1. Completing the Accounting Cycle
Chapter 4

2. Objective 1
Prepare an accounting
work sheet.

3. The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.

4. The Accounting Cycle
For a new business, begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.

5. The Accounting Cycle Accounts Receivable Accounts Receivable 1,700
1,350
Accounts Receivable 1,700
Service Revenue ,700
Accounts Receivable
1,350
1,700
3,050
Accounts Receivable
1,350
1,700

6. The Accounting Cycle Work Sheet Cash Accounts receivable 12,100 3,050
Balance
Sheet
Income
Statement

7. Postclosing Trial Balance
The Accounting Cycle
Adjusting entries
Closing entries
Cash Accounts Receivable
12,100 3,050
Postclosing Trial Balance
Cash
Accounts
receivable
12,100
3,050

8. The Accounting Work Sheet
What is the work sheet?
A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements.
It is an internal document.

9. The Accounting Work Sheet
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr Dr Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
1,350
250
15,500
1,000
12,000
42,200
7,500
1,200
1,100
1,500
7,200
23,700
42,200
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

10. The Accounting Work Sheet
The company has earned revenue of $1,700 which will be collected next month.
Inventory of supplies at month end totaled $150.
Depreciation for the period was calculated as $200.

11. The Accounting Work Sheet
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr Dr Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
1,350
250
15,500
1,000
12,000
42,200
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
a) 1,700 b) c)
2,000 b) c)
a) 1,700
2,000
7,500
1,200
1,100
1,500
7,200
23,700
42,200
7,700
1,200
1,100
1,500
7,200
25,400
44,100
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

12. The Accounting Work Sheet
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr Dr Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
12,100
3,050
150
15,500
1,000
31,800
7,700
1,200
1,100
1,500
7,200
25,400
44,100
7,700
1,200
1,100
1,500
7,200
18,700
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

13. The Accounting Work Sheet
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr Dr Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
12,100
3,050
150
15,500
1,000
31,800
7,700
1,200
1,100
1,500
7,200
25,400
44,100
7,700
1,200
1,100
1,500
7,200
18,700
25,400
12,000
100
200
12,300
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

14. The Accounting Work Sheet
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr Dr Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
Net income
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
12,100
3,050
150
15,500
1,000
31,800
7,700
1,200
1,100
1,500
7,200
25,400
44,100
7,700
1,200
1,100
1,500
7,200
18,700
13,100
31,800
25,400
12,000
100
200
12,300
13,100
25,400
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

15. Objective 2
Use the work sheet
to complete the
accounting cycle.

16. Recording the Adjusting Entries
The work sheet
helps identify
the accounts
that need
adjustments.
Actual adjustment
of the accounts
requires
journalizing
and posting
the entries.

17. Recording the Adjusting Entries
The adjusting entries may be recorded in the journal when they are entered on the work sheet.
Many accountants journalize and post the adjusting entries just before they make the closing entries.

18. Objective 3
Close the revenue,
expense, and
withdrawal accounts.

19. Closing the Accounts
Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.

20. Expenses and Withdrawals
Closing the Accounts
Closing Entries
Expenses and Withdrawals
decrease
Owner’s Equity.
Revenues
increase
Owner’s Equity.

21. Closing the Accounts
Revenues and Expense accounts are closed to Income Summary.
Income Summary is closed to Capital.
Withdrawals are closed to Capital.
In a corporation, Dividends are closed to Retained Earnings.

22. Closing the Accounts Income Summary
A debit balance represents net loss.
A credit balance represents net income.

23. Closing the Accounts (Close Revenue Account) Income Summary Revenue
28,500
12,000
7,500
9,000
(Close Expense
Accounts)
4,450
28,500
24,050
Salary Exp
(Close Income
Summary)
1,500
1,800
3,300
Capital
Account
Rent Exp
2,500
24,050
(Close
Withdrawals
Account)
Withdrawals
Supplies Exp
2, ,500
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

24. Postclosing Trial Balance
The accounting cycle ends with the postclosing trial balance.
The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.

25. Permanent Accounts What accounts never close? Assets Liabilities
Owner’s equity
Balances of permanent accounts carry over to the next period.

26. Classify assets and liabilities as current or long-term.
Objective 4
Classify assets and liabilities
as current or long-term.

27. Liquidity
This is a measure of how quickly an item can be converted into cash.
On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their relative liquidity.

28. Current Assets
Current assets are cash, or will be converted to cash, in one year or within the normal business operating cycle.
What are some other examples?
short-term receivables
inventory
prepaid expenses

29. Current Liabilities
Current liabilities are debts or obligations due within one year or within the operating cycle.
What are some examples?
accounts and salary payables
short-term notes payable
unearned revenue

30. Long-term Assets and Liabilities
Long-term assets include all other assets.
property, equipment, and intangibles
Long-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.

31. The Classified Balance Sheet
Debit side
Current assets
Long-term assets
Credit side
Current liabilities
Long-term liabilities
Listed in the order
of decreasing
liquidity
Listed in the order
of how soon they
must be paid

32. The Classified Balance Sheet
XYZ Services
January 31, 20XX
Assets Liabilities
Current assets: Current liabilities:
Cash ,100 Accounts payable ,200
Accounts receivable ,050 Salary payable 1,100
Supplies Unearned revenue 1,500
Total current assets 15, Total liabilities 3,800
Plant assets Owner’s equity
Equipment 15, Capital 19,300
Less Accum. deprec. 7, ,800
Total liabilities and
Total assets 23,100 owner’s equity 23,100

33. Different Formats of the Balance Sheet
Report Format
Account Format
Assets
Liabilities
Owner’s Equity
Assets = Liabilities +
Owner’s Equity

34. Use the current ratio and the debt ratio to evaluate a company.
Objective 5
Use the current ratio and the debt
ratio to evaluate a company.

35. Comparative Financial Statements
They enhance the user’s ability to analyze a company’s past performance.
What are two common ratios used to measure liquidity?
Current ratio
Debt ratio

36. Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.
Current ratio = Current assets ÷ Current liabilities

37. Total liabilities ÷ Total assets
Debt Ratio
It indicates the proportion of a business’s assets that are financed with debt.
It measures their ability to pay both current and long-term debt.
Total liabilities ÷ Total assets

38. Trend Analysis
Decision makers compare various ratios over a period of time.

39. End of Chapter 4