Transcript Measuring Business Income--The Adjusting Process.ppt

Managerial Accounting - 2.1
Measuring Business Income:
The Adjusting Process
Chapter 3
Managerial Accounting - 2.2
It’s Just Lunch

–
Disappointed by blind dates and personal
ads,
Andrea McGinty founded a prescreened
lunch dating service.
Managerial Accounting - 2.3
It’s Just Lunch
In 1996, the business earned revenues of
$4.5 million.
 Also, the business earned a net income of
$400,000.
 How was this number computed?
 Expenses were deducted from revenues to
determine net income.

Managerial Accounting - 2.4
Chapter Objectives
1
2
Distinguish accrual-basis accounting from
cash-basis accounting.
Apply the revenue and matching principles.
Managerial Accounting - 2.5
Chapter Objectives
3
4
5
Make adjusting entries at the end of the
accounting period.
Prepare an adjusted trial balance.
Prepare the financial statements from the
adjusted trial balance.
Managerial Accounting - 2.6
Objective 1
Distinguish accrual-basis
accounting from cash-basis
accounting.
Managerial Accounting - 2.7
The Two Bases of Accounting:
1
2
Accrual-basis
Cash-basis
Managerial Accounting - 2.8
Accrual Basis

–
–
–
Accountants record transactions...
when revenues are earned,
or when expenses are incurred,
regardless of when cash changes hands.
Managerial Accounting - 2.9
Cash Basis

–
–
–
Accountants record transactions...
when cash is paid,
or when cash is received,
regardless of when a revenue is earned or an
expense is incurred.
Managerial Accounting - 2.10
Remember GAAP?
Generally Accepted Accounting Principles
 GAAP requires that a business use the accrual
basis.

Managerial Accounting - 2.11
GAAP

–
–
Accountants record revenues as they are
earned...
and expenses as they are incurred,
not necessarily when cash is received or
paid.
Managerial Accounting - 2.12
Accrual Accounting
Using accrual accounting, Its’ Just Lunch
records revenue when it sells dating
services, not when it collects cash later.
 Likewise, It’s Just Lunch records expenses
when incurred.

Managerial Accounting - 2.13
Example

–
Salary expense not only includes amounts
paid to employees,
it includes any amount owed to employees.
Managerial Accounting - 2.14
Dennis’ Landscaping
Services performed during the month of
July - $15,000.
 Cash collected from customers - $6,000.
 Expenses for the month - $12,000.
 Cash paid out - $9,000.

Managerial Accounting - 2.15
Cash Basis
Revenues are the cash collected from
customers - $6,000.
 Expenses are the cash paid out during the
month - $9,000.

Managerial Accounting - 2.16
Cash Basis

Dennis’ Landscaping lost $3,000 during the
month of July.
Managerial Accounting - 2.17
Cash Basis

Revenue: $15,000 Cash In: $6,000
Expenses: $12,000 Cash Out: $9,000
Dennis’ Landscaping
Income
Statement
For the Month
Ended July 31, 19xx
Revenues
$6,000
Expenses
9,000
Net Loss
$3,000
Managerial Accounting - 2.18
Accrual Basis
Revenues of $15,000 are recognized for the
services performed during the month.
 Expenses are the $12,000 incurred during
the month.

Managerial Accounting - 2.19
Accrual Basis

Dennis’ Landscaping made a profit of
$3,000.
Managerial Accounting - 2.20
Cash

Dennis’ Landscaping
Income Statement For
the Month Ended July
31, 19xx Revenues
$6,000 Expenses
9,000 Net Loss
$3,000
Accrual
Dennis’ Landscaping
Income Statement For
the Month Ended July
31, 19xx Revenues
$15,000 Expenses
12,000 Net Income $
3,000

Managerial Accounting - 2.21
Why Does GAAP Require
the Accrual Basis?

