Transcript Organizational Behaviour Course 5587WI2

Chapter 5
Completing the Accounting
Cycle and Classifying Accounts
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
The Accounting Cycle
• Chapter 5 covers the white boxes,
closing off the Accounting Cycle.
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Closing Process
• The Closing Process prepares the accounts for recording
transactions in the upcoming accounting period
• The Closing Process closes “temporary” accounts which
are opened at the beginning of the period to record
transactions for that period.
– They are considered temporary because they contain transactions
that counted for that period alone, and do not carry the financial
position of the organization.
– Revenue, expense, withdrawals accounts (which are Income
Statement accounts) and Income Summary
• “Permanent” or “Real” accounts report of transactions that
affect the future position of the organization
– Asset, liability, owner’s capital accounts
– Generally, these are balance sheet accounts
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Closing Entries
• Closing entries transfer the end-of-period balances in the
revenue, expense and withdrawals accounts to the Owner’s
capital account
• We transfer these through the Income Summary account,
as is shown in Exh 5.5
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Closing Entries
• Example p. 198 and 199, Vertically Inclined
• Step 1: Close credit balance of revenue accounts to
Income Summary
• Step 2: Close debit balance of expense accounts to Income
Summary
• Step 3: Close Income Summary to Owner’s Capital
account
• Step 4: Close Withdrawals account direct to Owner’s
Capital
– Withdrawals go direct to Owner’s Capital. You can consider
Withdrawals almost like a contra account to Owner’s Capital
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Post Closing Trial Balance
• The Post Closing Trial Balance is a list of the permanent
accounts and their balances after all closing entries are
journalized and posted.
– Essentially it is the same as the Adjusted Trial Balance but there
are no Income Statement accounts listed because their contents
have been transferred to Owner’s Capital
– Therefore, essentially, the Post Closing Trial Balance is very
similar to the Balance Sheet
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
So now you’ve seen it all…
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Mid-Chapter Demonstration Problem
• Lets try the Mid-chapter demo problem
• P. 204 shows the Adjusted Trial Balance
• Identify accounts to be closed
• Journalize the accounts to close them, illustrate the activity
in T-accounts
• Prepare the Post Closing Trial Balance
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Classifying the Balance Sheet
• This is nothing more than placing the Balance Sheet
accounts under descriptive headings so that users of the
information get a bit more info about the accounts on the
balance sheet
• The Classified Balance Sheet organizes assets and
liabilities into subgroups to provide more information for
decision making
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Classes
• Current Assets – those assets that are expected to be
converted into cash through the normal operations of the
business, within one accounting period/operating cycle
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Cash is by definition a current asset
Accounts Receivable
Inventory
Prepaid expenses
Marketable Securities
• Current Assets are a measure of the Liquidity of an
organization
• Again, cash is the most important asset in a business. It is
the fuel that keeps it going. Running out of cash means
you can’t pay your creditors
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Classes
• Current liabilities – those liabilities that are expected to be
satisfied within one accounting period/operating cycle
– Accounts payable
– The current portion of debt (the amount of the debt due in this
operating cycle)
– Interest payable
– Wages payable
• Current Ratio = Current Assets/Current Liabilities
– It is a measure of how liquid the organization is
• Quick Ratio = (cash + AR + Marketable
Securities)/Current Liabilities
– It is a more stringent measure of liquidity
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Classes
• Long-Term Investments – investments held for more than
one year or longer than the operating cycle.
– Long running bonds held by the company
– Notes receivable that are going to be due in more than one cycle
– Land not used in operations
• Property, Plant and Equipment – these are tangible assets
used to produce or sell products and services for more than
one accounting period
– Capital assets are long-lived assets used in the operations of the
business. There are 2 types: Tangible assets and Intangible assets
(next page)
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Classes
• Tangible assets – assets used in the production of revenue
for the business. Usually you can tell a tangible asset by
whether you can kick it or not (but some of your tangible
assets should not be kicked)
– Property (land, vehicles, buildings, machinery), plant and
equipment
• Intangible assets – assets used in the production of
revenues, but they are generally harder to kick. They also
can be much harder to value
– Patents, trademarks, goodwill, copyrights, franchises
• All of these assets are “consumed” in the course of
producing revenue, but they themselves are not sold to
produce revenue
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Classes
• Long-term Liabilities – are obligations due beyond the
longer of one year or the operating cycle
– Notes payable (longer term portion), mortgages, bonds payable,
lease obligations
– If a portion of a long term liability will be paid in the next
accounting cycle, then it is broken out into a current liability
portion
• Owner’s Equity – is the owner’s claim on the assets of a
company. Depending on the type of organization, the line
item on the Balance Sheet may read differently.
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Lets try it out…
• Try Problem 5-4A
– Prepare the closing entries (journal entries)
– Prepare the post closing trial balance
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
And one more…
• Try Exercise 5-15 and 5-16
– Prepare the journal entries
– Prepare the post closing trial balance
– Prepare the Balance Sheet using the proper classifications
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Onward…
• Chapter 6
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD