Completing the Accounting Cycle ACG 2021: Chapter 4

Completing the Cycle Record entries in the journal Post to the ledger Prepare trial balance Record and post adjusting entries Prepare adjusted trial balance Prepare financial statements Income Statement Statement of Retained earnings Balance Sheet Statement of Cash Flows

Financial Statements Income statement Shows results of operations for a period of time Brady Corp Income Statement December 31, 2001 Revenues: Fees earned $50,000 Expenses Salaries exp $12,000 Rent expense 15,800 Supplies exp 7,200 Total 35,000 Net income 15,000

Statement of Retained Earnings Financial Statements Statement of Retained Earnings Shows the changes in the earnings of the corporation Brady Corp Statement of Retained Earnings Dec 31, 2001 Beg RE $9,875 Add Net income 15,000 24,875 Deduct: dividends 10,000 Ending RE 14,875

Financial Statements Balance sheet Three sections Shows that the accounting equation holds true Snapshot of a moment in time Three sections Assets Liabilities Shareholder’s Equity

Balance Sheet Brady Corporation Balance Sheet Dec 31, 2001 Assets: Liabilities: Cash $12,705 Accts pay $7280 Accts rec 5,400 Loans pay 9800 Supplies 1,250 Total $17,080 Fixed assets 15,100 Total $34,455 Stockholder’s Equity Capital stock $2,500 Retained earn 14,875 Total 17,375 TOTAL 34,455

Financial Statements Statement of Cash Flows sources and uses of cash Operating Investing Financing Always prepared in the same order

Closing Entries Real accounts Temporary Balances of accounts reported on the balance sheet are carried forward from year to year Temporary Balances of accounts reported on the income statement not carried forwarded We ZERO the account

Closing Entries Income Summary Four entries Clearance account used to process the closing entries Four entries Close revenues Close expenses Close income summary Close dividends

Example: Fees earned $10,000 Rent expense $2,000 Wages expense $6,000 Dividends $4,000 Retained earnings $12,000

Close Revenues Date Account PR Debit Credit Dec 31 Fees earned 10000 Income summary 10,000

Close Expenses Date Account PR Debit Credit Dec 31 Income summary 8000 Rent expense 2000 Wages expenses 6000

Close income summary Income summary Exp $8,000 Rev $10,000 Balance $2,000

Close income summary Date Account PR Debit Credit Dec 31 Close the amount of net income to retained earnings Date Account PR Debit Credit Dec 31 Income summary 2000 Retained earnings

Close dividends Date Account PR Debit Credit Dec 31 Retained earnings 4000 Dividends

Balance in Retained earnings Dividends $4,000 $12,000 Beg Balance 2,000 Net income $10,000 Ending balance

Example 1 Date Account PR Debit Credit Dec 31 Fees earned 20,000 Income Summary Income summary 24,000 Rent expense 6000 Wages exp 8000 Misc exp 10000

Example 1 Date Account PR Debit Credit Dec 31 Retained earnings 4000 Income summary 4,000 Income Summary 3000 Dividends

Closing entries After closing entries are posted Post Closing trial balance is prepared

Accounting Year Calendar year – ends on December 31st Fiscal year – ends other than December 31st