dividends account, and
credit the dividends account.
3
Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
Slide 4-40
3
Exhibit 4 Flowchart of Closing Entries for NetSolutions (summary)
Stockholders’ Equity
Slide 4-41
3
Closing Entries for NetSolutions
Step 2
Step 3
Step 1
Step 4
Exhibit 5
Slide 4-42
After the closing entries are posted, all of the temporary accounts have zero balances.
3
Closing Entries
Slide 4-43
3Ledger for NetSolutions (continued)Exhibit 6
Slide 4-44
Ledger for NetSolutions (continued)
3Exhibit 6
Slide 4-45
3
Ledger for NetSolutions (continued)Exhibit 6
Slide 4-46
3
Ledger for NetSolutions (concluded)Exhibit 6
Slide 4-47
After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co.
Retained Earnings
$615,850Dividends
25,000Fees Earned
380,450Wages Expense
250,000Rent Expense
65,000Supplies Expense
18,250Miscellaneous Expense
6,200
Journalize the four entries required to close the accounts.
Example Exercise 4-53
Closing Entries
4-49
Slide 4-48
3Example Exercise 4-5 (continued)
July 31 Fees Earned…………………………….. 380,450Income Summary…………………. 380,450
31 Income Summary……………………… 339,450Wages Expense…………………… 250,000Rent Expense……………………… 65,000Supplies Expense………………… 18,250Miscellaneous Expense…………. 6,200
31 Income Summary………………………. 41,000Retained Earnings…...…………… 41,000
31 Retained Earnings……………………… 25,000Dividends……………….………….. 25,000
4-50
For Practice: PE 4-5A, PE 4-5B
Follow My Example 4-5
Slide 4-49
A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.
3
Post-Closing Trial Balance
Slide 4-50
3
Post-Closing Trial BalanceExhibit 7
Slide 4-51
Integral Case 2
Slide 4-52
A multiple-column form used in preparing financial statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.
Using A WorksheetUsing A WorksheetUsing A WorksheetUsing A Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Worksheet
Slide 4-53
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Illustration 4-1
Slide 4-54
Illustration:
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Illustration 4-2Preparing a trial balance
Slide 4-55
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 Share Capital 10,000 Dividends 500 Service Revenue 10,000
Salaries Expense 4,000 Rent 900
Totals 28,700 28,700
Financial PositionAdjusted Income
Trial Balance Adjustments Trial Balance StatementStatement of
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet
Trial balance amounts come directly from ledger accounts.
Include all accounts with balances.
Slide 4-56 SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
Illustration 3-22General journal showing adjusting entries
Adjusting Journal Entries
(Chapter 3)
Slide 4-57
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 1,500 Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 400 Share Capital 10,000 Dividends 500 Service Revenue 10,000 400
200 Salaries Expense 4,000 1,200 Rent 900
Totals 28,700 28,700
Advertising Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries Payable 1,200
Totals 3,440 3,440
Financial PositionAdjusted Income
Trial Balance Adjustments Trial Balance StatementStatement of
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
(a)(b)
(a)
(g
)
(c)
(d)
(d
)
(e)
(b
)
(e)(f)
(f)(g)
(c)
Enter adjustment amounts, total adjustments columns,and check for equality.
Add additional accounts as needed.
Adjustments Key:
(a) Supplies Used.(b) Insurance Expired.(c) Depreciation Expensed.(d) Service Revenue Earned.(e) Service Revenue Accrued.(f) Interest Accrued.(g) Salaries Accrued.
Slide 4-58
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Share Capital 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600
200 Salaries Expense 4,000 1,200 5,200 Rent 900 900
Totals 28,700 28,700
Advertising Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190
Financial PositionAdjusted Income
Trial Balance Adjustments Trial Balance StatementStatement of
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
(a)(b)
(a)
(g
)
(c)
(d)
(d
)
(e)
(b
)
(e)(f)
(f)(g)
(c)
Total the adjusted trial balance columns and check for equality.
Slide 4-59
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Share Capital 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 Interest Expense 50 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600
Statement of Adjusted IncomeTrial Balance Adjustments Trial Balance Statement Financial Position
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
(a)(b)
(a)
(g
)
(c)
(d)
(d
)
(e)
(b
)
(e)(f)
(f)(g)
(c)
Extend all revenue and expense account balances to the income statement columns.
Slide 4-60
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Share Capital 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Financial Position Adjusted Income
Trial Balance Adjustments Trial Balance Statement Statement of
SO 1 Prepare a SO 1 Prepare a worksheet.worksheet.
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Extend all asset, liability, and equity account balances to the statement of
financial position columns.
