Completing the
Accounting
Cycle
Chapter 4
Objective 1
Prepare an accounting
work sheet.
The Accounting Cycle
 The accounting cycle is the process by
which accountants prepare financial
statements for an entity for a specific
period of time.
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.
The Accounting Cycle
Accounts Receivable
1,350
Accounts Receivable 1,700
Service Revenue
1,700
Accounts Receivable
1,350
1,700
Accounts Receivable
1,350
1,700
3,050
The Accounting Cycle
Cash
Accounts
receivable
Balance
Sheet
Work Sheet
12,100
3,050
Income
Statement
The Accounting Cycle
Adjusting entries
Cash
12,100
Closing entries
Accounts Receivable
3,050
Postclosing Trial Balance
Cash
12,100
Accounts
receivable 3,050
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.
The Accounting Work Sheet
Trial Balance
Dr.
Cr.
12,100
1,350
250
15,500
7,500
1,200
1,100
1,500
7,200
1,000
23,700
12,000
Account Title
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
42,200 42,200
©2002 Prentice Hall, Inc.
Business Publishing
Adjustments
Dr.
Cr.
Accounting, 5/E
Adjusted
Trial Balance
Dr.
Cr.
Horngren/Harrison/Bamber
4-9
The Accounting Work Sheet
a The company has earned revenue of $1,700
which will be collected next month.
b Inventory of supplies at month end totaled
$150.
c Depreciation for the period was calculated
as $200.
The Accounting Work Sheet
Trial Balance
Adjustments
Account Title
Dr.
Cr.
Dr.
Cr.
Cash
12,100
Accounts receivable
a) 1,700
1,350
Supplies
b) 100
250
Equipment
15,500
Accum. depreciation
7,500
c) 200
Accounts payable
1,200
Salary payable
1,100
Unearned revenue
1,500
Capital
7,200
Withdrawals
1,000
Revenue
23,700
a) 1,700
Salary expense
12,000
Supplies expense
b) 100
Depreciation expense
c) 200
Totals
2,000
2,000
42,200 42,200
©2002 Prentice Hall, Inc.
Business Publishing
Accounting, 5/E
Adjusted
Trial Balance
Dr.
Cr.
12,100
3,050
150
15,500
7,700
1,200
1,100
1,500
7,200
1,000
25,400
12,000
100
200
44,100 44,100
Horngren/Harrison/Bamber
4 - 11
The Accounting Work Sheet
Account Title
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
©2002 Prentice Hall, Inc.
Adjusted
Trial Balance
Dr.
Cr.
12,10
0
3,050
150
15,50 7,700
0 1,200
1,100
1,500
7,200
Income
Statement
Dr.
Cr.
Balance
Sheet
Dr.
Cr.
12,10
0
3,050
150
15,50 7,700
0 1,200
1,100
1,500
7,200
25,400
1,000
12,00
0 44,100
100
200
Business44,10
Publishing Accounting, 5/E
1,000
18,700
31,80
0
Horngren/Harrison/Bamber
4 - 12
The Accounting Work Sheet
Account Title
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
©2002 Prentice Hall, Inc.
Adjusted
Trial Balance
Dr.
Cr.
12,10
0
3,050
150
15,50 7,700
0 1,200
1,100
1,500
7,200
Income
Statement
Dr.
Cr.
25,400
25,400
1,000
Balance
Sheet
Dr.
Cr.
12,10
0
3,050
150
15,50 7,700
0 1,200
1,100
1,500
7,200
12,000
100
200
12,300
1,000
12,00
0 44,100
25,400
18,700
100
200
31,80
Business44,10
Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 13
0
The Accounting Work Sheet
Account Title
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
©2002 Prentice Hall, Inc.
Adjusted
Trial Balance
Dr.
Cr.
12,10
0
3,050
150
15,50 7,700
0 1,200
1,100
1,500
7,200
Income
Statement
Dr.
Cr.
25,400
25,400
1,000
Balance
Sheet
Dr.
Cr.
12,10
0
3,050
150
15,50 7,700
0 1,200
1,100
1,500
7,200
12,000
100
200
12,300
13,100
25,400
1,000
12,00
0 44,100
25,400
18,700
100
13,100
200
25,400 31,80 31,800
Business44,10
Publishing Accounting, 5/E Horngren/Harrison/Bamber
4 - 14
0
Objective 2
Use the work sheet
to complete the
accounting cycle.
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.
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.
Objective 3
Close the revenue,
expense, and
withdrawal accounts.
Closing the Accounts
 Closing the accounts is the end of period
process that prepares the accounts for
recording transactions during the next
period.
Closing the Accounts
Closing Entries
Revenues
increase
Owner’s
Equity.
Expenses
and
Withdrawals
decrease
Owner’s
Equity.
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.
Closing the Accounts
Income Summary
A debit
balance
represents
net loss.
A credit
balance
represents
net income.
Closing the Accounts
Revenue
28,500 12,000
7,500
9,000
Salary Exp
1,500 3,300
1,800
Rent Exp
800 800
Supplies Exp
350 350
©2002 Prentice Hall, Inc.
(Close Revenue
Account)
Income
Summary
(Close Expense
4,450 28,500
Accounts)
24,050
(Close Income
Summary)
Capital
Account
24,050
2,500
(Close
Withdrawals Withdrawals
Account)
2,500 2,500
Business Publishing
Accounting, 5/E
Horngren/Harrison/Bamber
4 - 23
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.
Permanent Accounts
 What accounts never close?
– Assets
– Liabilities
– Owner’s equity
 Balances of permanent accounts carry over
to the next period.
Objective 4
Classify assets and liabilities
as current or long-term.
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.
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
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
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.
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
The Classified Balance Sheet
XYZ Services
January 31, 20XX
Assets
Current assets:
Cash
12,100
Accounts receivable
3,050
Supplies
150
Total current assets
15,300
Plant assets
Equipment
15,500
Less Accum. deprec.
7,700 7,800
Total assets
23,100
Liabilities
Current liabilities:
Accounts payable
Salary payable
Unearned revenue
Total liabilities
Owner’s equity
Capital
Total liabilities and
owner’s equity
1,200
1,100
1,500
3,800
19,300
23,100
Different Formats of
the Balance Sheet
Report Format
Assets
Liabilities
Owner’s Equity
Account Format
Assets = Liabilities +
Owner’s Equity
Objective 5
Use the current ratio and the debt
ratio to evaluate a company.
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?
1 Current ratio
2 Debt ratio
Current Ratio
 This measures the ability of a business to
pay its current liabilities with its current
assets.
Current ratio = Current assets ÷ Current liabilities
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
Trend Analysis
 Decision makers compare various ratios
over a period of time.
End of Chapter 4