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Slide1
Completing the Accounting Cycle
1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 4
PowerPoint Editor: Beth Kane, MBA, CPA
Wild, Shaw, and ChiappettaFundamental Accounting Principles22nd Edition Slide2
04-P1: Benefits of a Work Sheet
2Slide3
The Worksheet
An internal document that serves as a useful tool for organizing accounting information.Not a required report3Slide4
Benefits of a Work Sheet
Aids the preparation of financial statements.
Reduces possibility of errors.Links accounts and their adjustments.Assists in planning and organizing an audit.Helps in preparing interim financial statements.
Shows the effects of proposed transactions.Not a required report.P 1
4Slide5
Steps to prepare a worksheet
5Slide6
NEED-TO-KNOW
The following 10-column work sheet contains the year-end unadjusted trial balance for Magic Company
as of December 31, 20X2. Complete the work sheet by entering the necessary adjustments, computing the adjusted
account balances, extending the adjusted balances into the appropriate financial statement columns, and entering
the amount of net income for the period. Note: The Magic, Capital account balance was $75,000 at December 31, 20X1.
No.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash
13,000
106
Accounts receivable
8,000
183
Land
85,000
201
Accounts payable
10,000
251
Long-term notes payable
33,000
301
Magic, Capital
75,000
302
Magic, Withdrawals
20,000
401
Fees earned
70,000
622
Salaries expense
54,000
650
Office supplies expense
8,000
Totals
188,000
188,000
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Income
Statement
Balance Sheet
and Statement of
Owner's Equity
1. Prepare and complete the work sheet, starting with the unadjusted trial balance and including adjustments
based on the following.
a. The company has earned $9,000 in fees that were not yet recorded at year-end.
b.
The company incurred $2,000
in
salary
expense
that was not yet
recorded at year-end.
(Hint: For simplicity, assume it records any salary not yet paid as part of accounts payable.)
c. The long-term note payable was issued on December 31 this year. Thus, no interest has yet accrued
on this loan.
P 1
6Slide7
a. The company has earned $9,000 in fees that were not yet recorded at year-end.
b. The company incurred $2,000 in salary expense that was not yet recorded at year-end.
(Hint: For simplicity, assume it records any salary not yet paid as part of accounts payable.)
c. The long-term note payable was issued on December 31 this year. Thus, no interest has yet accrued
on this loan.
