1. Completing the Accounting Cycle Instructor: Professor John Ahmad
Chapter 4
Completing the Accounting Cycle
Accounting 211
Instructor: Professor John Ahmad

2. In Chapter 4, we will: 1 Prepare a work sheet
2 Explain the process of closing the books
3 Describe the content and purpose of a post-closing trial balance
4 State the required steps in the accounting cycle
5 Explain the approaches to preparing correcting entries
6 Identify the sections of a classified balance sheet

3. What is a Worksheet?
multiple-column form used for the adjustment process and preparing financial statements
working tool for the accountant
not a permanent accounting record
Eases preparation of adjusting entries and financial statements

4. Example of a Work Sheet

5. Remember: A work sheet is not a permanent accounting record
When it is used:
financial statements are prepared from the work sheet
adjustments are journalized and posted from the work sheet after financial statements, so management can receive the financial statements more quickly

6. To Prepare A Work Sheet:
1 Prepare the trial balance
2 Enter adjustments in the adjustments columns
3 Enter adjusted balances in adjusted trial balance columns
4 Extend adjusted trial balance amounts to the appropriate financial statement columns
5 Total the statement columns, compute net income (loss), and complete the work sheet
Now, let’s see how this works!

7. First, enter the unadjusted trial balance amounts to the worksheet!
FastForward Work Sheet
For Month Ended December 31, 2004
First, enter the unadjusted trial balance amounts to the worksheet! 43

8. Here are our adjusting entries for December.
Insurance expense
Prepaid insurance
Supplies expense 1050
Supplies
Depreciation expense
Accum. Depr. – Equip

9. Here Are More Adjusting Entries for December.
Unearned revenue
Consulting Revenue
Salaries Expense
Salaries Payable
Accounts Receivable 1,800
Consulting Revenue 1,800

10. Next, enter the adjustments!
FastForward Work Sheet
For Month Ended December 31, 2004
Next, enter the adjustments! 44

11. Prepare the adjusted trial balance!
FastForward Work Sheet
For Month Ended December 31, 2004 45

12. FastForward Work Sheet For Month Ended December 31, 2004
Then, extend the adjusted trial balance amounts to the financial statements!
FastForward Work Sheet
For Month Ended December 31, 2004 45

13. Total statement columns, compute income or loss, and balance columns.
FastForward Work Sheet
For Month Ended December 31, 2004 45

14. Prepare the Financial Statements
Prepare the Income
Statement.
A work sheet does not substitute for financial statements.

15. Prepare the Statement of Changes in Owner’s Equity.

16. Prepare the Balance Sheet.

17. Which of these characteristics are true about a work sheet?
a permanent accounting record
an optional device used by accountants
a part of the general ledger
a part of the journal

18. Although it’s optional, the work sheet is a very useful tool!
Answer!
permanent accounting record
optional device used by accountants
part of the general ledger
part of the journal
Although it’s optional, the work sheet is a very useful tool!

19. TEMPORARY VS. PERMANENT ACCOUNTS
TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawing Owner’s capital account
Now, let’s talk about closing entries and income summary!

20. CLOSING ENTRIES Closing entries Income Summary
Transfer net income (loss) and owner’s drawings to owner’s capital
Journalizing and posting is a required step in the accounting cycle
Income Summary
A temporary account
Used in closing revenue and expense accounts
Minimizes the details in the permanent owner’s capital account

21. Closing Process
Identify accounts for closing.
Resets revenue, expense and withdrawal account balances to zero at the end of the period.
Helps summarize a period’s revenues and expenses in the Income Summary account.
Record and post closing entries.
Prepare post-closing trial balance.

22. Temporary and Permanent Accounts
Temporary Accounts
Revenues
Income Summary
Expenses
Withdrawals
Permanent Accounts
Assets
Liabilities
Owner’s Capital
The closing process applies only to temporary accounts.

23. Recording Closing Entries
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Owner’s Capital.
Close Withdrawals to Owner’s Capital.
Let’s see how the closing process works!

