Lesson 5 Completing the Accounting Cycle

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Lesson 5 Completing the Accounting Cycle. Task Team of FUNDAMETAL ACCOUNTING School of Business, Sun Yat-sen University. Outline. Describe the preparation of adjusted trial balance Describe and prepare a worksheet and describe its usefulness. - PowerPoint PPT Presentation

Text of Lesson 5 Completing the Accounting Cycle

  • Lesson 5Completing the Accounting Cycle Task Team ofFUNDAMETAL ACCOUNTINGSchool of Business, Sun Yat-sen University

  • OutlineDescribe the preparation of adjusted trial balance Describe and prepare a worksheet and describe its usefulness.Describe the closing process and explain why temporary accounts are closed each period.Prepare closing entries.*

  • Accounting Cycle *

  • What We Have Done?So far we have discussed the following steps in the accounting cycle:Analyzing Recording Posting Unadjusted trial balance Adjusting Adjusted trial balance

    *Lets start from the worksheet

  • What are on the Worksheet? A worksheet includes following columns:Unadjusted trial balance.Adjusting entriesAdjusted trial balance.income statementBalance sheetWorksheet can be used to simplify the preparation of financial statements. *

  • A Blank Worksheet*

    Sheet1

    Smith Inc.

    Work Sheet

    For Year ended Dec.31 2012

    AccountUnadjusted Trial BalanceAdjustmentsAdjusted Trial BalanceIncome StatementBalance Sheet and Statement of Owner's Equity

    DrCrDrCrDrCrDrCrDrCr

    Sheet2

    Sheet3

  • Steps in preparation of the worksheet*Step 1:Enter the accounts and unadjusted trial balance

    Sheet1

    Smith Inc.

    Work Sheet

    For Year ended Dec.31 2012

    AccountUnadjusted Trial BalanceAdjustmentsAdjusted Trial BalanceIncome StatementBalance Sheet and Statement of Owner's Equity

    DrCrDrCrDrCrDrCrDrCr

    Cash171000

    Short-term investment100000

    Accounts Receivable36000

    Interest receivable

    Prepaid Expense20000

    Inventory20000

    Plant and Equipmemt250000

    Accumulated Depreciation

    Accounts Payable50000

    Wages payable

    Unearned Revenue50000

    Paid Capital500000

    Sales Revenue36000

    Interest Revenue

    Cost of Sales30000

    Operating expenses9000

    total636000636000

    Sheet2

    Sheet3

  • Steps in preparation of the worksheet*Step2:Entry the adjusting entries

    Sheet1

    Smith Inc.

    Work Sheet

    For Year ended Dec.31 2012

    AccountUnadjusted Trial BalanceAdjustmentsAdjusted Trial BalanceIncome StatementBalance Sheet and Statement of Owner's Equity

    DrCrDrCrDrCrDrCrDrCr

    Cash171000

    Short-term investment100000

    Accounts Receivable36000

    Interest receivable2916.67

    Prepaid Expense2000010000

    Inventory20000

    Plant and Equipmemt250000

    Accumulated Depreciation2600

    Accounts Payable50000

    Wages payable35000

    Unearned Revenue5000025000.00

    Paid Capital500000

    Sales Revenue3600025000

    Interest Revenue2916.67

    Cost of Sales30000

    Operating expenses900047600.00

    total63600063600075516.6775516.67

    Sheet2

    Sheet3

  • Steps in preparation of the worksheet*Step3:Entry the adjusted trial balance

    Sheet1

    Smith Inc.

    Work Sheet

    For Year ended Dec.31 2012

    AccountUnadjusted Trial BalanceAdjustmentsAdjusted Trial BalanceIncome StatementBalance Sheet and Statement of Owner's Equity

    DrCrDrCrDrCrDrCrDrCr

    Cash171000171000

    Short-term investment100000100000

    Accounts Receivable3600036000

    Interest receivable2916.672916.67

    Prepaid Expense200001000010000

    Inventory2000020000

    Plant and Equipmemt250000250000

    Accumulated Depreciation26002600

    Accounts Payable5000050000

    Wages payable3500035000

    Unearned Revenue5000025000.0025000.00

    Paid Capital500000500000

    Sales Revenue360002500061000

    Interest Revenue2916.672916.67

    Cost of Sales3000030000

    Operating expenses900047600.0056600.00

    total63600063600075516.6775516.67676516.67676516.67

    Sheet2

    Sheet3

  • Steps in preparation of the worksheet*Step4:Entry Adjusted Amounts to Income Statement Columns

    Sheet1

    Smith Inc.

