Financial Accounting Cycle Steps

Financial Accounting
Instructor : Gustavo Tanaka Chapter : 4
Completing the Accounting Cycle
Slide 4-1
Study Objectives Study Objectives

1. 2. 3.
Prepare a worksheet. Explain the process of closing the books. Describe the content and purpose of a post-closing trial balance.
4. 5. 6.
State the required steps in the accounting cycle. Explain the approaches to preparing correcting entries. Identify the sections of a classified statement of financial position.
Slide 4-2
Completing the Accounting Cycle Completing the Accounting Cycle

Classified Statement of Financial Position
Intangible assets Property, plant, and equipment Long-term investments Current assets Equity Non-current liabilities Current liabilities
Slide 4-3
Using a Worksheet
Steps in preparation Preparing financial statements Preparing adjusting entries
Closing the Books

Preparing closing entries Posting closing entries Preparing a postclosing trial balance
Summary of Accounting Cycle

Reversing entries An optional step Correcting entriesAn avoidable step
Integral Case 1
Slide 4-4
1
Exhibit 1
End-of-Period Spreadsheet (Work Sheet)
Slide 4-5
1 Flow of Accounting Information Spreadsheet (Work Sheet)

Trial Balance Accounts Dr Cr Adjustments Dr Cr Adjusted TB Dr Cr
Accounts are listed in the Trial Balance column using the ending balance found in the general ledger.
Slide 4-6

Adjustments are entered here. Two possibilities: 1. Deferrals Existing balances are changed. 2. Accruals New information is entered.
Slide 4-7

Adjustments are combined with the trial balance. Account balances are now adjusted.
Slide 4-8

Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet Dr Cr
Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.
Slide 4-9

Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet Dr Cr
Asset, liability, capital stock, and dividends balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.
Slide 4-10
1
Example Exercise 4-1
Flow of Accounts into Financial Statements The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-ofperiod spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column.
1. Dividends 1. Utilities Expense 2. Accumulated DepreciationEquipment 3. Unearned Rent 4-11
Slide 4-11
5. 6. 7. 8.
Fees Earned Accounts Payable Rent Revenue Supplies
Example Exercise 4-1 (continued)
Follow My Example 4-1
1. 2. 3. 4. 5. 6. 7. 8.
Balance Sheet column Income Statement column Balance Sheet column Balance Sheet column Income Statement column Balance Sheet column Income Statement column Balance Sheet column
For Practice: PE 4-1A, PE 4-1B
4-12
Slide 4-12
The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the spreadsheet (work sheet).
Slide 4-13
2
Exhibit 2
Financial Statements Prepared from Work Sheet
to retained earnings statement

Slide 4-14
2
Determining the Net Income from End-of-Period Spreadsheet 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
Slide 4-15
Follow My Example 4-2
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
Slide 4-16
2 Retained Earnings Statement
The first item presented on the retained earnings statement is the balance of the Retained Earnings account at the beginning of the period.
Slide 4-17
2
Exhibit 2
Financial Statements Prepared from Work Sheet (continued) from the income statement
to the balance sheet
Slide 4-18
2
Example Exercise 4-3 Retained Earnings Statement 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.
4-20
Slide 4-19
Example Exercise 4-3 (continued) Follow My Example 4-3
GADDIS EMPLOYMENT SERVICES RETAINED EARNINGS STATEMENT For the Year Ended December 31, 2009
Retained earnings, January 1, 2009 $186,000 Dividends $ 25,000 Less net income 18,750 Decrease in retained earnings 6,250 Retained earnings, December 31, 2009 $179,750
For Practice: PE 4-3A, PE 4-3B 4-21

Slide 4-20
The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the spreadsheet (or work sheet).
Slide 4-21
2 Balance Sheet
A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.
Slide 4-22
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
Slide 4-23
Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.
Slide 4-24
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
Slide 4-25
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
Slide 4-26
Liabilities not due for a long time (usually more than one year) are long-term liabilities.

