CHAPTER 4

COMPLETING THE ACCOUNTING CYCLE

Summary of the Accounting Cycle

Illustration 4-12

1. Analyze business transactions

9. Prepare a post-closing trial balance 8. Journalize and post closing entries 7. Prepare financial statements 6. Prepare an adjusted trial balance

2. Journalize the transactions

3. Post to ledger accounts

4. Prepare a trial balance

5. Journalize and post adjusting entries

SO 4 State the required steps in the accounting cycle.

PREPARING THE F/S

Why do we make F/S?

To provide quantitative financial information about a business enterprise that is useful for economic decision-making to a wide range of users

Who Uses Accounting Data

Internal Users External Users

Management of diff departments: HR Marketing Finance Production Sales

Managerial Accounting

BIR Customers Creditors Banks Labor unions Investors SEC

Financial Accounting

Who is responsible for preparing the F/S?

Management has the primary responsibility for the preparation and presentation of financial statements

Steps in Preparing a Worksheet

Illustration 4-1

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

1. Prepare a Trial Balance on the Worksheet
Account Titles Cash Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Salaries Expense Rent Expense Totals Trial Balance Dr. Cr. 15,200 2,500 600 5,000 5,000 2,500 1,200 10,000 500 10,000 4,000 900 28,700 Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr.

Illustration 4-2
Balance Sheet Dr. Cr.

28,700

Trial balance amounts come directly from ledger accounts. Include all accounts with balances.

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

Illustration 3-23 General journal showing adjusting entries

Adjusting Journal Entries (Chapter 3)

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

2. Enter the Adjustments in the Adjustments Columns
Account Titles Cash Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Salaries Expense Rent Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries Payable Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 15,200 (a) 1,500 2,500 (b) 600 50 5,000 5,000 2,500 1,200 (d) 400 10,000 500 (d) 400 10,000 (e) 200 (g) 4,000 1,200 900 28,700 28,700 (a) 1,500 (b) 50 (c) 40 (c) 40 (e) 200 (f) 50 (f) 50 (g) 1,200 3,440 3,440 Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr.

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.

Enter adjustment amounts, total adjustments columns, and check for equality.

Add additional accounts as needed. SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

3. Complete the Adjusted Trial Balance Columns
Account Titles Cash Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Salaries Expense Rent Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries Payable Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 15,200 (a) 1,500 2,500 (b) 600 50 5,000 5,000 2,500 1,200 (d) 400 10,000 500 (d) 400 10,000 (e) 200 (g) 4,000 1,200 900 28,700 28,700 (a) 1,500 (b) 50 (c) 40 (c) 40 (e) 200 (f) 50 (f) 50 (g) 1,200 3,440 3,440 Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900 1,500 50 40 40 200 50 50 1,200 30,190 Income Statement Dr. Cr. Balance Sheet Dr. Cr.

30,190

Total the adjusted trial balance columns and check for equality.

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

4. Extend Amounts to Financial Statement Columns
Account Titles Cash Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Salaries Expense Rent Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries Payable Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 15,200 (a) 1,500 2,500 (b) 600 50 5,000 5,000 2,500 1,200 (d) 400 10,000 500 (d) 400 10,000 (e) 200 (g) 4,000 1,200 900 28,700 28,700 (a) 1,500 (b) 50 (c) 40 (c) 40 (e) 200 (f) 50 (f) 50 (g) 1,200 3,440 3,440 Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900 1,500 50 40 40 200 50 50 1,200 30,190 40 50 Income Statement Dr. Cr. Balance Sheet Dr. Cr.

10,600 5,200 900 1,500 50

30,190

7,740

10,600

Extend all revenue and expense account balances to the income statement columns.

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

4. Extend Amounts to Financial Statement Columns
Account Titles Cash Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Salaries Expense Rent Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 15,200 (a) 1,500 2,500 (b) 600 50 5,000 5,000 2,500 1,200 (d) 400 10,000 500 (d) 400 10,000 (e) 200 (g) 4,000 1,200 900 28,700 28,700 (a) 1,500 (b) 50 (c) 40 (c) 40 (e) 200 (f) 50 (f) 50 (g) 1,200 3,440 3,440 Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900 1,500 50 40 40 200 50 50 1,200 30,190 40 200 50 50 1,200 19,590 2,860 22,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500

10,600 5,200 900 1,500 50 40

30,190

Extend all asset, liability, and owners Compute Net Income or Net Loss. balances to the balance sheet columns.

