1. 4 – Completing the Accounting Cycle
4 – Completing the Accounting Cycle
After studying this chapter, you should be able to:
Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.
Prepare financial statements from adjusted account balances.
Prepare closing entries.
Describe the accounting cycle.
Illustrate the accounting cycle for one period.
Explain what is meant by the fiscal year and the natural business year.

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

3. 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. 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.
4-2
Cash
Accounts Receivable
Notes Receivable
Supplies
Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

5. 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

6. 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.
4-2
Accounts payable
Notes payable
Wages payable
Interest payable
Unearned fees
Liabilities not due for a long time (usually more than one year) are long-term liabilities.
Notes payable
Mortgage payable
Bond payable

7. Jason Corbin, Capital 5. Cash Notes Receivable (due 6. Unearned Rent
4-2
Example
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) owner’s equity section of the December 31, 2007 balance sheet of Hindsight Consulting.
Jason Corbin, Capital 5. Cash
Notes Receivable (due 6. Unearned Rent
in 6 months) months)
Notes Payable (due in 7. Accumulated Depr.—
2009) Equipment
4. Land 8. Accounts Payable

8. 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.

9. 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 owner’s capital account. The balance of the owner’s drawing account is also transferred to the owner’s capital account. The entries that transfer these balances are called closing entries.

10. 4-3
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. 120

11. Miscellaneous Expense
4-3
Wages Expense
Bal. 4,525
Bal. 1,600
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. 200
Miscellaneous Expense
Bal. 455

12. 4-3
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 the capital account.
Step 3
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
7,105

13. 4-3
Chris Clark, Capital
Bal. 25,000
7,105
Chris Clark, Drawing
Bal. 4,000
Debit the capital account for the balance of the drawing account, and credit drawing for the same amount.
Step 4
4,000
4,000

14. 4-3
Step 1
Step 2
Step 3
Step 4

15. 4-3
After the closing entries are posted, all of the temporary accounts have zero balances.

16. Journalize the four entries required to close the accounts.
4-3
Example Exercise
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.
Terry Lambert, Capital $615,850
Terry Lambert, Drawing 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.

17. 4-3 Example 31 Income Summary 41,000 July 31 Fees Earned 380,450
4-3
Example
July 31 Fees Earned 380,450
Income Summary 380,450
31 Income Summary 339,450
Wages Expense 250,000
Rent Expense 65,000
Supplies Expense 18,250
Miscellaneous Expense 6,200
31 Income Summary 41,000
Terry Lambert, Capital 41,000
31 Terry Lambert, Capital 25,000
Terry Labert, Drawing 25,000
For Practice: PE 4-5A, PE 4-5B

18. Post-Closing Trial Balance
Exhibit 7 Post-Closing Trial Balance
4-3
NetSolutions
Post-Closing Trial Balance
December 31, 2008
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital

19. Describe the accounting cycle.
4-4
Objective 4
Describe the accounting cycle.

20. 4-4
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.
Note – Not all steps are mandatory and in practice a few of the steps are combined

21. The Accounting Cycle Steps
The Accounting Cycle Steps
4-4
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

22. Adjusting entries are journalized and posted to the ledger.
4-4
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.

23. Objective 5 Illustrate the accounting cycle for one period.
4-5
Objective 5
Illustrate the accounting cycle for one period.
Refer to the textbook for this extended illustration.

24. 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.