Slide 4-27
Notes payable Mortgage payable Bond payable
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.
Slide 4-28
2
Exhibit 2
Financial Statements Prepared from Work Sheet (continued) from the retained earnings statement
Slide 4-29
2
Classified Balance Sheet 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 2. Notes Receivable (due in 6 months) 3. Notes Payable (due in 2011) 4. Land 4-31
Slide 4-30
5. Cash 6. Unearned Rent 7. Accumulated Depr. Equipment 8. Accounts Payable
Follow My Example 4-4 4-4 My Example Follow 1. 2. 3. 4. Stockholders equity Current asset Long-term liability Property, plant, and equipment 5. Current asset 6. Current liability 7. Property, plant, and equipment 8. Current liability
4-32
Slide 4-31
3 Closing Entries
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.
Slide 4-32
3 Closing Entries
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.
Slide 4-33
3 Closing Entries
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.
Slide 4-34
3
Exhibit 3
The Closing Process
Slide 4-35
3
Exhibit 4
Flowchart of Closing Entries for NetSolutions (continued)
Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.
Fees Earned Income Summary 16,960 16,840 Bal. 16,840 Rent Revenue 120 Bal. 120
Slide 4-36
3
Exhibit 4
Wages Expense Bal. Bal. Bal. Bal. Bal. Bal. Bal.
Slide 4-37
4,525 1,600 50
4,525 1,600 50 985 2,040 200 455
Income Summary 9,855 16,960
Rent Expense Depreciation Expense Utilities Expense 985 2,040 200 455 Supplies Expense Insurance Expense Miscellaneous Expense
Debit Income Summary for the total expenses and credit each expense account for its balance.
3
Exhibit 4
Income Summary 9,855 7,105 16,960
Retained Earnings Bal. 0 7,105
Debit Income Summary for the amount of its balance (in this case, the net income) and credit Retained Earnings.
Dividends Bal.
Slide 4-38
4,000
3
Exhibit 4
Retained Earnings 4,000 Bal. 25,000 7,105
Dividends Bal. 4,000 4,000
Debit Retained Earnings for the balance of the dividends account, and credit the dividends account.
Slide 4-39
3
Exhibit 4
Flowchart of Closing Entries for NetSolutions (summary)
Stockholders Equity
Slide 4-40
3
Exhibit 5
Closing Entries for NetSolutions
Step 1
Step 2
Step 3
Step 4
Slide 4-41
3 Closing Entries
After the closing entries are posted, all of the temporary accounts have zero balances.
Slide 4-42
3
Exhibit 6
Ledger for NetSolutions (continued)
Slide 4-43
3
Exhibit 6 Ledger for NetSolutions (continued)
Slide 4-44
3
Exhibit 6
Ledger for NetSolutions (continued)
Slide 4-45
3
Exhibit 6
Ledger for NetSolutions (concluded)
Slide 4-46
3
Closing Entries 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 $615,850 Dividends 25,000 Fees Earned Journalize the four entries required to close the accounts. 380,450 4-49 Wages Expense
Slide 4-47
250,000 Rent Expense
Example Exercise 4-5 (continued) Follow My Example 4-5 July 31 31 Fees Earned.. 380,450 Income Summary. Income Summary 339,450 Wages Expense Rent Expense Supplies Expense Miscellaneous Expense. Income Summary. 41,000 Retained Earnings... Retained Earnings Dividends... 25,000 25,000 380,450 250,000 65,000 18,250 6,200 41,000
31 31
For Practice: PE 4-5A, PE 4-5B 4-50

Slide 4-48
3 Post-Closing Trial Balance
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.
Slide 4-49
3
Exhibit 7
Post-Closing Trial Balance
Slide 4-50
Integral Case 2
Slide 4-51
Using A Worksheet Using A Worksheet Worksheet

A multiple-column form used in preparing financial statements. Not a permanent accounting record. Five step process. Use of worksheet is optional.
Slide 4-52
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet Steps in Preparing a Worksheet

