Completing the Accounting Cycle Chapter 4 Prepared by
Completing the Accounting Cycle Chapter 4 Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives 1. Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 2. Prepare financial statements from adjusted account balances. 3. Prepare closing entries. 4. Describe the accounting cycle. 5. Illustrate the accounting cycle for one period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives 6. Explain what is meant by the fiscal year and the natural business year. 7. Describe and illustrate the use of working capital and the current ratio in evaluating a company’s financial condition. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 1 Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1 Flow of Accounting Information (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1 Flow of Accounting Information (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1 Flow of Accounting Information © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. (concluded)
LO 1 Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Unadjusted TB Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr Cr è Account balances are listed in the Unadjusted Trial Balance columns using the ending balances found in the general ledger. (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1 Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Unadjusted TB Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr Cr è Adjustments are entered here. Two possibilities: § Deferrals – Existing balances are changed § Accruals – New information is entered (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1 Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Unadjusted TB Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr Cr è Adjustments are combined with the unadjusted trial balance amounts to provide balances for the Adjusted Trial Balance columns. (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1 Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet Dr Cr è Revenue and expense balances in the Adjusted Trial Balance columns are extended to the Income Statement columns. (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1 Flow of Accounting Information End-of-Period Spreadsheet (Work Sheet) Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet Dr Cr è Asset, liability, and stockholders’ equity, balances in the Adjusted Trial Balance columns are extended to the Balance Sheet columns. (concluded) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 4 -1 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 2 Prepare financial statements from adjusted account balances. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Income Statement The income statement for Net. Solutions is prepared directly from the Income Statement or Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet) beginning with fees earned of $16, 840. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Income Statement to retained earnings statement © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Retained Earnings Statement è The first item presented on the retained earnings statement is the balance of the Retained Earnings account at the beginning of the period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Retained Earnings Statement from the income statement to the balance sheet © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 4 -2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Balance Sheet The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2, 065. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Balance Sheet from the retained earnings statement © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Classified Balance Sheet è A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; current liabilities; and long-term liabilities. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Current Assets è 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 § Notes Receivable § Supplies © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Notes Receivable è Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Fixed Assets è Property, plant, and equipment (also called fixed assets or plant assets) include assets that depreciate over a period of time. Land is an exception, as it is not subject to depreciation. § § Equipment Machinery Buildings Land © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Current Liabilities è 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 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Long-Term Liabilities è Liabilities not due for a long time (usually more than one year) are called long-term liabilities. § Long-term notes payable § Mortgage payable § Bond payable © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2 Stockholders’ Equity è Stockholders’ equity is the stockholders’ right to the assets of the business. It is presented on the balance sheet below the liabilities section. § Capital stock § Retained earnings © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 4 -3 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3 Prepare closing entries. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Closing Entries è Accounts that are relatively permanent from year to year are called permanent accounts or real accounts. These accounts are carried forward from year to year. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Closing Entries è Accounts that report amounts for only one period are called temporary accounts or nominal accounts. Temporary accounts are not carried forward because they relate to only one period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Closing Entries è To report amounts for only one period, temporary accounts should have zero balances at the beginning of the next period. è To achieve this, the revenue and expense account balances are transferred to Income Summary at the end of the period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Closing Entries è The balance of Income Summary (net income or net loss) is then transferred to the Retained Earnings account. è The balance of the Dividends account is also transferred to the Retained Earnings account. è The entries that transfer these balances are called closing entries. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Closing Entries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Closing Entries è Income Summary is a temporary account that is only used during the closing process. è At the end of the closing process, the Income Summary account will have a zero balance. è Closing entries are recorded in the journal and dated as of the last date of the accounting period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Journalizing and Posting Closing Entries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Journalizing and Posting Closing Entries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Journalizing and Posting Closing Entries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Journalizing and Posting Closing Entries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Closing Entries Step 1 Step 2 Step 3 Step 4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Temporary Account Balances è After the closing entries are posted, all of the temporary accounts have zero balances. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Ledger (concluded) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 4 -4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 4 -4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Post-Closing Trial Balance è A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance and ready for the next accounting period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3 Post-Closing Trial Balance © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 4 Describe the accounting cycle. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4 Accounting Cycle è The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4 Accounting Cycle 1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. An unadjusted trial balance is prepared. 4. Adjustment data are assembled analyzed. 5. An optional end-of-period spreadsheet (work sheet) is prepared. (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4 Accounting Cycle 6. Adjusting entries are journalized and posted to the ledger. 7. An adjusted trial balance is prepared. 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 4 -5 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4 Accounting Cycle to the financial statements © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4 Accounting Cycle From the adjusted trial balance © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 5 Illustrate the accounting cycle for one period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Accounting Cycle (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Accounting Cycle (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Accounting Cycle (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Accounting Cycle © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Unadjusted Trial Balance © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 End-of-Period Spreadsheet © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Adjusting Entries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Adjusted Trial Balance © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Income Statement (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Retained Earnings Statement (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Balance Sheet © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Closing Entries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Post-Closing Trial Balance © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Ledger (continued) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 5 Ledger © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 6 Explain what is meant by the fiscal year and the natural business year. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 6 Accounting Period è The annual accounting period adopted by a business is known as its fiscal year. è When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural business year. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 6 Accounting Period © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 6 Financial History of a Business © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 7 Describe and illustrate the use of working capital and the current ratio in evaluating a company’s financial condition. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 7 Working Capital and Current Ratio è The ability to convert assets into cash is called liquidity. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 7 Working Capital and Current Ratio è The ability of a business to pay its debts is called solvency. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 7 Working Capital and Current Ratio è Working capital is the excess of the current assets of a business over its current liabilities. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 7 Working Capital and Current Ratio Net. Solutions’ working capital at the end of 2011 is $6, 355 as computed below. This amount of working capital implies that Net. Solutions is able to pay its current liabilities. Working Capital = Current Assets – Current liabilities = $7, 745 – $1, 390 = $6, 355 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 7 Working Capital and Current Ratio è The current ratio is another means of expressing the relationship between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 7 Working Capital and Current Ratio The current ratio for Net. Solutions at the end of 2011 is 5. 6, computed as follows: Current Ratio = = = Current Assets Current Liabilities $7, 745 $1, 390 5. 6 (rounded) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 4 -6 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Appendix End-of-Period Spreadsheet © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit Adjusted Trial Balance Adjustments Debit Credit Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 900 4, 000 360 25, 000 16, 340 4, 275 1, 600 985 800 455 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The unadjusted trial balance is checked for equality. Credit
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Adjustments Debit Credit Supplies needs adjusting 900 4, 000 360 25, 000 16, 340 4, 275 1, 600 985 800 455 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Adjusted Trial Balance Debit Credit
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit Adjustments Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Credit (a) Cost of supplies on hand at December 31 is $760. 360 25, 000 16, 340 4, 275 1, 600 985 800 455 42, 600 Debit (a) 1, 240 900 4, 000 Adjusted Trial Balance (a) 1, 240 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit Adjustments Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Credit (b) The insurance expense for December is $200 ($2, 400 ÷ 12). 360 25, 000 16, 340 4, 275 1, 600 985 800 455 42, 600 Debit (a) 1, 240 (b) 200 900 4, 000 Adjusted Trial Balance (a) 1, 240 (b) 200 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit Adjusted Trial Balance Adjustments Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Credit 360 25, 000 (c) 120 16, 340 (c) 4, 275 1, 600 985 800 455 42, 600 Credit (a) 1, 240 (b) 200 900 4, 000 Debit (a) 1, 240 (b) 200 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 120 (c) Rent revenue earned during December was $120 ($360 ÷ 3).
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Adjustments Debit (d) 500 Credit 4, 000 (c) 120 16, 340 (d) (c) 4, 275 1, 600 985 800 455 42, 600 Debit Credit (a) 1, 240 (b) 200 900 360 25, 000 Adjusted Trial Balance (a) 1, 240 (b) 200 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. (d) Fees accrued at the end of December, but not recorded, totaled $500. 500 120
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Adjustments Debit (d) 500 900 4, 000 360 25, 000 120 Credit Debit Credit (a) 1, 240 (b) 200 (e) (d) (c) (e) 985 800 455 42, 600 (c) 16, 340 4, 275 1, 600 Adjusted Trial Balance 250 (a) 1, 240 (b) 200 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. (e) Wages accrued, but 250 not paid, at the end of December totaled $250. 500 120
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Adjustments Debit (d) 500 900 4, 000 360 25, 000 985 800 455 42, 600 (c) 120 16, 340 4, 275 1, 600 Adjusted Trial Balance (e) 250 (f) 50 Credit Debit Credit (a) 1, 240 (b) 200 (f) 50 (e) 250 (d) (c) 500 120 (a) 1, 240 (b) 200 42, 600 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. (f) Depreciation of office equipment is $50 for December.
