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Chapter 4

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4-1

Completing the Accounting Cycle

Chapter 4
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

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.


4-2

Benefits of a Work Sheet


P1

Aids the Assists in


preparation of planning and
financial organizing an
statements. audit.

Helps in
Reduces Not a preparing
possibility of required interim financial
errors.
report. statements.
Shows the
Links accounts
effects of
and their
proposed
adjustments.
transactions.
4-3
FastForward
P1 Worksheet
For the Month Ended December 31, 2013
4-4

This weekend
• Please complete Problem 4-5A & 4-4A and check
the answer provided on Connect. Be prepared for
such a problem on your exam.
• Also, do not forget exercise 3-1,3-2, 3-3, 3-4 and
problems 3-1A, 3-2A, 3-3A, and 3-6A
• See your syllabus for additional problems and
exercises (Practice, practice, and practice some
more)
4-5

CLOSING ENTRIES
4-6

The Accounting Cycle


4-7

C1

Recording Closing Entries


1. Resets revenue,
expense, and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the period.
Record and post
2. Helps summarize a closing entries.
period’s revenues and
expenses in the
Income Summary Prepare post-closing
account. trial balance.
4-8

C1 Temporary and
Permanent Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The closing process
applies only to
temporary accounts.
4-9

P2

Recording Closing Entries


 Close Credit Balances in
Revenue Accounts to Income Let’s see how
Summary. the closing
 Close Debit Balances in process works!
Expense accounts to Income
Summary.
 Close Income Summary
account to Owner’s Capital.
 Close Withdrawals to Owner’s
Capital.
4 - 10

IMPORTANT
 Do NOT use DEBITS and CREDITS columns when
you are preparing Financial Statements
 Use the Specific Account Names given on the Trial
Balance; do NOT make up your own, unless it is a
new account
 No short forms whatsoever allowed in any
assignments or exams
4 - 11

Exercise 4-2A
CRUZ COMPANY
Post-Closing Trial Balance
December 31, 2013
Debit Credit
Cash ................................................................ $19,000
Supplies ......................................................... 13,000
Prepaid insurance ......................................... 3,000
Equipment ...................................................... 24,000
Accumulated depreciation–Equipment ....... $ 7,500
T. Cruz, Capital* ............................................. 51,500
Totals .............................................................. $59,000 $59,000
4 - 12

The Classified Balance


Sheet
ASSETS
◦ Current Assets - ≤ 1 year or the
operating cycle, whichever is longer
◦ Non-Current Assets - >1 year or
the operating cycle, whichever is
longer
 Plant Assets
 Long-Term Investments
 Intangible Assets
4 - 13

The Classified Balance


Sheet
LIABILITIES
◦ Current Liabilities - ≤ 1 year or
the operating cycle, whichever is
longer
◦ Long-Term Liabilities - >1 year or
the operating cycle, whichever is
longer

EQUITY
◦ Capital Account
4 - 14

The Classified Balance


Sheet
ASSETS
◦ Current Assets
◦ Non-Current Assets
LIABILITIES
◦ Current Liabilities
◦ Long-Term Liabilities
EQUITY
◦ Capital Account
Thoroughly read Chapter 4 (it is only about 10 pages long). Pay
great attention to the classified balance sheet (Pages149 to 151)
4 - 15

This weekend
Please complete Problem 4-5A & 4-4A and check
the answer provided on Connect. Be prepared for
such a problem on your exam.
Also, do not forget exercise 3-1,3-2, 3-3, 3-4 and
problems 3-1A, 3-2A, 3-3A, and 3-6A
See your syllabus for additional problems and
exercises (Practice, practice, and practice some
more)
4 - 16

Exercise 4-4
WILSON TRUCKING COMPANY
Income Statement
For Year Ended December 31, 2013

Trucking fees earned ................................................ $130,000


Expenses
Depreciation expense—Trucks ........................... $23,500
Salaries expense .................................................. 61,000
Office supplies expense ...................................... 8,000
Repairs expense—Trucks ................................... 12,000
Total expenses ..................................................... 104,500
Net income ................................................................. $ 25,500

WILSON TRUCKING COMPANY


Statement of Owner’s Equity
For Year Ended December 31, 2013

K. Wilson, Capital, December 31, 2012 ................... $175,000


Add: Net income ...................................................... 25,500
200,500
Less: Withdrawals .................................................... (20,000)
K. Wilson, Capital, December 31, 2013 ................... $180,500
4 - 17

Exercise 4-5
WILSON TRUCKING COMPANY
Balance Sheet
December 31, 2013
Assets
CURRENT ASSETS
Cash ................................................................ $ 8,000
Accounts receivable ..................................... 17,500
Office supplies ............................................... 3,000
Total current assets ...................................... 28,500
NON-CURRENT ASSETS
Trucks ............................................................. $172,000
Accumulated depreciation-Trucks .............. (36,000) 136,000
Land ................................................................ 85,000
Total Non-Current Assets ............................. 221,000
Total assets ...................................................... $249,500
Liabilities
CURRENT LIABILITIES
Accounts payable .......................................... $ 12,000
Interest payable ............................................. 4,000
Total current liabilities .................................. 16,000
Long-term notes payable ................................ 53,000
Total liabilities ................................................. 69,000
Equity
*
K. Wilson, Capital ........................................... 180,500
Total liabilities and equity .............................. $249,500
4 - 36

C3

Current assets are expected to be sold,


collected, or used within one year or the
company’s operating cycle.
4 - 37

C3

Long-term investments are expected to be held for


more than one year or the operating cycle.
4 - 38

C3

Plant assets are tangible long-lived assets used to


produce or sell products and services.
4 - 39

C3

Intangible assets are long-term resources used to


produce or sell products and services and that lack
physical form.
4 - 40

C3

Current liabilities are obligations due within the longer of


one year or the company’s operating cycle.
4 - 41

C3

Long-term liabilities are obligations not due within


the longer of one year or the company’s operating
cycle.
4 - 42

C3

Equity is the owner’s claim on the assets.


4 - 43

Global View
The definition of an asset is similar under U.S. GAAP and IFRS and
involves three basic criteria:
(1) the company owns or controls the right to use the item,
(2) the right arises from a past transaction or event, and
(3) the item can be reliably measured.
Both systems define the initial asset value as historical cost for
nearly all assets.

The definition of a liability is similar under U.S. GAAP and IFRS and
involves three basic criteria:
(1) the item is a present obligation requiring a probable future resource
outlay,
(2) the obligation arises from a past transaction or event, and
(3) the obligation can be reliably measured.
4 - 44

A1

Current Ratio
Helps assess the company’s ability to pay its
debts in the near future

Current Assets
Current Ratio =
Current Liabilities

Limited Brands, Inc.


4 - 45

P4

Appendix 4A – Reversing Entries


Reversing entries are optional. They are recorded in
response to accrued assets and accrued liabilities that
were created by adjusting entries at the end of a
reporting period. The purpose of reversing entries is to
simplify a company’s recordkeeping.

Let’s see how the accounting for our payroll


accrual will be handled with and without
reversing entries.
4 - 46

P4
4 - 47

P4

Without Reversing Entries With Reversing Entries


4 - 48

End of Chapter 4

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