7,740 2,860 10,600 equity

10,600 10,600

22,450 22,450

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

5. Total Columns, Compute Net Income (Loss)
Account Titles Cash Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Owner's Capital Owner's Drawing Service Revenue Salaries Expense Rent Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 15,200 (a) 1,500 2,500 (b) 600 50 5,000 5,000 2,500 1,200 (d) 400 10,000 500 (d) 400 10,000 (e) 200 (g) 4,000 1,200 900 28,700 28,700 (a) 1,500 (b) 50 (c) 40 (c) 40 (e) 200 (f) 50 (f) 50 (g) 1,200 3,440 3,440 Adjusted Trial Balance Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600 5,200 900 1,500 50 40 40 200 50 50 1,200 30,190 40 200 50 50 1,200 19,590 2,860 22,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 15,200 1,000 550 5,000 5,000 2,500 800 10,000 500

10,600 5,200 900 1,500 50 40

30,190

7,740 2,860 10,600

10,600 10,600

22,450 22,450

Compute Net Income or Net Loss.

SO 1 Prepare a worksheet.

Worksheet Exercise E4-1 Complete worksheet Prepare I/S, Owners Equity Statement, and B/S

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet Review Question

Net income is shown on a worksheet in the:
a. income statement debit column only. b. balance sheet debit column only. c. income statement credit column and balance sheet debit column. d. income statement debit column and balance sheet credit column.

SO 1 Prepare a worksheet.

Using a Worksheet
Preparing Statements from a Worksheet

Income statement is prepared from the income statement columns.

Balance sheet and owners equity statement are prepared from the balance sheet columns. Companies journalize and post adjusting entries.

SO 1 Prepare a worksheet.

Using a Worksheet
Steps in Preparing a Worksheet

Multiple-column form used in preparing financial statements. Not a permanent accounting record. Use of worksheet is optional.

SO 1 Prepare a worksheet.

CLOSING THE BOOKS

Closing the Books

Preparing Closing Entries
A required step in the accounting cycle, after F/S are prepared.

SO 2 Explain the process of closing the books.

Closing the Books

Preparing Closing Entries
Closing entries formally recognize, in the general ledger, the transfer of

net income (or net loss) and

owners drawing

to owners capital.

SO 2 Explain the process of closing the books.

Closing the Books

Preparing Closing Entries
Closing entries are only made at the end of the annual accounting period.

SO 2 Explain the process of closing the books.

Closing the Books

At the end of the accounting period, the company makes the accounts ready for the next period.
Illustration 4-5

SO 2 Explain the process of closing the books.

Interrelatedness of Financial Statements

Income Statement

Owners Equity Statement

Balance Sheet

Statement of Cash Flows

SO 8 Understand the four financial statements and how they are prepared.

Interrelatedness of Financial Statements

Companies prepare four financial statements :

Interrelatedness of Financial Statements

Companies prepare four financial statements :

Interrelatedness of Financial Statements

Interrelatedness of Financial Statements

Income Statement

Owners Equity Statement

Balance Sheet

Statement of Cash Flows

SO 8 Understand the four financial statements and how they are prepared.

Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.
Illustration 4-9

SO 3

Closing Exercises
Self-Test 4-9 Brief Exercises 4-5 Exercises 7

Summary of the Accounting Cycle

Illustration 4-12

1. Analyze business transactions

9. Prepare a post-closing trial balance 8. Journalize and post closing entries 7. Prepare financial statements 6. Prepare an adjusted trial balance

2. Journalize the transactions

3. Post to ledger accounts

4. Prepare a trial balance

5. Journalize and post adjusting entries

SO 4 State the required steps in the accounting cycle.

Homework
HW Practice

Exercises 2-3 Problems 1-4

P4-5A & Comprehensive Problem 4 counts as 5 pts in quizzes. 0pts if not submitted. Must be handwritten Time yourselves: 30 mins. Speed + accuracy. Write your times (for each problem) on the upper right hand corner for both problems. Objective: Prepare Financial Statements in good form. Do not bother with making 3-column ledgers (standard form of accounts). T-accounts will suffice.

HW Submission (required)

Next meeting
Wrap up Chapter 4
Reversing entries Correcting entries Classified Balance Sheet