ch04 - Chapter 4 Chapter 4 Chapter Chapter Completing the...

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Unformatted text preview: Chapter 4 Chapter 4 Chapter Chapter Completing the Accounting Cycle Chapter 4-1 Study Objectives Study Objectives 1. Prepare a worksheet. 2. Explain the process of closing the books. 3. Describe the content and purpose of a post­closing 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 balance sheet. Chapter 4 -2 Completing the Accounting Cycle Completing the Accounting Cycle Using Using a Worksheet Worksheet Steps in Steps preparation preparation Preparing Preparing financial statements statements Preparing Preparing adjusting entries adjusting Chapter 4-3 Closing Closing the Books Books Preparing Preparing closing entries closing Posting closing Posting entries entries Preparing a Preparing post-closing trial balance balance Summary Summary of Accounting Cycle Cycle Reversing Reversing entries—An optional step optional Correcting Correcting entries—An avoidable step avoidable Classified Classified Balance Sheet Balance Current assets Long-term Long-term investments investments Property, plant, Property, and equipment and Intangible assets Current liabilities Long-term Long-term liabilities liabilities Stockholders’ Stockholders’ equity equity Using A Worksheet Using A Worksheet Worksheet A multiple­column form used in preparing financial statements. Not a permanent accounting record. Five step process. Use of worksheet is optional. Chapter 4 -4 SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet Illustration 4­1 Chapter 4-5 SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet Illustration The trial balance for Undercover Roofing for the month ended March 31, 2008, is as follows. T rial Balance Account Titles Dr. Cr. Cash $ 2,500 Accounts Receivable 1,800 Roofing Supplies 1,100 Equipment 6,000 Accumulated Depreciation $ 1,200 Accounts Payable 1,400 Unearned Revenue 300 Common stock 1,000 Retained earnings 6,000 Dividends 600 Service Revenue 3,000 Salaries Expense 700 M iscellaneous Expense 200 T otals $ 12,900 $ 12,900 Chapter 4-6 Other data: 1. Supplies on hand total $140. 2. Depreciation for March is $200. 3. Unearned revenue amounted to $130 on March 31. 4. Accrued salaries are $350. Instructions a. Prepare and complete the worksheet. SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet 1. Prepare a Trial Balance on the Worksheet Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Trial Balance Dr. Cr. 2,500 1,800 1,100 6,000 1,200 1,400 300 1,000 6,000 600 3,000 700 200 12,900 12,900 Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr. Include all accounts with balances. Trial balance amounts come directly from ledger accounts. Chapter 4 -7 SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet 2. Enter the Adjustments in the Adjustments Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 1,200 (b) 200 1,400 300 (c) 170 1,000 6,000 600 3,000 (c) 170 700 (d) 350 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Add additional accounts as needed. Chapter 4 -8 Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr. Adjustments Key: (a) Supplies used. (b) Depreciation expense. (c) Service revenue earned. (d) Salaries accrued. Enter adjustment amounts, total adjustments columns, and check for equality. SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet 3. Complete the Adjusted Trial Balance Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Chapter 4-9 Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 1,200 (b) 200 1,400 300 (c) 170 1,000 6,000 600 3,000 (c) 170 700 (d) 350 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Total the adjusted trial balance columns and check for equality. Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 960 200 13,450 350 13,450 SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet 4. Extend Amounts to Financial Statement Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 1,200 (b) 200 1,400 300 (c) 170 1,000 6,000 600 3,000 (c) 170 700 (d) 350 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 3,170 1,050 200 960 200 350 13,450 2,410 3,170 Extend all revenue and expense account balances to the income statement columns. Chapter 4-10 SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet 4. Extend Amounts to Financial Statement Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Chapter 4-11 Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 1,200 (b) 200 1,400 300 (c) 170 1,000 6,000 600 3,000 (c) 170 700 (d) 350 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 13,450 Extend all asset, liability, and equity account balances to the balance sheet columns. Income Statement Dr. Cr. Balance Sheet Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 350 13,450 2,410 3,170 11,040 350 10,280 SO 1 Prepare a worksheet. Steps in Preparing a Worksheet Steps in Preparing a Worksheet 5. Total Columns, Compute Net Income (Loss) Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 1,200 (b) 200 1,400 300 (c) 170 1,000 6,000 600 3,000 (c) 170 700 (d) 350 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 350 13,450 2,410 760 3,170 3,170 11,040 3,170 11,040 350 10,280 760 11,040 Compute Net income or Net loss. Chapter 4-12 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. Balance sheet and retained earnings statement are prepared from the balance sheet columns. Chapter 4-13 SO 1 Prepare a worksheet. Preparing Financial Statements from a Worksheet Preparing Financial Statements from a Worksheet b. Prepare an income statement for the month ended March 31, 2008. Undercover Roofing Income Statement For the Month Ended March 31, 2008 Revenues Service revenues Expenses Salaries expense Supplies expense Depreciation expense Miscellaneous expense Total expenses Net income Chapter 4-14 $ 3,170 $ 2,410 760 $ 1,050 960 200 200 SO 1 Prepare a worksheet. Preparing Financial Statements from a Worksheet Preparing Financial Statements from a Worksheet b. Prepare a statement of retained earnings for the month ended March 31, 2008. Undercover Roofing Retained Earnings Statement For the Month Ended March 31, 2008 Retained earnings, beginning Add: Net income Less: Dividends Retained earnings, ending Chapter 4-15 $ $ 6,000 760 (600) 6,160 SO 1 Prepare a worksheet. Preparing Financial Statements from a Worksheet Preparing Financial Statements from a Worksheet b. Prepare a balance sheet as of March 31, 2008. Undercover Roofing Balance Sheet March 31, 2008 Chapter 4-16 Assets Current assets Cash Accounts receivable Roofing supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total assets $ 6,000 1,400 Liabilities and Stockholders' Equity Current liabilities Accounts payable Salaries payable Unearned revenue Total current liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholder's equity $ $ $ 2,500 1,800 140 4,440 4,600 9,040 1,400 350 130 1,880 1,000 6,160 9,040 SO 1 Prepare a worksheet. 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. Chapter 4-17 SO 1 Prepare a worksheet. Preparing Financial Statements from a Worksheet Preparing Financial Statements from a Worksheet c. Journalize the adjusting entries from the adjustments columns of the worksheet. Dat e Mar. 31 Account Tit le Supplies expense Ref . Debit 960 Roof ing supplies Depreciat ion expense 960 200 Accumulat ed depreciat ion U nearned revenue 200 170 S ervice revenue S alaries expense S alaries payable Chapter 4-18 Credit 170 350 350 SO 1 Prepare a worksheet. Closing the Books Closing the Books At the end of the accounting period, the company makes the accounts ready for the next period. Illustration 4­5 Chapter 4-19 SO 2 Explain the process of closing the books. Closing the Books Closing the Books Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss) and dividends to retained earnings at the end of the accounting period. Chapter 4-20 SO 2 Explain the process of closing the books. Closing the Books Closing the Books Note: Dividends are closed directly to Retained Earnings and not to Income Summary because Dividends are not an expense. Chapter 4-21 Illustration 4­6 Retained Earnings is a permanent account; all other accounts are temporary accounts. SO 2 Explain the process of closing the books. Closing the Books Closing the Books d. Journalize the closing entries from the financial statement columns of the worksheet. Service revenue Income summary Closing Entries need to be Posted 3,170 Income summary Salary expense Supplies expense Depreciation expense Miscellaneous expense 2,410 Income summary Retained earnings Retained earnings Dividends Chapter 4-22 760 600 3,170 1,050 960 200 200 760 600 SO 2 Explain the process of closing the books. 