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Transcript of The Accounting Cycle - memberfiles.freewebs.commemberfiles.freewebs.com/45/34/63343445/documents/The...
The Accounting Cycle
• Accounting cycle process
– Records individual transactions
– Produces the four basic financial statements
– Gets the general ledger ready for the next
accounting period
– Made up of eight steps
Accounting Cycle Steps
• Record journal entries from transactions
• Post journal entries to the general ledger
• Prepare unadjusted trial balance
• Adjust the accounts
• Prepare an adjusted trial balance
• Prepare the financial statements
• Close the temporary accounts
• Prepare a post-closing trial balance
Unadjusted Trial Balance
• A listing of individual
accounts, usually in financial
statement order.
• Ending debit or credit
balances are listed in two
separate columns.
• Total debit account balances
should equal total credit
account balances.
Matrix, Inc.
Unadjusted Trial Balance
At December 31, 2006
Description Debit Credit
Cash 3,900$
Accounts receivable 4,985
Inventory 3,300
Equipment 4,800
Accumulated depreciation - Equip. 1,440$
Furniture and fixtures 6,600
Accumulated depreciation - furn. & fix. 2,200
Accounts payable 2,985
Notes payable 4,000
Common stock 10,000
Retained earnings, 12/31/05 1,760
Sales revenue 35,000
Cost of goods sold 27,500
Operating expenses 6,300
Totals 57,385$ 57,385$
Unadjusted Trial Balance Example
Problem
Following unadjusted account balances for Delilah’s Deluxe Doggie Dayspa:
Delilah's Deluxe Doggie Dayspa
Unadjusted Trial Balance
December 31, 2005
Cash 13,500
Accounts Receivable 14,000
Supplies 3,500
Prepaid Rent 24,000
Prepaid Insurance 12,000
Notes Receivable (due 3/31/04) 30,000
Equipment 245,000
Accounts Payable 12,500
Unearned Service Revenue 20,000
Notes Payable (due 5/1/07) 100,000
Common Stock 50,000
Dividends 12,000
Service Revenue 367,500
Salary Expense 165,000
Rent Expense 20,000
Income Tax Expense 11,000
Required: Prepare a trial balance in good form.
The Unadjusted Trial BalanceIf total debits do not equal total credits on the
trial balance, errors have occurred . . .
in preparing balanced
journal entries,
in posting the correct dollar
effects of a transaction,
or in copying ending balances
from the ledger to the
trial balance.
Adjusting EntriesThere are two types of adjusting
entries.ACCRUALS
Revenues
earned or
expenses
incurred that
have not been
previously
recorded.
DEFERRALS
Receipts of
assets or
payments of
cash in advance
of revenue or
expense
recognition.
End of accounting period.
Cash received. Revenues earned.
Example includes rent received in
advance (an unearned revenue).
Deferred Revenue
End of accounting period.
Cash receivedRevenues earned
Example includes interest earned
during the period (accrued revenue).
Accrued Revenue
End of accounting period.
Cash paid.
Examples include prepaid rent, advertising,
and insurance.
Deferred Expense
Expense incurred.
End of accounting period.
Cash paid.
Examples include salaries and wages
incurred but not recorded.
Accrued Expense
Expense incurred.
• Certain circumstances require
adjusting entries to record
accounting estimates.
• Examples include . . .
–Depreciation
–Bad debts
– Income taxes
$$$
Adjustments Involving
Estimates
Depreciation Adjustment
The accounting
concept of
depreciation involves
the systematic and
rational allocation of
the cost of a long-
lived asset over
multiple accounting
periods it is used to
generate revenue.
This is a “cost
allocation” concept,
not a “valuation”
concept.
