c. 2014 Cengage Learning. All Rights Reserved.

May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives

1. Describe the flow of accounting information

from the unadjusted trial balance into the
adjusted trial balance and financial
statements.
2. Prepare financial statements from adjusted
account balances.
3. Prepare closing entries.
4. Describe the accounting cycle.
5. Illustrate the accounting cycle for one period.
Learning Objectives

6. Explain what is meant by the fiscal year and

the natural business
7. Describe and illustrate the use of working
capital and the current ratio in evaluating a
company’s financial condition.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
FLOW OF ACCOUNTING INFORMATION
Flow of Accounting Information

End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

o Account balances are listed in the Unadjusted Trial

Balance column using the ending balances found
in the general ledger.
(continued)
Flow of Accounting Information

End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

o Adjustments are entered here. Two possibilities:

 Deferrals – Existing balances are changed
 Accruals – New information is entered
(continued)
Flow of Accounting Information

End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

 Adjustments are combined with the unadjusted trial

balance amounts. Account balances are now
adjusted.
(continued)
Flow of Accounting Information

End-of-Period Spreadsheet (Work Sheet)

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

o Revenue and expense balances in

the Adjusted Trial Balance column are
extended to the Income Statement column.
(continued)
Flow of Accounting Information

End-of-Period Spreadsheet (Work Sheet)

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

o Asset, liability, owner’s equity, and drawing

balances in the Adjusted Trial Balance column
are extended to the Balance Sheet column.
(concluded)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Income Statement

o The income statement is prepared directly

from the Income Statement or Adjusted Trial
Balance columns of the end-of-period
spreadsheet (work sheet) beginning with fees
earned of $16,840.
 FINANCIAL STATEMENT
PREPARATION FROM
END-OF-PERIOD SPREADSHEET –
INCOME STATEMENT

to statement of owner’s equity

Statement of Owner’s Equity

o The first item presented on the statement of

owner’s equity is the balance of the owner’s
capital account at the beginning of the period.
 FINANCIAL STATEMENT
PREPARATION FROM END-OF-
PERIOD
SPREADSHEET – STATEMENT OF
OWNER’S EQUITY
from the income statement

to the balance sheet

Balance Sheet

o The balance sheet is prepared directly from

the Balance Sheet or Adjusted Trial Balance
columns of the end-of-period spreadsheet (or
work sheet), beginning with Cash of $2,065.
 FINANCIAL STATEMENT
PREPARATION FROM
END-OF-PERIOD SPREADSHEET –
BALANCE SHEET
from the statement of owner’s equity
Classified Balance Sheet

o A classified balance sheet is a balance sheet

that was expanded by adding subsections for
(1) current assets, (2) property, plant, and
equipment, (3) current liabilities, and (4) long-
term liabilities.
CURRENT ASSETS

Cash and other assets  Cash

that are expected to be
converted into cash,
 Accounts
Receivable
sold, or used up usually
within a year or less,  Notes Receivable
through the normal
operations of the
 Supplies
business, are called
current assets.
Notes Receivable

o Notes receivable are written promises by the

customer to pay the amount of the note and
possibly interest at an agreed rate.
FIXED ASSETS

Property, plant, and  Equipment

equipment (also called
fixed assets or plant
 Machinery
assets) include assets that  Buildings
depreciate over a period
of time. Land is an
 Land
exception, since it is not
subject to depreciation.
CURRENT LIABILITIES

Liabilities that will be  Accounts payable

due within a short time
(usually one year or
 Wages payable
less) and that are to be  Interest payable
paid out of current
assets are called
 Unearned fees
current liabilities.
LONG-TERM LIABILITIES

Liabilities not due for a  Long-term notes

long time (usually more payable
than one year) are
called long-term
 Mortgage
liabilities.
payable
 Bond payable
Owner’s Equity

o Owner’s equity is the owner’s right to the

assets of the business. Owner’s equity is
added to the total liabilities, and this
combined total must be equal to the total
assets.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Closing Entries

o Accounts that are relatively permanent from

year to year are called permanent accounts or
real accounts. These accounts are carried
forward from year to year.
Closing Entries

o Accounts that report amounts for only one

period are called temporary accounts or
nominal accounts. Temporary accounts are not
carried forward because they relate to only
one period.
Closing Entries

o To report amounts for only one period,

temporary accounts should have zero
balances at the beginning of the next period.
o To achieve this, the revenue and expense
account balances are transferred to Income
Summary at the end of the period.
Closing Entries

