Chapter 4
Completing the Accounting
Cycle – Part II
Beginning on page 156
1
Objective 4
Describe the accounting
cycle.
2
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.
3
Accounting Cycle
1. Transactions are analyzed and recorded
in the journal.
2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
4. Adjustment data are assembled and
analyzed.
5. An optional end-of-period spreadsheet
(work sheet) is prepared.
(continued)
4
Accounting Cycle (continued)
6. Adjusting entries are journalized and
posted to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and
posted to the ledger.
10. A post-closing trial balance is prepared.
5
Example Exercise 4-6
Accounting Cycle
From the following list of steps in the accounting cycle, identify what
two steps are missing.
a. Transactions are analyzed and recorded in the journal.
b. Transactions are posted to the ledger.
c. Adjustment data are assembled and analyzed.
d. An optional end-of-period spreadsheet (work sheet) is prepared.
e. Adjusting entries are journalized and posted to the ledger.
f. Financial statements are prepared.
g. Closing entries are journalized and posted to the ledger.
h. A post-closing trial balance is prepared.
6
Example Exercise 4-6 (continued)
The following two steps are missing: (1) the
preparation of an unadjusted trial balance and (2) the
preparation of the adjusted trial balance. The
unadjusted trial balance should be prepared after step
(b). The adjusted trial balance should be prepared
after step (e).
7
Problem 4-6A
• Let’s take a look at your textbook exercises for
this unit. We only have one – Problem 4-6A
p 189
• Please be aware that it is a long one, so get
started on it ASAP.
Instruction 1
• Journalize each transaction in a two-column
journal, referring to the following chart of
accounts in selecting the accounts to be
debited and credited.
• Exhibit 9 on page 159-160 for an example of
the journal and related journal entries.
NOTE: THE AMOUNTS HERE ARE FOR THE DEMO
ONLY!!! PLEASE USE THE INFORMATION IN THE
TEXTBOOK TO COMPLETE YOUR WORK!!!
First you complete the daily transactions for
the company that are given to you in the
instructions on page 189.
NOTE: The Post Ref Column should be blank
at this point.
Instruction 2
• Post the journal to a ledger of four-column
accounts.
• Exhibit 17 page 166-168 for an example of a
four-column ledger.
After you have completed ALL of the
journal entries based on the
transactions from pages 189-190, you
will fill in the ledger for each related
account. Please note the Post Ref here.
The post ref on the ledgers should be
the Page Number of the journal. On the
journal, the post ref is the account
number that you moved the information
into.
Instruction 3
• Prepare an unadjusted trial balance.
• Exhibit 10 on page 161.
As you complete your ledgers from the
information that you get from your
journal entries from the daily
transactions, be sure to ONLY complete
them up to the line that says “Adjusting”.
At this point you have not done the
Adjustments, so this section of the ledger
is not ready to be completed. You will
need the subtotal at this point to
complete your UNADJUSTED TRIAL
BALANCE. HINT: You CANNOT complete
the template from top to bottom. You
have to jump around within the template
depending on the step of the accounting
cycle.
Once you get the TOTALS in the ledgers
from the daily transactions that you
recorded from page 189 (you should NOT
have information in the ledgers for your
adjustments or closing entries at this
point), you can then complete the
UNADJUSTED TRIAL balance. Remember,
this has to balance.
Instruction 4
• At the end of June, the following adjustment
data were assembled. Analyze and use these
data to complete parts (5) and (6).
• Part 5 is not optional.
• Part 5 is NOT optional, it is a part of your
grade.
• The worksheet is required.
Instruction 5
• This is NOT optional, the worksheet is
required.
• Enter the unadjusted trial balance on an endof-period spreadsheet (worksheet) and
complete the spreadsheet.
• Exhibit 11 page 162.
Add left to right!
After you complete your UNADJUSTED TRIAL BALANCE (HINT: The
template TELLS you what the balance of the Unadjusted Trial Balance
should be on the worksheet as a way to double check yourself.), you
can then begin to fill out your worksheet for the adjustments. The
adjustment information is on page 190 in letters a-f. Remember to
include the letters a-f on the worksheet for the “Adjustments”
columns. HINT: MAKE SURE TO ADD FROM LEFT TO RIGHT!
