Accounting concepts ppt

accounting conventions ppt and accounting fundamentals ppt
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Dr.DouglasPatton,United States,Teacher
Published Date:26-07-2017
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CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE www.ThesisScientist.comWORK SHEET  A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements.  It is a working tool or a supplementary device for the accountant and not a permanent accounting record.  Use of a work sheet should make the preparation of adjusting entries and financial statements easier. www.ThesisScientist.comILLUSTRATION 4-1 WORK SHEET Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit 4. Extend adjusted 1. Prepare 2. Enter 3. Enter balance to appropriate trial balance adjustment adjusted columns. on the data. balances 5. Calculate income/loss worksheet. and complete the worksheet. www.ThesisScientist.comPURPOSE OF CLOSING ENTRIES 1. Updates the owner’s capital account in the ledger by transferring net income (loss) and owner’s drawings to owner’s capital. 2. Prepares the temporary accounts (revenue, expense, drawings) for the next period’s postings by reducing their balances to zero. www.ThesisScientist.comILLUSTRATION 4-2 TEMPORARY VERSUS PERMANENT ACCOUNTS TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed All revenue accounts All asset accounts All expense accounts All liability accounts Owner’s drawings Owner’s capital account (Income Statement / (Balance Sheet Accounts) www.ThesisScientist.com Drawings Accounts)ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS (INDIVIDUAL) (INDIVIDUAL) EXPENSES REVENUES Normal Dr. Normal Cr. Cr. to close Dr. to close Balance Balance - 0 - - 0 - 2 1 OWNER’S CAPITAL Opening Balance Revenues Expenses 1 Debit each revenue account for its balance, and credit the owner’s capital account for total revenues. 2 Debit the owner’s capital account for total expenses, and credit each expense account for its balance. www.ThesisScientist.comILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS OWNER’S CAPITAL Expenses Opening Balance Drawings Revenues Ending Balance 3 OWNER’S DRAWINGS Normal Dr. Cr. to close Balance - 0 - 3 Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s drawings for the same amount. www.ThesisScientist.comCLOSING ENTRIES STOP AND CHECK 1. Does the balance in your Owner’s Capital account equal the ending capital balance reported in the Balance Sheet and Statement of Owner’s Equity? 2. Are all of your temporary account balances zero? www.ThesisScientist.comPOST-CLOSING TRIAL BALANCE  After all closing entries have been journalized and posted, a post-closing trial balance is prepared.  The purpose of this trial balance is to prove the equality of the permanent (balance sheet) account balances that are carried forward into the next accounting period. www.ThesisScientist.comILLUSTRATION 4-8 POST-CLOSING TRIAL BALANCE Pioneer Advertising Agency Post-Closing Trial Balance October 31, 2002 After Adjustment Debit Credit Cash 15,200 The post-closing trial Accounts Receivable 200 balance is prepared Advertising Supplies 1,000 from the permanent Prepaid Insurance 550 Office Equipment 5,000 accounts in the ledger. Accumulated Amortization 83 Notes Payable 5 ,000 The post-closing trial Accounts Payable 2,500 balance provides evidence Unearned Revenue 800 that the journalizing and Salaries Payable 1 ,200 posting of closing entries Interest Payable 25 C.R. Byrd, Capital has been properly 12,342 21,950 21,950 completed. www.ThesisScientist.comSTEPS IN THE ACCOUNTING CYCLE 1. Analyse transactions 2. Journalize the 9. Prepare transactions post-closing trial balance 3. Post to ledger accounts 8. Journalize and post 4. Prepare a closing entries trial balance 7. Prepare 5. Journalize financial and post statements adjusting 6. Prepare entries adjusted trial balance www.ThesisScientist.comREVERSING ENTRIES (OPTIONAL STEP)  A reversing entry is made at the beginning of the next accounting period.  A reversing entry reverses certain adjusting entries made in the previous period. Opening balances can then be ignored when preparing year-end adjusting entries.  This topic is illustrated in Appendix 4A. www.ThesisScientist.comCORRECTING ENTRIES  Errors that occur in recording transactions should be corrected as soon as they are discovered by preparing correcting entries.  Correcting entries are unnecessary if the records are free of errors; they can be journalized and posted whenever an error is discovered.  They involve any combination of balance sheet and income statement accounts. www.ThesisScientist.comILLUSTRATION 4-10 STANDARD BALANCE SHEET CLASSIFICATIONS Financial statements become more useful when the elements are classified into significant subgroups. A classified balance sheet generally has the following standard classifications: Assets Liabilities and Equity Current Assets Current Liabilities Long-Term Investments Long-Term Liabilities Capital Assets Owner’s/ Partners’/ Shareholders’ Equity www.ThesisScientist.comCURRENT ASSETS  Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company’s operating cycle, whichever is longer.  Listed in the order of liquidity.  Examples of current assets are cash, temporary investments, accounts receivable, inventory, and prepaids. www.ThesisScientist.comLONG-TERM INVESTMENTS  Long-term investments are resources that can be realized in cash, but the conversion into cash is not expected within one year or the operating cycle, whichever is longer.  Examples include investments in shares or bonds of another company or investment in land held for resale. 100 XYZ shares www.ThesisScientist.comCAPITAL ASSETS  Tangible resources of a relatively permanent nature that are used in the business and not intended for sale are classified as (1) property, plant, and equipment and (2) natural resources. (1) Examples of property, plant, and equipment include land, buildings, and machinery. (2) Examples of natural resources include tracts of timber, oil and gas reserves, and mineral deposits. www.ThesisScientist.comCAPITAL ASSETS  Intangible assets are noncurrent resources that do not have physical substance.  Examples include patents, copyrights, trademarks, or trade names that give the holder exclusive right of use for a specified period of time. www.ThesisScientist.comCURRENT LIABILITIES  Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer.  Examples include accounts payable, unearned revenue, interest payable, and current maturities of long-term debt. www.ThesisScientist.comLONG-TERM LIABILITIES  Obligations expected to be paid after one year are classified as long-term liabilities.  Examples include long-term notes payable, bonds payable, mortgages payable, and lease liabilities. www.ThesisScientist.com

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