    Work Sheet

    For Year ended Dec.31 2012

    AccountUnadjusted Trial BalanceAdjustmentsAdjusted Trial BalanceIncome StatementBalance Sheet and Statement of Owner's Equity

    DrCrDrCrDrCrDrCrDrCr

    Cash171000171000

    Short-term investment100000100000

    Accounts Receivable3600036000

    Interest receivable2916.672916.67

    Prepaid Expense200001000010000

    Inventory2000020000

    Plant and Equipmemt250000250000

    Accumulated Depreciation26002600

    Accounts Payable5000050000

    Wages payable3500035000

    Unearned Revenue5000025000.0025000.00

    Paid Capital500000500000

    Sales Revenue36000250006100061,000

    Interest Revenue2916.672916.672,917

    Cost of Sales300003000030,000

    Operating expenses900047600.0056600.0056,600

    total63600063600075516.6775516.67676516.67676516.6786,60063,917

    Net Income(22,683)

    Sheet2

    Sheet3

  • Steps in preparation of the worksheet*Step5:Entry Adjusted Amounts to Balance sheet Columns

    Sheet1

    Smith Inc.

    Work Sheet

    For Year ended Dec.31 2012

    AccountUnadjusted Trial BalanceAdjustmentsAdjusted Trial BalanceIncome StatementBalance Sheet

    DrCrDrCrDrCrDrCrDrCr

    Cash171000171000171000

    Short-term investment100000100000100000

    Accounts Receivable360003600036000

    Interest receivable2916.672916.672916.67

    Prepaid Expense20000100001000010000

    Inventory200002000020000

    Plant and Equipmemt250000250000250000

    Accumulated Depreciation26002600-2600

    Accounts Payable500005000050000

    Wages payable350003500035000

    Unearned Revenue5000025000.0025000.0025000

    Paid Capital500000500000500000

    Retained Earnings(22683)

    Sales Revenue36000250006100061,000

    Interest Revenue2916.672916.672,917

    Cost of Sales300003000030,000

    Operating expenses900047600.0056600.0056,600

    total63600063600075516.6775516.67676516.67676516.6786,60063,917

    Net Income(22,683)

    63,91763,917587,317587,317

    Sheet2

    Sheet3

  • Preparing the Financial StatementsFinancial Statements can be prepared easily using the completed worksheet.The nature and the preparation of Financial Statement will be discussed in lesson 9*

  • Closing ProcessThe closing process occurs at the end of an accounting period after financial statements are prepared.Reasons for closing entries:Resets revenue and expense account balances to zero at the end of the period.Updates the retained earnings account to reflect net income and distributions.

    *

  • Temporary and Permanent AccountsTemporary accounts are also called nominal accounts. They are opened at the beginning of a period, used to record events for that period and closed at the end of the period. They accumulate data related to one accounting period only.

    *

  • *Temporary Accounts

  • Permanent Accounts*

  • Steps in the Closing ProcessSet an Income Summary account.Close Revenue accounts to Income Summary.Close Expense accounts to Income Summary.Close Income Summary account to Retained Earnings*

  • Close Revenue Accounts to Income Summary*

  • Close Expense Accounts to Income Summary*

  • Close Income Summary to Retained Earnings*

  • The Closing EntriesClose revenue accounts to Income Summary. The entries are: Dr. All Revenue Cr. Income Summary*

  • The Closing EntriesClose expense accounts to Income Summary. The entries are: Dr. Income Summary Cr. All Expenses*

  • The Closing EntriesClose Income Summary account to Retained Earnings.If there is a profit, the entries are: Dr. Income Summary Cr. Retained EarningsIf there is a loss, the entries are: Dr. Retained Earnings Cr. Income Summary

    *

  • Post-Closing Trial BalancePost-Closing Trial Balance is a list of balances for all accounts that not closed. The purpose of a post-closing trial balance is to verifies that:Total debits = total credits for permanent accounts.All temporary accounts have zero balances*

  • Post-Closing Trial Balance*

    Sheet1

    Smith Inc.

    Post-Closing Trial Balance

    For Year ended Dec.31 2012

    AccountBalance Sheet

    DrCr

    Cash171000

    Short-term investment100000

    Accounts Receivable36000

    Interest receivable2916.67

    Prepaid Expense10000

    Inventory20000

    Plant and Equipmemt250000

    Accumulated Depreciation2600

    Accounts Payable50000

    Wages payable35000

    Unearned Revenue25000

    Paid Capital500000

    Retained Earnings(22683)

    Sales Revenue

    Interest Revenue

    Cost of Sales

    Operating expenses

    total589,917589,917

    Sheet2

    Sheet3

  • The End of Lesson 5

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