o The balance of Income Summary (net income

or net loss) is then transferred to the owner’s
capital account.
o The balance of the owner’s drawing account is
also transferred to the owner’s capital account.
o The entries that transfer these balances are
called closing entries.
CLOSING ENTRIES
Closing Entries

o Income Summary is a temporary account that

is only used during the closing process.
o At the end of the closing process, the Income
Summary account will have a zero balance.
o Income Summary is sometimes called a
clearing account.
JOURNALIZING AND
POSTING CLOSING
ENTRIES
JOURNALIZING AND
POSTING CLOSING
ENTRIES
JOURNALIZING AND
POSTING CLOSING
ENTRIES
JOURNALIZING AND
POSTING CLOSING
ENTRIES
CLOSING ENTRIES

Step 1

Step 2

Step 3

Step 4
Temporary Account Balances

o After the closing entries are posted, all of the

temporary accounts have zero balances.
LEDGER

(continued)
LEDGER

(continued)
LEDGER

(continued)
LEDGER
LEDGER

(concluded)
Post-Closing Trial Balance

o A post-closing trial balance is prepared after

the closing entries have been posted. The
purpose of the post-closing (after closing) trial
balance is to verify that the ledger is in
balance at the beginning of the next period.
POST-CLOSING
TRIAL BALANCE
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounting Cycle

o The accounting process that begins with

analyzing and journalizing transactions and
ends with preparing the accounting records
for the next period’s transactions is called the
accounting cycle. There are ten steps in the
accounting cycle.
Accounting Cycle

1. Transactions are analyzed and recorded in

the journal.
2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
4. Adjustment data are assembled and
analyzed.
5. An optional end-of-period spreadsheet
(work sheet) is prepared.
(continued)
Accounting Cycle

6. Adjusting entries are journalized and posted

to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and posted to
the ledger.
10. A post-closing trial balance is prepared.
ACCOUNTING
CYCLE

to the
financial
statements
ACCOUNTING
CYCLE
From the adjusted
trial balance
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
ACCOUNTING
CYCLE

(continued)
ACCOUNTING
CYCLE

(continued)
ACCOUNTING
CYCLE

(concluded)
ACCOUNTING
CYCLE
UNADJUSTED TRIAL
BALANCE
END-OF-PERIOD
SPREADSHEET
ADJUSTING ENTRIES
ADJUSTED TRIAL
BALANCE
 INCOME
STATEMENT

(continued)
 STATEMENT OF
OWNER’S EQUITY

(continued)
BALANCE SHEET

(concluded)
CLOSING ENTRIES
POST-CLOSING
TRIAL BALANCE
LEDGER

(continued)
(continued)
LEDGER

(continued)
LEDGER

(concluded)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounting Period

o The annual accounting period adopted by a

business is known as its fiscal year.
o When a business adopts a fiscal year that ends
when business activities have reached the
lowest point in its annual operation, such a
fiscal year is also called the natural business
year.
ACCOUNTING
PERIOD
 FINANCIAL
HISTORY OF A
BUSINESS
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Working Capital and Current Ratio

o The ability to convert assets into cash is called

liquidity.
Working Capital and Current Ratio

o The ability of a business to pay its debts is

called solvency.
Working Capital and Current Ratio

o Working capital is the excess of the current

assets of a business over its current liabilities.
Working Capital and Current Ratio

o NetSolutions’ working capital at the end of

2013 is $6,355 as computed below. This amount
of working capital implies that NetSolutions is
able to pay its current liabilities.

Working Capital = Current Assets – Current liabilities

= $7,745 – $1,390
= $6,355
Working Capital and Current Ratio

o The current ratio is another means of

expressing the relationship between current
assets and current liabilities. The current ratio
is computed by dividing current assets by
current liabilities.
Working Capital and Current Ratio

o The current ratio for NetSolutions at the end of

2013 is 5.6, computed as follows:

Current Assets
Current Ratio =
Current Liabilities
$7,745
=
$1,390
= 5.6 (Rounded)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr.
8 Accounts Payable 900 The
9 Wages Payable
10 Unearned Rent 360 unadjusted
11 Chris Clark, Capital 25,000
12 Chris Clark, Drawing 4,000 trial balance
13 Fees Earned 16,340 is checked
14 Rent Revenue
15 Wages Expense 4,275 for equality.
16 Rent Expense 1,600
17 Depreciation Expense
18 Utilities Expense 985
19 Supplies Expense 800
20 Insurance Expense
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 81
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 Supplies
3 Supplies 2,000
4 Prepaid Insurance 2,400
needs
5 Land 20,000 adjusting
6 Office Equipment 1,800
7 Accumulated Depr.
8 Accounts Payable 900
9 Wages Payable
10 Unearned Rent 360
11 Chris Clark, Capital 25,000
12 Chris Clark, Drawing 4,000
13 Fees Earned 16,340
14 Rent Revenue
15 Wages Expense 4,275
16 Rent Expense 1,600
17 Depreciation Expense
18 Utilities Expense 985
19 Supplies Expense 800
20 Insurance Expense
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 82
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr. (a) Cost of
8 Accounts Payable 900 supplies on
9 Wages Payable hand at
10 Unearned Rent 360 December 31
11 Chris Clark, Capital 25,000
12 Chris Clark, Drawing 4,000
is $760.
13 Fees Earned 16,340
14 Rent Revenue
15 Wages Expense 4,275
16 Rent Expense 1,600
17 Depreciation Expense
18 Utilities Expense 985
19 Supplies Expense 800 (a) 1,240
20 Insurance Expense
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 83
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 200
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr. (b) The insurance
8 Accounts Payable 900 expense for
9 Wages Payable December is
10 Unearned Rent 360 $200 ($2,400 ÷
11 Chris Clark, Capital 25,000
12).
12 Chris Clark, Drawing 4,000
13 Fees Earned 16,340
14 Rent Revenue
15 Wages Expense 4,275
16 Rent Expense 1,600
17 Depreciation Expense
18 Utilities Expense 985
19 Supplies Expense 800 (a) 1,240
20 Insurance Expense (b) 200
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 84
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 200
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr. (c) Rent
8 Accounts Payable 900 revenue
9 Wages Payable earned
10 Unearned Rent 360 (c) 120 during
11 Chris Clark, Capital 25,000
12 Chris Clark, Drawing 4,000 December
13 Fees Earned 16,340 was $120
14 Rent Revenue (c) 120 ($360 ÷ 3).
15 Wages Expense 4,275
16 Rent Expense 1,600
17 Depreciation Expense
18 Utilities Expense 985
19 Supplies Expense 800 (a) 1,240
20 Insurance Expense (b) 200
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 85
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (d) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 200
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr. (d) Fees accrued
8 Accounts Payable 900 at the end of
9 Wages Payable December,
10 Unearned Rent 360 (c) 120 but not
11 Chris Clark, Capital 25,000
12 Chris Clark, Drawing 4,000 recorded,
13 Fees Earned 16,340 (d) 500 totaled $500.
14 Rent Revenue (c) 120
15 Wages Expense 4,275
16 Rent Expense 1,600
17 Depreciation Expense
18 Utilities Expense 985
19 Supplies Expense 800 (a) 1,240
20 Insurance Expense (b) 200
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 86
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (d) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 200
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr. (e) Wages
8 Accounts Payable 900 accrued, but
9 Wages Payable (e) 250 not paid, at
10 Unearned Rent 360 (c) 120 the end of
11 Chris Clark, Capital 25,000
12 Chris Clark, Drawing 4,000 December
13 Fees Earned 16,340 (d) 500 totaled $250.
14 Rent Revenue (c) 120
15 Wages Expense 4,275 (e) 250
16 Rent Expense 1,600
17 Depreciation Expense
18 Utilities Expense 985
19 Supplies Expense 800 (a) 1,240
20 Insurance Expense (b) 200
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 87
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (d) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 200
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr. (f) 50 (f) Depreciation
8 Accounts Payable 900 of office
9 Wages Payable (e) 250
10 Unearned Rent 360 (c) 120 equipment is
11 Chris Clark, Capital 25,000 $50 for
12 Chris Clark, Drawing 4,000 December.
13 Fees Earned 16,340 (d) 500
14 Rent Revenue (c) 120
15 Wages Expense 4,275 (e) 250
16 Rent Expense 1,600
17 Depreciation Expense (f) 50
18 Utilities Expense 985
19 Supplies Expense 800 (a) 1,240
20 Insurance Expense (b) 200
21 Miscellaneous Exp. 455
22 42,600 42,600
23
24
25 88
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (d) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 200
5 Land 20,000
6 Office Equipment 1,800
7 Accumulated Depr. (f) 50
8 Accounts Payable 900
9 Wages Payable (e) 250
10 Unearned Rent 360 (c) 120
11 Chris Clark, Capital 25,000
12 Chris Clark, Drawing 4,000
13 Fees Earned 16,340 (d) 500
14 Rent Revenue (c) 120
15 Wages Expense 4,275 (e) 250
16 Rent Expense 1,600
17 Depreciation Expense (f) 50
18 Utilities Expense 985
19 Supplies Expense 800 (a) 1,240
20 Insurance Expense (b) 200
21 Miscellaneous Exp. 455
22 Summed
42,600 42,600 2,360 2,360
23 and ruled
24
25 89
Add / Subtract Adjustments