(a)(b)
(a)
(g
)
(c)
(d)
(d
)
(e)
(b
)
(e)(f)
(f)(g)
(c)
Slide 4-61
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Share Capital 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600
200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net income 2,860 2,860 Totals 10,600 10,600 22,450 22,450
Financial Position Adjusted Income
Trial Balance Adjustments Trial Balance Statement Statement of
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
(a)(b)
(a)
(g
)
(c)
(d)
(d
)
(e)
(b
)
(e)(f)
(f)(g)
(c)
Compute Net Income or Net Loss.
Slide 4-62
Income statement is prepared from the income
statement columns.
Statement of financial position and retained earnings
statement are prepared from the statement of
financial position columns.
Companies journalize and post adjusting entries.
Preparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Worksheet
Slide 4-63
Preparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Illustration 4-4
Slide 4-64
Preparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Illustration 4-4
Slide 4-65
Preparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a Worksheet
Illustration 4-4
Slide 4-66
The adjusting entries are prepared from the
adjustments columns of the worksheet.
Journalizing and posting of adjusting entries follows
the preparation of financial statements when a
worksheet is used.
Preparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Adjusting Entries
Slide 4-67
Preparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Illustration 3-22General journal showing adjusting entries
Adjusting Journal Entries
(Chapter 3)
Slide 4-68
At the end of the accounting period, the company makes the accounts ready for the next period.
Closing the BooksClosing the BooksClosing the BooksClosing the Books
SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.
Illustration 4-5
Slide 4-69
Closing entriesClosing entries formally recognize, in the general ledger, the transfer of
net income (or net loss) and
dividends
to Retained Earnings.
Closing the BooksClosing the BooksClosing the BooksClosing the Books
SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.
Closing entries are only at the end of the annual accounting period.
Slide 4-70
Closing the BooksClosing the BooksClosing the BooksClosing the Books
SO 2SO 2
Illustration 4-6
Retained Earnings is a permanent account; all
other accounts are temporary accounts.
Dividends are closed directly to Retained Earnings and not to Income Summary
because Dividends are not an expense.
Note:
Slide 4-71
Closing the BooksClosing the BooksClosing the BooksClosing the Books
Closing entries
need to be
posted
Illustration 4-7Closing entries journalized
Slide 4-72
Posting closing entries
Illustration 4-8Posting of closing entries
Closing the BooksClosing the BooksClosing the BooksClosing the Books
Slide 4-73
Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.
Preparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial Balance
Temporary accounts will have zero balances.
Illustration 4-9
SO 3SO 3
Slide 4-74
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. statement of financial position debit column only.
c. income statement credit column and statement of financial position debit column.
d. income statement debit column and statement of financial position credit column.
Review Question
Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet
SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.
Slide 4-75
Summary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting Cycle
1. Analyze business transactions1. Analyze business transactions
2. Journalize the transactions 2. Journalize the transactions
6. Prepare an adjusted trial balance
6. Prepare an adjusted trial balance
7. Prepare financial statements
7. Prepare financial statements
8. Journalize and post closing entries
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
9. Prepare a post-closing trial balance
4. Prepare a trial balance4. Prepare a trial balance
3. Post to ledger accounts3. Post to ledger accounts
5. Journalize and post adjusting entries
5. Journalize and post adjusting entries
Illustration 4-12
SO 4 State the required steps in the accounting cycle.SO 4 State the required steps in the accounting cycle.
Slide 4-76
End
Integral Case 2
Slide 4-77
Correcting entries
are unnecessary if the records are error-free.
are made whenever an error is discovered.
must be posted before closing entries.
Instead of preparing a correcting entry, it is possible to
reverse the incorrect entry and then prepare the correct entry.
Correcting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable Step
SO 5 Explain the approaches to preparing correcting entries.SO 5 Explain the approaches to preparing correcting entries.
Slide 4-78
Illustration (Case 1):Illustration (Case 1): On May 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full.
Correcting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable Step
SO 5 Explain the approaches to preparing correcting entries.SO 5 Explain the approaches to preparing correcting entries.
Cash 50Incorrect entry Service revenue
50Cash 50Correct
entry Accounts receivable 50Service revenue 50Correcting Correcting
entryentry Accounts receivable 50
Slide 4-79
Illustration (Case 2):Illustration (Case 2): On May 18, Mercato purchased on account office equipment costing $450. The transaction was journalized and posted as a debit to Delivery Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3.
Correcting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable Step
SO 5 Explain the approaches to preparing correcting entries.SO 5 Explain the approaches to preparing correcting entries.
Delivery equipment 45Incorrect entry Accounts payable
45Office equipment 450
Accounts payable 450
Office equipment 450Correcting Correcting
entryentryDelivery equipment
45Accounts payable 405
Correct entry
Slide 4-80
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Presents a snapshot at a point in time.
To improve understanding, companies group similar assets and similar liabilities together.
Assets Equity and Liabilities
Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets
Illustration 4-17Standard Classifications
Slide 4-81
Assets that do not have physical substance.
Intangible Assets
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-82
Long useful lives.
Currently used in operations.
Depreciation - allocating the cost of assets to a number of years.
Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life.
Property, Plant, and Equipment
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-83
Illustration 4-20
Property, Plant, and Equipment
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
(in billions)
₩₩₩
Slide 4-84
Investments in stocks and bonds of other companies.
Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities.
Long-Term Investments
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-85
Assets that a company expects to convert to cash or
use up within one year or the operating cycle,
whichever is longer.
Operating cycle is the average time it takes from the
purchase of inventory to the collection of cash from
customers.
Current Assets
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-86
Illustration 4-22
Current Assets
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-87
Review Question
Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-88
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation – Share Capital and Retained Earnings.
Equity
Illustration 4-23
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-89
Obligations a company expects to pay after one year.
Non-current Liabilities
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-90
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Review Question
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-91
Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-92
Obligations the company is to pay within the coming year.
Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude.
Liquidity - ability to pay obligations expected to be due within the next year.
Current Liabilities
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-93
Current Liabilities
The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position
SO 6 Identify the sections of a classified statement of financial position.SO 6 Identify the sections of a classified statement of financial position.
Slide 4-94
Completing the Accounting Cycle
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
Procedures used to prepare the worksheet are the same for
all companies under both IFRS and GAAP.
Both GAAP and IFRS are consistent regarding the type of
financial statements prepared.
IFRS requires that specific items be reported on the
statement of financial position, whereas no such general
standard exists in GAAP.
Key DifferencesKey Differences
Slide 4-95
Completing the Accounting Cycle
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
o Both require note disclosures on accounting policies and
judgments.
o Comparative prior period information must be presented
and financial statements must be prepared annually.
o Current/noncurrent classification for assets and liabilities is
normally required.
o Like IFRS, a classified statement of financial position is
usually used under GAAP.
SimilaritiesSimilarities
Slide 4-96
Completing the Accounting Cycle
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
IFRS companies may report PP&E first in their statements of
financial position. This presentation is not used under
GAAP.
Under IFRS, companies, under certain conditions, can
report property, plant and equipment at cost or at fair value.
While the use of the term “reserve” is discouraged by
GAAP, it is used extensively under IFRS.
Key DifferencesKey Differences
Slide 4-97
Completing the Accounting Cycle
Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP
The IASB and FASB are working on a project to converge
their standards related to financial statement presentation.
Proposal is that each of the statements will be organized in
the same format.
The same classifications used in the statement of financial
position would also be used in the income statement and
the statement of cash flows.
Looking to the FutureLooking to the Future
Slide 4-98
It is often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period.
Companies make a reversing entry at the beginning of the next accounting period.
Each reversing entry is the exact opposite of the adjusting entry made in the previous period.
The use of reversing entries does not change the amounts reported in the financial statements.
SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.
Reversing Entries
APPENDIX Reversing EntriesReversing EntriesAPPENDIX Reversing EntriesReversing Entries
Slide 4-99 SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.
Illustration: To illustrate the optional use of reversing entries for
accrued expenses, we will use the salaries expense transactions for
Pioneer Advertising Agency.
1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries
earned between October 15 and October 26.
2. October 31 (adjusting entry): Salaries earned between October
29 and October 31 are $1,200. The company will pay these in the
November 9 payroll.
3. November 9 (subsequent salary entry): Salaries paid are $4,000.
Of this amount, $1,200 applied to accrued wages payable and
$2,800 was earned between November 1 and November 9.
APPENDIX Reversing EntriesReversing EntriesAPPENDIX Reversing EntriesReversing Entries
Slide 4-100
With Reversing Entries (per appendix)
SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.
Initial Salary Entry
Oct. 26 Same entry
Adjusting Entry
Closing Entry
Reversing Entry
Salaries payable 1,200Salaries expense
1,200Subsequent Salary Entry
Oct. 31 Same entry
Oct. 31 Same entry
Nov. 1
Salaries expense 4,000Cash
4,000
Nov. 9
Illustration 4A-1
APPENDIX Reversing EntriesReversing EntriesAPPENDIX Reversing EntriesReversing Entries
Slide 4-101 SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.
Illustration 4A-2 Postings with reversingentries
APPENDIX Reversing EntriesReversing EntriesAPPENDIX Reversing EntriesReversing Entries
Slide 4-102
Key Concepts
- A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.
- Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.
- The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle