Kế toán tài chính 2 - Chapter 4: Completing the accounting cycle

Completing the Accounting CycleMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 4Learning ObjectivesState all the steps in the accounting cycle.Explain and prepare closing entries.Prepare the post-closing trial balance.Prepare reversing entries as appropriate.Prepare and use a work sheet.2Copyright © Houghton Mifflin Company. All rights reserved.Overview of the Accounting CycleObjective 1State all the steps in the accounting cycle3Copyright © Houghton Mifflin Company. All rights reserved.The Accounting CycleA series of steps in the accounting systemPurposeMeasure business activities in the form of transactionsTransform these transactions into financial statementsCommunicate useful information to decision makers4Copyright © Houghton Mifflin Company. All rights reserved.Steps in the Accounting Cycle business transactions from source documents the entries in the journal the entries to the ledger and prepare a trial balance the accounts and prepare an adjusted trial balance the accounts and prepare a post-closing trial balance financial statementsAnalyze Record Post Adjust Close PrepareThe order of these steps can vary depending on the system in place Step 6 may be completed before Step 55Copyright © Houghton Mifflin Company. All rights reserved.Overview of the Accounting CycleInputOutputAccounting System6Copyright © Houghton Mifflin Company. All rights reserved.DiscussionIs it necessary to complete all six steps in the accounting cycle? Yes. All six steps must be accomplished to complete the accounting cycle. However, the order of these steps can vary somewhat depending on the system in place7Copyright © Houghton Mifflin Company. All rights reserved.Closing EntriesObjective 2Explain and prepare closing entries8Copyright © Houghton Mifflin Company. All rights reserved.Two Account TypesPermanent accountsBalance sheet accounts Also called real accountsCarry end-of-period balances into the next accounting periodTemporary accountsIncome statement accounts (revenues and expenses) Also called nominal accountsBegin each accounting period with a zero balance9Copyright © Houghton Mifflin Company. All rights reserved.Closing EntriesJournal entries made at the end of an accounting periodTwo purposesClear revenue, expense, and Withdrawal accounts (temporary accounts) of their balancesSummarize a period's revenues and expensesRevenue and expense accounts must begin each new period with zero balances for the income statement to present the activity of a single period10Copyright © Houghton Mifflin Company. All rights reserved.Income Summary AccountSummarizes revenues and expenses for a periodTemporary accountUsed only in the closing processNever appears in the financial statementsAppears in chart of accounts after Withdrawals and before revenue accounts11Copyright © Houghton Mifflin Company. All rights reserved.Income Summary Account (cont’d)All revenue and expense account balances are transferred to Income Summary during the closing processThe balance in Income Summary equals net income or loss reported on the income statementThis balance is then transferred to the Capital account (an owner's equity account)Revenue and expense accounts represent increases and decreases to owner's equity12Copyright © Houghton Mifflin Company. All rights reserved.Required Closing EntriesClose credit balances from income statement accounts to Income SummaryClose debit balances from income statement accounts to Income SummaryClose the Income Summary account balance to the Capital accountClose the Withdrawals account balance to the Capital account13Copyright © Houghton Mifflin Company. All rights reserved.The Closing ProcessIncome SummaryWithdrawalsCapitalExpense AccountsRevenue AccountsExpense accounts carry normal debit balancesRevenue accounts carry normal credit balancesBal. XXXBal. XXXTo close: Credit revenue accounts Debit Income SummaryXXXXXXTo close: Debit expense accounts Credit Income SummaryBal. -0-Bal. -0-XXXXXXBal. XXBal. -0-A credit balance in Income Summary represents net income for the periodTo close: Debit Income Summary Credit CapitalXXXXStep 1Step 2Step 314Copyright © Houghton Mifflin Company. All rights reserved.The Closing Process (cont.)Income SummaryWithdrawalsCapitalExpense AccountsRevenue AccountsBal. XXXBal. XXXXXXXXXBal. -0-Bal. -0-XXXXXXBal. XXBal. -0-If a net loss occurred for the period, Income Summary would carry a debit balanceTo close: Credit Income Summary Debit CapitalXXXXStep 3(cont.)The Withdrawals account carries a normal debit balanceTo close: Credit Withdrawals Debit Income SummaryStep 4XXXXBal. XXBal. -0-Notice that all the temporary accounts now carry zero balances. Capital is a permanent account