No.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash
13,000
13,000
13,000
106
Accounts receivable
8,000
(a) 9,000
17,000
17,000
183
Land
85,000
85,000
85,000
201
Accounts payable
10,000
(b) 2,000
12,000
12,000
251
Long-term notes payable
33,000
33,000
33,000
301
Magic, Capital
75,000
75,000
75,000
302
Magic, Withdrawals
20,000
20,000
20,000
401
Fees earned
70,000
(a) 9,000
79,000
79,000
622
Salaries expense
54,000
(b) 2,000
56,000
56,000
650
Office supplies expense
8,000
8,000
8,000
Totals
188,000
188,000
11,000
11,000
199,000
199,000
64,000
79,000
135,000
120,000
Net income
15,000
15,000
Totals
79,000
79,000
135,000
135,000
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Income
Statement
Balance Sheet
and Statement of
Owner's Equity
P 1
7Slide8
No.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash
13,000
13,000
13,000
106
Accounts receivable
8,000
(a) 9,000
17,000
17,000
183
Land
85,000
85,000
85,000
201
Accounts payable
10,000
(b) 2,000
12,000
12,000
251
Long-term notes payable
33,000
33,000
33,000
301
Magic, Capital
75,000
75,000
75,000
302
Magic, Withdrawals
20,000
20,000
20,000
401
Fees earned
70,000
(a) 9,000
79,000
79,000
622
Salaries expense
54,000
(b) 2,000
56,000
56,000
650
Office supplies expense
8,000
8,000
8,000
Totals
188,000
188,000
11,000
11,000
199,000
199,000
64,000
79,000
135,000
120,000
Net income
15,000
15,000
Totals
79,000
79,000
135,000
135,000
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Income
Statement
Balance Sheet
and Statement of
Owner's Equity
2. Use information from the completed work sheet in part 1 to prepare adjusting entries.
Date
Debit
Credit
Dec. 31
Accounts Receivable
9,000
Fees earned
9,000
Dec. 31
Salaries expense
2,000
Accounts payable
2,000
Dec. 31
No journal entry required
General Journal
P 1
8Slide9
Debit
Credit
Cash
$13,000
Accounts receivable
17,000
Land
85,000
Accounts payable
$12,000
Long-term notes payable
33,000
Magic, Capital
75,000
Magic, Withdrawals
20,000
Fees earned
79,000
Salaries expense
56,000
Office supplies expense
8,000
Totals
$199,000
$199,000
Fees earned
$79,000
Magic, Capital, Dec. 31 20X1
$75,000
Expenses
Plus: Net income
15,000
Salaries expense
$56,000
Less: Magic, Withdrawals
(20,000)
Office supplies expense
8,000
Magic, Capital, Dec. 31
20X2
$70,000
64,000
Net income
$15,000
Cash
$13,000
Accounts payable
$12,000
Accounts receivable
17,000
Long-term notes payable
33,000
Land
85,000
Total liabilities
45,000
Magic, Capital
7
0,000
Total assets
$115,000
Total liabilities and equity
115,000
Assets
Liabilities
Equity
For Year Ended December 31, 20X2
For Year Ended December 31, 20X2
Magic Company
Balance Sheet
December 31, 20X2
Magic Company
Magic Company
Income Statement
Statement of Owner’s Equity
3. Prepare the income statement and the statement of owner’s equity for the year ended December 31 and
the unclassified balance sheet at December 31.
P 1
9Slide10
04-C1: Closing Process
10
An important step at the end of the accounting period AFTER financial statements have been completed.
It prepares accounts for recording transactions and events for the next period.Slide11
Recording Closing Entries
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.
C 1
11Slide12
Temporary Accounts
Revenues
Income Summary
Expenses
Withdrawals
Temporary
Accounts
The closing process applies only to temporary accounts.
C 1
12
They are temporary because the accounts are opened at the beginning of a period, used to record transactions and events for that period, and then closed at the end of the period. Slide13
Permanent Accounts
Assets
Liabilities
Owner’s Capital
Permanent
Accounts
The closing process applies only to temporary accounts.
C 1
13
Permanent
(or
real
)
accounts
report on activities related to one or more future accounting periods.
They
carry their ending balances into the next period and generally consist of all balance sheet accounts. Slide14
Temporary Accounts
Revenues
Income Summary
Expenses
Withdrawals
Permanent Accounts
Assets
Liabilities
Owner’s Capital
Temporary and
Permanent
Accounts
The closing process applies only to temporary accounts.
C 1
14Slide15
04-P2: Recording Closing Entries
15Slide16
Recording Closing Entries
Close Credit Balances in Revenue Accounts to Income Summary.
Close Debit Balances in Expense accounts to Income Summary.Close Income Summary account to Owner’s Capital.Close Withdrawals to Owner’s Capital.P 2
16Slide17
Income Summary Account
A temporary account only used for the closing processContains a credit for the sum of all revenues (and gains)Contains a debit for the sum of all expenses (and losses)Balance equals net income/loss Transfer balance to capital account
17Slide18
NEED-TO-KNOW
Debit
Credit
Cash
$13,000
Accounts receivable
17,000
Land
85,000
Accounts payable
$12,000
Long-term notes payable
33,000
Magic, Capital
75,000
Magic, Withdrawals
20,000
Fees earned
79,000
Salaries expense
56,000
Office supplies expense
8,000
Totals
$199,000
$199,000
Magic Company
Trial Balance
December 31, 20X2
Use the adjusted trial balance of Magic Company to prepare its closing entries.
