Chapter 5

Classification Structure

A classified balance sheet has no required layout. Important classification is the separation between current and noncurrent items for both assets and liabilities. Current items are those expected to come due within one year or the company's operating cycle, whichever is longer.

Enter Adjustments

An identifying letter links the debit and credit of each adjusting entry. This is called keying the adjustments. Then Journal to ledger.

Closing Process

An important step at the end of an accounting period after financial statements has been completed. It prepares accounts for recording those transactions and the events of the next period

Analyze transactions

Analyze transactions to prepare for journalizing

Prepare Adjusted Trial Balance

Combining the adjustments with the unadjusted balance for each account. The totals confirm the equality of debits and credits.

5) Total Statement Columns, Compute Income or Loss, and Balance Columns

Each financial statement column is totaled. The difference between the totals of the Income Statement columns is net income or net loss. This occurs because revenues are entered in the Credit column and expenses in the Debit column. If the Credit total exceeds the Debit total, there is net income. If the Debit total exceeds the Credit total, there is net loss

Steps to preparing the worksheet

Enter Unadjusted Trial Balance, Enter Adjustments, Prepare Adjusted Trial Balance, Sort Adjusted Trial Balance Amounts to Financial Statements and Total Statement Columns, Compute Income or Loss, and Balance Columns.

Closing process must

Identify accounts for closing, Record and post the closing entries, Prepare a post-closing trail balance.

Enter Unadjusted Trial Balance

Includes all accounts in the ledger plus any new ones from adjusting entries. Most adjusting entries (expenses form salaries, supplies, depreciation, and insurance) are predictable and recurring. Totals of both columns must be equal.

Purpose of closing process

It resets revenue, expense, and withdrawals account balances to zero at the end of each period. This is done so that these accounts can properly measure income and withdrawals for the next period. Helps in summarizing a period's revenues and expenses.

Close

Journalize and post entries to close temporary accounts

For a service company, the operating cycle is the time span between

Paying employees who perform the services, and receiving cash form customers

Journalize

Record accounts, including debits and credits, in a journal.

Adjust

Record adjustments to bring account balance up to date; journalize and post adjustments

Reverse (optional)

Reverse certain adjustments in the next period.

4) Sort Adjusted Trial Balance Amounts to Financial Statements

Sorting account balances form the adjust trial balance to their proper financial statements columns. Expenses go to the Income Statement Debit column and revenues to the Income Statement Credit column. Assets and withdrawals go to the Balance Sheet & Statement of Owner's Equity Debit column. Liabilities and owner's capital go to the Balance Sheet & Statement of Owner's Equity Credit column.

Prepare adjusted trial balance

Summarize adjusted ledger accounts and amounts

Prepare unadjusted trial balance

Summarize unadjusted ledger accounts and amounts

Prepare post-closing trial balance

Test clerical accuracy of the closing procedures.

Post

Transfer debits and credits form the journal to the ledger.

Prepare statements

Use adjusted trial balance to prepare financial statements.

Work sheet

a tool to use at the end of an accounting period to help organize data and prepare financial statements

Temporary accounts

accumulate data related to one accounting period

Temporary accounts include

all income statement accounts, the withdrawals account, and the Income Summary account.

Closing entries are necessary

at the end of each period after financial statements are prepared

Unclassified balance sheet

one whose items are broadly grouped into assets, liabilities, and equity.

Classified balance sheet

organizes assets and liabilities into important subgroups that provide more information to decision makers

Permanent accounts

report on activities related to one or more future accounting periods

Permanent accounts carry

their ending balances into the next period and generally consist of all balance sheet accounts. These asset, liability and equity accounts are not closed.

To record and post closing entries

to transfer the end-of-period balances in revenue, expense, and withdrawals accounts to the permanent capital account.