COMPLETING THE

ACCOUNTING CYCLE

Chapter 4

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
P1
BENEFITS OF A WORK SHEET
Aids the Assists in
preparation of planning and
financial organizing an
statements. audit.

Helps in preparing
Reduces Not a interim ( monntly and
possibility of
errors.
required quarterly) financial
report. statements.
Shows the
Links accounts
effects of
and their
proposed
adjustments.
transactions.
McGraw-Hill/Irwin Slide 2
 FastForward
Work Sheet
For Month Ended December 31, 2009
P1 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable
Salaries payable
6,200
-
First, enter the
Unearned consulting revenue
C. Taylor, Capital
3,000
30,000
unadjusted
C. Taylor, Withdrawals
Consulting revenue
200
5,800
amounts to the
Rental revenue 300
worksheet.
Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300

McGraw-Hill/Irwin Slide 3
 FastForward
Work Sheet
For Month Ended December 31, 2009
P1 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Accum. depr. - Equip. - c 375
Accounts payable 6,200 Next,
Next, enter
enter
Salaries payable
Unearned consulting revenue
-
3,000 d 250
e 210
the
the
C. Taylor, Capital 30,000 adjustments.
adjustments.
C. Taylor, Withdrawals 200
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals 45,300 45,300 3,785 3,785

McGraw-Hill/Irwin Slide 4
 FastForward
Prepare Work Sheet
adjusted trial For Month Ended December 31, 2009
Unadjusted Adjusted
balance. Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350 4,350
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned consulting revenue 3,000 d 250 2,750
C. Taylor, Capital 30,000 - 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685

McGraw-Hill/Irwin Slide 5
 Sort
Sort adjusted
adjusted trial
trial balance
FastForwardbalance
Work Sheet
amounts
amounts to financial
to financial
For Month statements.
statements.
Ended December 31, 2007
P1 Adjusted Income Balance Sheet &
Trial Balance Statement Statement of Equity
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350 4,350
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned consulting revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535

McGraw-Hill/Irwin Slide 6
 Total
Total statement columns,FastForward
statement columns, compute
compute
Work Sheet
income
income or
or loss,
loss, and
and
For balance
balance
Month columns.
columns.
Ended December 31, 2007
P1 Adjusted Income Balance Sheet &
Trial Balance Statement Statement of Equity
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350 4,350
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned consulting revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
Net income 3,785 3,785
8,150 8,150 43,320 43,320

McGraw-Hill/Irwin Slide 7
 P1
PREPARE THE FINANCIAL STATEMENTS
FastForward
Income Statement
For the Month Ended December 31, 2009 Prepare the Income
Revenues:
Consulting revenue $ 7,850
Statement.
Rental revenue 300
Total revenues 8,150
Operating expenses: A work sheet
Depr. expense - Equip. $ 375
Salaries expense 1,610 does not
Insurance expense
Rent expense
100
1,000 substitute for
Supplies expense
Utilities expense
1,050
230
financial
Total expenses
Net income
4,365
$ 3,785
statements.
McGraw-Hill/Irwin Slide 8
 FastForward
P1 Income Statement
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 7,850
Rental revenue 300
Total revenues 8,150
Operating expenses:
Depr. expense - Equip. $ 375
Prepare the Statement
Salaries expense
Insurance expense
1,610
100
of Owner’s Equity.
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Total expenses 4,365 FastForward
Net income $ 3,785 Statement of Owner's Equity
For the Month Ended December 31, 2009

C. Taylor, Capital 12/1/09 $ -0-

Investment by owner 30,000
Add: Net income $ 3,785 33,785
Total 33,785
Less: Withdrawal by owner 200
C. Taylor, Capital 12/31/09 $ 33,585

McGraw-Hill/Irwin Slide 9
 FastForward
Statement of Owner's Equity
For the Month Ended December 31, 2009
Prepare the
C. Taylor, Capital 12/1/09 $ -0-
Investment by owner
Add: Net income $
30,000
3,785 33,785
Balance Sheet.
Total 33,785
Less: Withdrawal by owner 200 FastForward
C. Taylor, Capital 12/31/09 $ 33,585 Balance Sheet
December 31, 2009
Assets
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment $ 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,745
Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned consulting revenues 2,750
Total liabilities $ 9,160
Owner's Equity
C.Taylor, Capital 33,585
Total liabilities and equity $ 42,745

McGraw-Hill/Irwin Slide 10
C1
CLOSING PROCESS
 Resets revenue,
expense and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the period.
Record and post
 Helps summarize a closing entries.
period’s revenues
and expenses in the
Income Summary Prepare post-closing
account. trial balance.
McGraw-Hill/Irwin Slide 11
 TEMPORARY AND
C1
PERMANENT ACCOUNTS
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The closing process
applies only to
temporary accounts.
McGraw-Hill/Irwin Slide 12
 P2
RECORDING CLOSING ENTRIES
Close Revenue accounts to
Income Summary.
Let’s see how
the closing
Close Expense accounts to
process works!
Income Summary.

Close Income Summary

account to Owner’s Capital.

Close Withdrawals to
Owner’s Capital.

