Download classified balance sheet

Chapter 4
Completing the Accounting
Cycle – Part I
1
Objective 1
Describe the flow of accounting
information from the unadjusted trial
balance into the adjusted trial balance
and financial statements.
2
Exhibit 1
End-of-Period Spreadsheet (Work Sheet)
3
Flow of Accounting Information
Spreadsheet (Work Sheet)
Accounts
Trial Balance
Adjustments
Adjusted TB
Dr
Dr
Dr
Cr
Cr
Cr
Accounts are listed in the Trial Balance column using the ending
balance found in the general ledger.
4
Flow of Accounting Information
Spreadsheet (Work Sheet)
Accounts
Trial Balance
Adjustments
Adjusted TB
Dr
Dr
Dr
Cr
Cr
Cr
Adjustments are entered here. Two possibilities:
1. Deferrals – Existing balances are changed.
2. Accruals – New information is entered.
5
Flow of Accounting Information
Spreadsheet (Work Sheet)
Accounts
Trial Balance
Adjustments
Adjusted TB
Dr
Dr
Dr
Cr
Cr
Cr
Adjustments are combined with the
trial balance. Account balances are now
adjusted.
6
Flow of Accounting Information
Spreadsheet (Work Sheet)
Accounts
Adjusted TB
Income State.
Dr
Dr
Cr
Cr
Balance Sheet
Dr
Cr
Revenue and expense balances in the Adjusted Trial
Balance column are extended to the Income
Statement column.
7
Flow of Accounting Information
Spreadsheet (Work Sheet)
Accounts
Adjusted TB
Income State.
Dr
Dr
Cr
Cr
Balance Sheet
Dr
Cr
Asset, liability, owner’s equity, and drawing
balances in the Adjusted Trial Balance
column are extended to the Balance Sheet
column.
8
Example Exercise 4-1
Flow of Accounts into Financial Statements
The balances for the accounts listed below appear in the
Adjusted Trial Balance columns of the end-of-period
spreadsheet (work sheet). Indicate whether each balance
should be extended to (a) an Income Statement column or (b) a
Balance Sheet column.
1.
2.
3.
4.
Amber Bablock, Drawing
Utilities Expense
Accumulated Depreciation—
Equipment
Unearned Rent
5.
6.
7.
8.
Fees Earned
Accounts Payable
Rent Revenue
Supplies
9
Example Exercise 4-1 (continued)
1.
2.
3.
4.
5.
6.
7.
8.
Balance Sheet column
Income Statement column
Balance Sheet column
Balance Sheet column
Income Statement column
Balance Sheet column
Income Statement column
Balance Sheet column
10
Objective 2
Prepare financial statements
from adjusted account
balances.
11
The income statement is prepared
directly from the Income Statement
or Adjusted Trial Balance columns
of the spreadsheet (work sheet).
12
Exhibit 2
Financial Statements Prepared from Work Sheet
13
Example Exercise 4-2
Determining the Net Income from End-of-Period Spreadsheet
In the Balance Sheet columns of the end-of-period spreadsheet
(work sheet) for Dimple Consulting Co. for the current year, the
Debit column total is $678,450, and the Credit column total is
$599,750 before the amount of net income or net loss has been
included. In preparing the income statement from the end-ofperiod spreadsheet (work sheet), what is the amount of net
income or net loss?
14
Example Exercise 4-2 (continued)
A net income of $78,700 ($678,450 – $599,750) would be reported.
When the Debit column of the Balance Sheet columns is more than
the Credit column, net income is reported. If the Credit column
exceeds the Debit column, a net loss is reported.
15
The first item presented on
the statement of owner’s
equity is the balance of the
owner’s capital account at
the beginning of the period.
16
Exhibit 2
from the income statement
to the balance sheet
17
The balance sheet is prepared
directly from the Balance
Sheet or Adjusted Trial
Balance columns of the
spreadsheet (or worksheet).
18
A classified balance sheet is a
balance sheet that was expanded
by adding subsections for current
assets; property, plant, and
equipment; and current liabilities.
19
Cash and other assets that are expected
to be converted into cash, sold or used
up usually within a year or less,
through the normal operations of the
business, are called current assets.
• Cash
• Accounts Receivable
• Supplies
20
Property, plant, and equipment (also
called fixed assets) include assets that
depreciate over a period of time. Land
is an exception as it is not subject to
depreciation.
• Equipment
• Machinery
• Buildings
• Land
21
Liabilities that will be due within a
short time (usually one year or less)
and that are to be paid out of current
assets are called current liabilities.
• Accounts payable
• Wages payable
• Interest payable
• Unearned fees
22
Liabilities not due for a long
time (usually more than one
year) are long-term liabilities.
