It's Financial accounting slide. Chapter 5

1. THE ACCOUNTING CYCLE
ABDULLAH RAMZAN
WASEEM USMAN
MAHRUKH ALAM
MUHAMMAD AMIR
USAMA CHAUDHRY

2. OVERVIEW
1. Adjusted Trial Balance
2. Closing Entries
3. Financial Analysis and Decision Making

3. ABDULLAH RAMZAN
ADJUSTED TRIAL BALANCE

4. ADJUSTED TRIAL BALANCE
Trial Balance :-
A trial balance is a bookkeeping worksheet in which the balances of all ledgers are
compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the
end of every reporting period. The general purpose of producing a trial balance is to ensure the
entries in a company's bookkeeping system are mathematically correct.
Adjusted Trial Balance :-
An adjusted trial balance is a listing of all the account titles and balances contained
in the general ledger after the adjusting entries for an accounting period have been posted to
the accounts.

5. OBJECTIVES OF PREPARING TRIAL BALANCE
1. Testing of arithmetic accuracy
2. To help in preparing Financial statements
3. Helps in locating errors
4. Help in comparison
5. Help in making adjustments.

6. WASEEM USMAN
EXAMPLE OF TRIAL BALANCE

7. EXAMPLE OF TRIAL BALANCE
Find out
1. Income statement
2. Statement of Retained earning
3. Balance Sheet

8. Income Statement

9. Statement of Retained Earning

10. Balance sheet

11. MAHRUKH ALAM
CLOSING ENTRIES

12. CLOSING ENTRIES
Closing Entries:-
Closing entries are journal entries made at the end of an accounting period which transfer the
balances of temporary accounts to permanent accounts. Closing entries are based on the account balances
in an adjusted trial balance.
Temporary accounts include:
1.Revenue, Income and Gain Accounts
2.Expense and Loss Accounts
3.Dividend, Drawings or Withdrawals Accounts
4.Income Summary Account

13. EXAMPLE OF CLOSING ENTRIES
Note Date Account Debit Credit
1 Jan 31 Service Revenue 85,600
Income Summary 85,600
2 Jan 31 Income Summary 77,364
Wages Expense 38,200
Supplies Expense 18,480
Rent Expense 12,000
Miscellaneous Expense 3,470
Electricity Expense 2,470
Telephone Expense 1,494
Depreciation Expense 1,100
Interest Expense 150
3 Jan 31 Income Summary 8,236
Retained Earnings 8,236
4 Jan 31 Retained Earnings 5,000
Dividend 5,000
The following example shows the
closing entries based on the adjusted
trial balance of Company A.
1.Revenue, Income and Gain Accounts
2.Expense and Loss Accounts
3.Dividend, Drawings or Withdrawals Accounts
4.Income Summary Account

14. MUHAMMAD AMIR
FINANCIAL ANALYSIS AND DECISION MAKING

15. FINANCIAL ANALYSIS AND DECISION MAKING
1.Net Income Percentage
2.Return on Equity
3.Working Capital
4.Current Ratio

16. NET INCOME PERCENTAGE
Net Income is the percentage of revenue remaining after all operating expenses, interest, taxes
and preferred stock dividends (but not common stock dividends) have been deducted from a company’s
total revenue
The formula for net income is:
(Total Revenue – Total Expenses) = Net Income/Total Revenue = Net Income Percentage
By dividing net profit by total revenue, we can see what percentage of revenue made it all the
way to the bottom line, which is good for investors

17. RETURN ON EQUITY
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on
equity measures a corporation's profitability by revealing how much profit a company generates with the money
shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to
Preferred stock.) Shareholder's equity does not include preferred shares.
Also known as "return on net worth" (RONW).

18. USAMA CHAUDHRY
FINANCIAL ANALYSIS AND DECISION MAKING

19. WORKING CAPITAL
Working capital is a measure of both a company's efficiency and its short-term financial health. Working
capital is calculated as:
Working Capital = Current Assets - Current Liabilities
The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has
enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C
(working capital). While anything over 2 means that the company is not investing excess assets. Most
believe that a ratio between 1.2 and 2.0 is sufficient. Also known as "net working capital".

20. CURRENT RATIO
The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term
obligations. To gauge this ability, the current ratio considers the current total assets of a company (both
liquid and illiquid) relative to that company’s current total liabilities.
The formula for calculating a company’s current ratio, then, is:
Current Ratio = Current Assets / Current Liabilities
The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current
assets and liabilities.
The current ratio is also known as the working capital ratio.