Completing the

Chapter
Accounting Cycle

4
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Benefits
Benefits of
of aa Work
Work Sheet
Sheet
Aids
Aidsthe
the Assists
Assists in
in
preparation
preparationof of planning
planningand
and
financial
financial organizing
organizingan an
statements.
statements. audit.
audit.
Helps
Helpsin in
Reduces Not a preparing
Reduces required preparing
possibility
possibilityof
of interim
interim
errors. report. financial
errors. financial
statements.
statements.
Shows
Showsthe the
Links
Linksaccounts
accounts effects
effectsof of
and
andtheir
their proposed
proposed
adjustments.
adjustments. transactions.
transactions.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
 FastForward
Work Sheet
For Month Ended December 31, 2004

First,
First, enter
enter
the
the
unadjusted
unadjusted
amounts
amounts toto
the
the
worksheet.
worksheet.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 FastForward
Work Sheet
For Month Ended December 31, 2004

Next,
Next, enter
enter the
the
adjustments.
adjustments.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 FastForward
Prepare
Prepare Work Sheet
adjusted
adjusted trial
trial For Month Ended December 31, 2004
balance.
balance.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Sort FastForward
Sort adjusted
adjusted trial balance
Work Sheet balance
trial
amounts
amounts to financial
toEnded
For Month financial statements.
statements.
December 31, 2004

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Total FastForward
Total statement
statement columns,
columns, compute
compute
Work Sheet
income
income or
or loss,
loss, and
and
balance
balance
For Month Endedcolumns.
columns.
December 31, 2004

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Prepare
Prepare the
the Financial
Financial Statements
Statements

Prepare the Income

Statement.

A
A work
work sheet
sheet
does
does not
not
substitute
substitute for
for
financial
financial
statements.
statements.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Prepare the Statement of
Changes in Owner’s Equity.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Prepare the
Balance Sheet.
FastForward
Balance Sheet
December 31, 2004
Assets
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment $ 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,345
Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned consulting revenues 2,750
Total liabilities $ 9,160
Owner's Equity
C.Taylor, Capital 33,185
Total liabilities and equity $ 42,345

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Process
Process
 Resets revenue,
expense and Identify accounts for
withdrawal account closing.
balances to zero at
the end of the period.
Record and post closing
 Helps summarize a entries.
period’s revenues
and expenses in the
Income Summary
Prepare post-closing trial
account. balance.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Temporary
Temporary and
and Permanent
Permanent Accounts
Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
Theclosing
closingprocess
process
applies
appliesonly
only to
to
temporary
temporaryaccounts.
accounts.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Recording
Recording Closing
Closing Entries
Entries

Close
Close Revenue
Revenue accounts
accounts
to
to Income
Income Summary.
Summary. Let’s see how the
closing process

Close
Close Expense
Expense accounts
accounts works!
to
to Income
Income Summary.
Summary.


Close
Close Income
Income Summary
Summary
account
account to
to Owner’s
Owner’s
Capital.
Capital.


Close
Close Withdrawals
Withdrawals to
to
Owner’s
Owner’s Capital.
Capital.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 25,000

10,000 25,000
Income Summary

Owner's Capital Withdrawals Account

30,000 5,000

30,000 Balances before closing. 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 Close Revenue 25,000 25,000
accounts to Income
Summary.
10,000 -
Income Summary
25,000

Owner's Capital 25,000 Withdrawals Account

30,000 5,000

30,000 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000
Close Expense 25,000 25,000
accounts to Income
Summary.
- -
Income Summary
10,000 25,000

Owner's Capital 15,000 Withdrawals Account

30,000 5,000

The
Thebalance
balancein
inIncome
Income
30,000 Summary
Summaryequals
equalsnet
net 5,000
income.
income.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000
Close Income 25,000 25,000
Summary to
Owner’s Capital.
- -
Income Summary
10,000 25,000
15,000

Owner's Capital - Withdrawals

Withdrawals Account
Account
30,000
30,000 5,000
5,000
15,000

45,000 5,000
5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000 25,000 25,000

- -
Income Summary
10,000 25,000
15,000

-
Owner's Capital Withdrawals Account
5,000 30,000 5,000 5,000
15,000 Close Withdrawals
account to Owner’s 5,000
-
45,000
40,000
Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Close Revenue
accounts to
Income Summary.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

