Lecture Principles of financial accouting - Chapter 4: Completing the accounting cycle

Chapter 4

Completing the Accounting Cycle

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
Winston Kwok, Ph.D., CPA
McGraw­Hill/Irwin

        Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.


4 ­ 2

P 1

Benefits of a Work Sheet
Aids the
preparation of
financial
statements.
Reduces
possibility of
errors.
Links accounts
and their
adjustments.

Not a
required
report.

Assists in
planning and
organizing an
audit.
Helps in
preparing
interim
financial
statements.
Shows the
effects of
proposed
transactions.


P 1

4 ­ 3

FastForward
Worksheet
For the Month Ended December 31, 2011
Unadjusted Trial 
Balance

Adjustments

Adjusted Trial 
Balance

Income 
Statement

Balance Sheet 
and Statement 
of Changes in 
Equity


P 1

4 ­ 4

FastForward
Worksheet
For the Month Ended December 31, 2011
Unadjusted Trial 
Balance

Adjustments

Adjusted Trial 
Balance

Income 
Statement

Balance Sheet 
and Statement 
of Changes in 
Equity


P 1

4 ­ 5

FastForward
Worksheet
For the Month Ended December 31, 2011
Unadjusted Trial 
Balance

Adjustments

Adjusted Trial 
Balance

Income 
Statement

Balance Sheet 
and Statement 
of Changes in 
Equity

P 1

4 ­ 6

FastForward
Worksheet
For the Month Ended December 31, 2011
Unadjusted Trial 
Balance

Adjustments

Adjusted Trial 
Balance

Income 
Statement

Balance Sheet 
and Statement 
of Changes in 
Equity


P 1

4 ­ 7

FastForward

Worksheet
For the Month Ended December 31, 2011
Unadjusted Trial 
Balance

Adjustments

Adjusted Trial 
Balance

Income 
Statement

Balance Sheet 
and Statement 
of Changes in 
Equity


4 ­ 8

P 1

Preparing the Financial Statements


4 ­ 9

C 1

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.


4 ­ 10

Temporary and
Permanent Accounts

C 1

Income

Summary

Liabilities

Permanent
Accounts

The
The closing
closing process
process
applies
applies only
only to
to
temporary
temporary accounts.
accounts.

Owner’s
Capital

Temporary
Accounts

Assets

Withdrawals

Expenses

Revenues


4 ­ 11

P 2

Recording Closing Entries
Close Credit Balances in
Let’s see how
Revenue Accounts to Income
Summary.
the closing
Close Debit Balances in Expense
process works!
accounts to Income Summary.
Close Income Summary account
to Owner’s Capital.
Close Withdrawals to Owner’s
Capital.


4 ­ 12

P 2

FastForward
Adjusted Trial Balance
December 31, 2011

Debit
Cash
$
4,350
Accounts receivable
1,800
Supplies
8,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
200
Consulting revenue
Rental revenue
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

Credit

$

375
6,200
210
2,750
30,000
7,850
300

$

47,685

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

4 ­ 13

P 2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit
Cash
$
4,350
Accounts receivable
1,800
Supplies
8,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
200
Consulting revenue
Rental revenue
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

Credit

$

375
6,200
210
2,750
30,000
7,850
300

$

47,685

1. Close Credit
Balances in
Revenue
Accounts to
Income
Summary.


4 ­ 14

P 2

 Close Credit Balances in
Revenue Accounts to Income Summary
Dr.
Dec. 31

Consulting revenue
Rental revenue
Income summary

Cr.

7,850
300
8,150

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

4 ­ 15

P 2

 Close Credit Balances in
Revenue Accounts to Income Summary
Consulting Revenue
7,850
7,850

Income Summary
8,150

Rental Revenue
300
300

-


4 ­ 16

P 2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit
Cash

$
4,350
Accounts receivable
1,800
Supplies
8,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
200
Consulting revenue
Rental revenue
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

Credit

$

375
6,200
210
2,750
30,000
7,850
300

$

47,685

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


4 ­ 17

P 2

 Close Debit Balances in Expense
Accounts to Income Summary
Dec. 31 Income summary
Depreciation expense-Equipment
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense

Dr.
4,365

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

Cr.
375
1,610
100
1,000
1,050
230


4 ­ 18

P 2

 Close Debit Balances in Expense
Accounts to Income Summary

Depreciation
Expense- Eq.
375
375
    
-

Rent Expense
1,000
1,000
    
-

Salaries Expense
1,610
1,610
    
-

Supplies Expense
1,050
1,050
    
-

Insurance Expense
100

100
    
-

Utilities Expense
230
230
    
-

Income Summary
4,365
8,150

    

3,785

Net Income


4 ­ 19

P 2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit
Cash

$
4,350
Accounts receivable
1,800
Supplies
8,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
200
Consulting revenue
Rental revenue
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

Credit

$

375
6,200
210
2,750
30,000
7,850
300

$

47,685

3. Close Income
Summary to
Owner’s Capital.


4 ­ 20

P 2

 CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL
Dec. 31 Income summary
C. Taylor, Capital

Dr.
3,785

Cr.
3,785

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


4 ­ 21

P 2

 CLOSE INCOME SUMMARY
TO OWNER’S CAPITAL

C. Taylor, Capital
30,000
3,785
33,785

Income Summary
4,365
8,150
3,785

-


4 ­ 22

P 2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit
Cash
$
4,350
Accounts receivable
1,800
Supplies
8,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
200
Consulting revenue

Rental revenue
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

Credit

$

375
6,200
210
2,750
30,000
7,850
300

$

47,685

4. Close
Withdrawals
Account to
Owner’s
Capital.


4 ­ 23

P 2

 CLOSE WITHDRAWALS ACCOUNT
TO OWNER’S CAPITAL

Dec. 31 C. Taylor, Capital
C. Taylor, Withdrawals

Dr.
200

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

Cr.
200


4 ­ 24

P 2

 CLOSE WITHDRAWALS ACCOUNT
TO OWNER’S CAPITAL
C. Taylor,
Withdrawals
200
200

-

C. Taylor, Capital
200
30,000
3,785
33,585


4 ­ 25

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.