4 Completing the Accounting Cycle

4-1

Objective 1
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

Spreadsheet (Work Sheet)

Trial Balance

Adjustments

Adjusted TB

Accounts

Dr

Cr

Dr

Cr

Dr

Cr

Accounts are listed in the Trial Balance column using the ending balance found in the general ledger.

Spreadsheet (Work Sheet)

Trial Balance

Adjustments

Adjusted TB

Accounts

Dr

Cr

Dr

Cr

Dr

Cr

Adjustments are entered here. Two possibilities: 1. Deferrals Existing balances are changed. 2. Accruals New information is entered.

Spreadsheet (Work Sheet)

Trial Balance

Adjustments

Adjusted TB

Accounts

Dr

Cr

Dr

Cr

Dr

Cr

Adjustments are combined with the trial balance. Account balances are now adjusted.

Spreadsheet (Work Sheet)

Adjusted TB Income State. Balance Sheet

Accounts

Dr

Cr

Dr

Cr

Dr

Cr

Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.

Spreadsheet (Work Sheet)

Adjusted TB Income State. Balance Sheet

Accounts

Dr

Cr

Dr

Cr

Dr

Cr

Asset, liability, owners equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

4-2

Objective 2
Prepare financial statements from adjusted account balances.

To balance sheet

From statement of owner equity

4-2

A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

4-2

Cash and other assets that are expected to be converted into cash, sold or used up usually within a year or less, through the normal operations of the business are called current assets.
Cash Accounts Receivable Supplies

4-2

Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

4-2

Property, plant, and equipment (also called fixed assets) include assets that depreciate over a period of time. Land is an exception as it is not subject to depreciation.
Equipment Machinery Buildings Land

4-2

Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities.
Accounts payable Wages payable Interest payable Unearned fees

4-2

Liabilities not due for a long time (usually more than one year) are long-term liabilities.
Notes payable Mortgage payable Bond payable

4-2

Owners equity is the owners right to the assets of the business. Owners equity is added to the total liabilities, and the total must be equal to the total assets.

4-3

Objective 3

Prepare closing entries.

4-3

Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.

4-3

To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary.

4-3

The balance of Income Summary is then transferred to the owners capital account. The balance of the owners drawing account is also transferred to the owners capital account. The entries that transfer these balances are called closing entries.

Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue. Debit Income Summary for the total expenses and credit each expense account for its balance. Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account. Debit the capital account for the balance of the drawing account, and credit drawing for the same amount.

Step 1 Step 2

Step 3 Step 4

4-3

After the closing entries are posted, all of the temporary accounts have zero balances.

Exhibit 7 Post-Closing Trial Balance NetSolutions Post-Closing Trial Balance December 31, 2007 Cash 2 065 00 Accounts Receivable 2 720 00 Supplies 760 00 Prepaid Insurance 2 200 00 Land 20 000 00 Office Equipment 1 800 00 Accumulated Depreciation 50 Accounts Payable 900 Wages Payable 250 Unearned Rent 240 Chris Clark, Capital 28 105 29 545 00 29 545

00 00 00 00 00 00

4-4

Objective 4

Describe the accounting cycle.

4-4

The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next periods transactions is called the accounting cycle. There are ten steps in the accounting cycle.

The Accounting Cycle

4-4

1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. An unadjusted trial balance is prepared. 4. Adjustment data are assembled and analyzed. 5. An optional end-of-period spreadsheet (work sheet) is prepared.
Continued

4-4

6. Adjusting entries are journalized and posted to the ledger. 7. An adjusted trial balance is prepared. 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared.

4-5

Objective 5
Illustrate the accounting cycle for one period.
Refer to the textbook for this extended illustration.

4-6

Objective 6
Explain what is meant by the fiscal year and the natural business year.

4-6

The annual accounting period adopted by a business is known as its fiscal year. When a business adopts a fiscal year that ends when business activities have reached the lowest point in its annual operation, such a fiscal year is also called the natural year.

Appendix
End-of-Period Spreadsheet (Work Sheet)

Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Unadjusted Trial Balance Debit Credit

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600

The unadjusted trial balance is checked for equality.

42,600

Unadjusted Trial Balance Account Title

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Debit

Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600

Cost of supplies on hand at end of period is $760.

42,600

Unadjusted Trial Balance Account Title

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Debit

Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000

(a) 1,240

16,340
4,275 1,600 985 800 455 42,600

(a) 1,240

The insurance expense for December is $200 ($2,400/12)

42,600
(b) 200

Accounts are added as needed.

Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Unadjusted Trial Balance Debit Credit

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000

(a) 1,240 (b) 200

16,340
4,275 1,600 985 800 455 42,600

Rent revenue earned during December was $120.

(a) 1,240 (b) 200 (c) 120

42,600

Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Unadjusted Trial Balance Debit Credit

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 (c) 120

(a) 1,240 (b) 200

4,275 1,600 985 800 455 42,600

(a) 1,240 42,600

Wages accrued but not paid at the end of December totaled $250.
(c) 120 (d) 250

Insurance Expense Rent Revenue Wages Payable

(b) 200

Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Unadjusted Trial Balance Debit Credit

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 (c) 120

(a) 1,240 (b) 200

4,275 1,600 985 800 455 42,600

(d) 250
(a) 1,240 42,600

Fees accrued at the end of December but not recorded total $500.
(c) 120 (d) 250

Insurance Expense Rent Revenue Wages Payable

(b) 200

Unadjusted Trial Balance

Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Adjustments Debit Credit

Adjusted Trial Balance

Debit Credit

Debit

Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600

(e) 500 (a) 1,240 (b) 200

(c) 120 (e) 500 (d) 250

Depreciation of office equipment is $50 for December.

(a) 1,240
42,600 (b) 200 (c) 120 (d) 250 (f) 50 (f) 50

Unadjusted Trial Balance Account Title

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Debit

Credit

Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation

2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000

(e) 500 (a) 1,240 (b) 200

(c) 120 (e) 500 (d) 250 (a) 1,240

4,000
16,340 4,275 1,600 985 800 455 42,600

42,600 (b) 200 (c) 120 (d) 250 (f) 50 (f) 2,360 50 2,360

Summed and ruled

The next step is to add or subtract the adjustments from (to) the amounts found in the Unadjusted Trial Balance columns and enter the results in the Adjusted Trial Balance columns.

The next step is to extend amounts in the Adjusted Trial Balance columns to the Income Statement and Balance Sheet columns.

The Income Statement and Balance Sheet columns are totaled.

The net income or net loss is determined. Then the Income Statement and Balance Sheet columns are totaled and double-ruled.
The difference between the Income Statement column totals is the net income (or net loss) for the period.