and will carry its balance into the next accounting period15Copyright © Houghton Mifflin Company. All rights reserved. Closing Revenue AccountsJoan Miller has two revenue accounts with balancesIncome SummaryAdvertising Fees EarnedArt Fees Earned 6,400 400A compound entry can be used to close the two revenue accounts to Income SummaryJuly 31 6,400July 31 400July 31 6,800Bal. -0-Bal. -0-16Copyright © Houghton Mifflin Company. All rights reserved. Closing Expense AccountsIncome SummaryJuly 31 6,800Joan Miller has nine revenue accounts with balancesA compound entry closes the nine revenue accounts to Income SummaryThe same closing procedure is used as with the revenue accounts except expense accounts carry credit balances and must be debited to be closedJuly 31 4,80017Copyright © Houghton Mifflin Company. All rights reserved. July 31 6,800 Closing the Income Summary AccountIncome SummaryJuly 31 4,800Revenues and expenses are now summarized in the Income Summary accountThe balance in the Income Summary account represents net income or loss for the periodBal. 2,000A credit balance in the Income Summary account represents net income for the periodRevenues > Expenses = Net IncomeIf the Income Summary account had a debit balance, it would represent a net loss for the periodRevenues < Expenses = Net LossJoan Miller, CapitalThe Income Summary account must now be closed to the Capital accountBal. -0-2,0002,00018Copyright © Houghton Mifflin Company. All rights reserved. Closing the Withdrawals AccountJoan Miller, CapitalJoan Miller, WithdrawalsJoan Miller made withdrawals of $1,400 from the business during the period1,400The Withdrawals account must be closed to the Capital accountWithdrawals represent reductions in owner's equity so the account carries a normal debit balanceBal. -0-1,4001,4001,600Bal. 200The Capital account now reflects net income and withdrawals for the period19Copyright © Houghton Mifflin Company. All rights reserved.The Accounts After ClosingRevenue, expense, and Withdrawals accounts have zero balancesThe Capital account reflectsNet income or lossWithdrawals Balance sheet accounts reflect correct balances to be carried forward into the next accounting period20Copyright © Houghton Mifflin Company. All rights reserved.DiscussionCould the Income Summary account have a debit balance when the income statement accounts are closed to it?Yes, if a net loss has been incurred21Copyright © Houghton Mifflin Company. All rights reserved.The Post-Closing Trial BalanceObjective 3Prepare the post-closing trial balance22Copyright © Houghton Mifflin Company. All rights reserved.The Post-Closing Trial BalanceThe final trial balanceUsed to verify that total debits equal total creditsOnly balance sheet accounts show balances because income statement accounts and Withdrawals have been closedThe Capital account now reflects previous revenue, expense, and Withdrawals balances 23Copyright © Houghton Mifflin Company. All rights reserved.The Post-Closing Trial Balance (cont’d)Only balance sheet accounts appear on the post-closing trial balanceIncome statement and Withdrawals accounts have been closed and are reflected in the Capital account balanceOnly accounts with balances are listed on a trial balance24Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the significance of the post-closing trial balance?The post-closing trial balance checks thatThe total debits and total credits in the ledger are equal after the closing entries have been postedOnly balance sheet accounts show balances25Copyright © Houghton Mifflin Company. All rights reserved.Reversing Entries: The Optional First Step in the Next Accounting PeriodObjective 4Prepare reversing entries as appropriate26Copyright © Houghton Mifflin Company. All rights reserved.Reversing EntriesAre made to reverse adjusting entries recorded at the end of the previous accounting periodSimplify the bookkeeping process Are optionalAre made on the first day of the new accounting periodOnly adjustments for accruals are reversedReversing deferrals would not simplify the bookkeeping process27Copyright © Houghton Mifflin Company. All rights reserved.Adjusting and closing entries are the same whether reversing entries are used or notReversing entries are made on the first day of the new accounting periodEffects of Reversing Entries28Copyright © Houghton Mifflin Company. All rights reserved.Effects of Reversing EntriesIf no reversing entry was made, the amount of wages expense must be determined for the current period ($1,200 - $360)If a reversing entry was made, the entire amount of wages paid is entered as an expensePayment of wages29Copyright © Houghton Mifflin Company. All rights reserved.