Completing the Accounting Cycle

Completing the Accounting CycleChapter 4Benefits of a Work SheetAids the preparation of financial statements.Reduces possibility of errors.Links accounts and their adjustments.Assists in planning and organizing an audit.Helps in preparing interim financial statements.Shows the effects of proposed transactions.Not a required report.P 1FastForwardWorksheetFor the Month Ended December 31, 2013P 1Recording Closing EntriesResets revenue, expense, and withdrawal account balances to zero at the end of the period.Helps summarize a period’s revenues and expenses in the Income Summary account.Identify accountsfor closing.Record and postclosing entries. Prepare post-closingtrial balance.C 1Temporary AccountsRevenuesIncome SummaryExpensesWithdrawalsPermanent AccountsAssetsLiabilitiesOwner’s CapitalTemporary andPermanent AccountsThe closing process applies only to temporary accounts.C 1Let’s see how the closing process works!Recording Closing EntriesClose Credit Balances in Revenue Accounts to Income Summary.Close Debit Balances in Expense accounts to Income Summary.Close Income Summary account to Owner’s Capital.Close Withdrawals to Owner’s Capital.P 2Using the adjusted trial balance, let’s prepare the closing entries for FastForward.P 21. Close Credit Balances in Revenue Accounts to Income Summary.P 2 Close Credit Balances inRevenue Accounts to Income SummaryNow, let’s look at the ledger accounts after posting this closing entry.P 2P 2 Close Credit Balances inRevenue Accounts to Income Summary2. Close Debit Balances in Expense Accounts to Income Summary.P 2Now, let’s look at the ledger accountsafter posting this closing entry. Close Debit Balances in Expense Accounts to Income SummaryP 2Net Income Close Debit Balances in Expense Accounts to Income Summary P 23. Close Income Summary to Owner’s Capital.P 2Now, let’s look at the ledger accountsafter posting this closing entry. Close Income Summaryto Owner’s CapitalP 2P 2 Close Income Summaryto Owner’s Capital4. Close Withdrawals Account to Owner’s Capital.P 2Now, let’s look at the ledger accountsafter posting this closing entry. Close Withdrawals Accountto Owner’s CapitalP 2P 2 Close Withdrawals Accountto Owner’s CapitalSummary of the Closing ProcessClose Credit Balances in Revenue Accounts to Income Summary.Close Debit Balances in Expense Accounts to Income Summary.Close Income Summary to Owner’s Capital.Close Withdrawals Account to Owner’s Capital.Let’s look at FastForward’spost-closing trial balance.Post-Closing Trial BalanceList of permanent accounts and their balances after posting closing entries.Total debits and credits must be equal.P 3Post-Closing Trial BalanceP 3Accounting CycleC 2Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle.Classified Balance SheetC 3Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle. C 3Long-term investments are expected to be held for more than one year or the operating cycle.C 3Plant assets are tangible long-lived assets used to produce or sell products and services.C 3Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.C 3Current liabilities are obligations due within the longer of one year or the company’s operating cycle.C 3Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle.C 3Equity is the owner’s claim on the assets. C 3Global ViewThe definition of an asset is similar under U.S. GAAP and IFRS and involves three basic criteria: the company owns or controls the right to use the item, the right arises from a past transaction or event, and 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.Current RatioHelps assess the company’s ability to pay its debts in the near future      Current Ratio =Current Assets Current Liabilities      Limited Brands, Inc.A 1P 4Appendix 4A – Reversing EntriesReversing 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.P 4P 4Without Reversing EntriesWith Reversing EntriesEnd of Chapter 4