Because accrual accounting provides a more
complete portrayal of operating
performance and financial position.
Managerial Accounting - 2.22
Problems with Cash Basis

–
–
–
–
Over or understatement of...
Revenue
Expense
Accounts receivable
Accounts payable
Managerial Accounting - 2.23
The Time Period Concept...
–
–
requires that accounting information be
reported at regular intervals.
requires that income be measured accurately
each period.
Managerial Accounting - 2.24
Accounting Period

Managers adopt an artificial period of time
to evaluate performance.
Managerial Accounting - 2.25
The Annual Accounting Period
Can Be...
–
–
a calendar year (January 1st to December
31st), or
a fiscal year (any consecutive 12-month
period).
Managerial Accounting - 2.26
Interim Period Statements...
are prepared for less than one year.
 Monthly
 Quarterly
 Semi-annually
–
Managerial Accounting - 2.27
Objective 2
Apply the revenue and
matching principles.
Managerial Accounting - 2.28
Revenue Principle
Revenue is recognized when it is deemed
earned.
 Recognition of revenue and cash receipts do
not necessarily occur at the same time.
 Cash could be received at the same time.
 Cash could be received after the earning.
 Cash could be received before the earning.

Managerial Accounting - 2.29
The Matching Principle...
is the basis for recording expenses.
 Expenses are the costs of assets and the
increase in liabilities incurred in the
earning of revenues.
–
Managerial Accounting - 2.30
Expense Recognition
Expenses are recognized when the benefit
from the expense is received.
 Recognition of expenses and cash payments
do not necessarily occur at the same time.

Managerial Accounting - 2.31
The Time Period Concept...
–
–
allows businesses to report accounting
information on a regular basis.
interacts with the revenue principle and the
matching principle to underlie the use of
accruals.
Managerial Accounting - 2.32
The Time Period Concept
 In
order to measure income accurately,
businesses update the revenue and
expense accounts before the end of the
period.
Managerial Accounting - 2.33
Objective 3
Make adjusting entries at
the end of the accounting
period.
Managerial Accounting - 2.34
Adjusting Entries
At the end of the period accountants prepare
financial statements.
 This end-of-period process starts with the
unadjusted trial balance.

Managerial Accounting - 2.35
Adjusting Entries...
–
are made to bring accounts to correct
balances before preparing financial
statements.
Managerial Accounting - 2.36
Adjusting Entries...
–
–
–
assign revenue to period earned.
assign expenses to the period incurred.
bring related asset and liability accounts
into correct balance.
Two Types Of
Adjusting Entries
1
2
Prepaids
Accruals
Managerial Accounting - 2.37
Managerial Accounting - 2.38
Prepaids

A prepaid, or deferral, is the postponement
of the recognition of an expense already
paid or incurred or a revenue already
received.
Managerial Accounting - 2.39
Prepaid Expenses
These are goods or services paid for in
advance that do not expire during the
current accounting period.
 They include miscellaneous assets that will
expire or will be used up in the near future.

Managerial Accounting - 2.40
Prepaid Expenses

–
–
–
–
–
Examples:
Prepaid rent
Prepaid insurance
Supplies
Buildings
Equipment
Managerial Accounting - 2.41
Prepaid Expenses

On January 2, 19x1, Dennis’ Landscaping
paid $1,200 for a one year insurance policy.
Prepaid
Insurance
Cash
1,200
1,200
Managerial Accounting - 2.42
Prepaid Expenses

Jan. 2, 19x1
Insurance 1,200
1,200 Paid insurance
Prepaid
Cash
Managerial Accounting - 2.43
Prepaid Expenses
This insurance expense must be matched to
the months to which it applies.
 What is the journal entry on January 31,
19x1?

Managerial Accounting - 2.44
Prepaid Expenses
On January 31, 19x1, one month of the 12month insurance policy has expired.
 $1,200/12 = $100
 Jan. 31, 19x1
Insurance
expense
100
Prepaid
insurance
100 One month’s
insurance premium

Managerial Accounting - 2.45
???????
What was the determining factor in
matching this expense?
 Time

Managerial Accounting - 2.46
Supplies
Wordcrafters started business the beginning
of the month.
 $500 worth of office supplies were
purchased on March 15, 19x1, for cash.

Managerial Accounting - 2.47
Supplies
Office Supplies
500
Cash
500
Office Supplies
500
Cash or Accounts Payable
500
Purchased office supplies
Managerial Accounting - 2.48
Supplies
An inventory at month end indicated that
$120 in office supplies remained.
 Therefore, $380 worth of supplies was used
during the month ($500 - $120).

