Chapter_4 - Completing the Accounting Cycle Chapter 4 1 Preparation of Financial Statements The end product of the accounting cycles is the

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Unformatted text preview: Completing the Accounting Cycle Chapter 4 1 Preparation of Financial Statements The end product of the accounting cycles is the preparation of the financial statements: Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows 2 Worksheet Contains the Trial Balance The Debits & Credits from the Adjusting Entries Contains the Adjusted Trial Balance Used to summarize and ensure the mathematical accuracy of the Income Statement & Balance Sheet Also known as the End of Period Spreadsheet 3 Classified Balance Sheet Adds subsections to the Balance Sheet to aid the decision making of financial statement users Current Assets vs. Fixed Assets, Current Liabilities vs. Long-Term Liabilities 4 Current Assets Those assets which are expected to generate cash or be used up within one year or the operating cycle whichever is longer. Examples: Cash Accounts Receivable Supplies Prepaid Insurance Etc. 5 Fixed Assets Also known as Property, Plant, & Equipment Assets that will not be used up within one year or the operating cycle whichever is longer Examples: Land Building Office Equipment Etc. 6 Current Liabilities Those liabilities that are due and will be paid within one year or the operating cycle whichever is longer. Examples: Accounts Payable Wages Payable Etc. 7 Long-Term Liabilities Those liabilities that are not due and will not be paid off within one year or the operating cycle whichever is longer Examples: Mortgage Payable Bonds Payable Etc. 8 Types of Accounts Real Accounts (Balance Sheet Accounts) Assets Liabilities Stockholders' Equity (other than Dividends) Temporary Accounts (Income Statement Accounts and Dividends) Revenues Expenses Dividends 9 Closing Entries Journalized and posted after the preparation of the financial statements Usually there are four closing entries. There would be three entries if the entity did not pay dividends during the accounting period. Purposes: To close out the balances of the temporary accounts Update the balance of the Retained Earnings Account 10 Income Summary Account A special account that is used in journalizing the first three closing entries 11 Closing Entry #1 Closes out the balance of all Revenue accounts into Income Summary Debit all Revenue accounts and Credit Income Summary 12 Closing Entry #2 Closes out the balance of all Expenses into Income Summary. Debit Income Summary and Credit all Expense Accounts After the second closing entry is prepared and posted the Income Summary Account now contains amount of the entity's Net Income or Net Loss. Why? 13 Closing Entry #3 Closes out the balance in the Income Summary Account into Retained Earnings. The amount of the entry is the Net Income or Net Loss and the accounts to be used are Income Summary and Retained Earnings. However, the debits and credits will be based on whether the entity had a net income or net loss. Why? 14 Closing Entry #4 If the entity declared dividends during the accounting period, the Dividends account must be closed into Retained Earnings. Debit Retained Earnings and Credit Dividends 15 After journalizing the closing entries, they must be posted to the accounts in the general ledger. After posting, only the permanent accounts will have balances and the balance of Retained Earnings will be updated. As is usual after posting, a trial balance must be prepared to ensure that Debits = Credits. This trial balance is known as the Post-Closing Trial Balance. If it balances, the accounting records are know ready for the next accounting period. 16 Steps in the Accounting Cycle Journalize and post the regular entries. Prepare a Trial Balance Journalize and post the adjusting entries. Prepare the Worksheet Prepare the Financial Statements Journalize and post the closing entries. Prepare a Post-Closing Trial Balance 17 Computerized Accounting Systems Posting is done automatically and accurately. Trial Balances balance on the first try! Prepares the Income Statement & Balance Sheet. The closing process (entries, posting, and Post-Closing Trial Balance) is done automatically and accurately! 18 ...
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This note was uploaded on 03/18/2008 for the course ACCTG 211 taught by Professor Johnston during the Spring '99 term at Pennsylvania State University, University Park.

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