Illustration 4-1
Slide 4-53

Illustration:
Illustration 4-2 Preparing a trial balance
Slide 4-54

1. Prepare a Trial Balance on the Worksheet
Account Titles Cash Advertising Supplies Prepaid Insurance Office Equipment Notes Payable Accounts Payable Unearned Revenue Share Capital Dividends Service Revenue Salaries Expense Rent 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. Statement of Financial Position Dr. Cr.
28,700
Trial balance amounts come directly from ledger accounts. Include all accounts with balances.
Slide 4-55

Illustration 3-22 General journal showing adjusting entries
Adjusting Journal Entries

(Chapter 3)
Slide 4-56

2. Enter the Adjustments in the Adjustments Columns
Trial Balance Adjustments Dr. Cr. Dr. Cr. Cash 15,200 (a) 1,500 Advertising Supplies 2,500 (b) Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 (d) 400 Share Capital 10,000 Dividends 500 (d) 400 Service Revenue 10,000 (e) 200 Salaries Expense 4,000 (g) 1,200 Rent 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 (b) 50 Insurance Expense (c) Accumulated Depreciation 40 (c) 40 Depreciation Expense (e) 200 Accounts Receivable (f) 50 Interest Expense (f) Interest Payable 50 (g) 1,200 Salaries Payable Totals 3,440 3,440 Account Titles Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Statement of Financial Position 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.
Slide 4-57
Add additional accounts as needed. SO 1 Prepare a worksheet.

3. Complete the Adjusted Trial Balance Columns
Trial Balance Adjustments Dr. Cr. Dr. Cr. Cash 15,200 (a) 1,500 Advertising Supplies 2,500 (b) Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 (d) 400 Share Capital 10,000 Dividends 500 (d) 400 Service Revenue 10,000 (e) 200 Salaries Expense 4,000 (g) 1,200 Rent 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 (b) 50 Insurance Expense (c) Accumulated Depreciation 40 (c) 40 Depreciation Expense (e) 200 Accounts Receivable (f) 50 Interest Expense (f) Interest Payable 50 (g) 1,200 Salaries Payable Totals 3,440 3,440 Account Titles 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. Statement of Financial Position Dr. Cr.
30,190
Slide 4-58
Total the adjusted trial balance columns and check for equality.

4. Extend Amounts to Financial Statement Columns
Trial Balance Adjustments Dr. Cr. Dr. Cr. Cash 15,200 (a) 1,500 Advertising Supplies 2,500 (b) Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 (d) 400 Share Capital 10,000 Dividends 500 (d) 400 Service Revenue 10,000 (e) 200 Salaries Expense 4,000 (g) 1,200 Rent 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 (b) 50 Insurance Expense (c) Accumulated Depreciation 40 (c) 40 Depreciation Expense (e) 200 Accounts Receivable (f) 50 Interest Expense (f) Interest Payable 50 (g) 1,200 Salaries Payable Totals 3,440 3,440 Account Titles 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. Statement of Financial Position Dr. Cr.
10,600 5,200 900 1,500 50
30,190
7,740
10,600
Slide 4-59
Extend all revenue and expense account balances to the income statement columns.

4. Extend Amounts to Financial Statement Columns
Trial Balance Adjustments Dr. Cr. Dr. Cr. Cash 15,200 (a) 1,500 Advertising Supplies 2,500 (b) Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 (d) 400 Share Capital 10,000 Dividends 500 (d) 400 Service Revenue 10,000 (e) 200 Salaries Expense 4,000 (g) 1,200 Rent 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 (b) 50 Insurance Expense (c) Accumulated Depreciation 40 (c) 40 Depreciation Expense (e) 200 Accounts Receivable (f) 50 Interest Expense (f) Interest Payable 50 (g) 1,200 Salaries Payable Totals 3,440 3,440 Account Titles 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 Income Statement Dr. Cr. Statement of Financial Position 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
10,600
22,450
Slide 4-60
Extend all asset, liability, and equity account balances to the statement of financial position columns.

