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Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia

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Chapter 4

Completing the Accounting

Cycle

Learning Objectives

1. Prepare an accounting work sheet

2. Use the work sheet to complete the accounting cycle

3. Close the revenue, expense and


drawings accounts

4. Classify assets and liabilities as current or non-current

5. Use the current and debt ratios to evaluate a business

Prepare an accountingwork sheet.

Objective 1


work sheet.


The Accounting Cycle

The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.


p


For a new business, begin by setting up ledger accounts.

For an established business, begin with account balances carried over from the


account balances carried over from the previous period.




24,800

2 250



2,250

Prepare the financial statements


Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia See Exhibit 4-1 p153

The Accounting Work Sheet

What is the work sheet?

A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the


move data from the trial balance to the financial statements.

It is an internal document.


AdjustedTrial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesFurniture

12,1001,350

25016,500



Accum. depreciationAccounts payableSalary payableUnearned revenueCapitalDrawingsRevenueSalary expenseSupplies expenseDepreciation expenseTotals

1,000

12,000

42,200

7,5001,2001,1001,5007,200

23,700

42,200


a. Prepaid rent expired, $1,000.

b. Supplies on hand,$400.

c. Depreciation on furniture, $275.

d A d l $950


d. Accrued salary expense, $950.

e. Accrued service revenue, $250.

f. Amount of unearned service revenue that has been earned, $150.

AdjustedTrial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesPrepaid rentFurnitureAccum. depreciationAccounts payableSalary payable

24,8002,250

7003,000

16,500

13,100

a) 250b) 300c) 1000

d) 275

e) 950

24,8002,500

4002,000

16,50027513,100950



Salary payableUnearned revenueCapitalDrawingsRevenue

RentSalary expenseSupplies expenseDepreciation expenseElectricity and gasTotals

3,200

950

40051,800

45031,250

7,000

51,800

f) 150

c) 1000e) 950b) 300d) 275

2,925

e) 950

a) 250f) 150

2,925

3,200

1,0001,900

300275400

53,275

95030031,250

7,400

53,275


Adjusted Income Balance Trial Balance Statement Sheet


24,8002,500

4002,000

16,50027513,100950


24,8002,500

4002,000

16,50027513,100950




3,200

1,0001,900

300275400

53,275

95030031,250

45,875

3,200

49,400

95030031,250

7,400

53,275



24,8002,500

4002,000

16,500


27513,100950




3,200

1,0001,900

300275400

53,275

95030031,250

7,400

53,275

7,400

7,400

1,0001,900

300275400

3,875


Totals

Profit


53,275 7,400

7,400

3,875

3,525

7,400

53,275 45,875

3,525

49,400

49,400

49,400



Use the work sheetto complete the

Objective 2


to complete theaccounting cycle.

The work sheetmay help identify

Actual adjustmentof the accounts

Recording theAdjusting Entries


y p ythe accounts

that needadjustments.

requiresjournalisingand postingthe entries.

Recording theAdjusting Entries

The adjusting entries may be recorded in the journal when they are entered on the work sheet.

Many accountants journalise and post


Many accountants journalise and post the adjusting entries just before they make the closing entries.


Close the revenue,expense and

Objective 3


pdrawings accounts.

Closing the Accounts

Closing the accounts is the end-of-period process that prepares the accounts for recording transactions during the next period.


g p

Revenue and Expense accounts (temporary or nominal accounts) are closed.

Closing Entries

Expenses



RevenuesincreaseOwner’s Equity.

Expenses and

DrawingsdecreaseOwner’s Equity.




Income Summary

A dit



A creditbalance

represents net profit.

A debitbalance

represents net loss.

Revenue

7,000250150

7,4003,875 7,4003,525

(Close RevenueAccount)

(Close ALL ExpenseAccounts)


IncomeSummary


150Salary Exp

1,900950950Rent Exp1000 1000

Supplies Exp300 300

31,2503,525

31,575

(Close IncomeSummary)

Drawings

3,200 3,200

3,200

CapitalAccount

(CloseDrawingsAccount)


Post-closing Trial Balance

The accounting cycle ends with the post-closing trial balance.

The post-closing trial balance is dated as


p gof the end of the period for which the statements have been prepared.

Permanent Accounts

What accounts never close?

– Assets

– Liabilities

O ’ it


– Owner’s equity

Balances of permanent accounts carry over to the next accounting period.

Reversing Entries…(Appendix to Chapter 4) Ease the burden of accounting for

transactions after adjusting and closing entries have been made.

Not all adjusting entries are reversed (usually accrued revenues and


(usually accrued revenues and expenses).

Reversing entries are not required but they save accountants having to remember that part of a payment or receipt in next period relates to the previous period.


Reversing Entries…an example Assume at the end of the month Paula

Lee eTravel still owes its employees $950, with next pay being 5 August for $1,050

Adjusting Entry;D S l E 950


Dr Salary Expense 950Cr Salary Payable 950

Without a reversing entry the next Monday;Dr Salary Payable 950Dr Salary Expense 100

Cr Cash 1,050

Reversing Entries…an example

If a reversing entry were made it would be;Dr Wages Payable 950

Cr Wages Expense 950


g p

Having recorded a reversing entry, next Friday when wages were paid it would be the same as every other pay day;Dr Wages Expense 1,050

Cr Cash 1,050

See Appendix Ch 4 pp.191-92

Classify assets and liabilities

Objective 4


assets and liabilitiesas current or non-current


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


liabilities are classified as either current or non-current to indicate their relative liquidity.

Current Assets

Current assets are cash, or will be converted to cash, in one year (or within the normal business operating cycle).


y )

What are some other examples?

– short-term receivables

– inventory

– prepaid expenses

Current Liabilities

Current liabilities are debts or obligations due within one year.

What are some examples?

accounts and salary payables


– accounts and salary payables

– short-term bills payable

– unearned revenue


Non-current Assets and Liabilities

Non-current assets include all other assets.

– property, equipment and intangibles

N t li biliti ll th d bt


Non-current liabilities are all other debts due in longer than one year (or the entity’s operating cycle).

Debit sideCurrent assets

Non-current assets

Credit sideCurrent liabilities

Non-current liabilities

The Classified Balance Sheet


Listed in the order of

decreasingliquidity

Listed in the order of how

soon theymust be paid

Assets LiabilitiesCurrent assets: Current liabilities:Cash 24,800 Accounts payable 1,200Accounts receivable 2,500 Salary payable 1,100S

XYZ ServicesAs at July 31

The Classified Balance Sheet


Supplies 400 Unearned revenue 1,500Prepaid rent 2,000 Total Current liabilities 3,800Total current assets 29,700

Total liabilities 3,800Non-current assets Owner’s equity

Furniture 16,500 Capital 31,575Less Accum. deprec. (275) 16,225

Total liabilities andTotal assets 45,925 owner’s equity 45,925

See exhibit 4-13 (Woolworths) page 168 of the textbook


Report-style FormatAssets

Account-style Format

Assets = Liabilities

Different Formats of theBalance Sheet


Assets =

Liabilities +

Owner’s Equity

+Owner’s Equity

Use the current and debtratios to evaluate a business

Objective 5


ratios to evaluate a business

Comparative Financial Statements

They enhance the user’s ability to analyse a company’s past performance.

What are two common ratios used to li idit ?


measure liquidity?

1. Current ratio

2. Debt ratio


Current Ratio

This measures the ability of a business to pay its current liabilities with its current assets.


Current ratio = Current assets ÷ Current liabilities

Debt Ratio

It indicates the proportion of a business’s assets that are financed with debt.

It measures their ability to pay both current and long term debt


Debt ratio = Total liabilities ÷ Total assets

and long-term debt.

Trend Analysis

Decision-makers compare various ratios over a period of time.



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PowerPoint to accompany - Learnlinelearnline.cdu.edu.au/units/cma201/lectures/Week 2/Ch04_Horngren... · PowerPoint to accompany Chapter 4 Completing the Accounting Cycle Learning