COMPLETING THE ACCOUNTING CYCLE The accounting cycle 1 ANALYZE transactions 2 RECORD transactions in journal and post to ledger T accounts 8 Prepare postclosing trial balance start new accounting period 7 Prepare for next accounting period with closing entries in journal and ledger 3 From ledger info prepare a trial balance before adjustments 4 ADJUST balances by recording adjusting entries in journal and posting to ledger 6 REPORT with financial statements prepared from adjusted account balances 5 Prepare adjusted trial balance CLOSING ENTRIES Permanent real accounts balance sheet accounts balance in account at end of Year 1 balance in account at beginning of Year 2 Temporary nominal accounts accounts that affect Retained earnings Revenues Expenses and Dividends balances are temporary that is balance accumulates for current period only then moves into RE start each new accounting period with zero balance Reasons for recording closing entries Zero out each temporary account that is set each revenue expense and dividends account balance to zero before new accounting period begins Up date balance in RE change RE balance from Beginning RE to ending RE by transferring in balances from temporary accounts Income summary account account used only during closing process OMIT EXAMPLE PROBLEM BELOW UNDERSTAND PURPOSE OF CLOSING ENTRIES BUT NO CALCULATIONS OR ENTRIES NEEDED Example Closing entries A company s trial balance after adjustments showed the following accounts and balances Cash Accounts receivable Supplies Office equipment Accumulated depreciation Accounts payable Unearned revenue Common stock Retained earnings Dividends Revenue Salaries expense Supplies expense Depreciation expense Debit 14 000 1 200 600 6 500 Credit 1 500 5 200 1 600 2 000 8 000 3 200 25 050 16 800 550 500 Use the T accounts below to show the necessary closing entries Classified balance sheet Reports assets liabilities and equity into sub categories to provide useful information ASSETS Current assets cash and other assets that a business expects to convert to cash or use up in a relatively short time period one year or one operating cycle current assets include Cash Marketable securities AR Inventories Supplies and Prepaid expenses Long term assets Non current assets may be further classified as Property Plant and Equipment Assets used in operations used to generate revenues over multiple accounting periods Includes Land Buildings Equipment Machinery Computers Investments Assets not used in operations but held as an investment Intangible Assets Non current and non physical usually confer legal right Examples includes patents copyrights franchises LIABILITIES Current liabilities debts that come due within one year normally require use of current assets to be satisfied On balance sheet generally listed in order they must be paid Examples include Accounts payable Short term notes payable Un Revenues accrued liabilities such as wages payable and interest payable and current maturities of long term debt any long term debt or portion of a note or bond payable that become due within one year must be reclassified as current Long term liabilities Non current liabilities debts that are due in more than one year example include Long term notes payable Bonds payable Mortgages payable STOCKHOLDERS EQUITY Paid in capital amounts invested into business by owners stock accounts Retained earnings earned capital Accumulated other comprehensive income Using the classified balance sheet Working capital current assets current liabilities Current ratio current assets current liabilities Class example Comparative balance sheets for Palo Pinto Company are shown below December 31 Assets 2014 2013 Cash 25 000 35 000 Marketable securities 15 000 12 000 Accounts receivable net 20 000 50 000 Inventory 55 000 50 000 Supplies 10 000 3 000 Property Plant and Equipment net 200 000 160 000 Total assets 325 000 310 000 Liabilities and Stockholders Equity Accounts payable Short term notes payable Accrued liabilities Bonds payable Common stock Retained earnings Total liabilities and stks equity 15 000 30 000 5 000 28 000 200 000 47 000 325 000 25 000 24 000 6 000 20 000 200 000 35 000 310 000 Required 1 Determine Palo Pinto Company s working capital and current ratio as of December 31 2013 and 2014 2 Did these ratios improve or decline Solution Current assets 2014 25 000 15 000 20 000 55 000 10 000 125 000 Current assets 2013 35 000 12 000 50 000 50 000 3 000 150 000 Current liabilities 2014 15 000 30 000 5 000 50 000 Current liabilities 2013 25 000 24 000 6 000 55 000 Working capital Current ratio Both ratios declined 2014 125 000 50 000 75 000 125 000 50 000 2 5 2013 150 000 55 000 95 000 150 000 55 000 2 73