  Close
 Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary

D e c . 3 C1 o n su l ti n g r e v e n u e 7,850
R e n ta l r e v e n u e 300
I n c o m e su m m a r y 8,150

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

  Close
 Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary

Consulting Revenue
7,850 7,850

-
Income Summary
7,850
300
Rental Revenue
300 300

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Close Expense
accounts to
Income Summary.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

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

Dec. 31 Income summary 4,365

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

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 

Close
Close
CloseExpense
Expense Accounts
Accounts
Accounts to
to
toIncome
Close Expense Accounts toIncome
Expense Income
Income
Summary
Summary
Summary
Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Income Summary
Salaries Expense Supplies Expense 4,365 7,850
1,610 1,610 1,050 1,050 300
3,785
- -

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Close Income
Summary to
Owner’s Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

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

Dec. 31 Income summary 3,785

C. Taylor, Capital 3,785

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 

Close
Close
Close Income
IncomeSummary
Summary
Summary to
to
toOwner’s
Close Income Summary toOwner’s
Income Owner’s
Owner’s
Capital
Capital
Capital
Capital

C. Taylor, Capital Income Summary

30,000 4,365 7,850
3,785 3,785 300
-
33,785

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Close
Withdrawals to
Owner’s Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

  Close
 Close Withdrawals
Withdrawals to
to Owner’s
Owner’s
Capital
Capital

Dec. 31 C. Taylor, Capital 600

C. Taylor, Withdrawals 600

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

  Close
 Close Withdrawals
Withdrawals to
to Owner’s
Owner’s
Capital
Capital

C. Taylor,
Withdrawals C. Taylor, Capital
600 600 600 30,000
3,785

- 33,185

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Post-Closing
Post-Closing Trial
Trial Balance
Balance

Let’s look at
 List
List of
of permanent
permanent FastForward’s
accounts
accounts and
and their
their post-closing trial
balances balance.
balances after
after posting
posting
closing
closing entries.
entries.

 Total
Total debits
debits and
and
credits
credits must
must be
be equal.
equal.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Post-Closing
Post-Closing Trial
Trial Balance
Balance

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Let’s discuss
the
components
of a classified
balance
sheet.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Classified
Classified Balance
Balance Sheet
Sheet
Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current Assets Current Liabilities
Noncurrent Assets Noncurrent Liabilities
Long-Term Investments Equity
Plant Assets
Intangible 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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
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

Current assets are expected

Land held for future expansion
Total investments 67,500 to be
48,000

sold, collected, or
Plant assets
Store equipment used within one
$ 33,200
Less accumulated depreciation
8,000 25,200
year or the company’s
Buildings 170,000 operating
Less accumulated depreciation
45,000 125,000
Land cycle. 73,200 223,400
Total plant assets
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
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
Long-term investments
Less accumulated depreciation
Land
125,000
73,200
are
45,000

expected to be held for the

Total plant assets
Intangible assets longer
223,400
10,000

of one year or the operating cycle.

Total assets $ 343,800

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
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
Plant assets are tangible long-lived
Investments in stocks and bonds
Land held for future expansion
18,000
48,000
assets used to produce 67,500
Total investments
Plant assets
or sell
products and
Store equipment$ 33,200
services.
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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
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
Intangible assets are long-term
Buildings 170,000
Less accumulated depreciation
125,000 45,000
resources used to produce
Land
Total plant assets
73,200 or sell
223,400
products and services and
Intangible assets
Total assets
10,000
$ 343,800
that
lack physical form.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Snowboarding Components
Balance Sheet
January 31, 2005
LIABILITIES
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
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Current liabilities are obligations due

within the longer of one year or the
company’s operating cycle.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Snowboarding Components
Balance Sheet
January 31, 2005
LIABILITIES
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
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Long-term liabilities are obligations

not due within the longer of one year
or the company’s operating cycle.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Snowboarding Components
Balance Sheet
January 31, 2005
LIABILITIES
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
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Equity is the owner’s claim on the

assets.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Current
Current Ratio
Ratio
Helps assess the company’s
ability to pay its debts in the near
future

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 End of Chapter 4

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005