Managerial Accounting - 2.49
Supplies
The cost of supplies must be matched to the
period in which they were used.
 What is the journal entry on March 31,
19x1?

Managerial Accounting - 2.50
Supplies

Mar. 31, 19x1
Supplies Expense 380
Supplies
380
Office
Office

One month’s usage of supplies Supplies
Expense
Supplies 380
500 380
Bal. 120
Managerial Accounting - 2.51
???????
What was the determining factor in
matching this expense?
 Usage

Managerial Accounting - 2.52
Depreciation of Plant Assets

Plant assets are large prepaid expenses.
Managerial Accounting - 2.53
Depreciation...
is a cost allocation of a long-lived asset.
 Depreciation expense is the cost converted
from an asset to an expense.
 Estimates are used.
–
Managerial Accounting - 2.54
Dennis’ Landscaping
On January 2nd, the business purchased a
truck for $30,000 cash.
 The truck is expected to last for 3 years.

Managerial Accounting - 2.55
Journalizing

January 2, 19x1
30,000
30,000
Purchase of truck
Machinery
Cash
Managerial Accounting - 2.56
Matching Principle
The cost of the truck must be matched with
the accounting periods in which it was used
to earn income.
 What would the journal entry be for the year
ended December 31, 19x1?

Managerial Accounting - 2.57
Straight Line Method
Cost: $30,000
 Service life: 3 Years
 Cost/Estimated useful life
 $30,000/3 = $10,000 per year

Managerial Accounting - 2.58
Depreciation Expense

Dec. 31, 19x1
Depreciation
Expense 10,000
Accumulated Depreciation 10,000
To record depreciation expense for a oneyear period
Managerial Accounting - 2.59
Contra Accounts
A contra account is one that is paired with
and deducted from another related account
in the financial statements.
 Normal balance is opposite its companion
account.
 Accumulated depreciation is a contra
account to plant assets.

Managerial Accounting - 2.60
Book Value...
–
is the cost of an asset that has not been
depreciated.
Managerial Accounting - 2.61
Dennis’ Landscaping

Partial Balance Sheet
December 31, 19x1

Plant Assets
Machinery
$30,000
Less
Accumulated Depreciation 10,000
$20,000

Contra account
Book value
Managerial Accounting - 2.62
Dennis’ Landscaping

Partial Balance Sheet
December 31, 19x2

Plant Assets
Machinery
$30,000
Less Accumulated Depreciation 20,000
$10,000

Contra account
Book value
Managerial Accounting - 2.63
Accruals
An accrual is the recognition of an expense
or revenue that has risen but has not yet
been recorded.
 Expenses or revenues are recorded before
the cash settlement.

Managerial Accounting - 2.64
Accrued Expenses...
–
are expenses that have been incurred but not
yet paid.
Managerial Accounting - 2.65
Accrued Expenses
Employees of Mary Business Services are
paid every Friday.
 Weekly salaries total $30,000.

Managerial Accounting - 2.66
Accrued Expenses
Mary’s is closed on Saturday and Sunday.
 The employees were last paid on
April
26th, which was a Friday.

Managerial Accounting - 2.67
Accrued Expenses
The employees will be paid on May 3rd.
 What is the adjusting entry on
April
30th?
 They worked April 29th and 30th.
 $30,000/5 = $6,000 per day
 $6,000 x 2 days = $12,000

Managerial Accounting - 2.68
Accrued Expenses

Apr. 30, 19x1
Expense
12,000
Payable
12,000
To accrue two days salaries
Salaries
Salaries
Managerial Accounting - 2.69
Accrued Revenues
These are revenues that have been earned
but not yet received.
 They are an asset.

Managerial Accounting - 2.70
Accrued Revenues
During the month of August, Dennis’
Landscaping rendered services to customers
totaling $15,000.
 At the end of August, the customers have
not as yet been billed.

