Accounting 21th waren reeve fess chapter 04

Chapter 4
Completing the
Accounting Cycle
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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Some
Some of
of the
the action
action has
has been
been automated,
automated, so
so
click
click the
the mouse
mouse when
when you

you see
see this
this
lightning
lightningbolt
bolt in
in the
the lower
lower right-hand
right-hand
corner
corner of
of the
the screen.
screen. You
You can
can point
point and
and
click
click anywhere
anywhere on
on the
the screen.
screen.


Objectives
Objectives
1.

2.
3.
4.
5.

Review the seven basic steps of the accounting cycle.
Prepare a work After
sheet. studying this
After studying this
Prepare financial statements from a work sheet.
chapter,
you
should
chapter,
you
should
Prepare adjusting and closing entries
from a work sheet.
to:
be
able
to: year and the natural
Explain what is meantbe
byable
the fiscal
business year.
6. Analyze and interpret the financial solvency of a
business by computing working capital and the current
ratio.

Seven
Seven Basic
Basic Steps
Steps of
of the
the
Accounting
Accounting Cycle
Cycle
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data are
assembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.


Assets
Assets are
are commonly
commonly divided
divided into
into classes
classes
and
and that
that two

two of
of these
these classes
classes are
are current
current
assets
assets and
and property,
property, plant,
plant, and
and equipment.
equipment.


That’s
That’s correct.
correct. Cash
Cash and
and other
other
assets
assets that
that are
are expected
expected to
to be
be
converted
converted into

into cash,
cash, sold,
sold, or
or used
used
up
up usually
usually in
in less
less than
than aa year
year are
are
current
current assets.
assets.


For
For example?
example?

Well…
Well… besides
besidescash,
cash, there’s
there’s
notes
notes receivable,
receivable, accounts

accounts
receivable,
receivable, supplies,
supplies, and
and
other
other prepaid
prepaid items.
items.


There
There are
are some
some exceptions,
exceptions, but
but
that’s
that’s basically
basically correct.
correct. Assets
Assets
So,
assets
that
have
a
life
So,
assets

that
have
a
life
such
as
office
equipment,
such as office equipment,
over
a
year
are
listed
under
over
a
year
are
listed
under
machinery,
buildings,
and
land
machinery, buildings, and land
property,
plant,
and
property,

plant,
and
would
appear
under
that
heading.
would appear under that heading.
equipment.
equipment.


Liabilities
Liabilities due
due usually
usually within
within one
one
year
year or
or less
less and
and that
that are
are to
to be
be paid
paid
out
out of

of current
current assets
assets are
are called
called
current
current liabilities.
liabilities.
√ Accounts payable
√ Wages payable
√ Interest payable
√ Unearned fees


Liabilities
Liabilities not
not due
due for
for
more
more than
than aa year
year usually
usually
are
are long-term
long-term liabilities.
liabilities.

 Mortgage note

payable
 Mortgage payable
 Bond payable


The
The work
work sheet
sheet isis aa useful
useful
device
device for
for understanding
understanding the
the
flow
flow of
of accounting
accounting data
data from
from
the
the unadjusted
unadjusted trial
trial balance
balance to
to
the
the financial
financial statements.

statements.


The Work Sheet
Trial Balance

Accounts

Dr

Cr

Adjustments

Dr

Cr

Adjusted TB

Dr

Cr

Prepared
Prepared from
from the
the general
generalledger.
ledger.

Accounts
Accounts are
are listed
listed in
in the
the following
following
order:
order: assets,
assets, liabilities,
liabilities, owner’s
owner’s
equity,
equity, revenues,
revenues, and
and expenses.
expenses.


The Work Sheet
Trial Balance

Accounts

Dr

Cr

Adjustments

Dr

Cr

Adjusted TB

Dr

Cr

Adjustments
Adjustmentsare
are entered
entered here.
here.
Two
Two possibilities:
possibilities:
1.
1. Deferrals
Deferrals–– Existing
Existing balances
balances are
are
changed.
changed.
2.
2. Accruals
Accruals –– New
New information

information isis
entered.
entered.


The Work Sheet
Trial Balance

Accounts

Dr

Cr

Adjustments

Dr

Cr

Adjusted TB

Dr

Cr

Adjustments
Adjustmentsare
are combined
combined with

with
the
the trial
trial balance.
balance. Account
Account
balances
balances are
are now
now adjusted.
adjusted.


NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance
Account Title
Credit
1 Cash
2
3
4
5
6
7
8
9
10
11

12
13
14
15
16
17
18
19
20
21
22

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

Debit

Adjustments

Credit

2,065
2,220
2,000
2,400
20,000
1,800

4,000
4,275
1,600
985
800
455
42,600

900
360
25,000
16,340

42,600

Debit

Credit

Adjusted
Trial Balance
Debit

The
The Unadjusted
Unadjusted
Trial
Trial Balance
Balance


(a)
(a) The
The Supplies
Supplies account
account has
has aa debit
debit of
of
$2,000.
$2,000. A
A count
count of
of supplies
supplies at
at the
the end
end of
of

the
the period
period reveals
reveals that
that $760
$760 isis on
on hand.
hand.
Therefore,
Therefore, $1,240
$1,240 in
in supplies
supplies was
was used
used
during
during the
the two-month
two-month period.
period.


NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance
Account Title
Credit
1 Cash
2

3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing

Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

Debit

Adjustments

Credit

2,065
2,220
2,000
2,400
20,000
1,800

4,000
4,275
1,600
985
800
455
42,600

Debit

Credit

(a) 1,240

900
360
25,000
16,340

(a) 1,240
42,600

Adjusted
Trial Balance
Debit


(b)
(b)The
The Prepaid
Prepaid Insurance
Insurance account
account has
has aa
debit
debit balance
balance of
of $2,400,
$2,400, which
which

represents
represents prepayment
prepayment of
of insurance
insurance for
for
24
24 months
months beginning
beginning December
December 1.
1.
Thus,
Thus, the
the insurance
insurance expense
expense for
for this
this
month
month isis $100
$100 ($2,400
($2,400 ÷÷ 24).
24).


NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance

Account Title
Credit
1 Cash
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment

Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
Insurance Expense

Debit

Adjustments

Credit

2,065
2,220
2,000
2,400
20,000
1,800

4,000
4,275
1,600
985
800

455
42,600

Debit

Credit

Adjusted
Trial Balance
Debit

(a) 1,240
(b)

100

900
360
25,000
16,340

(a) 1,240
42,600

Accounts are added as needed.

(b) 100


(c)

(c) The
The Unearned
Unearned Rent
Rent account
account has
has aa credit
credit
balance
balance of
of $360,
$360, which
which represents
represents the
the
receipt
receipt of
of three-months’
three-months’ rent
rent beginning
beginning
with
with December
December 1.
1. Thus,
Thus, the
the rent
rent revenue
revenue
for
for December

December isis $120.
$120.

FOR
RENT


NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance
Account Title
Credit
1 Cash
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

18
19
20
21
22

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

Insurance Expense
Rent Revenue
(c) 120

Debit

Adjustments

Credit

2,065
2,220
2,000
2,400
20,000
1,800

4,000
4,275
1,600
985
800
455
42,600

Debit

Credit

Adjusted
Trial Balance
Debit

(a) 1,240
(b) 100
900
360(c) 120
25,000

16,340

(a) 1,240
42,600

(b) 100


(d)
(d) Wages
Wages accrued
accrued but
but not
not paid
paid at
at
the
the end
end of
of December
December total
total $250.
$250.


NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance
Account Title

Credit
1 Cash
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable

Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

Insurance Expense
Rent Revenue
Wages
(c)
120Payable
(d) 250

Debit

Adjustments

Credit

2,065
2,220
2,000
2,400
20,000
1,800

4,000
4,275
1,600
985
800
455
42,600

Debit

Credit

Adjusted
Trial Balance
Debit

(a) 1,240
(b) 100
900
360
25,000

(c)

120

16,340
(d) 250
(a) 1,240
42,600

(b) 100


(e)
(e) Fees
Fees accrued
accrued at
at the
the end
end of
of
December,
December, but
but not
not recorded,
recorded,
total
total $500.
$500.


NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance
Account Title
Credit
1 Cash
2

3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing

Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

Insurance Expense
Rent Revenue
(c) 120
Wages Payable
(d) 250

Debit

Adjustments

Credit

2,065
2,220
2,000
2,400
20,000
1,800

4,000
4,275
1,600
985

800
455
42,600

Debit

(e)

900
360
25,000
16,340

Credit

500

Debit

(a) 1,240
(b) 100

(c)

120

(e) 500
(d) 250
(a) 1,240

42,600

Adjusted
Trial Balance

(b) 100