COMPLETING THE ACCOUNTING CYCLEThe accounting cycle1. ANALYZE 2. RECORD transactions 3. From ledger info, preparetransactions in journal and post to a trial balance before ledger (“T”) accounts adjustments8. Prepare post- 4. ADJUST balances by closing trial balance; recording adjusting entries instart new accounting period journal and posting to ledger7. Prepare for next 6. REPORT with financial 5. Prepare adjustedaccounting period with statements prepared from trial balanceclosing entries adjusted account balances(in journal and ledger)CLOSING ENTRIESPermanent (real) accounts: balance sheet accounts; balance in account at end of Year 1 = balance in account at beginning of Year 2Temporary (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 withzero balanceReasons 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 accountsIncome summary account: account used only during closing processOMIT EXAMPLE PROBLEM BELOW; UNDERSTAND PURPOSE OF CLOSING ENTRIESBUT NO CALCULATIONS OR ENTRIES NEEDEDExample: Closing entriesA company’s trial balance after adjustments showed the following accounts and balances. Debit CreditCash $14,000Accounts receivable 1,200Supplies 600Office equipment 6,500Accumulated depreciation $ 1,500Accounts payable 5,200Unearned revenue 1,600Common stock 2,000Retained earnings 8,000Dividends 3,200Revenue 25,050Salaries expense 16,800Supplies expense 550Depreciation expense 500Use the T accounts below to show the necessary closing entries.Classified balance sheetReports assets, liabilities, and equity into sub-categories to provide useful informationASSETSCurrent 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 expensesLong – term assets (Non-current assets)- may be further classified asProperty, Plant, and EquipmentAssets used in operations, used to generate revenues, over multiple accounting periodsIncludes Land, Buildings, Equipment, Machinery, Computers….InvestmentsAssets not used in operations but held as an investmentIntangible AssetsNon-current and non-physical; usually confer legal rightExamples includes patents, copyrights, franchisesLIABILITIESCurrent liabilities – debts that come due within one year; normally require use of current assets to be satisfiedOn balance sheet, generally listed in order they must be paidExamples 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 oneyear; example include Long term notes payable, Bonds payable, Mortgages payableSTOCKHOLDERS’ EQUITYPaid-in capital – amounts invested into business by owners, stock accountsRetained earnings – earned capitalAccumulated other comprehensive incomeUsing the classified balance sheetWorking capital = current assets – current liabilitiesCurrent ratio = current assets / current liabilitiesClass exampleComparative balance sheets for Palo Pinto Company are shown below. December 31 Assets 2014 2013Cash $ 25,000 $ 35,000Marketable securities 15,000 12,000 Accounts receivable (net) 20,000 50,000Inventory 55,000 50,000Supplies 10,000 3,000Property, Plant, and Equipment (net) 200,000 160,000Total assets $325,000 $310,000Liabilities and Stockholders’ EquityAccounts payable $ 15,000 $ 25,000Short-term notes payable 30,000 24,000 Accrued liabilities 5,000 6,000Bonds payable 28,000 20,000Common stock 200,000 200,000Retained earnings 47,000 35,000Total liabilities and stks’ equity $325,000 $310,000Required: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 = 125,000Current assets 2013 = 35,000 + 12,000 + 50,000 + 50,000 + 3,000 = 150,000Current liabilities 2014 = 15,000 + 30,000 + 5,000 = 50,000Current liabilities 2013 = 25,000 + 24,000 + 6,000 = 55,0002014 2013Working capital 125,000 – 50,000 = 75,000 150,000 – 55,000 = 95,000Current ratio 125,000 / 50,000 = 2.5 150,000 / 55,000 = 2.73Both ratios