Managerial Accounting - 2.71
Accrued Revenues
What is the August 31st adjusting entry?
 August 31, 19x1
Accounts
Receivable 15,000
Service Revenue
15,000
To record unpaid invoices

Managerial Accounting - 2.72
????????
What is the determining factor in
recognizing this service revenue?
 Performance

Managerial Accounting - 2.73
Unearned Revenue

Collecting cash from customers in advance
of doing work creates a liability called
unearned revenue.
Managerial Accounting - 2.74
Unearned Revenue

–
–
–
Examples:
Commissions collected In advance
Season tickets to sporting events
Magazine subscriptions
Managerial Accounting - 2.75
Unearned Revenue

On September 1, 19x1, a football team
received $200,000 from season ticket
holders to attend 16 games.
Managerial Accounting - 2.76
Unearned Revenue

Sept. 1, 19x1
200,000
Ticket Revenue 200,000
Season ticket receipts
Cash
Unearned
Managerial Accounting - 2.77
Unearned Revenue
Four of the sixteen games had been played
by September 30, 19x1.
 What would the journal entry be?

Managerial Accounting - 2.78
Unearned Revenue
Revenue per game = $200,000/16
 $12,500
 $12,500 x 4 = $50,000

Managerial Accounting - 2.79
Unearned Revenue

Sept. 30, 19x1
ticket revenue 50,000
revenue
50,000
To record four games
Unearned
Ticket
Managerial Accounting - 2.80
Notice
Adjusting entries always have:
– one income statement account and
– one balance sheet account.
 Adjusting entries never involve cash.

Managerial Accounting - 2.81
Objective 4
Prepare an adjusted
balance.
trial
Managerial Accounting - 2.82
Adjusted Trial Balance
The adjusting process starts with the
unadjusted trial balance.
 Adjusting entries are made at the end of the
accounting period and then an adjusted trial
balance is prepared.

Managerial Accounting - 2.83
Adjusted Trial Balance
The adjusted trial balance verifies the
equality of debits and credits after the
adjusting process.
 It serves as the basis for the preparation of
the financial statements.
 The adjusted trial balance is an internal
statement.

Managerial Accounting - 2.84
Objective 5
Prepare the financial
statements from the adjusted
trial balance.
Managerial Accounting - 2.85
Prepare the Statements
The adjusted trial balance is an internal
statement used to prepare the financial
statements.
 Financial statements are external
statements.

Managerial Accounting - 2.86
Financial Statements

–
–
–
–
The financial statements are:
Income Statement
Statement of Owners’ Equity
Cash Flow Statement
Balance Sheet
Managerial Accounting - 2.87
Financial Statements

1
–
–
–
2
Financial statements have two parts:
The first part includes the following:
Name of the entity
Title of the statement
Date or period covered
The second part is the body of the
statement.
Relationships Among
Statements
Managerial Accounting - 2.88
the
The income statement reports net income or
net loss.
 Net income or net loss is determined by
subtracting expenses from revenues.

Relationships Among
Statements
Managerial Accounting - 2.89
the
Revenues and expenses are owners’ equity
account.
 Net income or net loss is transferred to the
statement of owners’ equity.

Relationships Among
Statements
Managerial Accounting - 2.90
the
Capital is a balance sheet account.
 The ending balance in the statement of
owners’ equity is transferred to the balance
sheet.

Relationships Among
Statements

Managerial Accounting - 2.91
the
The statement of cash flow explains the
cause for the change in the cash balance
between two balance sheets dates.
Managerial Accounting - 2.92
Completing the
Accounting Cycle
Chapter 4
Managerial Accounting - 2.93
Motorola Company
This company is best known for its
computer chips, cellular phones and
other electronic products.
 In order to successfully compete,
Motorola gets its financial data to
management quickly.

Managerial Accounting - 2.94
Motorola
Motorola accomplishes this goal by rapidly
closing its books.
 Motorola can close its accounts in just
two days.

Managerial Accounting - 2.95
Chapter Objectives
1
2
3
Prepare an accounting work sheet.
Use the work sheet to complete the
accounting cycle.
Close the revenue, expense and withdrawal
accounts.
Managerial Accounting - 2.96
Chapter Objectives
4
5
6
Correct typical accounting errors.
Classify assets and liabilities as current or
long-term.
Use the current and debt ratios to evaluate a
business.
Managerial Accounting - 2.97
The Accounting Cycle

The accounting cycle is the process by
which accountants prepare financial
statements for an entity for a specific period
of time.
Managerial Accounting - 2.98
The Accounting Cycle
For a new business, begin by setting up
ledger accounts.
 For an established business, begin with
account balances carried over from the
previous period.

