Basics of Accounting Cycle, Adjusting Enteries, Closing Process, Net Profit Margin Ratio

7/29/2019 Basics of Accounting Cycle, Adjusting Enteries, Closing Process, Net Profit Margin Ratio.

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Chapter 4

The Accounting Cycle

Adjusting Entries

Closing Process Net Profit Margin Ratio


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The Accounting Cycle

Accounting cycle process

Records individual transactions

Produces the four basic financial statements

Gets the general ledger ready for the next

accounting period

Made up of eight steps


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Accounting Cycle Steps

Record journal entries from transactions

Post journal entries to the general ledger

Prepare unadjusted trial balance

Adjust the accounts

Prepare an adjusted trial balance

Prepare the financial statements

Close the temporary accounts

Prepare a post-closing trial balance


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Unadjusted Trial Balance

A listing of individualaccounts, usually in financial

statement order.

Ending debit or creditbalances are listed in two

separate columns.

Total debit account balances

shouldequal total creditaccount balances.


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Matrix, Inc.


At December 31, 2006

Description Debit Credit

Cash 3,900$

Accounts receivable 4,985

Inventory 3,300

Equipment 4,800Accumulated depreciation - Equip. 1,440$

Furniture and fixtures 6,600

Accumulated depreciation - furn. & fix. 2,200

Accounts payable 2,985

Notes payable 4,000

Common stock 10,000

Retained earnings, 12/31/05 1,760

Sales revenue 35,000

Cost of goods sold 27,500

Operating expenses 6,300

Totals 57,385$ 57,385$

Unadjusted Trial Balance Example


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Problem

Following unadjusted account balances for Delilahs Deluxe Doggie Dayspa:

Delilah's Deluxe Doggie Dayspa


December 31, 2005

Cash 13,500

Accounts Receivable 14,000

Supplies 3,500

Prepaid Rent 24,000

Prepaid Insurance 12,000Notes Receivable (due 3/31/04) 30,000

Equipment 245,000

Accounts Payable 12,500

Unearned Service Revenue 20,000

Notes Payable (due 5/1/07) 100,000

Common Stock 50,000

Dividends 12,000

Service Revenue 367,500

Salary Expense 165,000

Rent Expense 20,000

Income Tax Expense 11,000

Required: Prepare a trial balance in good form.


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The Unadjusted Trial Balance

If total debits do not equal total credits on thetrial balance, errors have occurred . . .

in preparing balanced

journal entries,

in posting the correct dollareffects of a transaction,

or in copying ending balancesfrom the ledger to the

trial balance.


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Adjusting Entries

There are two types of adjustingentries.ACCRUALS

Revenues

earned orexpenses

incurred thathave not been

previouslyrecorded.

DEFERRALS

Receipts of

assets orpayments of

cash in advanceof revenue or

expenserecognition.


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End ofaccounting period.

Cash received. Revenues earned.

Example includes rent received inadvance (an unearned revenue).

Deferred Revenue


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Cash receivedRevenues earned

Example includes interest earnedduring the period (accrued revenue).

Accrued Revenue


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Cash paid.

Examples include prepaid rent, advertising,and insurance.

Deferred Expense

Expense incurred.


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Cash paid.

Examples include salaries and wagesincurred but not recorded.

Accrued Expense

Expense incurred.


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Certain circumstances require

adjusting entries to record

accounting estimates. Examples include . . .

Depreciation

Bad debts

Income taxes

$$$

Adjustments Involving

Estimates


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Depreciation Adjustment

The accountingconcept of

depreciation involvesthe systematicandrationalallocation of

the cost of a long-lived asset over

multiple accountingperiods it is used togenerate revenue.

This is a cost

allocation concept,

not a valuation

concept.


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Prepare the Adjusted Trial

Balance After weve completed and posted the

adjusting entries to the general ledger

accounts, we prepare another trial balance

We confirm again that the debit balances equal

the credit balances

Basis for preparing the financial statements


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Prepare adjusting entries from the following information:

a) An inventory of supplies reveals that $1,300 of supplies are on hand. (deferred expense/ asset)

b) Delilahs has a 6 day work week, Monday through Saturday. (accrued expense/ liability)

Employees are paid every Friday. 12/31 is on a Tuesday. Delilahs weekly payroll is $3,600.

c) The equipment was purchased 1/1/05. (deferred expense/ asset)It has an expected life of 10 years and no salvage value.

d) The note receivable was issued by a client on 10/31/05. (accrued revenue/ asset)The annual interest rate is 7%.

e) The note payable was issued 4/1/05. The annual interest rate is 5%. (accrued expense/ liability)

f) Unearned service revenue represents gift certificates purchased. (Deferred revenue/ liability)At year end, $8,000 of the certificates have been used.

g) Prepaid insurance represents a payment of $12,000 for 2 years coverage. (deferred expense/ asset)The payment was made 7/1/05.

h) Prepaid rent represents a payment of $24,000 for 12 months rent. (deferred expense/ asset)

The payment was made 9/1/05.

Problem


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Post these journal entries to the t-accounts and prepare an adjusted trial balance.

Problem


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Prepare the Financial Statements

Goal of the whole process

Financial statements that reflect the financialcondition and transactions of the company

Income Statement

Statement of Changes of Owners Equity

Balance Sheet

Statement of Cash Flows


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From the adjusted trial balance for Delilahs, prepare an income statement,

statement of stockholders equity, & classified balance sheet.

For computing the EPS, assume 10,000 shares are outstanding.

Problem


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Closing the Books

Even though the

balance sheet

account balances

carry forward

from period to

period, the

income statementaccounts do not.

Closing entries:

1. Transfer net income

(or loss) to Retained

Earnings.

2. Establish a zero

balance in each of the

temporaryaccounts tostart the next

accounting period.


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Closing the Books

The following accounts are calledtemporary or nominal accounts and

are closed at the end of the period .

. . Revenues. Expenses.

Gains.

Losses.

Dividends declared.


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Closing the Books

Assets, liabilities, and stockholdersequity are permanent, or real

accounts, and are neverclosed.

Assets.

Liabilities.

Stockholders

Equity.


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Closing the Books

Two steps are used in

the closing process .

. .1. Close revenues and

gains to Retained

Earnings.2. Close expenses and

losses to Retained

Earnings.


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Post-Closing Trial Balance

Prepared after the temporary accounts are

closed

Serves as a final check that debits = credits

Confirms that we start the next accounting

period with only permanent accounts


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Post-Closing Trial BalanceMatrix, Inc.

Adjusted Trial BalanceAt December 31, 2004


Cash 3,900$


Inventory 3,300





Notes payable 4,000

Common stock 10,000

Retained earnings, 1/1/04 1,760Sales revenue 35,000

Cost of goods sold 27,500

Operating expenses 6,300

Totals 57,385$ 57,385$


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Post-Closing Trial BalanceMatrix, Inc.

Post-Closing Trial BalanceAt December 31, 2004


Cash 3,900$


Inventory 3,300





Notes payable 4,000

Common stock 10,000

Retained earnings, 12/31/04 2,960Sales revenue -

Cost of goods sold -

Operating expenses -

Totals 23,585$ 23,585$


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Key Ratio Analysis

Net Profit Margin indicates how effectivemanagement is at generating profit on every

dollar of sales.

Net IncomeNet Sales

Net ProfitMargin

=


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Prepare closing entries and post-closing trial balance for Delilahs.

Prepare net profit margin for Delilahs.

Problem

Documents

Basics of Accounting Cycle, Adjusting Enteries, Closing Process, Net Profit Margin Ratio