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Chapter 4

COMPLETING THE ACCOUNTING


CYCLE

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
4-2

C1

RECORDING CLOSING ENTRIES


1. Resets revenue,
expense and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the
Record and post
period.
closing entries.
2. Helps summarize a
periods revenues
and expenses in the Prepare post-closing
Income Summary trial balance.
account.
4-3

C1 TEMPORARY AND
PERMANENT ACCOUNTS
Revenues Assets

Withdrawals

Liabilities
Expenses

Owners
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
The closing
closing process
process
applies
applies only
only to
to
temporary
temporary accounts.
accounts.
4-4

P2

RECORDING CLOSING ENTRIES


Close Credit Balances in
Revenue Accounts to IncomeLets see how
Summary. the closing
process works!
Close Debit Balances in Expense
accounts to Income Summary.
Close Income Summary account
to Owners Capital.
Close Withdrawals to Owners
Capital.
4-5

P2

Using the
adjusted trial
balance, lets
prepare the
closing
entries for
FastForward.
4-6

P2

1. Close Credit
Balances in
Revenue
Accounts to
Income
Summary.
4-7

P2
CLOSE CREDIT BALANCES IN
REVENUE ACCOUNTS TO INCOME
SUMMARY
Dr. Cr.
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150

Now, lets look at the ledger accounts after


posting this closing entry.
4-8

P2
CLOSE CREDIT BALANCES IN
REVENUE ACCOUNTS TO INCOME
SUMMARY
Consulting Revenue
7,850 7,850

Rental Revenue
300 300

-
4-9

P2

2. Close Debit
Balances in
Expense Accounts
to Income
Summary.
4 - 10

P2
CLOSE DEBIT BALANCES IN
EXPENSE ACCOUNTS TO INCOME
SUMMARY

Now, lets look at the ledger accounts


after posting this closing entry.
4 - 11

P2
CLOSE DEBIT BALANCES IN
EXPENSE ACCOUNTS TO INCOME
SUMMARY
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Salaries Expense Supplies Expense


1,610 1,610 1,050 1,050
- -

Insurance Expense Utilities Expense Net Income


100 100 230 230
- -
4 - 12

P2

3. Close Income
Summary to
Owners Capital.
4 - 13

P2 CLOSE INCOME SUMMARY


TO OWNERS CAPITAL

Now, lets look at the ledger accounts


after posting this closing entry.
4 - 14

P2 CLOSE INCOME SUMMARY


TO OWNERS CAPITAL
4 - 15

P2

4. Close
Withdrawals
Account to
Owners
Capital.
4 - 16

P2 CLOSE WITHDRAWALS ACCOUNT


TO OWNERS CAPITAL

Now, lets look at the ledger accounts


after posting this closing entry.
4 - 17

P2
CLOSE WITHDRAWALS ACCOUNT
TO OWNERS CAPITAL
4 - 18

SUMMARY OF THE CLOSING


PROCESS
1. Close Credit Balances in Revenue Accounts
to Income Summary.
2. Close Debit Balances in Expense Accounts to
Income Summary.
3. Close Income Summary to Owners Capital.
4. Close Withdrawals Account to Owners
Capital.
4 - 19

P3

POST-CLOSING TRIAL BALANCE

List of permanent accounts and


their balances after posting
closing entries.

Totaldebits and credits must be


equal.
4 - 20

POST-CLOSING TRIAL BALANCE


P3
4 - 21

C2

ACCOUNTING CYCLE
4 - 22

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
Property, plant and equipment
Intangible assets

Current items are those expected to come due (both


collected and owed) within the longer of one year or the
companys normal operating cycle.
4 - 23

C3

Current assets are expected to be sold,


collected, or used within one year or the
companys operating cycle.
4 - 24

C3

Long-term financial assets or investments are


expected to be held for more than one year or
the operating cycle.
4 - 25

C3

Property, plant and equipment are tangible


long-term assets used to produce or sell
products and services.
4 - 26

C3

Intangible assets are long-term resources


used to produce or sell products and services
and that lack physical form.
4 - 27

C3

Current liabilities are obligations due within the


longer of one year or the companys operating cycle.
4 - 28

C3

Long-term liabilities are obligations not due


within the longer of one year or the companys
operating cycle.
4 - 29

C3

Equity
Equity is
is the
the owners
owners claim
claim on
on the
the assets.
assets.
4 - 30

A1

CURRENT RATIO
Helps assess the companys ability to pay
its debts in the near future

Current Assets
Current Ratio =
Current Liabilities

Limited Brands, Inc.


$ in millions 2009 2008 2007 2006
$ $ $ $
Current assets 2,867 2,919 2,771 2,784

Current liabilities 1,225 1,374 1,709 1,575

Current ratio 2.3 2.1 1.6 1.8


Industry current
4 - 31

END OF CHAPTER 4
4 - 32

SUGGESTED QUESTIONS TO ENSURE


YOUR LECTURE UNDERSTANDING

Chapter 4
Questions 2,5,10
QS4-1,QS4-9
Ex4-4
P4-4A (Part 1 & 2)