Managerial Accounting - 2.99
Work Performed This Period
Start with the account balances in the ledger
at the beginning of the period.
 Analyze and journalize transactions.
 Post journal entries to the ledger accounts.

Managerial Accounting - 2.100
End of Period Work
Compute the unadjusted balance in each
account.
 Make adjustments.
 Prepare the adjusted trial balance.
 Prepare the financial statements.

Managerial Accounting - 2.101
End of Period Work
Journalize and post the adjusting entries.
 Journalize and post the closing entries.
 Prepare the post closing trial balance. This
trial balance readies the accounts for the
next period.

Managerial Accounting - 2.102
Objective 1
Prepare an accounting
work sheet.
Managerial Accounting - 2.103
Accounting Work Sheet
A work sheet is a multi-columned document
used by accountants to help move data from
the trial balance to the financial statements.
 It is an internal document.

Steps in Preparing
the Work Sheet
Managerial Accounting - 2.104
Enter the account titles.
 Then enter the unadjusted ending balances
in the trial balance column and total.

Managerial Accounting - 2.105
The Accounting Work Sheet
Adjusted Trial Balance
TRIAL BALANCE
ACCOUNT TITLE
CASH
ACCTS RECEIVABLE
SUPPLIES
EQUIPMENT
ACCUM DEPRECIATION
ACCOUNTS PAYABLE
SALARY PAYABLE
UNEARNED REVENUE
CAPITAL
WITHDRAWALS
REVENUE
SALARY EXPENSE
TOTALS
ADJUSTMENTS
ADJ. TRIAL BAL.
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12,100
1,350
250
15,500
7,500
1,200
1,100
1,500
7,200
1,000
23,700
12,000
42,200
42,200
Managerial Accounting - 2.106
Adjustments
a
b
c
The company has earned revenue of $1,700
which will be collected next month.
Inventory of supplies at month end totaled
$150.
Depreciation for the period was calculated
as $200.
Managerial Accounting - 2.107
The Accounting Work Sheet
Adjusted Trial Balance
TRIAL BALANCE
ACCOUNT TITLE
CASH
ACCTS RECEIVABLE
SUPPLIES
EQUIPMENT
ACCUM DEPRECIATION
ACCOUNTS PAYABLE
SALARY PAYABLE
UNEARNED REVENUE
CAPITAL
WITHDRAWALS
REVENUE
SALARY EXPENSE
SUPPLIES EXPENSE
DEPRECIATION EXP
TOTALS
ADJUSTMENTS
ADJ. TRIAL BAL.
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12,100
1,350
250
15,500
a) 1,700
7,500
1,200
1,100
1,500
7,200
b)
100
c)
200
1,000
23,700
a) 1,700
12,000
b)
c)
42,200
42,200
100
200
2,000
2,000
Managerial Accounting - 2.108
The Accounting Work Sheet
Adjusted Trial Balance
TRIAL BALANCE
ACCOUNT TITLE
CASH
ACCTS RECEIVABLE
SUPPLIES
EQUIPMENT
ACCUM DEPRECIATION
ACCOUNTS PAYABLE
SALARY PAYABLE
UNEARNED REVENUE
CAPITAL
WITHDRAWALS
REVENUE
SALARY EXPENSE
SUPPLIES EXPENSE
DEPRECIATION EXP
TOTALS
ADJUSTMENTS
ADJ. TRIAL BAL.
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12,100
1,350
250
15,500
a) 1,700
7,500
1,200
1,100
1,500
7,200
b)
100
c)
200
1,000
7,700
1,200
1,100
1,500
7,200
1,000
23,700
a) 1,700
12,000
b)
c)
42,200
12,100
3,050
150
15,500
42,200
100
200
2,000
2,000
25,400
12,000
100
200
44,100
44,100
Managerial Accounting - 2.109
The Accounting Work Sheet
Adjusted Trial Balance
ADJ. TRIAL BAL.
ACCOUNT TITLE
CASH
ACCTS RECEIVABLE
SUPPLIES
EQUIPMENT
ACCUM DEPRECIATION
ACCOUNTS PAYABLE
SALARY PAYABLE
UNEARNED REVENUE
CAPITAL
WITHDRAWALS
REVENUE
SALARY EXPENSE
SUPPLIES EXPENSE
DEPRECIATION EXP
TOTALS
INC. STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12,100
3,050
150
15,500
12,100
3,050
150
15,500
7,700
1,200
1,100
1,500
7,200
1,000
7,700
1,200
1,100
1,500
7,200
1,000
25,400
12,000
100
200
44,100
44,100
31,800
18,700
Managerial Accounting - 2.110
The Accounting Work Sheet
Adjusted Trial Balance
ADJ. TRIAL BAL.
ACCOUNT TITLE
CASH
ACCTS RECEIVABLE
SUPPLIES
EQUIPMENT
ACCUM DEPRECIATION
ACCOUNTS PAYABLE
SALARY PAYABLE
UNEARNED REVENUE
CAPITAL
WITHDRAWALS
REVENUE
SALARY EXPENSE
SUPPLIES EXPENSE
DEPRECIATION EXP
TOTALS
INC. STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12,100
3,050
150
15,500
12,100
3,050
150
15,500
7,700
1,200
1,100
1,500
7,200
7,700
1,200
1,100
1,500
7,200
1,000
1,000
25,400
12,000
100
200
44,100
44,100
25,400
12,000
100
200
12,300
25,400
31,800
18,700
Managerial Accounting - 2.111
The Accounting Work Sheet
Adjusted Trial Balance
ADJ. TRIAL BAL.
ACCOUNT TITLE
CASH
ACCTS RECEIVABLE
SUPPLIES
EQUIPMENT
ACCUM DEPRECIATION
ACCOUNTS PAYABLE
SALARY PAYABLE
UNEARNED REVENUE
CAPITAL
WITHDRAWALS
REVENUE
SALARY EXPENSE
SUPPLIES EXPENSE
DEPRECIATION EXP
TOTALS
NET INCOME
INC. STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
12,100
3,050
150
15,500
12,100
3,050
150
15,500
7,700
1,200
1,100
1,500
7,200
7,700
1,200
1,100
1,500
7,200
1,000
1,000
25,400
12,000
100
200
44,100
44,100
25,400
12,000
100
200
12,300
13,100
25,400
25,400
31,800
25,400
31,800
18,700
13,100
31,800
Managerial Accounting - 2.112
Objective 2
Use the work sheet
to complete the
accounting cycle.
Recording the
Adjusting Entries
Managerial Accounting - 2.113
The work sheet helps identify the accounts
that need adjustments.
 Actual adjustment of the accounts requires
journalizing and posting the entries.