5. Total Columns, Compute Net Income (Loss)
Trial Balance Adjustments Dr. Cr. Dr. Cr. Cash 15,200 (a) 1,500 Advertising Supplies 2,500 (b) Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 (d) 400 Share Capital 10,000 Dividends 500 (d) 400 Service Revenue 10,000 (e) 200 Salaries Expense 4,000 1,200 (g) Rent 900 Totals 28,700 28,700 Advertising Supplies Expense (a) 1,500 (b) 50 Insurance Expense (c) Accumulated Depreciation 40 (c) Depreciation Expense 40 (e) 200 Accounts Receivable (f) Interest Expense 50 (f) Interest Payable 50 (g) 1,200 Salaries Payable Totals 3,440 3,440 Net income Totals Account Titles 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. Statement of Financial Position 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
Slide 4-61
Compute Net Income or Net Loss. SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet Preparing Financial Statements from a Worksheet
Worksheet
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.
Slide 4-62
Illustration 4-4
Slide 4-63
Illustration 4-4
Slide 4-64
Illustration 4-4
Slide 4-65
Preparing Adjusting Entries from a Worksheet Preparing Adjusting Entries from a Worksheet
Adjusting Entries
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.
Slide 4-66
Preparing Adjusting Entries from a Worksheet Preparing Adjusting Entries from a Worksheet
Illustration 3-22 General journal showing adjusting entries
Adjusting Journal Entries

(Chapter 3)
Slide 4-67
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
Slide 4-68
SO 2 Explain the process of closing the books.

Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss) and dividends to Retained Earnings. Closing entries are only at the end of the annual accounting period.
Slide 4-69
SO 2 Explain the process of closing the books.
Note: Dividends are closed directly to Retained Earnings and not to Income Summary because Dividends are not an expense.
Illustration 4-6
Retained Earnings is a permanent account; all other accounts are temporary accounts.
Slide 4-70
SO 2

Illustration 4-7 Closing entries journalized
Closing entries need to be posted
Slide 4-71

Illustration 4-8 Posting of closing entries
Posting closing entries
Slide 4-72
Preparing a Post-Closing Trial Balance Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.
Temporary accounts will have zero balances.
Illustration 4-9
Slide 4-73
SO 3
Steps in Preparing 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. 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.
Slide 4-74
Summary of 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
Slide 4-75
SO 4 State the required steps in the accounting cycle.
End Integral Case 2
Slide 4-76
Correcting EntriesAn Avoidable Step Correcting EntriesAn Avoidable Step

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.
Slide 4-77
SO 5 Explain the approaches to preparing correcting entries.

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. Incorrect entry Correct entry
Correcting entry
Slide 4-78
Cash Service revenue Cash Accounts receivable Service revenue Accounts receivable
50 50 50 50 50 50

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. Incorrect entry Correct entry
Correcting entry
Slide 4-79
Delivery equipment Accounts payable Office equipment Accounts payable Office equipment Delivery equipment Accounts payable
45 45 450 450 450 45 405
The Classified Statement of Financial Position The Classified Statement of Financial Position
Presents a snapshot at a point in time. To improve understanding, companies group similar assets and similar liabilities together.
Standard Classifications
Assets Intangible assets Property, plant, and equipment Long-term investments Current assets
Slide 4-80
Illustration 4-17
Equity and Liabilities Equity Non-current liabilities Current liabilities
SO 6 Identify the sections of a classified statement of financial position.
Intangible Assets
Assets that do not have physical substance.
Slide 4-81
Property, Plant, and Equipment

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 assets life.
Slide 4-82
Property, Plant, and Equipment

Illustration 4-20
(in billions)
Slide 4-83
Long-Term Investments
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.
Slide 4-84
Current Assets
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.
Slide 4-85
Current Assets
Illustration 4-22
Slide 4-86
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.
Slide 4-87
Equity
Proprietorship - one capital account. Partnership - capital account for each partner. Corporation Share Capital and Retained Earnings.
Illustration 4-23
Slide 4-88
Non-current Liabilities
Obligations a company expects to pay after one year.
Slide 4-89
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
Slide 4-90
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
Slide 4-91
Current Liabilities
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.
Slide 4-92
Current Liabilities
Slide 4-93
Understanding U.S. GAAP Understanding U.S. GAAP

