1. Completing the Accounting Cycle4
Completing the Accounting Cycle

2. 1
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
4-4

3. 1
Exhibit 1
End-of-Period Spreadsheet (Work Sheet)

4. 1 Example Exercise 4-1 Flow of Accounts into Financial Statements
The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column.
Dividends
Utilities Expense
Accumulated Depreciation—Equipment
Unearned Rent
Fees Earned
Accounts Payable
Rent Revenue
Supplies
4-11

5. Prepare financial statements from adjusted account balances.2
Prepare financial statements from adjusted account balances.
4-13

6. 2
Balance Sheet
A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

7. 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

8. 2
Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

9. 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

10. 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

11. 2
Liabilities not due for a long time (usually more than one year) are long-term liabilities.
Notes payable
Mortgage payable
Bond payable

12. 2
Stockholders’ equity is the stockholders’ right to the assets of the business. The stockholders’ equity consists of capital stock and retained earnings. The stockholders’ equity is added to the total liabilities, and the total must be equal to the total assets.

13. 2 Example Exercise 4-4 Classified Balance Sheet
The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability; (d) long-term liability; or (e) stockholders’ equity section of the December 31, 2009 balance sheet of Hindsight Consulting.
Capital Stock 5. Cash
Notes Receivable (due 6. Unearned Rent
in 6 months) 7. Accumulated Depr.—
3. Notes Payable (due in Equipment
2011) 8. Accounts Payable
4. Land
4-31

14. Prepare closing entries.3
Prepare closing entries.
4-33
4-33

15. 3
Closing Entries
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.

16. 3
Closing Entries
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.

17. 3
Closing Entries
The balance of Income Summary is then transferred to Retained Earnings. The balance of the Dividends account is also transferred to Retained Earnings. The entries that transfer these balances are called closing entries.

18. 3
Exhibit 3
The Closing Process

19. 3
Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.
Step 1:
Fees Earned
Bal. 16,840
Income Summary
16,840
Step 1
16,960
Rent Revenue
120
Bal

20. Miscellaneous Expense3
Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
Wages Expense
Bal. 4,525
Bal ,600
Bal. 50
Bal. 985
Bal. 2,040
455
200
2,040
985 50
1,600
4,525
Income Summary
Rent Expense
9,855
16,960
Depreciation Expense
Utilities Expense
Step 2
Supplies Expense
Debit Income Summary for the total expenses and credit each expense account for its balance.
Insurance Expense
Bal
Miscellaneous Expense
Bal. 455

21. 3
Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
Income Summary
9,855
16,960
7,105
Debit Income Summary for the amount of its balance (in this case, the net income) and credit Retained Earnings.
Step 3
Retained Earnings
Bal. 0
Dividends
Bal. 4,000
7,105

22. 3
Flowchart of Closing Entries for NetSolutions (continued)
Exhibit 4
Retained Earnings
Bal. 25,000
7,105
Dividends
Bal. 4,000
Debit Retained Earnings for the balance of the dividends account, and credit the dividends account.
Step 4
4,000
4,000

23. 3 Exhibit 4 Flowchart of Closing Entries for NetSolutions (summary)
Stockholders’ Equity

24. 3 Exhibit 5 Closing Entries for NetSolutions Step 1 Step 2 Step 3

25. 3
Closing Entries
After the closing entries are posted, all of the temporary accounts have zero balances.

26. 3 Example Exercise 4-5 Closing Entries
After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co.
Retained Earnings $615,850
Dividends 25,000
Fees Earned 380,450
Wages Expense 250,000
Rent Expense 65,000
Supplies Expense 18,250
Miscellaneous Expense 6,200
Journalize the four entries required to close the accounts.
4-49

27. Post-Closing Trial Balance3
Post-Closing Trial Balance
A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.

28. 3
Exhibit 7
Post-Closing Trial Balance

29. Describe the accounting cycle.4
Describe the accounting cycle.
4-53

30. 4
The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle.

31. Transactions are analyzed and recorded in the journal.4
Accounting Cycle
Transactions are analyzed and recorded in the journal.
Transactions are posted to the ledger.
An unadjusted trial balance is prepared.
Adjustment data are assembled and analyzed.
An optional end-of-period spreadsheet (work sheet) is prepared.
(continued)

32. Accounting Cycle (continued)4
Accounting Cycle (continued)
Adjusting entries are journalized and posted to the ledger.
An adjusted trial balance is prepared.
Financial statements are prepared.
Closing entries are journalized and posted to the ledger.
A post-closing trial balance is prepared.

33. 6
Explain what is meant by the fiscal year and the natural business year.
4-76

34. 6
Fiscal Year
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.