Recording the
Adjusting Entries
Managerial Accounting - 2.114
The adjusting entries may be recorded in the
journal when they are entered on the work
sheet.
 Many accountants journalize and post the
adjusting entries just before they make the
closing entries.

Managerial Accounting - 2.115
Objective 3
Close the revenue, expense and
withdrawal accounts.
Managerial Accounting - 2.116
Closing the Accounts

Closing the accounts is the end of period
process that prepares the accounts for
recording transactions during the next
period.
Managerial Accounting - 2.117
Closing the Accounts
What accounts are closed at the end of the
period?
 Revenue, Expenses and Withdrawals.
 These relate to a specific period and are
called temporary accounts.

Managerial Accounting - 2.118
Income Summary
The Income Summary account is used to
close the temporary accounts.
 This is the “most temporary” account.
 It is used only to facilitate the closing
process.

Managerial Accounting - 2.119
Closing the Accounts
Revenues and Expense accounts are closed
to Income Summary.
 Income Summary is closed to Capital.
 Withdrawals are closed to Capital.

Managerial Accounting - 2.120
Closing the Accounts
Net income will be represented by a credit
balance in the Income Summary.
 Net loss by a debit balance.

Managerial Accounting - 2.121
Flowchart of Closing Process
(Close Revenue Account)
Revenue
28,500 12,000
7,500
9,000
Salary Exp
1,500 3,300
1,800
Rent Exp
800
800
Supplies Exp
350
350
Income
Summary
(Close Expense
4,450
Accounts)
24,050
28,500
(Close Income Summary)
Capital
Account
2,500 24,050
(Close
Withdrawals Withdrawals
Account)
2,500 2,500
Managerial Accounting - 2.122
Postclosing Trial Balance
The accounting cycle ends with the
postclosing trial balance.
 The postclosing trial balance is dated as of
the end of the period for which the
statements have been prepared.

