Download ppt - Lesson 5 Completing the Accounting Cycle

Lesson 5Completing the Accounting Cycle

Task Team ofFUNDAMETAL 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.

• Describe the closing process and explain why temporary accounts are closed each period.

• Prepare closing entries.

2

Accounting Cycle

3

1.Analyze 1.Analyze TransactionsTransactions

1.Analyze 1.Analyze TransactionsTransactions

2.Journalize2.Journalize2.Journalize2.Journalize 3. Post 3. Post 3. Post 3. Post

4. Unadjusted 4. Unadjusted trial balancetrial balance

4. Unadjusted 4. Unadjusted trial balancetrial balance

5. Adjust5. Adjust 5. Adjust5. Adjust

6. Adjusted 6. Adjusted trial balancetrial balance

6. Adjusted 6. Adjusted trial balancetrial balance

7. Prepare 7. Prepare finance finance

statementsstatements

7. Prepare 7. Prepare finance finance

statementsstatements

8.Close8.Close 8.Close8.Close Start the Start the

next cyclenext 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

4

Let’s start Let’s start from the from the

worksheetworksheet

What are on the Worksheet?

• A worksheet includes following columns:

– Unadjusted trial balance.– Adjusting entries– Adjusted trial balance.– income statement– Balance sheet

• Worksheet can be used to simplify the preparation of financial statements.

5

A Blank Worksheet

6

Steps in preparation of the worksheet

7

AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Cash 171000

Short-term investment 100000

Accounts Receivable 36000

Interest receivable

Prepaid Expense 20000

Inventory 20000

Plant and Equipmemt 250000

Accumulated Depreciation

Accounts Payable 50000

Wages payable

Unearned Revenue 50000

Paid Capital 500000

Sales Revenue 36000

Interest Revenue

Cost of Sales 30000

Operating expenses 9000

total 636000 636000

Smith Inc.Work Sheet

For Year ended Dec.31 2012

Balance Sheet andStatement of Owner's

Equity

Unadjusted TrialBalance

Adjustments Adjusted Trial

Balance Income Statement


Cash 171000



Interest receivable

Prepaid Expense 20000

Inventory 20000


Accumulated Depreciation


Wages payable

Unearned Revenue 50000

Paid Capital 500000

Sales Revenue 36000

Interest Revenue

Cost of Sales 30000

Operating expenses 9000

total 636000 636000




Equity




Step 1:Step 1:Enter the Enter the

accounts and accounts and unadjusted unadjusted trial balancetrial balance

Step 1:Step 1:Enter the Enter the

accounts and accounts and unadjusted unadjusted trial balancetrial balance


8


Cash 171000



Interest receivable 2916.67

Prepaid Expense 20000 10000

Inventory 20000


Accumulated Depreciation 2600


Wages payable 35000

Unearned Revenue 50000 25000.00

Paid Capital 500000

Sales Revenue 36000 25000

Interest Revenue 2916.67

Cost of Sales 30000

Operating expenses 9000 47600.00

total 636000 636000 75516.67 75516.67




Equity





Cash 171000



Interest receivable 2916.67

Prepaid Expense 20000 10000

Inventory 20000


Accumulated Depreciation 2600


Wages payable 35000

Unearned Revenue 50000 25000.00

Paid Capital 500000

Sales Revenue 36000 25000

Interest Revenue 2916.67

Cost of Sales 30000

Operating expenses 9000 47600.00

total 636000 636000 75516.67 75516.67




Equity




Step2:Step2:Entry the Entry the adjusting adjusting entries’entries’

Step2:Step2:Entry the Entry the adjusting adjusting entries’entries’



Cash 171000 171000Short-term investment 100000 100000Accounts Receivable 36000 36000

Interest receivable 2916.67 2916. 67

Prepaid Expense 20000 10000 10000

Inventory 20000 20000

Plant and Equipmemt 250000 250000

Accumulated Depreciation 2600 2600

Accounts Payable 50000 50000

Wages payable 35000 35000

Unearned Revenue 50000 25000.00 25000. 00

Paid Capital 500000 500000

Sales Revenue 36000 25000 61000

Interest Revenue 2916.67 2916. 67

Cost of Sales 30000 30000

Operating expenses 9000 47600.00 56600. 00

total 636000 636000 75516.67 75516.67 676516. 67 676516. 67


For Year ended Dec.31 2012 Balance Sheet and

Statement of Owner's Unadjusted Trial

BalanceAdjustments

Adjusted TrialBalance

Income StatementAccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Cash 171000 171000Short-term investment 100000 100000Accounts Receivable 36000 36000










Sales Revenue 36000 25000 61000

Interest Revenue 2916.67 2916. 67

Cost of Sales 30000 30000

Operating expenses 9000 47600.00 56600. 00

total 636000 636000 75516.67 75516.67 676516. 67 676516. 67




BalanceAdjustments


Income Statement

9

Step3:Step3:Entry the Entry the adjusted adjusted

trial balancetrial balance

Step3:Step3:Entry the Entry the adjusted adjusted

trial balancetrial balance



Cash 171000 171000

Short-term investment 100000 100000

Accounts Receivable 36000 36000










Sales Revenue 36000 25000 61000 61,000

Interest Revenue 2916.67 2916. 67 2,917

Cost of Sales 30000 30000 30,000

Operating expenses 9000 47600.00 56600. 00 56,600

total 636000 636000 75516.67 75516.67 676516. 67 676516. 67 86,600 63,917

Net Income (22,683)




BalanceAdjustments


Income StatementAccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Cash 171000 171000

Short-term investment 100000 100000

Accounts Receivable 36000 36000










Sales Revenue 36000 25000 61000 61,000

Interest Revenue 2916.67 2916. 67 2,917

Cost of Sales 30000 30000 30,000

Operating expenses 9000 47600.00 56600. 00 56,600

total 636000 636000 75516.67 75516.67 676516. 67 676516. 67 86,600 63,917

Net Income (22,683)




BalanceAdjustments


Income Statement

10

Step4:Step4:Entry Adjusted Entry Adjusted

Amounts to Amounts to Income Statement Income Statement

ColumnsColumns


Amounts to Amounts to Income Statement Income Statement

ColumnsColumns


11


Amounts to Amounts to Balance sheet Balance sheet

ColumnsColumns


Amounts to Amounts to Balance sheet Balance sheet

ColumnsColumns

Preparing the Financial Statements

• Financial Statements can be prepared easily using the completed worksheet.

• The nature and the preparation of Financial Statement will be discussed in lesson 9

12

Closing Process

• The 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.

13

Temporary and Permanent Accounts

• Temporary 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.

14

15

Income Income SummarySummary

Rev

enu

esR

even

ues

Exp

ense

sE

xpen

ses

The closing process The closing process applies only to applies only to

temporary accounts.temporary accounts.

The closing process The closing process applies only to applies only to

temporary accounts.temporary accounts.

Temporary Accounts

Permanent Accounts

16

AssetsAssets

LiabilitiesLiabilitiesOwner’s Owner’s CapitalCapital

The closing process does The closing process does not apply to permanent not apply to permanent

accounts.accounts.

The closing process does The closing process does not apply to permanent not apply to permanent

accounts.accounts.

Steps in the Closing Process

• Set an Income Summary account.• Close Revenue accounts to Income Summary.• Close Expense accounts to Income Summary.• Close Income Summary account to Retained

Earnings

17

Close Revenue Accounts to Income Summary

18

Income Summary63,917

63,917

Income Summary63,917

63,917

…61,000 61,000

Sales Revenue…

61,000 61,000

Sales Revenue

2,917 2,917

-

Interest Revenue2,917 2,917

-

Interest RevenueThe entries :

Dr. Sales Revenue 61000 Interest Revenue 2917 Cr. Income Summary 63917

The entries :

Dr. Sales Revenue 61000 Interest Revenue 2917 Cr. Income Summary 63917

Close Expense Accounts to Income Summary

19

…30,000 30,000

-

Cost of Sales…

30,000 30,000 -

Cost of Sales

Income Summary86,600 63,917

(22,683)


(22,683)

The entries:Dr. Income 86600 Cr. Cost of Sales 30000 Operating Expense 56600

The entries:Dr. Income 86600 Cr. Cost of Sales 30000 Operating Expense 56600

…56,600 56,600

-

Operating Expense…

56,600 56,600 -

Operating Expense

Close Income Summary to Retained Earnings

20

Retained Earnings…

(22,683)

Retained Earnings…

(22,683)


(22,683)

(22,683) -


(22,683)

(22,683) - The Entries:

Dr. Income Summary 22683 Cr. Retained Earnings 22683

The Entries:

Dr. Income Summary 22683 Cr. Retained Earnings 22683

The Closing Entries

• Close revenue accounts to Income Summary.

The entries are: Dr. All Revenue Cr. Income Summary

21

The Closing Entries

• Close expense accounts to Income Summary.

The entries are:Dr. Income Summary Cr. All Expenses

22

The Closing Entries

• Close Income Summary account to Retained Earnings.

– If there is a profit, the entries are:Dr. Income Summary Cr. Retained Earnings

– If there is a loss, the entries are:Dr. Retained Earnings Cr. Income Summary

23

Post-Closing Trial Balance

• Post-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

24


25

Account

Dr Cr

Cash 171000Short-term investment 100000Accounts Receivable 36000Interest receivable 2916. 67Prepaid Expense 10000Inventory 20000Plant and Equipmemt 250000Accumulated Depreciation 2600Accounts Payable 50000Wages payable 35000Unearned Revenue 25000Paid Capital 500000Retained Earnings (22683)Sales Revenue

Interest Revenue

Cost of Sales

Operating expenses

total 589,917 589,917

Smith Inc.



Balance SheetAccount

Dr Cr

Cash 171000Short-term investment 100000Accounts Receivable 36000Interest receivable 2916. 67Prepaid Expense 10000Inventory 20000Plant and Equipmemt 250000Accumulated Depreciation 2600Accounts Payable 50000Wages payable 35000Unearned Revenue 25000Paid Capital 500000Retained Earnings (22683)Sales Revenue

Interest Revenue

Cost of Sales

Operating expenses

total 589,917 589,917

Smith Inc.



Balance Sheet

The End of Lesson 5