24. Balances before closing.
Closing Process
Balances before closing.

25. Close Revenue accounts to Income Summary.
Closing Process
Close Revenue accounts to Income Summary.

26. Closing Process Close Expense accounts to Income Summary.
The balance in Income Summary equals net income.

27. Close Income Summary to Owner’s Capital.
Closing Process
Close Income Summary to Owner’s Capital.

28. Close Withdrawals account to Owner’s Capital.
Closing Process
Close Withdrawals account to Owner’s Capital.

29. Using the adjusted trial balance, let’s prepare the closing entries for FastForward.

30. Close Revenue accounts to Income Summary.

31. Close Revenue Accounts to Income Summary
Now, let’s look at the ledger accounts after posting this closing entry.

32. Close Expense Accounts to Income Summary
Now, let’s look at the ledger accounts after posting this closing entry.

33. Close Expense Accounts to Income Summary
Net Income

34. Close Income Summary to Owner’s Capital.

35. Close Income Summary to Owner’s Capital
Now, let’s look at the ledger accounts after posting this closing entry.

36. Close Income Summary to Owner’s Capital

37. Close Withdrawals to Owner’s Capital.

38. Close Withdrawals to Owner’s Capital
Now, let’s look at the ledger accounts after posting this closing entry.

39. Close Withdrawals to Owner’s Capital

40. ABOUT CLOSING ENTRIES Be Careful!
Avoid doubling revenue and expense balances – watch debits and credits
Remember: owner’s drawing does not move to the Income Summary account. Owner’s drawing is not an expense and it is not a factor in determining net income.

41. RESULTS OF POSTING CLOSING ENTRIES
Temporary accounts
All temporary accounts will have zero balances after posting the closing entries
Temporary accounts (revenues and expenses) are totaled, balanced and double ruled
Owner’s capital
Total equity of the owner at the end of the accounting period
No entries are journalized and posted to owner’s capital during the year
Permanent accounts (assets, liabilities, and owner’s capital) are not closed

42. POST-CLOSING TRIAL BALANCE
After all closing entries have been journalized the post-closing trial balance is prepared from the ledger.
The purpose of this trial balance is to
prove the equality of the permanent account balances that are carried forward into the next accounting period.

43. Post-Closing Trial Balance
Let’s look at FastForward’s post-closing trial balance.
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.

44. Post-Closing Trial Balance

45. Post-closing Trial Balance

46. Summary of Steps in the Accounting Cycle
1 Analyze business transactions
2 Journalize the transactions
3 Post to ledger accounts
4 Prepare a trial balance
5 Journalize and post adjusting entries

47. STEPS IN THE ACCOUNTING CYCLE
6 Prepare an adjusted trial balance
7 Prepare financial statements: Income Statement, Owner’s Equity Statement, Balance Sheet
8 Journalize and post closing entries
9 Prepare a post-closing trial balance

48. Correcting Entries Correcting Entries
errors should be corrected as soon as discovered
correcting entries are unnecessary if records are free of errors
can be journalized and posted whenever an error is discovered
involve any combination of balance sheet and income statement accounts

49. Illustrative Example Of Correcting Entry
Cash
Service Revenue 50
Accounts Receivable
Service Revenue

50. Another Illustrative Example Of Correcting Entry
Delivery Equipment 45
Accounts Payable 45
Office Equipment
Accounts Payable
Delivery Equipment
Accounts Payable

51. Question: The closing entry process consists of closing:
all asset and liability accounts
out the owner's capital account
all permanent accounts
all temporary accounts
Which answer is correct?

52. The closing entry process consists of closing
all asset and liability accounts
out the owner's capital account
all permanent accounts
all temporary accounts

53. Standard Balance Sheet Classifications
Financial statements become more useful when the elements are classified into significant subgroups.
A classified balance sheet generally has the following standard classifications (see next slide):

54. Classified Balance Sheet
Current items are those expected to come due (both collected and owed) within the longer of one year or the company’s normal operating cycle.

55. Current assets are expected to be sold, collected, or used within one year or the company’s operating cycle.

56. Long-term investments are expected to be held for the longer of one year or the operating cycle.

57. Plant assets are tangible long-lived assets used to produce or sell products and services.

58. Intangible assets are long-term resources used to produce or sell products and services and that lack physical form.

59. Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

60. Long-term liabilities are obligations not due within the longer of one year or the company’s operating cycle.

61. Equity is the owner’s claim on the assets.

62. REVERSING ENTRIES Reversing entry
Made at the beginning of the next accounting period
Purpose is to simplify the recording of a subsequent transaction related to an adjusting entry
Most often used to reverse two types of adjusting entries: accrued revenues and accrued expenses
Cant Get Bullets to appear one at a time.

63. ILLUSTRATIVE EXAMPLE OF REVERSING ENTRY

64. Questions?
Homework for Chapter 4
Have a great weekend!