MGMT-026 Chapter 04 Slides - Kids in Prison Program · Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance.

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 04

COMPLETING THE ACCOUNTING CYCLE

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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

4 - 3 FastForward Worksheet

For the Month Ended December 31, 2011 P 1

4 - 4 FastForward Worksheet

For the Month Ended December 31, 2011 P 1

4 - 5 FastForward Worksheet

For the Month Ended December 31, 2011 P 1

4 - 6 FastForward Worksheet

For the Month Ended December 31, 2011 P 1

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For the Month Ended December 31, 2011 P 1

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PREPARING THE FINANCIAL STATEMENTS P 1

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PREPARING THE FINANCIAL STATEMENTS P 1

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RECORDING CLOSING ENTRIES 1. Resets revenue,

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

2. 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

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Temporary Accounts

Revenues

Income Summary

Expe

nses

Withdraw

als

Permanent Accounts

Assets

Liab

ilitie

s Ow

ner’s C

apital TEMPORARY AND

PERMANENT ACCOUNTS

The closing process applies only to

temporary accounts.

C 1

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Let’s see how the closing

process works!

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

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Using the adjusted trial balance, let’s prepare the

closing entries for

FastForward.

P 2

FastForwardAdjusted Trial Balance

December 31, 2011Debit Credit

Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$

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Close Credit Balances in

Revenue Accounts to

Income Summary.

FastForwardAdjusted Trial Balance

December 31, 2011Debit Credit

Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$

P 2

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CLOSE CREDIT BALANCES IN REVENUE ACCOUNTS TO INCOME SUMMARY

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

Dr. Cr. Dec. 31 Consulting revenue 7,850 Rental revenue 300 Income summary 8,150

P 2

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Consulting Revenue7,850 7,850

-

Rental Revenue300 300

-

Income Summary8,150

P 2

CLOSE CREDIT BALANCES IN REVENUE ACCOUNTS TO INCOME SUMMARY

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Close Debit Balances in

Expense Accounts to Income Summary.

P 2

FastForwardAdjusted Trial Balance

December 31, 2011Debit Credit

Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$

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

CLOSE DEBIT BALANCES IN 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

P 2

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Income Summary4,365 8,150

3,785

Utilities Expense230 230

-

Rent Expense1,000 1,000

-

Net Income

CLOSE DEBIT BALANCES IN EXPENSE ACCOUNTS TO INCOME SUMMARY

Supplies Expense

1,050 1,050 -

Depreciation Expense- Eq.

375 375 -

Salaries Expense1,610 1,610

-

Insurance Expense100 100

-

P 2

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Close Income Summary to

Owner’s Capital.

P 2

FastForwardAdjusted Trial Balance

December 31, 2011Debit Credit

Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$

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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

P 2

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C. Taylor, Capital30,000 3,785

33,785

Income Summary4,365 8,150 3,785

-

P 2 CLOSE INCOME SUMMARY TO OWNER’S CAPITAL

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Close Withdrawals Account to Owner’s Capital.

FastForwardAdjusted Trial Balance

December 31, 2011Debit Credit

Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$

P 2

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

CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL

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

C. Taylor, Withdrawals 200

P 2

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C. Taylor, Capital200 30,000

3,785

33,585

C. Taylor, Withdrawals

200 200

-

P 2 CLOSE WITHDRAWALS ACCOUNT TO OWNER’S CAPITAL

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SUMMARY OF THE CLOSING PROCESS 1. Close Credit Balances in Revenue Accounts

to Income Summary. 2. Close Debit Balances in Expense Accounts

to Income Summary. 3. Close Income Summary to Owner’s Capital. 4. Close Withdrawals Account to Owner’s

Capital.

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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.

P 3

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POST-CLOSING TRIAL BALANCE P 3

FastForwardPost-Closing Trial Balance

December 31, 2011Debit Credit

Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 33,585 C. Taylor, Withdrawals - Consulting revenue - Rental revenue - Depreciation expense-Equipment - Salaries expense - Insurance expense - Rent expense - Supplies expense - Utilities expense - Totals 43,120$ 43,120$

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ACCOUNTING CYCLE C 2

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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

Categories of a Classified Balance SheetAssets Liabilities and Equity

Current assets Current liabilitiesNoncurrent assets Noncurrent liabilities

Long-term investments EquityPlant assetsIntangible assets

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Current assets are expected to be sold, collected, or used within one year or the

company’s operating cycle.

C 3

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

C 3

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Plant assets are tangible long-lived assets used to produce or sell products and services.

C 3

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

and that lack physical form.

C 3

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Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

C 3

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Long-term liabilities are obligations not due within the longer of one year or the company’s

operating cycle.

C 3

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Equity is the owner’s claim on the assets.

C 3

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GLOBAL VIEW

The definition of an asset is similar under U.S. GAAP and IFRS and involves three basic criteria: (1)the company owns or controls the right to use the item, (2)the right arises from a past transaction or event, and (3)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.

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CURRENT RATIO

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

Current Ratio = Current Assets

Current Liabilities

$ in millions 2009 2008 2007 2006

Current assets $ 2,867 $ 2,919 $ 2,771 $ 2,784

Current liabilities 1,225 1,374 1,709 1,575

Current ratio 2.3 2.1 1.6 1.8

Industry current ratlo 2.0 2.1 2.3 2.4

Limited Brands, Inc.

A 1

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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.

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P 4

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P 4

Without Reversing Entries With Reversing Entries

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END OF CHAPTER 04