o The next step is to add or subtract the

adjustments to (or from) the amounts found in
the Unadjusted Trial Balance columns and
enter the results in the Adjusted Trial Balance
columns.
 Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,220 (d) 500 2,720
3 Supplies 2,000 (a) 1,240 760
4 Prepaid Insurance 2,400 (b) 200 2,200
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accumulated Depr. (f) 50 50
8 Accounts Payable 900 900
9 Wages Payable (e) 250 250
10 Unearned Rent 360 (c) 120 240
11 Chris Clark, Capital 25,000 25,000
12 Chris Clark, Drawing 4,000 4,000
13 Fees Earned 16,340 (d) 500 16,840
14 Rent Revenue (c) 120 120
15 Wages Expense 4,275 (e) 250 4,525
16 Rent Expense 1,600 1,600
17 Depreciation Expense (f) 50 50
18 Utilities Expense 985 985
19 Supplies Expense 800 (a) 1,240 2,040
20 Insurance Expense (b) 200 200
21 Miscellaneous Exp. 455 455
22 42,600 42,600 2,360 2,360 43,400 43,400
23
24
25 91
Spreadsheet

o Preparing the work sheet as a spreadsheet

allows the computer to assist you in the
process. The spreadsheet illustrated in Exhibit
1 has been reproduced on the next slide.
Extending Amounts to Statement Columns

o The next step is to extend amounts in the

Adjusted Trial Balance columns to the Income
Statement and Balance Sheet columns. Because
of space limitations, the unadjusted trial
balance and the adjustments columns have
been removed for the remainder of this slide
presentation.
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,200 2,200
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accumulated Depr. 50 50
8 Accounts Payable 900 900
9 Wages Payable 250 250
10 Unearned Rent 240 240
11 Chris Clark, Capital 25,000 25,000
12 Chris Clark, Drawing 4,000 4,000
13 Fees Earned 16,840 16,840
14 Rent Revenue 120 120
15 Wages Expense 4,525 4,525
16 Rent Expense 1,600 1,600
17 Depreciation Expense 50 50
18 Utilities Expense 985 985
19 Supplies Expense 2,040 2,040
20 Insurance Expense 200 200
21 Miscellaneous Exp. 455 455
22 43,400 43,400
23
24
25 95
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,200 2,200
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accumulated Depr. 50 50
8 Accounts Payable 900 900
9 Wages Payable 250 250
10 Unearned Rent 240 240
11 Chris Clark, Capital 25,000 25,000
12 Chris Clark, Drawing 4,000 4,000
13 Fees Earned 16,840 16,840
14 Rent Revenue 120 120
15 Wages Expense 4,525 4,525
16 Rent Expense 1,600 1,600
17 Depreciation Expense 50 50
18 Utilities Expense 985 985
19 Supplies Expense 2,040 2,040
20 Insurance Expense 200 200
21 Miscellaneous Exp. 455 455
22 43,400 43,400 9,855 16,960 33,545 26,440
23
24
25 The four columns 96
are summed.
Determining Net Income (Net Loss)

Income Statement Balance Sheet

9,855 16,960 33,545 26,440

7,105 7,105
16,960 16,960 33,545 33,545

Net Income

o The difference between the Income Statement

column totals and Balance Sheet column totals is
net income (or net loss) for the period.
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,200 2,200
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accumulated Depr. 50 50
8 Accounts Payable 900 900
9 Wages Payable 250 250
10 Unearned Rent 240 240
11 Chris Clark, Capital 25,000 25,000
12 Chris Clark, Drawing 4,000 4,000
13 Fees Earned 16,840 16,840
14 Rent Revenue 120 120
15 Wages Expense 4,525 4,525
16 Rent Expense 1,600 1,600
17 Depreciation Expense 50 50
18 Utilities Expense 985 985
19 Supplies Expense 2,040 2,040
20 Insurance Expense 200 200
21 Miscellaneous Exp. 455 455
22 43,400 43,400 9,855 16,960 33,545 26,440
23 Net income 7,105 7,105
24 16,960 16,960 33,545 33,545
25 98
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.