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Adjustments Debit (d) 500 900 4, 000 360 25, 000 (c) 120 16, 340 4, 275 1, 600 985 800 455 Summed 42, 600 and ruled Adjusted Trial Balance (e) 250 (f) 50 Credit (a) 1, 240 (b) 200 (f) 50 (e) 250 (d) (c) 500 120 (a) 1, 240 (b) 200 2, 360 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2, 360 Debit Credit
Add/Subtract Adjustments è The next step is to add or subtract the adjustments to (or from) the amounts found in the Unadjusted Trial Balance columns and enter the results in the Adjusted Trial Balance columns. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Unadjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit Credit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 Adjustments Debit (d) 500 900 4, 000 360 25, 000 985 800 455 42, 600 (c) 120 Credit (a) 1, 240 (b) 200 (f) 50 (e) 250 (d) (c) (e) 250 (f) 50 500 120 (a) 1, 240 (b) 200 42, 600 Debit 2, 065 2, 720 760 2, 200 20, 000 1, 800 4, 000 16, 340 4, 275 1, 600 Adjusted Trial Balance 2, 360 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2, 360 4, 525 1, 600 50 985 2, 040 200 455 43, 400 Credit 50 900 250 240 25, 000 16, 840 120 43, 400
Spreadsheet è Preparing the work sheet as a spreadsheet allows the computer to assist you in the process. Exhibit 20 on the next slide shows you how the spreadsheet would appear on your computer screen. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Extending Amounts to Statement Columns è The next step is to extend amounts in the Adjusted Trial Balance columns to the Income Statement and Balance Sheet columns. è Because of space limitations, the Unadjusted Trial Balance and the Adjustments columns have been removed for the remainder of this slide presentation. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit 2, 065 2, 720 760 2, 200 20, 000 1, 800 4, 000 4, 525 1, 600 50 985 2, 040 200 455 43, 400 Credit Income Statement Debit Credit 43, 400 Debit 2, 065 2, 720 760 2, 200 20, 000 1, 800 50 900 250 240 25, 000 16, 840 120 Balance Sheet 4, 525 1, 600 50 985 2, 040 200 455 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16, 840 120 4, 000 Credit 50 900 250 240 25, 000
Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Debit 2, 065 2, 720 760 2, 200 20, 000 1, 800 4, 000 4, 525 1, 600 50 985 2, 040 200 455 43, 400 Credit Income Statement Debit Credit 43, 400 Debit 2, 065 2, 720 760 2, 200 20, 000 1, 800 50 900 250 240 25, 000 16, 840 120 Balance Sheet 4, 525 1, 600 50 985 2, 040 200 455 9, 855 16, 840 120 16, 960 4, 000 33, 545 Credit 50 900 250 240 25, 000 26, 440 The four columns are summed. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Determining Net Income (Net Loss) Income Statement Balance Sheet 9, 855 7, 105 16, 960 33, 545 26, 440 7, 105 33, 545 Net Income è The difference between the Income Statement column totals is net income (or net loss) for the period. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depr. Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Depreciation Expense Utilities Expense Supplies Expense Insurance Expense Miscellaneous Exp. Net income Debit 2, 065 2, 720 760 2, 200 20, 000 1, 800 4, 000 4, 525 1, 600 50 985 2, 040 200 455 43, 400 Credit Income Statement Debit Credit 43, 400 Debit 2, 065 2, 720 760 2, 200 20, 000 1, 800 50 900 250 240 25, 000 16, 840 120 Balance Sheet 4, 525 1, 600 50 985 2, 040 200 455 9, 855 7, 105 16, 960 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16, 840 120 4, 000 16, 960 33, 545 Credit 50 900 250 240 25, 000 26, 440 7, 105 33, 545
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Completing the Accounting Cycle The End Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 111
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