Prepare the Adjusted Trial
Balance
• After we’ve completed and posted the
adjusting entries to the general ledger
accounts, we prepare another trial balance
• We confirm again that the debit balances equal
the credit balances
• Basis for preparing the financial statements
Prepare adjusting entries from the following information:
a) An inventory of supplies reveals that $1,300 of supplies are on hand. (deferred expense/ asset)
b) Delilah’s has a 6 day work week, Monday through Saturday. (accrued expense/ liability)
Employees are paid every Friday. 12/31 is on a Tuesday. Delilah’s weekly payroll is $3,600.
c) The equipment was purchased 1/1/05. (deferred expense/ asset)
It has an expected life of 10 years and no salvage value.
d) The note receivable was issued by a client on 10/31/05. (accrued revenue/ asset)
The annual interest rate is 7%.
e) The note payable was issued 4/1/05. The annual interest rate is 5%. (accrued expense/ liability)
f) Unearned service revenue represents gift certificates purchased. (Deferred revenue/ liability)
At year end, $8,000 of the certificates have been used.
g) Prepaid insurance represents a payment of $12,000 for 2 years coverage. (deferred expense/ asset)
The payment was made 7/1/05.
h) Prepaid rent represents a payment of $24,000 for 12 months rent. (deferred expense/ asset)
The payment was made 9/1/05.
Problem
Prepare the Financial Statements
• Goal of the whole process
• Financial statements that reflect the financial condition and transactions of the company
– Income Statement
– Statement of Changes of Owners’ Equity
– Balance Sheet
– Statement of Cash Flows
From the adjusted trial balance for Delilah’s, prepare an income statement,
statement of stockholders’ equity, & classified balance sheet.
For computing the EPS, assume 10,000 shares are outstanding.
Problem
Closing the Books
Even though the
balance sheet
account balances
carry forward
from period to
period, the
income statement
accounts do not.
Closing entries:
1. Transfer net income
(or loss) to Retained
Earnings.
2. Establish a zero
balance in each of the
temporary accounts to
start the next
accounting period.
Closing the Books
The following accounts are called
temporary or nominal accounts and
are closed at the end of the period .
. .• Revenues.
• Expenses.
• Gains.
• Losses.
• Dividends declared.
Closing the Books
Assets, liabilities, and stockholders’
equity are permanent, or real
accounts, and are never closed.
• Assets.
• Liabilities.
• Stockholders’
Equity.
Closing the Books
Two steps are used in
the closing process .
. .
1. Close revenues and
gains to Retained
Earnings.
2. Close expenses and
losses to Retained
Earnings.
Post-Closing Trial Balance
• Prepared after the temporary accounts are
closed
• Serves as a final check that debits = credits
• Confirms that we start the next accounting
period with only permanent accounts
Post-Closing Trial BalanceMatrix, Inc.
Adjusted Trial Balance
At December 31, 2004
Description Debit Credit
Cash 3,900$
Accounts receivable 4,985
Inventory 3,300
Equipment 4,800
Accumulated depreciation - Equip. 1,440$
Furniture and fixtures 6,600
Accumulated depreciation - furn. & fix. 2,200
Accounts payable 2,985
Notes payable 4,000
Common stock 10,000
Retained earnings, 1/1/04 1,760
Sales revenue 35,000
Cost of goods sold 27,500
Operating expenses 6,300
Totals 57,385$ 57,385$
Post-Closing Trial BalanceMatrix, Inc.
Post-Closing Trial Balance
At December 31, 2004
Description Debit Credit
Cash 3,900$
Accounts receivable 4,985
Inventory 3,300
Equipment 4,800
Accumulated depreciation - Equip. 1,440$
Furniture and fixtures 6,600
Accumulated depreciation - furn. & fix. 2,200
Accounts payable 2,985
Notes payable 4,000
Common stock 10,000
Retained earnings, 12/31/04 2,960
Sales revenue -
Cost of goods sold -
Operating expenses -
Totals 23,585$ 23,585$
Key Ratio Analysis
Net Profit Margin indicates how effective
management is at generating profit on every
dollar of sales.
Net Income
Net Sales
Net Profit
Margin =