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. All temporary accounts will have zero balances. Chapter 4-23 Post-Closing Trial Balance Account Titles Dr. Cr. Cash $ 2,500 Accounts Receivable 1,800 Roofing Supplies 140 Equipment 6,000 Accumulated Depreciation $ 1,400 Accounts Payable 1,400 Salaries payable 350 Unearned Revenue 130 Common Stock 1,000 Retained Earnings 6,160 Totals $ 10,440 $ 10,440 SO 3 Describe the content and purpose of a post-closing trial balance. Summary of the Accounting Cycle Summary of the Accounting Cycle Illustration 4­12 1. Analyze business transactions 9. Prepare a post-closing trial balance 8. Journalize and post closing entries 3. Post to ledger accounts 7. Prepare financial statements 4. Prepare a trial balance 6. Prepare an adjusted trial 6. balance Chapter 4-24 2. Journalize the transactions 2. 5. Journalize and post adjusting entries SO 4 State the required steps in the accounting cycle. Correcting Entries—An Avoidable Step Correcting Entries—An Avoidable Step Correcting entries are unnecessary if the records are error­free. 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. Chapter 4-25 SO 5 Explain the approaches to preparing correcting entries. Correcting Entries—An Avoidable Step Correcting Entries—An Avoidable Step BE4-9 At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries. 1. A collection on account from a customer was recorded as a debit to Cash and a credit to Service Revenue for $780. Incorrect entry Cash 780 Service revenue Correct entry Cash 780 780 Accounts receivable Correcting entry Service revenue Accounts receivable Chapter 4-26 780 780 780 SO 5 Explain the approaches to preparing correcting entries. Correcting Entries—An Avoidable Step Correcting Entries—An Avoidable Step BE4-9 At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries. 2. The purchase of supplies on account for $1,570 was recorded as a debit to Supplies and a credit to Accounts Payable $1,750. Incorrect entry Supplies 1,750 Accounts payable Correct entry Supplies 1,750 1,570 Accounts payable Correcting entry Accounts payable Supplies Chapter 4-27 1,570 180 180 SO 5 Explain the approaches to preparing correcting entries. The Classified Balance Sheet The Classified Balance Sheet Presents a snapshot at a point in time. To improve understanding, companies group similar assets and similar liabilities together. Standard Classifications Assets Liabilities and Owner’s Equity Current assets Current liabilities Long­term investments Property, plant, and equipment Intangible assets Chapter 4-28 Illustration 4­17 Long­term liabilities Stockholders’ equity SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet 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. Chapter 4-29 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Current Assets Illustration 4­19 Companies usually list current asset accounts in the order they expect to convert them into cash. Chapter 4-30 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Long-Term Investments Investments in stocks and bonds of other companies. Investments in long­term assets such as land or buildings that a company is not currently using in its operating activities. Illustration 4­20 Chapter 4-31 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet 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 asset’s life. Chapter 4-32 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Property, Plant, and Equipment Illustration 4­21 Chapter 4-33 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Intangible Assets Assets that do not have physical substance. Illustration 4­22 Chapter 4-34 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Review Question Patents and copyrights are a. Current assets. b. Intangible assets. c. Long­term investments. d. Property, plant, and equipment. Chapter 4-35 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet 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. Chapter 4-36 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Current Liabilities Illustration 4­23 Chapter 4-37 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Long-Term Liabilities Obligations a company expects to pay after one year. Illustration 4­24 Chapter 4-38 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Review Question Which of the following is not a long­term liability? a. Bonds payable b. Current maturities of long­term obligations c. Long­term notes payable d. Mortgages payable Chapter 4-39 SO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet The Classified Balance Sheet Stockholders’ (Owners’) Equity Proprietorship ­ one capital account. Partnership ­ capital account for each partner. Corporation ­ Capital Stock and Retained Earnings. Illustration 4­25 Chapter 4-40 SO 6 Identify the sections of a classified balance sheet. ...
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