04 Completing the Cycle.pdf

Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Completion of the Accounting Cycle STUDY OBJECTIVES 1. PREPARE A WORK SHEET. 2. EXPLAIN THE PROCESS OF CLOSING THE BOOKS. 3. DESCRIB...

Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Completion of the Accounting Cycle STUDY OBJECTIVES 1. PREPARE A WORK SHEET. 2. EXPLAIN THE PROCESS OF CLOSING THE BOOKS. 3. DESCRIBE THE CONTENT AND PURPOSE OF A POST-CLOSING TRIAL BALANCE. 4. STATE THE REQUIRED STEPS IN THE ACCOUNTING CYCLE. 5. EXPLAIN THE APPROACHES TO PREPARING COR-RECTING ENTRIES. 6. IDENTIFY THE SECTIONS OF A CLASSIFIED BALANCE SHEET. 7. PREPARE REVERSING ENTRIES. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 1 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Preparing a Worksheet 1. (S.O. 1) The steps in preparing a work sheet are: 1. Prepare a trial balance on the work sheet. 2. Enter the adjustments in the adjustments columns. 3. Enter adjusted balances in the adjusted trial balance columns. 4. Extend adjusted trial balance amounts to appropriate financial statement columns. 5. Total the statement columns, compute the net income (or loss), and complete the work sheet. 2. A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements. The basic form of a work sheet consists of the following columns: 3. For each account in the work sheet, the amount in the adjusted trial balance columns is equal to the account balance that will appear in the ledger after the adjusting entries have been journalized and posted. 4. After the work sheet has been completed the statement columns contain all data that are required for the preparation of financial statements. The income statement is prepared from the income statement columns, and the owner's equity statement and balance sheet are prepared from the balance sheet columns. 5. Using a work sheet accountants can prepare financial statements before adjusting entries are journalized and posted. 6. A work sheet is not a journal and it cannot be used as a basis for posting to ledger accounts. Closing Entries Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 2 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 7. (S.O. 2) Closing entries formally recognize in the ledger the transfer of net income (or loss) and owner's drawings to owner's capital as shown in the owner's equity statement. 8. Journalizing and posting closing entries is a required step in the accounting cycle. 9. The drawing, revenue, and expense accounts are temporary (nominal) accounts. Asset accounts, liability accounts, and the owner's capital account are permanent (real) accounts. 10. A temporary account, Income Sum- mary, is used in closing revenue and expense accounts to minimize the amount of detail in the permanent owner's capital account. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 3 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 11. In closing the books of a proprietorship: a. Debit each revenue account for its balance, and credit Income Summary for total reve- nues. b. Debit Income Summary for total expenses, and credit each expense account for its balance. c. Debit Income Summary, and credit Owner's Capital for the amount of net income; con- versely, credit Income Summary and debit Owner's Capital if a net loss exists. d. Debit Owner's Capital for the balance in the Owner's Drawing account and credit Own- er's Drawing for the same amount. Post-Closing Trial Balance 12. (S.O. 3) After all closing entries have been journalized and posted, a post-closing trial balance is prepared. The purpose of this trial balance is to prove the equality of the per- manent account balances that are carried forward into the next accounting period. Based upon the adjustment data, the adjusted trial balance shown below was prepared. Music Depot Adjusted Trial Balance July 31,2010 Debit Credit Balances Balances Cash 12,780 Accounts Receivable 4,750 Supplies 175 Prepaid Insurance 2,475 Office Equipment 5,000 Accumulated Depreciation – Office Equipment 60 Accounts Payable 5,680 Wages Payable 120 Unearned Revenue 3,600 Lee Chang, Capital 10,500 Lee Chang, Drawing 1,700 Fees Earned 20,500 Wages Expense 2,520 Office Rent Expense 2,750 Equipment Rent Expense 1,100 Utilities Expense 860 Music Expense 2,810 Advertising Expense 1,600 Supplies Expense 855 Insurance Expense 225 Depreciation Expense 60 Miscellaneous Expense 800 40,460 40,460 Instructions 1. Prepare an end-of-period spread sheet. 2. Prepare an income statement, a statement of owners’ equity, and a balance sheet. (Note: Lee Chang made investments in Music Depot on June 1 and July 1, 2010.) Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 4 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 3. Journalize and post the closing entries. The income summary account is #33 in the ledger of Music Depot. Indicate closed accounts by inserting a line in both Balance columns opposite the closing entry. 4. Prepare a post-closing trail balance. Steps in the Accounting Cycle 13. (S.O. 4) The required steps in the accounting cycle are: a. Analyze business transactions. b. Journalize the transactions. c. Post to ledger accounts. d. Prepare a trial balance. e. Journalize and post adjusting entries: Prepayments/Accruals. f. Prepare an adjusted trial balance. g. Prepare financial statements: Income statement, Owner's equity statement, Balance sheet. h. Journalize and post closing entries. i. Prepare a post-closing trial balance. 14. A reversing entry is the exact opposite of an adjusting entry. The preparation of reversing entries is an optional bookkeeping procedure that is not a required step in the accounting cycle. Correcting Entries 15. (S.O. 5) Errors that occur in recording transactions should be corrected as soon as they are discovered by preparing correcting entries. Correcting entries: a. are unnecessary if the records are free of errors. b. are journalized and posted whenever an error is discovered. c. may involve any combination of balance sheet and income statement accounts. