chapter 4 accounting
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Important accountingTRANSCRIPT
Accounting Principles, 9th EditionWeygandt.Kieso.Kimmel
Chapter 4
Completing the Accounting Cycle
Aims of Lecture
Prepare a work sheet. Explain the process of closing the books. Describe the content and purpose of a post-closing
trial balance. State the required steps in the accounting cycle. Explain the approaches to preparing correcting
entries. Identify the sections of a classified balance sheet.
A worksheet is a multiple-column form used for the adjustment process and preparing financial statements.
It is a working tool, not a permanent accounting record.
Use of a worksheet is optional. Worksheet make it possible to provide the
financial statements to the interested parties at an earlier date.
Using a Worksheet
Form and Procedure for a Worksheet
Prepare a trial balance on the worksheet Enter the adjustments in the adjustments
columns Enter adjusted balances in adjusted trial
balance columns Extend adjusted trial balance amounts to
appropriate financial statement columns Total the statement columns, compute net
income (loss), and complete the work sheet
Steps in Preparing A Worksheet
Preparing Financial Statements from a Worksheet
After completing a worksheet a company will have all the required data at hand to prepare financial statements.
Using a worksheet, companies can prepare financial statements before they journalize or post adjusting entries.
A completed worksheet is not a substitute for formal financial statements.
Preparing Adjusting Entries from a Worksheet
A worksheet is not a journal. It cannot be used as a basis for posting to ledger
accounts. The adjusting entries are prepared from the
adjustment columns of the worksheet. The journalizing and posting of adjusting entries
follows the preparations of financial statements.
Closing the Books “Closing the books” means making the accounts
ready for the next period. Distinguishes between permanent and temporary
accounts. Temporary accounts relate only to given
accounting period. For example: revenues or expenses accounts and owner’s drawing account.
Permanent accounts relate to one or more future accounting periods. For example: Balance sheet accounts.
Temporary vs. Permanent Accounts
TEMPORARY (Nominal) PERMANENT (Real)These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawing account Owner’s capital account
Preparing Closing Entries Companies transfers temporary account balances to the
permanent owner’s equity account, Owner’s capital, by means of closing entries.
Closing entries formally transfers net income (loss) and owner’s drawings to owner’s capital.
It produce a zero balance in each temporary account.
Journalizing and posting is a required step in the accounting cycle.
Companies record closing entries in the general journal.
Preparing Closing Entries
Income Summary It is a temporary account used in closing revenue and expense
accounts. It minimizes the details in the permanent owner’s capital
account. Debit/Credit Rules for closing entries:
Debit each revenue account for its balance, and credit Income Summary for total revenues.
Debit income summary for total expenses, and credit each expense account for its balance.
Debit income summary and credit Owner’s capital for the amount of net income.
Debit owner’s capital for the balance in the owner’s drawing account and credit owner’s drawing for the same amount.
Diagram of Closing Process- Proprietorship
INCOME SUMMARY
(INDIVIDUAL)REVENUES
12
(INDIVIDUAL)EXPENSES
3
INCOME SUMMARY
OWNER’SCAPITAL
Diagram of Closing Process- Proprietorship
4
OWNER’S DRAWING
Diagram of Closing Process- Proprietorship
OWNER’SCAPITAL
Cautions in Preparing closing entries
Avoid doubling revenue and expense balances.
Do not close Owner’s Drawing through the Income Summary account.
Posting Closing Entries
All temporary accounts will have zero balances after posting the closing entries.
Owner’s capital represents total equity of the owner at the end of the accounting period.
No entries are journalized and posted to Income Summary account during the year.
We cannot close permanent accounts (assets, liabilities, and owner’s capital).
Post Closing Trial Balance
Post-closing trial balance has been prepared from the ledger after all closing entries have been journalized and posted.
The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.
Post-Closing Trial Balance
Post-Closing Trial Balance
Analyze business transactions
Journalize the transactions
Post to ledger accounts
Prepare a trial balance
Journalize and post adjusting entries (Deferrals/Accruals)
Steps in the Accounting Cycle
Prepare an adjusted trial balance
Prepare financial statements: Income Statement, Owner’s Equity Statement, Balance Sheet
Journalize and post closing entries
Prepare a post-closing trial balance
Steps in the Accounting Cycle
Made at the beginning of the next accounting period.
Exact opposite of adjusting entry.
Its an optional bookkeeping procedure.
Reversing Entries-An Optional Step
Errors should be corrected as soon as discovered There are differences between correcting entries
and adjusting entries. No correcting entries are needed, if records are
free of errors. Correcting entries can be journalized and posted
whenever an error is discovered. Involve any combination of balance sheet and
income statement accounts. Correcting entries must be posted before closing
entries.
Correcting Entries-An Avoidable Step
Comparisons of Entries& Correcting Entry
Cash 50 Service Revenue 50
Cash 50 Accounts Receivable 50
Service Revenue 50 Accounts Receivable 50
Comparisons of Entries& Correcting Entry
Incorrect Entry May 18
(To record purchase of equipment on account)
Correct Entry 18
(To record purchase of equipment on account)
Correcting Entry June 3
(To correct entry of May 18)
Delivery Equipment 45 Accounts Payable 45
Office Equipment 450 Accounts Payable 450
Office Equipment 450 Delivery Equipment 45 Accounts Payable 405
It is possible to reverse the incorrect entry and then prepare the correct entry.
Balance sheet presents a snapshot of a company’s financial position at a point in time.
Financial statements become more useful when the elements are classified into significant subgroups.
The Classified Balance Sheet
The Classified Balance Sheet
A classified balance sheet generally has the
following standard classifications:
Current Assets Current Liabilities
Long-Term Investments Long-Term Liabilities
Property, Plant and Owner’s Equity Equipment
Intangible Assets
Assets Liabilities & Owner’s Equity
Current assets are assets that a company expects to convert to cash or use up within one year.
Some companies use a period longer than one year.
Operating cycle of a company is the average time required to go from cash to cash in producing revenues.
Example: Inventory, accounts receivable and cash.
Current assets are listed in the order of their liquidity.
Current Assets
Long-term investments are generally,
Investments in stocks and bonds of another companies that are held for many years &
Long-term assets (buildings or equipments) that a company is not currently using in its operating activities.
Long-Term Investments
Tangible resources, relatively permanent nature, used in the business, and not intended for sale.
Examples: Land, buildings, and machinery.
Depreciation is the process of allocating the cost of assets to a number of years.
The accumulated depreciation account shows the total amount of depreciation that the company has expensed .
Property, Plant, and Equipment
Non-current resources that do not have physical substance.
Examples includes patents, copyrights, trademarks, or trade names, gives the holder exclusive right of use for a specified period of time.
Intangible Assets
Obligations that the company is to pay within the coming year.
Examples: Accounts payable, wages payable, interest payable, tax payable, bank loans payable and current maturities of long-term debt.
the relationship between current assets and current liabilities is important in evaluating a company’s liquidity.
Liquidity is the ability of a company to pay obligations that are expected to become due within the next year or operating cycle.
Current Liabilities
Long-term liabilities are obligations that a company expects to pay after one year.
Examples: Long-term notes payable, bonds payable, mortgages payable, and lease liabilities
Long-Term Liabilities
The content of the owner’s equity section varies with the form of business organization.
In Proprietorship, there is one capital account. In a Partnership there is a separate capital accounts
for each partner. Corporations divide owner’s equity into two
accounts-Capital Stock and Retained Earnings. Corporation combine the capital stock and
retained earnings accounts and report them on the balance sheet as stockholder’s equity.
Owner’s Equity