Let’s run through one adjustment on page 161
a. Insurance expired during April is $300.
This means we used up $300 of insurance. So
let’s see what we had in the prepaid
insurance account from the unadjusted trial
balance (right above this).
We had $1800 in Prepaid Insurance but we used
up (time has passed) $300 of this so we need
to take it out of the account.
Adjusting entry a con’t.
Since Prepaid Insurance is an asset it normally has a debit
balance.
If we want to take away from that account we have to do the
opposite or credit the account.
So we would debit Insurance Expense and credit Prepaid
Insurance.
Look at Exhibit 11 on page 162. Do you see the two letter a’s
under the adjustments columns?
Now go to Exhibit 12. See the JE?
Any questions on how to enter the adjusting entries?
Remember to read the adjusting information carefully.
You now will have the
“Adjustments” columns and the
“Adjusted Trial Balance” columns
completed. So you can then carry
over the asset, liability and owner’s
equity accounts to the balance
sheet columns and the revenue and
expense accounts to the income
statement columns. You take the
figures from the Adjusted Trial
Balance columns.
Back to the Problem -Instruction 6
• Journalize and post the adjusting entries.
• Exhibit 12 page 162 for the adjusting entries.
• Exhibit 17 page 166-168 for posting them.
Notice we enter the word “adjusting” in the item
column on the ledger for the adjusting entries.
Right below the worksheet is the area you
will use to record the adjustments from
the instructions on page 190 (the
adjusting entries are labeled a-f). Once
you complete them, then you will go back
up to your ledgers and NOW you will fill in
the rows labeled “Adjusting” and then for
these ledgers get new subtotals. The lines
in the ledger that say “Closing” are not
yet ready to be completed. Once you
have all of the adjustments on your
ledgers and the new totals on your
ledgers through this line, you can then
complete the ADJUSTED TRIAL BALANCE.
Remember, some accounts will not have a
change in their balance from the
Unadjusted Trial Balance to the Adjusted
Trial Balance because they did not have
an adjustment.
Instruction 7
• Prepare an adjusted trial balance.
• Exhibit 13 page 163.
You can now complete the ADJUSTED
TRIAL BALANCE based on the new
information that you placed in the
ledgers and any new totals for the
accounts that were adjusted. Some
account totals will remain the same
and the ones that were adjusted will be
different from the totals you had on
your UNADJUSTED TRIAL BALANCE.
Don’t forget, you will need to complete
the ADJUSTED TRIAL BALANCE on your
worksheet as well.
Instruction 8
• Prepare an income statement, a statement of
owner’s equity, and a balance sheet.
• Exhibit 14 page 164.
• You will complete the financial statements in
this order:
– Income Statement
– Statement of Owner’s Equity
– Balance Sheet
Where do you get the information to complete the financial
statements? The last four columns of the worksheet.
Instruction 9
• Prepare and post the closing entries. (Income Summary is
account #33 in the chart of accounts.)
• Exhibit 15 page 165 and Exhibit 17 pages 166-168 for the
posting.
• See page 150-153 for instructions on these. When the
closing entries are completed, you will once again go up to
the ledgers and NOW you will fill in any rows that say
“Closing”. These entries should “0” out the revenue,
expense and drawing accounts.
• You will once again have new totals in your ledgers. The
totals will be placed on your Post-Closing Trial Balance. See
Exhibit 16 on page 166.
Exhibit 15 pg 165
Closing Entries, Kelly Consulting
Closing
Revenues
Closing
Expenses
Closing Income
Summary
Closing Drawing
28
Pg 166
NOTE: ONLY ASSETS, LIABILITIES AND CAPITAL SHOULD REMAIN ON THE POSTCLOSING TRIAL BALANCE
Objective 6
Explain what is meant by
the fiscal year and the
natural business year.
30
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.
31
Questions???
• Textbook Exercises for unit 6 is Problem 4-6A.
• Don’t forget to use Problem 4-6B as a
reference.
• This is not a quick problem, so make sure you
begin working on it as soon as possible.
• If you finish it early, you can always start on
chapter 6.