Account Cycle

8/8/2019 Account Cycle

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OBJECTIVE 1

Prepare an accounting

work sheet.


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THE ACCOUNTING CYCLE

The accounting cycle is the process by which

accountants prepare financial statements for

an entity for a specific period of time.


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For a new business, begin by setting up ledger

accounts.

For an established business, begin withaccount balances carried over from the

previous period.


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Accounts Receivable

1,350

Accounts Receivable 1,700

Service Revenue 1,700

Accounts Receivable1,350

1,700

3,050

Accounts Receivable1,350

1,700



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Work Sheet

CashAccountsreceivable

12,1003,050

BalanceSheet

IncomeStatement



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Postclosing Trial Balanceascco nts

recei a le

,

,

dj sting entries losing entries

as cco nts Recei a le

, ,



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THE ACCOUNTING WORK SHEET

What is the work sheet?

A work sheet is a multi-columned document

used by accountants to help move data fromthe trial balance to the financial statements.

It is an internal document.


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AdjustedTrial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSupplies

EquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense

Totals

12,1001,350

250

15,500

1,000

12,000

42,200

7,5001,2001,1001,5007,200

23,700

42,200


2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 9


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a The company has earned revenue of $1,700

which will be collected next month.

b Inventory of supplies at month end totaled$150.

c Depreciation for the period was calculated as

$200.


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AdjustedTrial Balance Adjustments Trial Balance



Totals

12,1001,350

250

15,500

1,000

12,000

42,200

7,5001,2001,1001,5007,200

23,700

42,200

a) 1,700

b) 100c) 200

2,000

b) 100

c) 200

a) 1,700

2,000

12,1003,050

150

15,500

1,000

12,000100200

44,100

7,7001,2001,1001,5007,200

25,400

44,100



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Adjusted Income BalanceTrial Balance Statement Sheet



Totals

7,7001,2001,1001,5007,200

25,400

44,100

12,1003,050

150

15,500

1,000

12,000100200

44,100

12,1003,050

150

15,500

1,000

31,800

7,7001,2001,1001,5007,200

18,700



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Totals

7,7001,2001,1001,5007,200

25,400

44,100

12,1003,050

150

15,500

1,000

12,000100200

44,100

12,1003,050

150

15,500

1,000

31,800

7,7001,2001,1001,5007,200

18,700

12,000100200

12,300

25,400

25,400



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TotalsNet income

7,7001,2001,1001,5007,200

25,400

44,100

12,1003,050

150

15,500

1,000

12,000100200

44,100

12,1003,050

150

15,500

1,000

31,800

31,800

7,7001,2001,1001,5007,200

18,70013,100

31,800

12,000100200

12,30013,100

25,400

25,400

25,400

25,400



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OBJECTIVE 2

Use the work sheet

to complete theaccounting cycle.


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The work sheet

helps identifythe accounts

that needadjustments.

Actual adjustment

of the accountsrequires

journalizingand postingthe entries.

RECORDING THE ADJUSTING

ENTRIES


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RECORDING THE ADJUSTING

ENTRIES

The adjusting entries may be recorded in the

journal when they are entered on the work

sheet.

Many accountants journalize and post the

adjusting entries just before they make the

closing entries.


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OBJECTIVE 3

lose the revenue, expense, and

withdrawal accounts.


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CLOSING THE ACCOUNTS

losing the accounts is the end of period

process that prepares the accounts for

recording transactions during the next period.


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Closing Entries

Revenuesincrease

OwnersEquity.

Expensesand

Withdrawals

decreaseOwnersEquity.



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Revenues and Expense accounts are closed to

Income Summary.

Income Summary is closed to Capital.Withdrawals are closed to Capital.

In a corporation, Dividends are closed to

Retained Earnings.


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Income Summary

A creditbalancerepresents

net income.

A debitbalancerepresents

net loss.

CLOSING THE

ACCOUNTS


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POSTCLOSING TRIAL BALANCE

The accounting cycle ends with the postclosing

trial balance.

T

he postclosing trial balance is dated as ofthe end of the period for which the statements

have been prepared.


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PERMANENT

ACCOUNTS

What accounts never close?

Assets

Liabilities Owners equity

Balances of permanent accounts carry over to

the next period.


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OBJECTIVE 4

Classify assets and liabilities

as current or long-term.


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LIQUIDITY

This is a measure of how quickly an item can

be converted into cash.

On the balance sheet, assets and liabilities are

classified as either current or long-term to

indicate their relative liquidity.


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CURRENT

ASSETS

Current assets are cash, or will be converted to

cash, in one year or within the normal business

operating cycle.

What are some other examples?

short-term receivables

inventory

prepaid expenses


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CURRENT

LIABILITIES

Current liabilities are debts or obligations due

within one year or within the operating cycle.

What are some examples?

accounts and salary payables

short-term notes payable

unearned revenue


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LONG-TERM ASSETS AND

LIABILITIES

Long-term assets include all other assets.

property, equipment, and intangibles

Long-term liabilities are all other debts due inlonger than one year or the entitys operating

cycle.


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Assets Liabilities

Current assets: Current liabilities:Cash 12,100 Accounts payable 1,200

Accounts receivable 3,050 Salary payable 1,100

Supplies 150 Unearned revenue 1,500

Total current assets 15,300 Total liabilities 3,800

Plant assets Owners equity

Equipment 15,500 Capital 19,300

Less Accum. deprec. 7,700 7,800

Total liabilities and

Total assets 23,100 owners equity 23,100

XYZ ServicesJanuary 31, 20XX

THE CLASSIFIED BALANCE

SHEET


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Report Format

AssetsLiabilities

Owners Equity

Account Format

Assets = Liabilities +Owners Equity

DIFFERENT FORMATS OF THE BALANCE

SHEET


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OBJECTIVE 5

Use the current ratio and the debt

ratio to evaluate a company.


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COMPARATIVE FINANCIAL

STATEMENTS

They enhance the users ability to analyze a

companys past performance.

What are two common ratios used to measure

liquidity?

1 Current ratio

2 Debt ratio


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Current ratio = Current assets Current liabilities

CURRENT RATIO

This measures the ability of a business to

pay its current liabilities with its current

assets.


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Total liabilities Total assets

DEBT RATIO

It indicates the proportion of a businesss

assets that are financed with debt.

It measures their ability to pay both current and

long-term debt.


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TREND ANALYSIS

Decision makers compare various ratios over a

period of time.

Account Cycle

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