chapter_4 - Chapter 4 Notes Completing the accounting cycle...

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Unformatted text preview: Chapter 4 Notes Completing the accounting cycle 1 1 Exhibit 1 End-of-Period Spreadsheet (Work Sheet) 2 Preparing the Financial Statements At this point, we have an adjusted trial At balance balance We need to prepare the income statement We first first 3 The income statement is prepared directly from the Adjusted Trial Balance columns 4 2 Exhibit 2 Financial Statements Prepared from Work Sheet 4-55 1- to statement of owner’s equity 5 Statement of Owner’s Equity Next we prepare the statement of Owner’s Next Equity Equity We start with the beginning capital balance We of the owner of – This year’s beginning is last year’s ending 6 2 Exhibit 2 Financial Statements Prepared from Work Sheet (continued) from the income statement to the balance sheet 4-77 1- 7 Next is the Balance Sheet Next step is the balance sheet – The assets and liabilities on the balance sheet The are prepared directly from the Adjusted Trial Balance columns of the spreadsheet – Use the ending balance of owner’s capital Use account from the Statement of Owner’s Equity account 8 Balance Sheet, cont. A classified balance sheet is a balance classified sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities plant, 9 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 10 10 Accounts on the Balance Sheet Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate and . – More formal than accounts payable because More there is a note (a legal document) in place there – In addition, there can be interest calculated 11 11 Property, plant, and equipment (also called fixed assets) include tangible, long-lived assets acquired for use in business operations. As a general rule, fixed assets depreciate over time. Land is an exception to this general rule as it is a fixed asset but it is not subject to depreciation. • • • • Equipment Machinery Buildings Land 12 12 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 13 13 Liabilities not due for a long time (usually more than one year) are long-term liabilities. • • • Notes payable Mortgage payable Bond payable 14 14 2 Exhibit 2 Financial Statements Prepared from Work Sheet (continued) from the statement of owner’s equity 4-15 1-15 15 Next Step: Closing Entries o Accounts that are relatively permanent from year Accounts to year are called real accounts. Accounts that real Accounts report amounts for only one period are called temporary accounts or nominal accounts. temporary nominal o To report amounts for only one period, temporary To 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. Income 16 16 Closing Entries, cont. • The balance of Income Summary is then The Income transferred to the owner’s capital account. The balance of the owner’s drawing account is also transferred to the owner’s capital account. The entries that transfer these balances are called closing entries. closing • After the closing entries are posted, all of After the temporary accounts have zero zero balances. balances. 17 17 3 Exhibit 4 Flowchart of Closing Entries for NetSolutions 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 4-18 1-18 18 3 Exhibit 4 Wages Expense Bal. Bal. Bal. Bal. Bal. Bal. Bal. 4,525 1,600 50 Utilities Expense 985 2,040 200 455 985 2,040 200 455 Supplies Expense Insurance Expense Miscellaneous Expense 4,525 1,600 50 Flowchart of Closing Entries for NetSolutions (continued) Income Summary 9,855 16,960 Rent Expense Depreciation Expense Debit Income Summary for the total expenses and credit each expense account for its balance. 19 4-19 1-19 3 Exhibit 4 Flowchart of Closing Entries for NetSolutions (continued) Income Summary 9,855 7,105 16,960 Chris Clark, Capital Bal. 25,000 7,105 Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account. Chris Clark, Drawing Bal. 4,000 20 4-20 1-20 3 Exhibit 4 Flowchart of Closing Entries for NetSolutions (continued) Chris Clark, Capital 4,000 Bal. 25,000 7,105 Chris Clark, Drawing Bal. 4,000 4,000 Debit the capital account for the balance of the drawing account, and credit drawing for the same amount. 4-21 1-21 21 Post Closing Trial Balance Is prepared after the closing entries The purpose of the PCTB is to verify that The the ledger is in balance at the beginning of the next period. the Notice that the temporary accounts are not Notice there there 22 22 3 Exhibit 7 Post-Closing Trial Balance 4-23 1-23 23 Accounting Cycle o The accounting process that begins with The analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. accounting o According to your book, there are ten steps According in the accounting cycle. in 24 24 4 Accounting Cycle 1. Transactions are analyzed and recorded in the journal. 1. Transactions are posted to the ledger. 2. An unadjusted trial balance is prepared. 3. Adjustment data are assembled and analyzed. 4. An optional end-of-period spreadsheet (work sheet) is prepared. 4-25 1-25 (continued) 25 4 Accounting Cycle (continued) 1. Adjusting entries are journalized and posted to the ledger. 1. An adjusted trial balance is prepared. 2. Financial statements are prepared. 3. Closing entries are journalized and posted to the ledger. 4. A post-closing trial balance is prepared. 4-26 1-26 26 Fiscal Year Fiscal Your book formally discusses the concept of Your a fiscal year fiscal – We have discussed previously – A business will not want its year end to fall at a business time when it is at the height of its business time 27 27 ...
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