Closing Process


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Closing Process

  1. 1. Chapter 5
  2. 2. Closing Process <ul><li>Prepares account for recording the transaction of the next period </li></ul><ul><li>Performed at the end of an accounting period after financial statements are prepared </li></ul><ul><li>Revenue, expense and withdrawals accounts: </li></ul><ul><ul><li>To be reflected in owner’s equity </li></ul></ul><ul><ul><li>To begin with zero balances to measure results from period just ending </li></ul></ul><ul><li>Owner’s capital account to reflect: </li></ul><ul><ul><li>Increases from net income </li></ul></ul><ul><ul><li>Decreases from net losses and withdrawals from the period just ending. </li></ul></ul>
  3. 3. Accounts for Closing <ul><li>Temporary (or nominal accounts): accumulate data from one accounting period. Include all income statement accounts, withdrawals </li></ul><ul><li>Revenue and expense account balances are transferred to the Income Summary (a temporary account that contains a credit for the sum of all revenues and a debit for the sum of all expenses) </li></ul>
  4. 4. Four Step Process <ul><li>Close revenues accounts to Income Summary account (debit revenues, credit income summary) </li></ul><ul><li>Close expense accounts to Income Summary account (credit expenses, debit income summary) </li></ul><ul><li>Close Income Summary account to owner’s capital account </li></ul><ul><li>Close Withdrawals account to owner’s capital account. </li></ul>
  5. 5. Post-Closing Trial Balance <ul><li>List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted. </li></ul><ul><li>Identical to those in the balance sheet </li></ul><ul><li>Verifies that total debits equals total credits for permanent accounts </li></ul><ul><li>Verifies that all temporary accounts have zero balances </li></ul>
  6. 6. Classified Balance Sheet <ul><li>Organizes assets and liabilities into important subgroups to provide users with more information for making decisions. </li></ul><ul><li>Liabilities </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Long-Term Liabilities </li></ul><ul><li>Owner’s Equity </li></ul><ul><li>Assets </li></ul><ul><li>Current Assets </li></ul><ul><li>Long-Term Investments </li></ul><ul><li>Capital Assets: Plant and Equipment </li></ul><ul><li>Intangible Assets </li></ul>
  7. 7. Classification Groups <ul><li>Current assets: cash and other resources that are expected to be sold, collected or used with the longer of one year or the company’s operating cycles (prepaid expenses are usually grouped together and listed last) </li></ul><ul><li>Long-term Investments: held for more than one year or the operating cycle </li></ul><ul><li>Capital Assets: tangible and intangible long term assets used to produce or sell produces and services. </li></ul>
  8. 8. Classification Groups <ul><li>Current Liabilities: obligations due to be paid or settled within the longer of one year or the operating cycle. (accounts payable, notes payable, wages payable, taxes payable, interest payable and unearned revenues) </li></ul><ul><li>Long-term Liabilities: obligations not due within the longer of one year or the operating cycle. (notes payable, mortgages payable, bonds payable, and lease obligations) </li></ul><ul><li>Owner's equity: owner's claim on the assets of company. </li></ul>
  9. 9. Current Ratio <ul><li>Important measure used to evaluate a company’s ability to pay its short-tem obligations. </li></ul><ul><li>Liquidity: the ability to pay day-to-day obligations (current liabilities) with existing liquid assets </li></ul><ul><li>Helps make decisions on lending money to the company, allowing a customer to buy on credit, how to pay existing debts when they come due </li></ul><ul><li>A current ratio greater than or equal to 1 is favourable </li></ul>Current Ratio = Current Assets Current Liabilities
  10. 10. Homework <ul><li>Walk through demo problem </li></ul><ul><li>Pg 169 # 4-2, 170 #4-4, 4-6 pg 171#4-8, 4-9, 4-10 </li></ul><ul><li>172 4-11, 4-12 </li></ul><ul><li>173 4-2A, 4-3A, 4-4A, 4-5A and more check answers for appropriate problems </li></ul>
  11. 11. Alternate Correction <ul><li>Reverse the initial journal entry and enter the correct one. </li></ul>Paid two weeks salary including three days accrued in January 900 270 630 Salaries Payable Salaries Expense Cash Feb. 9 Credit Debit PR Account Titles and Explanation Date