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 5 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 16. To determine the correcting entry, it is useful to compare the incorrect entry with the correct entry, and then make a correcting entry. Another approach is to reverse the incorrect entry and then prepare the correct entry. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 6 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Classified Balance Sheet 17. (S.O. 6) Financial statements become more useful when the elements are classified into significant subgroups. A classified balance sheet generally has the following standard classifications: Liabilities and Assets Owner's Equity Current assets Current liabilities Long-term investments Long-term liabilities Property, plant, and Owner's equity equipment Intangible assets Assets 18. Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company's operating cycle, whichever is longer. Current assets are listed in the order of their liquidity. 19. The operating cycle of a company is the average time that is required to go from cash to cash in producing revenues. 20. Long-term investments are resources that can be realized in cash but the conversion into cash is not expected within one year or the operating cycle, whichever is longer. 21. Tangible resources of a relatively permanent nature that are used in the business and not intended for sale are classified as property, plant, and equipment. 22. Intangible assets are noncurrent resources that do not have physical substance, such as patents and copyrights. Liabilities 23. Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the oper- ating cycle, whichever is longer. 24. Obligations expected to be paid after one year are classified as long-term liabilities (or long-term debt). Owner's Equity 25. The content of the owner's equity section varies with the form of business organization. In a proprietorship, there is a single owner's equity account, called (Owner's Name), Capital. In a partnership, there are separate capital accounts for each partner. For a corporation, owners' equity is called stockholders' equity and it consists of two accounts: Capital Stock and Retained Earnings. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 7 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Form of Balance Sheet 26. A balance sheet is most often presented in report form with the assets shown above the liabilities and owner's equity. It may also be presented in account form with the assets section placed on the left and the liabilities and owner's equity section on the right. Reversing Entries 27. (S.O. 7) A reversing entry is made at the beginning of the next accounting period. The purpose of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting entry. 28. Reversing entries are most often used to reverse two types of adjusting entries: accrued revenues and accrued expenses. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 8 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 20 MINUTE QUIZ Circle the correct answer. True/False 1. An important purpose of closing entries is to set permanent account balances to zero in order to begin the next period. True False 2. The preparation of reversing entries is a required step in the accounting cycle. True False 3. A work sheet can be used as a basis for posting the adjustments to the ledger. True False 4. The content of the owner’s equity section of a proprietorship is the same as the content of the owners’ equity section of a corporation. True False 5. Adjustments are journalized and posted only at the end of an accounting period, whereas correcting entries are journalized and posted whenever an error is discovered. True False 6. Current assets are resources that can be realized in cash, but are not expected to be con- verted into cash within one year or the operating cycle, whichever is longer. True False 7. Long-term liabilities such as bank notes payable, mortgages payable, and bonds payable are expected to be paid from existing current assets. True False 8. The balance of Accumulated Depreciation will appear in the credit side of the work sheet’s Balance Sheet column. True False 9. The relationship between current assets and current liabilities is important in evaluating a company’s liquidity. True False Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 9 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 10. Intangible assets are not listed on the balance sheet because they do not have physical substance. True False Multiple Choice 1. The work sheet is a type of a. financial statement. b. permanent accounting record. c. working paper. d. journal. 2. In preparing closing entries, which of the following columns of the work sheet are the most helpful? a. The Adjustment column b. The Adjusted Trial Balance columns c. The Income Statement columns d. The Balance Sheet columns 3. The proper sequence for the accounting cycle is a. analyze, journalize, post, adjust, prepare statements, close. b. post, journalize, analyze, prepare statements, close, adjust. c. prepare statements, journalize, post, adjust, close, analyze. d. journalize, post, close, prepare statements, adjust, analyze. 4. After all the closing entries have been posted, the balance of the income summary will be a. a debit if a net income has occurred. b. a debit if a net loss has occurred. c. a credit if a net loss has occurred. d. zero. 5. The post-closing trial balance will a. be prepared before closing entries are posted to the ledger. b. contain both income statement and balance sheet accounts. c. contain only balance sheet accounts. d. contain only income statement accounts. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 10