CH 4: Completing the Accounting Cycle

operating cycle

The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. -For most businesses, this cycle takes less than a year so they use a one-year cutoff.

correcting entries

Unfortunately, errors may occur in the recording process. -Companies should correct errors, as soon as they discover them, by journalizing and posting correcting entries. -If the accounting records are free of errors, no correcting entries are needed. -Correcting entries must be posted before closing entries.

current assets

assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. -For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use them up in operations within one year.

Property, plant, and equipment

assets with relatively long useful lives that a company is currently using in operating the business. -This category includes land, buildings, machinery and equipment, delivery equipment, and furniture.

income summary

companies close the revenue and expense accounts to another temporary account called Income Summary >>>and then transfer the resulting net income or net loss from this account to Retained Earnings. -only used in closing, no journalize or post entires to this account during the year -The balance in Income Summary before it is closed must equal the net income or net loss for the period.

Liquidty

its ability to pay obligations expected to be due within the next year.

intangible assets

long-term assets (e.g., patents, trademarks, copyrights, goodwill) that have no real physical form but do have value

Current Liabilities

obligations that the company is to pay within the coming year or its operating cycle, whichever is longer EX: accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable. >>>>Also included as current liabilities are current maturities of longterm obligations—payments to be made within the next year on long-term obligations.

long-term investments

(1) investments in stocks and bonds of other companies that are normally held for many years (2) long-term assets such as land or buildings that a company is not currently using in its operating activities (3) long-term notes receivable

reversing entry

-Some accountants prefer to reverse certain adjusting entries by making a reversing entry at the beginning of the next accounting period. -A reversing entry is the exact opposite of the adjusting entry made in the previous period. -Use of reversing entries is an optional bookkeeping procedure; it is not a required step in the accounting cycle.

Steps in Preparing a Worksheet

1) Prepare a Trial Balance on Worksheet 2) Enter the Adjustments in the Adjustments Columns -------If additional accounts are needed, insert them on the lines immediately below the trial balance totals. -------Companies do not journalize the adjustments until after they complete the worksheet and prepare the financial statements. 3) Enter Adjusted Balances in the Balanced Trial Balance Columns --------For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries. 4) Extend Adjusted Trial Balance Amounts to Appropriate Financial Statement Columns 5) Total the Statement Columns, Compute the Net Income (or Net Loss), and Complete the Worksheet

post-closing trial balance

-The post-closing trial balance lists permanent accounts and their balances after the journalizing and posting of closing entries. -The purpose of the post-closing trial balance is to prove the equality of the permanent account balances carried forward into the next accounting period. -Since all temporary accounts will have zero balances, the post-closing trial balance will contain only permanent—balance sheet—accounts. -provides evidence that the company has properly journalized and posted the closing entries. -also shows that the accounting equation is in balance at the end of the accounting period.

closing entries

formally recognize in the ledger the transfer of net income (or net loss) and Dividends to Retained Earnings. >>>The retained earnings statement shows the results of these entries. -Closing entries also produce a zero balance in each temporary account. >>>Permanent accounts are not closed -Journalizing and posting closing entries is a required step in the accounting cycle. The company performs this step after it has prepared financial statements. -Companies record closing entries in the general journal.

worksheet

-a multiple-column form used in the adjustment process and in preparing financial statements. -it is not a permanent accounting record -neither a journal nor a part of the general ledger -The worksheet is merely a device used in preparing adjusting entries and the financial statements. >>>>Companies generally computerize worksheets using an electronic spreadsheet program such as Microsoft Excel. -The use of a worksheet is optional. >>>>When a company chooses to use one, it prepares financial statements directly from the worksheet. >>>>>>>>>>It enters the adjustments in the worksheet columns and then journalizes and posts the adjustments after it has prepared the financial statements.

Long-term liabilities

-are obligations that a company expects to pay after one year. -include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.

Classified Balance Sheet

-groups together similar assets and similar liabilities, using a number of standard classifications and sections. -The balance sheet presents a snapshot of a company's financial position at a point in time. To improve users' understanding of a company's financial position, companies often use a classified balance sheet. -These groupings help financial statement readers determine such things as (1) whether the company has enough assets to pay its debts as they come due (2) the claims of shortand long-term creditors on the company's total assets.

temporary accounts

-relate only to to a given accounting period -include all income statement accounts and the Dividends account. -The company closes all temporary accounts at the end of the period. these accounts are closed: all revenue accounts, all expense accounts, dividends

permanent accounts

-relate to one or more future accounting periods. -They consist of all balance sheet accounts, including stockholders' equity accounts. Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period. these accounts are closed: all assets account, all liability accounts, stockholders' equity

closing the books

At the end of the accounting period, the company makes the accounts ready for the next period. This is called closing the books. -In closing the books, the company distinguishes between temporary and permanent accounts.