Chapter 4

Completing the Accounting Cycle

Prepare the IncomeStatement.

Prepare the Financial Statements

A work sheet does not

substitute for financial

statements.

A work sheet does not

substitute for financial

statements.

P1

Prepare the Statement of Owner’s Equity.

P1

FastForwardBalance Sheet

December 31, 2007

AssetsCash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,745$

LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$

Owner's EquityC.Taylor, Capital 33,585 Total liabilities and equity 42,745$

FastForwardBalance Sheet

December 31, 2007

AssetsCash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,745$

LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$

Owner's EquityC.Taylor, Capital 33,585 Total liabilities and equity 42,745$

Prepare the Balance Sheet.

Resets revenue, expense and withdrawal account balances to zero at the end of the period.

Helps summarize a period’s revenues and expenses in the Income Summary account.

Identify accounts for closing.

Record and post closing entries.

Prepare post-closing trial balance.

Closing ProcessC1

Temporary Accounts

Revenues

Income Summary

Exp

ense

s

With

draw

als

Permanent Accounts

Assets

Lia

bili

ties

Ow

ner’s

Cap

ital

The closing process applies only to

temporary accounts.

The closing process applies only to

temporary accounts.

Temporary and Permanent Accounts

C1

Let’s see how the closing process

works!

Recording Closing Entries Close Revenue

accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.

P2

Balances before closing.

Income Summary

Owner's Capital30,000

30,000

Revenue Accounts25,000

25,000

Withdrawals Account5,000

5,000

Expense Accounts10,000

10,000

Closing ProcessP2

Income Summary25,000

25,000

Close Revenue accounts to Income

Summary.

Owner's Capital30,000

30,000

Revenue Accounts25,000 25,000

-

Withdrawals Account5,000

5,000

Expense Accounts10,000

10,000

Closing ProcessP2

Income Summary10,000 25,000

15,000 Owner's Capital30,000

30,000

Revenue Accounts25,000 25,000

-

Withdrawals Account5,000

5,000

Close Expense accounts to Income

Summary.

Expense Accounts10,000 10,000

-

Closing Process

The balance in Income Summary equals net

income.

The balance in Income Summary equals net

income.

P2

Owner's Capital30,000 15,000

45,000

Owner's Capital30,000 15,000

45,000

Withdrawals Account5,000

5,000

Withdrawals Account5,000

5,000

Close Income Summary to

Owner’s Capital.

Revenue Accounts25,000 25,000

-

Expense Accounts10,000 10,000

-

Income Summary10,000 25,000 15,000

-

Closing ProcessP2

Owner's Capital30,000 15,000

45,000

Owner's Capital5,000 30,000

15,000

40,000

Withdrawals Account5,000

5,000

Withdrawals Account5,000 5,000

-

Revenue Accounts25,000 25,000

-

Expense Accounts10,000 10,000

-

Income Summary10,000 25,000 15,000

-

Closing Process

Close Withdrawals account to Owner’s

Capital.

P2

Using the adjusted trial balance, let’s prepare the

closing entries for

FastForward.

P2

Close Revenue accounts to

Income Summary.

P2

Close Revenue Accounts to Income Summary

Dr. Cr.Dec. 31 Consulting revenue 7,850

Rental revenue 300 Income summary 8,150

Dr. Cr.Dec. 31 Consulting revenue 7,850

Rental revenue 300 Income summary 8,150

Now, let’s look at the ledger accounts after posting this closing entry.

P2

Close Revenue Accounts to Income Summary

Consulting Revenue7,850 7,850

-

Rental Revenue300 300

-

Income Summary8,150

P2

Close Expense accounts to

Income Summary.

P2

Now, let’s look at the ledger accounts after posting this closing entry.

Close Expense Accounts to Income Summary

Dr. Cr. Dec. 31 Income summary 4,365

Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230

P2

Income Summary4,365 8,150

3,785

Utilities Expense230 230

-

Rent Expense1,000 1,000

-

Net Income

Close Expense Accounts to Income Summary

Close Expense Accounts to Income Summary Close Expense Accounts to Income Summary

Supplies Expense1,050 1,050

-

Depreciation Expense- Eq.

375 375 -

Salaries Expense1,610 1,610

-

Insurance Expense100 100

-

P2

Close Income Summary to

Owner’s Capital.

P2

Now, let’s look at the ledger accounts after posting this closing entry.

Close Income Summary to Owner’s Capital

Dr. Cr. Dec. 31 Income summary 3,785

C. Taylor, Capital 3,785

P2

C. Taylor, Capital30,000 3,785

33,785

Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital

Income Summary4,365 8,150 3,785

-

P2

Close Withdrawals to

Owner’s Capital.

P2

Now, let’s look at the ledger accounts after posting this closing entry.

Close Withdrawals to Owner’s Capital

Dr. Cr. Dec. 31 C. Taylor, Capital 200

C. Taylor, Withdrawals 200

P2

C. Taylor, Capital200 30,000

3,785

33,585

C. Taylor, Withdrawals

200 200

-

Close Withdrawals to Owner’s Capital

Close Withdrawals to Owner’s Capital

P2

Let’s look at FastForward’s

post-closing trial balance.

Post-Closing Trial Balance

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

P3

Post-Closing Trial BalanceP3

Let’s discuss the

components of a classified

balance sheet.

C3

Categories of a Classified Balance SheetAssets Liabilities and Equity

Current assets Current liabilitiesNoncurrent assets Noncurrent liabilities

Long-term investments CapitalPlant assetsIntangible assets

Current items are those expected to come due (both collected and owed) within the longer of one year or

the company’s normal operating cycle.

Classified Balance SheetC3

Snowboarding ComponentsBalance Sheet (Partial)

January 31, 2008

Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$

ASSETS

Current assets are expected to be sold, collected, or used within one year or the company’s operating

cycle.

C3

Snowboarding ComponentsBalance Sheet (Partial)

January 31, 2008

Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$

ASSETS

Long-term investments are expected to be held for more than one year or the operating cycle.

C3

Snowboarding ComponentsBalance Sheet (Partial)

January 31, 2008

Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$

ASSETS

Plant assets are tangible long-lived assets used to produce or sell

products and services.

C3

Snowboarding ComponentsBalance Sheet (Partial)

January 31, 2008

Current assets Cash 6,500$ Short-term investments 2,100 Accounts receivable 4,400 Merchandise inventory 27,500 Prepaid expenses 2,400 Total current assets 42,900$ Long-term investments Notes receivable 1,500 Investments in stocks and bonds 18,000 Land held for future expansion 48,000 Total investments 67,500 Plant assets Store equipment 33,200$ Less accumulated depreciation 8,000 25,200 Buildings 170,000 Less accumulated depreciation 45,000 125,000 Land 73,200 Total plant assets 223,400 Intangible assets 10,000 Total assets 343,800$

ASSETS

Intangible assets are long-term resources used to produce or sell

products and services and that lack physical form.

C3

Current liabilities are obligations due within the longer of one year or the

company’s operating cycle.

Snowboarding ComponentsBalance Sheet (Partial)

January 31, 2008

Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$

T. Hawk, Capital 164,800 Total liabilities and equity 343,800$

LIABILITIES

EQUITY

C3

Long-term liabilities are obligations not due within the longer of one year

or the company’s operating cycle.

Snowboarding ComponentsBalance Sheet (Partial)

January 31, 2008

Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$

T. Hawk, Capital 164,800 Total liabilities and equity 343,800$

LIABILITIES

EQUITY

C3

Equity is the owner’s claim on the assets.

Snowboarding ComponentsBalance Sheet (Partial)

January 31, 2008

Current liabilities Accounts payable 15,300$ Wages payable 3,200 Notes payable 3,000 Current portion of long-term liabilities 7,500 Total current liabilities 29,000$ Long-term liabilities: Notes payable (net of current portion) 150,000 Total liabilities 179,000$

T. Hawk, Capital 164,800 Total liabilities and equity 343,800$

LIABILITIES

EQUITY

C3

Current Ratio

Helps assess the company’s ability to pay its debts in the near future

A1

End of Chapter 4