(2) Closing Entry:Brings account balance to zero. Expense will be reported on income statement for July(3)Aug 1 360Effects on the Wages Expense AccountWages Expense(1) Adjusting Entry:Records accrued unrecorded wages expense for the current period(1)Jul 31 360(2)Jul 31 360 Aug 1 -0-(3) Reversing Entry:Reduces Wages Expense account by the amount of accrued expense that was recorded for July(4) Entry to record payment of wages:Full amount of payment is recorded as an expense(4)Aug 9 1,200Bal. 840The balance in the Wages Expense account correctly reflects the amount of expense that applies to AugustIt was not necessary to look in previous records to determine this amount30Copyright © Houghton Mifflin Company. All rights reserved. Recording Wages Expense Using a Reversing EntryWages PayableWages ExpenseJuly 31: Joan Miller Advertising Agency made an adjusting entry to accrue unrecorded wagesJuly 31 360July 31 360Jul 31 360July 31: The Wages Expense account is closed to Income SummaryAug 1 -0-The Wages Expense account will now carry a zero balance into the next accounting periodThe Wages Payable account will carry a $360 balance into the next accounting period Recording Wages Expense Using a Reversing Entry (cont’d)Wages PayableWages ExpenseAug 1: The adjusting entry for accrued wages is reversedJuly 31 360July 31 360Jul 31 360Aug 1 -0-The Wages Expense account will now reflect $840 of wages expense for AugustThe liability for the secretary’s wages for July was removed with the reversing entryAug 1 360Aug 1 360Aug 9: Secretary’s wages are paid, $1,200Aug 9 1,200Bal. 840Bal. -0-32Copyright © Houghton Mifflin Company. All rights reserved. Recording Revenue Using a Reversing EntryAdvertising Fees EarnedAccounts ReceivableJuly 31: Joan Miller Advertising Agency made an adjusting entry to accrue unrecorded revenueJuly 31 200July 31 200Jul 31 200July 31: The Advertising Fees Earned account is closed to Income SummaryAug 1 -0-The Advertising Fees Earned account will now carry a zero balance into the next accounting periodThe Accounts Receivable account will carry a $200 balance into the next accounting period Recording Revenue Using a Reversing Entry (cont’d)Advertising Fees EarnedAccounts ReceivableAug 1: The adjusting entry for accrued revenue is reversedJuly 31 200July 31 200Jul 31 200Aug 1 -0-Aug 1 200Aug 1 200The Advertising Fees Earned account now reflects an abnormal balance of $200When payment is received, advertising fees earned for that period will automatically be reduced by the amount that applied to July34Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the purpose of reversing entries?To simplify the bookkeeping processThey enable the bookkeeper to continue preparing routine journal entries in the new accounting period35Copyright © Houghton Mifflin Company. All rights reserved.The Work Sheet: An Accountant’s ToolObjective 5Prepare and use a work sheet36Copyright © Houghton Mifflin Company. All rights reserved.Working PapersRelevant data collected by accountantsCalculations to determine the amount ofPrepaid insurance that has expiredDepreciationInventory of supplies on handAccrued wagesAnalysesPreliminary drafts of financial statements 37Copyright © Houghton Mifflin Company. All rights reserved.Working Papers (cont’d)Important for two reasonsOrganizationAvoid omitting important data or tasks that affect financial statementsProvide evidence of past workOther accountants or auditors can retrace steps used to prepare financial statements38Copyright © Houghton Mifflin Company. All rights reserved.The Work SheetA working paper; a tool for the accountantLessens the possibility of leaving out an adjustmentEssential for larger companiesHelps in checking the accuracy of accounts39Copyright © Houghton Mifflin Company. All rights reserved.The Work Sheet (cont’d)Facilitates the preparation of the financial statementsIs never publishedPreparation may be aided using a microcomputerSpreadsheet programGeneral ledger system 40Copyright © Houghton Mifflin Company. All rights reserved. Common Form of Work Sheet A title that consists ofThe name of the companyThe title, “Work Sheet”The period of time coveredOne column for account namesTen working columns Preparing the Work SheetStep 1 Enter and total account balances in the Trial Balance columnWhen using the work sheet, a separate trial balance does not need to be preparedIncludes only those accounts with balances42Copyright © Houghton Mifflin Company. All rights reserved. Preparing the Work SheetStep 2 Enter and total the adjustments in the Adjustments columnIf an adjustment calls for an account not used in the trial balance, it is added below the accounts already listed43Copyright © Houghton Mifflin Company. All rights reserved. Preparing the Work SheetStep 3 Enter and total the adjusted account balances in the Adjusted Trial Balance columnThe adjusted account balances are obtained by crossfootingCombining the amount of each account in the Trial Balance columns with the corresponding amounts in the Adjustments columns44Copyright © Houghton Mifflin Company. All rights reserved. Crossfooting Adding or subtracting a group of numbers horizontallyPay attention to debits and creditsThe $500 credit adjustment to Art Supplies decreases the $1,800 debit balance to an adjusted $1,300 debit balanceThe $360 debit adjustment to Wages Expense increases the $2,400 debit balance to an adjusted $2,760 debit balance45Copyright © Houghton Mifflin Company. All rights reserved. Preparing the Work SheetStep 4Extend the account balances from the Adjusted Trial Balance columns to the appropriate Income Statement or Balance Sheet columnsRevenue and expense accounts are extended to the Income Statement columnsAssets, liabilities, and owner's equity accounts are extended to the Balance Sheet columns46Copyright © Houghton Mifflin Company. All rights reserved. Preparing the Work SheetStep 5 Total the Income Statement columns and the Balance Sheet columns24,7205,2006,80026,320Enter the net income or net loss in both pairs of columns as a balancing figure and recompute1,6001,6006,8006,80026,32026,320This step determines net income or loss for the period and proves the arithmetical accuracy of the work sheet47Copyright © Houghton Mifflin Company. All rights reserved. Example of Preparing the Work SheetWages Expense Step 1 Enter Wages Expense account balance in the Trial Balance column48Copyright © Houghton Mifflin Company. All rights reserved. Example of Preparing the Work SheetWages Expense Step 2 Enter the adjustments in the Adjustments columnThe Wages Payable account must now be added to the list of accounts49Copyright © Houghton Mifflin Company. All rights reserved. Example of Preparing the Work SheetWages Expense Step 3 Enter the adjusted account balances in the Adjusted Trial Balance column50Copyright © Houghton Mifflin Company. All rights reserved. BalanceSheetAccount Example of Preparing the Work SheetWages ExpenseIncomeStatementAccount Step 4 Extend the account balances from the Adjusted Trial Balance columns to the appropriate Income Statement or Balance Sheet columns51Copyright © Houghton Mifflin Company. All rights reserved.Using the Work SheetThe work sheet assists the accountant in three principal tasksRecording the adjusting entriesRecording the closing entries in the general journalPrepares the records for the beginning of the next accounting periodPreparing the financial statements52Copyright © Houghton Mifflin Company. All rights reserved.Recording the Adjusting EntriesAdjustments are determined while preparing the work sheetAdjusting entries can be recordedWhen determinedLater when closing entries are recordedInformation can be copied from the work sheet and recorded in the general journalInclude appropriate explanationsPost to the general ledger53Copyright © Houghton Mifflin Company. All rights reserved.Recording the Closing EntriesAll accounts that need to be closed, except for Withdrawals, may be found in the Income Statement columns of the work sheetClosing entries are entered in the general journal and posted to the ledger54Copyright © Houghton Mifflin Company. All rights reserved.Preparing the Financial StatementsAccount balances have been sorted into Income Statement and Balance Sheet columns on the work sheetThe income statement is prepared from accounts in the Income Statement columnsThe statement of owner’s equity and balance sheet are prepared from accounts in the Balance Sheet columns55Copyright © Houghton Mifflin Company. All rights reserved. The Balance Sheetare not the same asthe totals of the Balance Sheet columns in the work sheetTotal assets and total liabilities and owner's equity on the balance sheet The Balance SheetThis is because the Accumulated Depreciation accounts have normal balances that appear in different columns from their associated accounts on the balance sheet The Balance SheetAlso, the owner’s Capital account on the balance sheet is the amount determined on the statement of owner’s equityDiscussionDo the Income Statement columns and the Balance Sheet columns of the work sheet balance after the amounts from the Adjusted Trial Balance columns are extended?No, they do not balance by the amount of net income or loss for the period59Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewState all the steps in the accounting cycle.Explain and prepare closing entries.Prepare the post-closing trial balance.Prepare reversing entries as appropriate.Prepare and use a work sheet.60Copyright © Houghton Mifflin Company. All rights reserved.