• Notes payable
• Mortgage payable
• Bond payable
23
Owner’s equity is the owner’s
right to the assets of the
business. Owner’s equity is
added to the total liabilities,
and the total must be equal to
the total assets.
24
Exhibit 2
Financial Statements Prepared from
Work Sheet (continued)
from the statement of owner’s equity
25
Example Exercise 4-4
Classified Balance Sheet
The following accounts appear in the adjusted trial balance of
Hindsight Consulting. Indicate whether each account would be
reported in the (a) current asset; (b) property, plant, and equipment;
(c) current liability, (d) long-term liability; or (e) owner’s equity
section of the December 31, 2009 balance sheet of Hindsight
Consulting.
1. Jason Corbin, Capital
2. Notes Receivable (due
in 6 months)
3. Notes Payable (due in
2011)
4. Land
5. Cash
6. Unearned Rent
7. Accumulated Depr.—
Equipment
8. Accounts Payable
26
Example Exercise 4-4 (continued)
1.
2.
3.
4.
Stockholders’ equity
Current asset
Long-term liability
Property, plant, and
equipment
5. Current asset
6. Current liability
7. Property, plant, and
equipment
8. Current liability
27
Objective 3
Prepare closing entries.
28
Closing Entries
Accounts that are relatively
permanent from year to year are
called real accounts. Accounts that
report amounts for only one period
are called temporary accounts or
nominal accounts.
29
Closing Entries
To report amounts for only one period,
temporary accounts should have zero
balances at the beginning of the
period. At the end of the period the
revenue and expense account balances
are transferred to Income Summary.
30
Closing Entries
The balance of Income Summary is
then transferred to the owner’s capital
account. The balance of the owner’s
drawing account is also transferred to
the owner’s capital account. The
entries that transfer these balances are
called closing entries.
31
Exhibit 3
The Closing Process
32
Exhibit 4
Flowchart of Closing Entries for NetSolutions
Debit each revenue account
for the amount of its balance,
and credit Income Summary
for the total revenue.
Fees Earned
Income Summary
16,960
16,840 Bal.16,840
Rent Revenue
120 Bal.120
33
Flowchart of Closing Entries for
NetSolutions (continued)
Exhibit 4
Wages Expense
Bal.4,525
4,525
Rent Expense
Bal.1,600
Income Summary
9,855
16,960
1,600
Depreciation Expense
50
Bal.50
Utilities Expense
Bal.985
985
Supplies Expense
Bal.2,040
2,040
Insurance Expense
Bal.200
200
Miscellaneous Expense
Bal.455
Debit Income Summary
for the total expenses and
credit each expense
account for its balance.
455
34
Flowchart of Closing Entries for
NetSolutions (continued)
Exhibit 4
Income Summary
9,855
7,105
16,960
Chris Clark, Capital
Bal.25,000
7,105
Debit Income Summary
for the amount of its
balance (in this case,
the net income) and
credit the capital
account.
Chris Clark, Drawing
Bal.4,000
35
Flowchart of Closing Entries for
NetSolutions (continued)
Exhibit 4
Chris Clark, Capital
4,000
Bal.25,000
7,105
Chris Clark, Drawing
Bal.4,000
4,000
Debit the capital
account for the balance
of the drawing
account, and credit
drawing for the same
amount.
36
Exhibit 4
Flowchart of Closing Entries for
NetSolutions (summary)
37
Exhibit 5
Closing Entries for NetSolutions
Step 1
Step 2
Step 3
Step 4
38
After the closing entries
are posted, all of the
temporary accounts have
zero balances.
39
Example Exercise 4-5
Closing Entries
After the accounts have been adjusted at July 31, the end of the fiscal
year, the following balances are taken from the ledger of Cabriolet
Services Co.
Terry Lambert, Capital
$615,850
Terry Lambert, Drawing
25,000
Fees Earned
380,450
Wages Expense
250,000
Rent Expense
65,000
Supplies Expense
18,250
Miscellaneous Expense
6,200
Journalize the four entries required to close the accounts.
40
Example Exercise 4-5 (continued)
July 31
31
31
31
Fees Earned……………………………..
Income Summary………………….
Income Summary………………………
Wages Expense……………………
Rent Expense………………………
Supplies Expense…………………
Miscellaneous Expense………….
Income Summary……………………….
Terry Lambert, Capital……………
Terry Lambert, Capital…………………
Terry Lambert, Drawing…………..
380,450
380,450
339,450
250,000
65,000
18,250
6,200
41,000
41,000
25,000
25,000
41
A post-closing trial balance is
prepared after the closing
entries have been posted. The
purpose of the PCTB is to
verify that the ledger is in
balance at the beginning of the
next period.
42
Exhibit 7
Post-Closing Trial Balance
43
THE END
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