McGraw-Hill/Irwin Slide 13
 FastForward
Adjusted Trial Balance
P2
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000 Using the
Accumulated depreciation-Equip. $ 375 adjusted trial
Accounts payable 6,200
Salaries payable 210 balance, let’s
Unearned consulting revenue
C. Taylor, Capital
2,750
30,000
prepare the
C. Taylor, Withdrawals 200 closing
Consulting revenue 7,850
Rental revenue 300
entries for
Depreciation expense-Equipment 375 FastForward.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685

McGraw-Hill/Irwin Slide 14
 FastForward
Adjusted Trial Balance
P2
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000 Revenue
C. Taylor, Withdrawals 200 accounts to
Consulting revenue 7,850 Income
Rental revenue 300
Depreciation expense-Equipment 375 Summary.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685

McGraw-Hill/Irwin Slide 15
 P2  CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

Dr. Cr.
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin Slide 16
 P2  CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

Consulting Revenue
7,850 7,850

Income Summary
8,150
Rental Revenue
300 300

McGraw-Hill/Irwin Slide 17
 FastForward
P2 Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close Expense
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000 accounts to
C. Taylor, Withdrawals 200 Income
Consulting revenue 7,850
Summary.
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685

McGraw-Hill/Irwin Slide 18
 P2  CLOSE EXPENSE ACCOUNTS
TO INCOME SUMMARY
Dr. Cr.
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Now, let’s look at the ledger accounts after

posting this closing entry.
McGraw-Hill/Irwin Slide 19
 P2  CLOSE EXPENSE ACCOUNTS
TO INCOME SUMMARY
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Salaries Expense Supplies Expense Income Summary

4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
McGraw-Hill/Irwin Slide 20
 FastForward
Adjusted Trial Balance
P2
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close Income
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000 Summary to
C. Taylor, Withdrawals 200 Owner’s Capital.
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685

McGraw-Hill/Irwin Slide 21
 P2  CLOSE INCOME SUMMARY
TO OWNER’S CAPITAL
Dr. Cr.
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin Slide 22
 P2
CLOSE INCOME SUMMARY
TO OWNER’S CAPITAL

C. Taylor, Capital Income Summary

30,000 4,365 8,150
3,785 3,785
-
33,785

McGraw-Hill/Irwin Slide 23
 FastForward
P2 Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000 Withdrawals to
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Owner’s
Rental revenue 300 Capital.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685

McGraw-Hill/Irwin Slide 24
 P2  CLOSE WITHDRAWALS
TO OWNER’S CAPITAL

Dr. Cr.
Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin Slide 25
 P2  CLOSE WITHDRAWALS
TO OWNER’S CAPITAL

C. Taylor,
Withdrawals C. Taylor, Capital
200 200 200 30,000
3,785

- 33,585

McGraw-Hill/Irwin Slide 26
 P3
POST-CLOSING TRIAL BALANCE

 List of permanent Let’s look at

accounts and their FastForward’s
post-closing trial
balances after posting balance.
closing entries.

 Total debits and

credits must be equal.

McGraw-Hill/Irwin Slide 27
 P3
POST-CLOSING TRIAL BALANCE
FastForward
Post-Closing Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C.Taylor, Capital 33,585
Totals $ 43,120 $ 43,120

McGraw-Hill/Irwin Slide 28
 C2 Steps in the Accounting Cycle

McGraw-Hill/Irwin Slide 29
 C3
CLASSIFIED BALANCE SHEET
Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current assets Current liabilities
Noncurrent assets Noncurrent liabilities
Long-term investments Equity
Plant assets
Intangible assets

Current items are those expected to come due (both

collected and owed) within the longer of one year or the
company’s normal operating cycle.

McGraw-Hill/Irwin Slide 30
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Current assets are expected to
Notes receivable be sold,
1,500
Investments in stocks and bonds
18,000
collected, or used within one 48,000
year or the
Land held for future expansion
Total investments 67,500
company’s operating cycle.
Plant assets
Equipment $ 33,200
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 31
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Plant assets
Long-term investments are
Equipment expected to be held
$ 33,200
for more than one year or170,000
Buildings
the operating
203,200
Less accumulated depreciation
53,000
cycle.
150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 32
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Plant assets are tangible long-lived assets used
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
to produce or sell products and services.
Total investments 67,500
Plant assets
Equipment $ 33,200
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 33
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Intangible assets are long-term resources
Plant assets
Equipment $ 33,200
used to produce or sell products
Buildings 170,000 and services
203,200
and that lack physical form.
Less accumulated depreciation
Land
53,000 150,200
73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 34
 Snowboarding Components
Balance Sheet (Partial)
C3
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Current liabilities are obligations due within
150,000the
Notes payable (net of current portion)
longer of one year or the company’s operating
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital cycle. 164,800
Total liabilities and equity $ 343,800

McGraw-Hill/Irwin Slide 35
 Snowboarding Components
Balance Sheet (Partial)
C3
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
Long-term liabilities are obligations not due
EQUITY
within the longer of one year or the company’s
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800
operating cycle.

McGraw-Hill/Irwin Slide 36
 Snowboarding Components
Balance Sheet (Partial)
C3
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Equity is the owner’s claim on the assets.

McGraw-Hill/Irwin Slide 37
 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.

$ in millions 2007 2006 2005 2004
Current assets $ 2,771 $ 2,784 $ 2,684 $ 4,433
Current liabilities 1,709 1,561 1,451 1,388
Current ratio 1.6 1.8 1.8 3.2
Industry current ratlo 2.3 2.4 2.5 2.7
McGraw-Hill/Irwin Slide 38
 END OF CHAPTER 4

McGraw-Hill/Irwin Slide 39