CH04_Warren22e.qxd
6/12/06
4:00 PM
FINAL
Page C
Chapter 4
176C
Completing the Accounting Cycle
At a Glance
1. Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial
balance and financial statements.
Key Points
Key Learning Outcomes
Exhibit 1 illustrates the end-of-period process
by which accounts are adjusted and how the
adjusted accounts flow into the financial
statements.
• Using an end-of-period
spreadsheet (work sheet),
describe how the unadjusted
trial balance accounts are
affected by adjustments and
how the adjusted trial balance accounts flow into the
income statement and balance sheet.
Example
Exercises
4-1
Practice
Exercises
4-1A, 4-1B
2. Prepare financial statements from adjusted account balances.
Example
Exercises
Practice
Exercises
Key Points
Key Learning Outcomes
Using the end-of-period spreadsheet (work
sheet) shown in Exhibit 1, the income statement and balance sheet for NetSolutions can
be prepared. The statement of owner’s equity
is prepared by referring to transactions that
have been posted to owner’s capital accounts
in the ledger. A classified balance sheet has
sections for current assets; property, plant,
and equipment; current liabilities; long-term
liabilities; and owner’s equity.
• Describe how the net income
or net loss from the period
can be determined from an
end-of-period spreadsheet
(work sheet).
4-2
4-2A, 4-2B
• Prepare an income statement,
statement of owner’s equity,
and a balance sheet.
4-3
4-3A, 4-3B
• Indicate how accounts would
be reported in a classified
balance sheet.
4-4
4-4A, 4-4B
3. Prepare closing entries.
Example
Exercises
Practice
Exercises
Key Points
Key Learning Outcomes
Four entries are required in closing the temporary accounts. The first entry closes the
revenue accounts to Income Summary. The
second entry closes the expense accounts to
Income Summary. The third entry closes the
balance of Income Summary (net income or
net loss) to the owner’s capital account. The
fourth entry closes the drawing account to
the owner’s capital account.
After the closing entries have been posted
to the ledger, the balance in the capital account agrees with the amount reported on
the statement of owner’s equity and balance
sheet. In addition, the revenue, expense, and
drawing accounts will have zero balances.
• Prepare the closing entry for
revenues.
4-5
4-5A, 4-5B
• Prepare the closing entry for
expenses.
4-5
4-5A, 4-5B
• Prepare the closing entry for
transferring the balance of
Income Summary to the
owner’s capital account.
4-5
4-5A, 4-5B
• Prepare the closing entry for
the owner’s drawing account.
4-5
4-5A, 4-5B
(continued)
CH04_Warren22e.qxd
176D
6/12/06
4:00 PM
Chapter 4
FINAL
Page D
Completing the Accounting Cycle
4. Describe the accounting cycle.
Key Points
Key Learning Outcomes
Example
Exercises
Practice
Exercises
The 10 basic steps of the accounting cycle are
as follows:
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.
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.
• List the 10 steps of the accounting cycle.
• Determine whether any steps
are out of order in a listing
of accounting cycle steps.
• Determine whether there are
any missing steps in a listing
of accounting cycle steps.
4-6
4-6A, 4-6B
5. Illustrate the accounting cycle for one period.
Key Points
Key Learning Outcomes
The complete accounting for Kelly Consulting
for the month of April is described and illustrated on pages 161–174.
• Complete the accounting
cycle for a period from beginning to end.
Example
Exercises
Practice
Exercises
Example
Exercises
Practice
Exercises
6. Explain what is meant by the fiscal year and the natural business year.
Key Points
Key Learning Outcomes
The annual accounting period adopted by a
business is its fiscal year. A company’s fiscal
year that ends when business activities have
reached the lowest point in its annual operating cycle is called the natural business year.
• Explain why companies use a
fiscal year that is different
from the calendar year.
Key Terms
accounting cycle (159)
clearing account (152)
closing entries (152)
closing process (152)
current assets (150)
current liabilities (150)
fiscal year (174)
fixed (plant) assets (150)
Income Summary (152)
long-term liabilities (150)
natural business year (174)
notes receivable (150)
real accounts (151)
temporary (nominal) accounts
(152)
Illustrative Problem
Three years ago, T. Roderick organized Harbor Realty. At July 31, 2008, the end of the
current fiscal year, the following end-of-period spreadsheet (work sheet) was prepared: