# College Accounting Notes - Chapter 4

Chapter Four                                                                     Page134

CompletingThe Accounting Cycle

Objective: To have studentsdemonstrate their knowledge in completing the accounting cycle by preparing aworksheet, extending the accounts, preparing the F/S and calculating N/I. Thenthey will close out the temporary accounts and prepare a post close trialbalance and classified balance sheet.

Topics to be covered:

Completing the AccountingCycle

-      Worksheet

o  Benefits

o  Parts

o  Use

-      Closing Process

o  Why and When

o  PermanentAccounts

o  Temporary Accounts

o  Closing J/E’s

o  Post-Close TrialBalance

-      Accounting Cycle

o  Description

o  Review

-      ClassifiedBalance Sheet

o  Structure

o  Categories

Worksheet

-      Often referredto as working papers

-      Not a formalreport

-      Helps inpreparation of F/S

-      Reduces errors

-      Helps organizeinformation to assist in audits

-      Prepare interimF/S

-      Shows effects of“what if” transactions

How the 10 column Worksheetworks and its parts

1.   Enter theunadjusted T/B from the G/L

2.   Enteradjustments (always at least 1 Dr. & 1 Cr. with reference number)

4.   Sort balancesfrom each account in order to extend the new balance into either the I/S orB/S.

5.   Total eachcolumn making sure the Dr. =Cr. for each column category.

6.   Compute the N/Ior N/L on the bottom of the I/S columns.

7.   Prepare formalF/S

(seethe transparencies in the book page 138-139)

Closingentries and Procedures

Theseare prepared after the reports have been finalized and the accounting period iscomplete.

Theyprepare the accounts for the next period:

-      First youidentify the accounts needed for closing (all temporary, I/S, accounts andselected permanent, B/S, accounts)

-      Journalize theadjustments from the worksheet

-      Record and postclosing entries into the G/L

-      Prepare aPost-Close Trial Balance.  Thisshould only have permanent accounts and their balances.  ALL temporary accounts will have a zerobalance and not be reported on the adjusted T/B.

Temporary accounts relate toone accounting period. All temporary accounts, accounts used in the incomestatement beginning with the numbers 4, 5, 6, 7, & 9, must be closed out tothe balance sheet using the temporary equity account call “Income Summary”.When done, all revenue and expense accounts will have a zero balance.

Permanent accounts relate toone or more future accounting periods. Permanent accounts, or real accounts,are all the accounts used on the B/S which include; assets, liabilities, andowners capital.

NewAccount in equity section that is a temporary holding account is called IncomeSummary.  This account is alsoknown as a mini income statement as the total revenue balance and total expensebalance are held here before being moved top owners capital.

Processof closing entries:

1. Close all credit balance revenue accounts to Income Summary. Use each account individually but the credit total goes to the Income summary account. ie.:

DrSales

DrFees

Cr.Income Summary

1. Close all debit balance expense accounts to Income Summary.  Use each account individually but the debit total goes to Income Summary.

Dr.Income Summary

Cr. Salary Exp

Cr. Utiity Exp.

3. Close the Income Summary Account out to the Owners Capital accountmaking the Income Summary account balance zero.  The amount that gets transferred is the same amount that isreported on the income statement.

Dr.Income Summary  - this is if youhad N/I

Cr.Owner’s capital

Or

Dr.Owner’s capital

Cr.Income Summary – this is if you had a N/L

1. Close the Owners Withdrawal account, a temporary equity account,  directly to the owners capital account.

Dr.Owners’s Capital

Cr.Owner’s Withdrawal

The last step is to preparea Post-Close Trial Balance to assure that no Temporary account still has abalance and that the G/L, Dr’s. & Cr’s . equal and the G/L is inbalance.  What is left is thebalance sheet and only permanent accounts.

The Accounting Cycle

-TenSteps

1.  Analyze Transactions

2.Journalize

3.Post

7.Prepare Financial Statements

8.Closing Entries

9.Prepare Post-Close Trial Balance

10.Reversing J/E (optional)

Classified Balance Sheet

In an unclassified, orsummary level balance sheet the accounts are broadly classified.

The Classified B/S: (seepage 146)

-      OrganizesAssets, Liabilities, and Equity into sub groups with detail and provides moreinformation to its users.

-      It separatescurrent and long term (long term being for more than one year)

o  Current Assets –are sold or collected or has value within one year.       ie; Cash, A/R

o  Plant Assets –Long lived, depreciable assets. Ie; Auto, Buildings

o  Long Term Assets– Held for more than one year. ie; N/R

o  IntangibleAssets – Long term resources that lack physical properties.    Ie; Contracts, copyrights,goodwill.

o  CurrentLiabilities – obligations that are settled within one year. ie; A/P

o  Long TermLiabilities – Obligations due after one year. ie; N/P

o  Equity – Ownersremaining claim on the assets. Ie; Owners Capital

Current Ratio

-Measures a companiesability to pay back It’s short term obligations:

CurrentAssets/ Current Liabilities

The further away from 1 thebetter it is. This is compared year to year and against the industryaverage.  Less than 1 is a currentliability exceeding a current asset and is not good.

DemoProblem page 148 – 151

QuickStudy, Exercises, and Problems

1.Do QS:       4-2– Accounting Cycle  pg 156

4-3– Classify B/S Items pg 156

Ex.4-1 – Prepare and post Closing J/E pg 157

Ex.4-2 – Closing J/E & Post Close T/B pg 158

Ex.4-8 -  Adjusting J/E’s fromWorksheet pg 159 & 160

2.Do QS:       4-1– Effects of Closing Entries  pg155 & 156

4-5– Compute Capital  pg 156

Ex.4-4 – Prepare F/S  pg 159

Ex.4-5 – Classified B/S pg 159

Problem4-1 Classify B/S accounts by category pg 162

3.Do QS:       4-6 – Applying aworksheet  pg 156

4-7– Worksheet Steps pg 157

Ex.4-10 –Extending to the I/S or B/S pg 160

Ex. 4-11 – I/S& Closing entries pg 161

4.Do Ex:   4-3 – Closing Entriesand Post Close T/B pg 158

Ex.  4-12  Worksheet withAdjustments & Closing entries pg 161

5.Do QS: 4-8 Partial Worksheet pg 157

Problem4-2 Apply Accounting Cycle J/E to Reports pg 162-163

6.Do QS: 4-9 Closing J/E’s pg 157

Finishproblem 4-2

7.Do Ex. 4-5 Worksheet extending pg 160

Problem4-5 Worksheet, Closing J/E, & F/S pg 165

CurrentRatio  QS 4-4 pg 156

Ex. 4-6 pg 159 (use ex 4-4)

EX 4-7 pg  15