Exam 2, 4: completing the accounting cycle

long-term liabilities

E.X. mortgage note payable, mortgage payable

1 Analyzing and recording transactions in the journal

First step int he accounting cycle is to analyze and record transactions in the journal using the double-entry accounting system. 1. carefully read the description of the transaction to determine whether an asset, liability, common stock, retained earnings, dividends, revenue, or expense account is affected 2. for each account affected by the transaction, determine whether the account increases or decreases 3. determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit 4. record the transaction using a journal entry

how are assets commonly divided?

Two sections on the balance sheet: 1. current assets 2. property, plant, equipment

Income Summary final closing entry

With a Net Loss: IS will have a debit balance after the first two closing entries. Credit IS for the amount of its balance and debit retained earnings account for the amount of the net loss. VICE VERSA for Net Income

Notes Receivable

a customer's written promise to pay an amount and possibly interest at an agreed-upon rate (usually charge interest)

natural business year

a fiscal year that ends when business activities have reached the lowest point in an annual operating cycle --at the low point in its operating cycle, a business has more time to analyze the results of operations and to prepare financial statements (img Financial History of Bus.)

Income Summary

a temporary account used in the closing process, it has no balance. aka, clearing account from the effect of clearing the revenue and expense accounts

7 preparing and adjusted trial balance

after the adjustments have been journalized and posted, and adjusted trial balance is prepared to verify the equality of the total of the debit and credit balances. --this is the last step before preparing the financial statements. id the adjusted trial balance doesn't balance, an error had occurred and must be found and corrected

Property, Plant, and Equipment

aka fixed assets or plant assets (depreciate over a period of time) - include equipment, machinery, buildings, and land (exception to depreciation)

Accounts Receivable

amounts customers owe, normally from providing services or selling merchandise on account

expenses in the income statement

are listed in the order of size, beginning with larger items. Miscellaneous is the last item, regardless of its amount

permanent accounts or real accounts

balances of the accounts reported on the balance sheet carried forward from year to year. (relatively permanent) EX: cash, accounts receivable, equipment, accumulated depreciation, accounts payable, common stock, retained earnings

temporary or nominal accounts

balances of the accounts reported on the income statement are not carries forward from year to year. - the balance of the dividends account is not carries forward Only reporting account amounts for one period

4 assembling and analyzing adjustment data

before financial statements can be prepared, the accounts must be updates. -- the four types of accounts that normally require adjustment include prepaid expenses, unearned revenue, accrued revenue, and accrued expenses.

Current assets

cash and other assets that are expected to be converted to cash or sold or used up usually within one year or less

current liabilities

due within a year or less could include: wages payable, interest payable, taxes payable, and unearned fees

6 journalizing and posting adjusting entries

each adjusting entry affects at least one income statement account and one balance sheet account

post-closing trial balance

is prepared after the closing entries have been posted -- it verifies that the ledger is in balance at the beginning of the next period. The accounts and amounts should agree exactly with the accounts and amounts listed on the balance sheet at the end of the period

Income statement

is prepared directly from the Adjusted Trial Balance columns

5 preparing an optional end-of-period spreadsheet

it is useful in showing the flow of accounting information from the unadjusted trial balance to the adjusted trail balance --also useful analyzing the impact of proposed adjustments on the financial statements

2 Posting Transactions to the ledger

periodically, transactions are recorded in the journal are posted to the accounts in the ledger, debits and credits for each journal entry posted to the accounts in the accounts in the order which they occur in the journal 1. The date is entered i the date column of the account 2. the amount is entered into the debit or credit column of the account 3. the journal page number is entered in the posting reference column 4. the account number is entered in the posting closing reference (Post. Ref.) column in the journal

3 Preparing an unadjusted trial balance

prepared to determine whether any errors have been made in posting the debits and credits to the ledger

Cross-referencing

reviewing the debit and credit of the adjustments on the unadjusted account balances -- normally entered in the order the data are assembled

Stockholders' Equity

right to the assets of the business is presented on the balance sheet below the liabilities section

Fiscal year

the annual accounting period adopted by a business --begins with the first day of the month selected and end on the last day of the twelfth month

what is prepared from the Adjusted Trial Balance columns of the spreadsheet?

the balance sheet

10 Preparing a Post-Closing Trial Balance

the post-closing trial balance is to verify that the ledger is in balance at the beginning of the next period. --the accounts and amounts in the post-closing trial balance should agree exactly with the accounts and amounts listed on the balance sheet at the end of the period

unadjusted trial balance

verifies the total of the debit balances equals the total of credit balances

Flow of accounts from the adjusted trial balance into the financial statement

1. The revenue and expense accounts flow into the income statement 2. The dividends account flows into the retained earnings statement 3. The asset, liability, and common stock accounts flow into the balance sheet. The end-of-the-period retained earnings also flows into the balance sheet from the retained earnings statement

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. Adjustments data are assembled and analyzed 5. An optional end-of-period spreadsheet is prepared 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

Liabilities

1. current liabilities 2. long-term liabilities

Closing entries

1. debit each revenue account for its balance and credit Income Summary for the total revenue 2. credit expense account for its balance and debit Income Summary for the total expenses 3. debit retained earnings account for the balance of the dividends account and credit the dividends account

9 journalizing and posting closing entries

1. debit each revenue account for its balance, credit Income Summary for the total revenue 2. credit each expense account for its balance, debit Income Summary for the total expenses 3. Debit Income Summary for its balance, credit the retained earnings account 4. debit the retained earnings account for the balance of the dividends account, credit dividends account

8 Preparing Financial Statements

1. income statement 2. retained earnings 3. balance sheet the statement can be prepared directly from the adjusted trial balance, the end-of-period spreadsheet, or the ledger

Closing process

1. revenue account balances are transferred to the Income Summary account 2. Expense account balances are transferred to an account called Income Summary 3. The balance of Income Summary (net income or loss) is transferred to the retained earnings account 4. The balance of the dividends account is transferred to the retained earnings account