Managerial Accounting - 2.123
Permanent Accounts
These never close :
– Assets
– Liabilities
– Owners’ equity
 Balances of permanent accounts carry over
to the next period.

Managerial Accounting - 2.124
Objective 4
Correct typical
accounting errors.
Managerial Accounting - 2.125
Correcting Errors

Suppose that Dennis’ Landscaping bought
supplies for $3,000 and erroneously debited
equipment.
Managerial Accounting - 2.126
Correcting Errors
What was the incorrect entry?
 Debit Equipment and credit Cash.
 What is the correcting entry?
 Debit Supplies and credit Equipment.

Managerial Accounting - 2.127
Objective 5
Classify assets and liabilities
as current or long-term.
Managerial Accounting - 2.128
Liquidity

This is a measure of how quickly an item
can be converted to cash.
Managerial Accounting - 2.129
Current or Long-term

On the balance sheet, assets and liabilities
are classified as either current or long-term
to indicate their relative liquidity.
Managerial Accounting - 2.130
Assets are Classified as
Current or Long-term

–
–
–
–
Current assets are cash, or will be converted
to cash, in one year or within the normal
business operating cycle.
Cash
Short term receivables
Inventory
Prepaid expenses
Managerial Accounting - 2.131
Assets are Classified as
Current or Long-term

–
Long-term assets include all other assets.
Property, equipment and intangibles
Managerial Accounting - 2.132
Liabilities are Classified as
Current or Long-term

–
–
–
Current liabilities are debts or obligations
due within one year or within the operating
cycle.
Accounts and salary payables
Short term notes payable
Unearned revenue
Managerial Accounting - 2.133
Liabilities are Classified as
Current or Long-term

Long-term liabilities are all other debts due
in longer than one year or the entity’s
operating cycle.
Managerial Accounting - 2.134
The Classified Balance Sheet
The debit side
– Current assets
– Long-term assets
 Assets are listed in order of decreasing
liquidity.

Managerial Accounting - 2.135
The Classified Balance Sheet
The credit side
– Current liabilities
– Long-term liabilities
 Liabilities are listed in the order of how
soon they must be paid.

Managerial Accounting - 2.136
Classified Balance Sheet
XYZ Services
January 31, 19xx
Assets
Liabilities
Current Assets
Current Liabilities
Cash
12,100
Accounts Receivable
Accounts Payable
1,200
Salary Payable
1,100
150
Unearned Revenue
1,500
15,300
Total Liabilities
3,800
3,050
Supplies
Total Current Assets
Plant Assets
Equipment
Less Accum Deprec
Total Assets
Owners’ Equity
15,500
7,700
Capital
19,300
Total Liabilities and
Equity
23,100
7,800
23,100
Different Formats of
the Balance Sheet
Managerial Accounting - 2.137
The report format lists assets first, then
liabilities and then owners’ equity.
 The account format reports assets on
the left side and liabilities and owners’
equity on the right side.

Managerial Accounting - 2.138
Objective 6
Use the current and debt
ratios to evaluate a business.
Managerial Accounting - 2.139
Comparative Financial Statements...
are statements that show two or more
consecutive periods.
 They enhance the user’s ability to analyze a
company’s past performance.
–
Managerial Accounting - 2.140
Evaluating with Ratios

1
2
Two common ratios used to measure
liquidity are:
Current ratio
Debt ratio
Managerial Accounting - 2.141
Current Ratio

This measures the ability of a business to
pay its current liabilities with its current
assets.
Managerial Accounting - 2.142
Current Ratio
Current assets/Current liabilities
 A ratio of 1.0 or more indicates that a
business should have no trouble paying its
current bills.

Managerial Accounting - 2.143
Debt Ratio
It indicates the proportion of a business’
assets that are financed with debt.
 It measures their ability to pay both current
and long-term debt.

Managerial Accounting - 2.144
Debt Ratio
Total liabilities/Total assets
 The lower the ratio, the safer.

Managerial Accounting - 2.145
Trend Analysis

Decision makers compare various ratios
over a period of time, looking for improving
trends.