P 2
18Slide19
Date
Debit
Credit
Dec. 31
Fees Earned
79,000
Income summary
79,000
Dec. 31
Income summary
64,000
Salaries expense
56,000
Office supplies expense
8,000
Dec. 31
Income summary
15,000
Magic, Capital
15,000
Dec. 31
Magic, Capital
20,000
Magic, Withdrawals
20,000
General Journal
Expenses
64,000
Revenues
79,000
Net income
15,000
Closing
15,000
0
12/31/20X1
7
5,000
Magic, Withdrawals
20,000
Net income
15,000
12/31/20X2
7
0,000
Income summary
Magic, Capital
Debit
Credit
Cash
$13,000
Accounts receivable
17,000
Land
85,000
Accounts payable
$12,000
Long-term notes payable
33,000
Magic, Capital
75,000
Magic, Withdrawals
20,000
Fees Earned
79,000
Salaries expense
56,000
Office supplies expense
8,000
Totals
$199,000
$199,000
P 2
19Slide20
Cash
$13,000
Accounts payable
$12,000
Accounts receivable
17,000
Long-term notes payable
33,000
Land
85,000
Total liabilities
45,000
Magic, Capital
7
0,000
Total assets
$115,000
Total liabilities and equity
115,000
Assets
Liabilities
Equity
Magic Company
Balance Sheet
December 31, 20X2
Debit
Credit
Cash
$13,000
Accounts receivable
17,000
Land
85,000
Accounts payable
$12,000
Long-term notes payable
33,000
Magic, Capital
70,000
Totals
$199,000
$199,000
$115,000
$115,000
Expenses
64,000
Revenues
79,000
Net income
15,000
Closing
15,000
0
12/31/20X1
7
5,000
Magic, Withdrawals
20,000
Net income
15,000
12/31/20X2
7
0,000
Income summary
Magic, Capital
P 2
20Slide21
04-P3: Post-Closing Trial Balance
21Slide22
Post-Closing Trial Balance
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.P 3
22Slide23
Post-Closing Trial Balance
P 3
23Slide24
04-C2: Accounting Cycle
24Slide25
Accounting Cycle
C 2
25Slide26
04-C3: Classified Balance Sheet
26Slide27
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 Sheet
C 3
27Slide28
Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.
C 3
Current Assets
28Slide29
Long-term investments are expected to be held for more than one year or the operating cycle.
C 3
Long-Term Investments
29Slide30
Plant assets are tangible long-lived assets used to produce or sell products and services.
C 3
Plant Assets
30Slide31
Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.
C 3
Intangible Assets
31Slide32
Current liabilities are obligations due within the longer of one year or the company’s operating cycle.
Current Liabilities
C 3
32Slide33
Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle.
C 3
Long-Term Liabilities
33Slide34
Equity is the owner’s claim on the assets.
C 3
Equity
34Slide35
NEED-TO-KNOW
Debit
Credit
Cash
$13,000
Accounts receivable
17,000
Land
85,000
Accounts payable
$12,000
Long-term notes payable
33,000
Magic, Capital
75,000
Magic, Withdrawals
20,000
Fees earned
79,000
Salaries expense
56,000
Office supplies expense
8,000
Totals
$199,000
$199,000
Magic Company
Adjusted Trial Balance
December 31, 20X2
Use the adjusted trial balance of Magic Company to prepare its classified
balance sheet as of December 31, 20X2.
C 3
35Slide36
NEED-TO-KNOW
Current assets
Cash
$13,000
Accounts receivable
17,000
Total current assets
30,000
Plant assets
Land
85,000
Total plant assets
85,000
Total assets
$115,000
Current liabilities
Accounts payable
$12,000
Total current liabilities
12,000
Long-term notes payable
33,000
Total liabilities
$45,000
Magic, Capital
7
0,000
Total liabilities and equity
$115,000
Magic Company
Balance Sheet
December 31, 20X2
Use the adjusted trial balance of Magic Company to prepare its classified balance sheet as of
December 31, 20X2.
Assets
Liabilities
Equity
Long-term liabilities
Debit
Credit
Cash
$13,000
Accounts receivable
17,000
Land
85,000
Accounts payable
$12,000
Long-term notes payable
33,000
Magic, Capital
75,000
Magic, Withdrawals
20,000
Fees earned
79,000
Salaries expense
56,000
Office supplies expense
8,000
Totals
$199,000
$199,000
Magic Company
Adjusted Trial Balance
December 31, 20X2
C 3
36Slide37
Global View
The definition of an asset is similar under U.S. GAAP and IFRS and involves three basic criteria:
the company owns or controls the right to use the item, the right arises from a past transaction or event, and the item can be reliably measured. Both systems define the initial asset value as historical cost for nearly all assets.
The definition of a liability is similar under U.S. GAAP and IFRS and involves three basic criteria: (1) the item is a present obligation requiring a probable future resource outlay, (2) the obligation arises from a past transaction or event, and (3) the obligation can be reliably measured.
37Slide38
04-A1: Current Ratio
38Slide39
Current Ratio
Helps assess the company’s ability to pay its debts in the near future
Current ratio =Current assets Current liabilities
Limited Brands, Inc.
A 1
39Slide40
04-P4: Reversing Entries
40Slide41
P 4
Appendix 4A – Reversing Entries
Reversing entries are optional. They are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period. The purpose of reversing entries is to simplify a company’s recordkeeping.
Let’s see how the accounting for our payroll accrual will be handled with and without reversing entries.
41Slide42
42
P 4Slide43
Without Reversing Entries
With Reversing Entries
43
P 4Slide44
End of Chapter 4
44