Key Differences
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.
Slide 4-94

Similarities
o
Both require note disclosures on accounting policies and judgments. Comparative prior period information must be presented and financial statements must be prepared annually. Current/noncurrent classification for assets and liabilities is normally required. Like IFRS, a classified statement of financial position is usually used under GAAP.
Slide 4-95

Key Differences
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.
Slide 4-96

Looking to the Future

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.
Slide 4-97
APPENDIX Reversing Entries APPENDIX Reversing Entries Reversing Entries

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.
Slide 4-98
SO 7 Prepare reversing entries.
APPENDIX Reversing Entries APPENDIX 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.
Slide 4-99

Illustration 4A-1
With Reversing Entries (per appendix)

Oct. 26 Initial Salary Entry Same entry Adjusting Entry Oct. 31 Same entry Closing Entry Same entry Reversing Entry Nov. 1 Salaries payable Salaries expense 1,200 1,200
Oct. 31
Subsequent Salary Entry Nov. 9 Salaries expense Cash 4,000 4,000
Slide 4-100

Illustration 4A-2 Postings with reversing entries
Slide 4-101
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 periods transactions is called the accounting cycle. There are ten steps in the accounting cycle
Slide 4-102

Financial Accounting Cycle Steps

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Financial Accounting Cycle Steps

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Financial Accounting

Instructor : Gustavo Tanaka Chapter : 4

Completing the Accounting Cycle

Study Objectives Study Objectives

Completing the Accounting Cycle Completing the Accounting Cycle

Closing the Books

Summary of Accounting Cycle

1 Flow of Accounting Information Spreadsheet (Work Sheet)

1 Flow of Accounting Information Spreadsheet (Work Sheet)

1 Flow of Accounting Information Spreadsheet (Work Sheet)

1 Flow of Accounting Information Spreadsheet (Work Sheet)

1 Flow of Accounting Information Spreadsheet (Work Sheet)

Fees Earned Accounts Payable Rent Revenue Supplies

Example Exercise 4-1 (continued)

Follow My Example 4-1

to retained earnings statement

Example Exercise 4-2 (continued)

Follow My Example 4-2

2 Retained Earnings Statement

to the balance sheet

Example Exercise 4-3 (continued) Follow My Example 4-3

For Practice: PE 4-3A, PE 4-3B 4-21

Notes payable Mortgage payable Bond payable

5. Cash 6. Unearned Rent 7. Accumulated Depr. Equipment 8. Accounts Payable

Example Exercise 4-4 (continued)

For Practice: PE 4-4A, PE 4-4B

Flowchart of Closing Entries for NetSolutions (continued)

4,525 1,600 50 985 2,040 200 455

Income Summary 9,855 16,960

Retained Earnings Bal. 0 7,105

Retained Earnings 4,000 Bal. 25,000 7,105

Dividends Bal. 4,000 4,000

250,000 Rent Expense

For Practice: PE 4-5A, PE 4-5B 4-50

3 Post-Closing Trial Balance

Using A Worksheet Using A Worksheet Worksheet

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

Adjusting Journal Entries

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

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

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

10,600 5,200 900 1,500 50

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

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

Steps in Preparing a Worksheet Steps in Preparing a Worksheet

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

7,740 2,860 10,600

Compute Net Income or Net Loss. SO 1 Prepare a worksheet.

Adjusting Journal Entries

Closing the Books Closing the Books

SO 2 Explain the process of closing the books.

Closing the Books Closing the Books

SO 2 Explain the process of closing the books.

Closing the Books Closing the Books

Closing the Books Closing the Books

Closing entries need to be posted

Closing the Books Closing the Books

Posting closing entries