Chapter 4
Completing the Accounting Cycle
• The accounting cycle is repeated each accounting period. The goal of the
cycle is the financial statements.
• The accounting cycle includes work performed at two different times:
• During the period  journalizing transactions
 Posting to the ledger
• End of the period  adjusting the accounts
 Closing the accounts
Preparing financial statements
The work sheet is an optional tool that accountants use in the adjusting and closing process.
1. Start with
ledger
balances
2. Analyze &
journalize
transactions
7. Post-closing
Trial Balance
6. Journalize &
post adjusting
& closing
entries
3. Post to the
ledger
4. Unadjusted
trial balance
5. Work sheet
(optional)
Financial
Statements
ILLUSTRATION
WORK SHEET
Account Titles
Trial Balance
Debit
Credit
1. Prepare
trial balance
on the
worksheet.
Adjustments
Debit
Credit
2. Enter
adjustment
data.
Adjusted Trial Balance
Debit
Credit
3. Enter
adjusted
balances
Income Statement
Debit
Credit
Balance Sheet
Debit
Credit
4. Extend adjusted
balance to appropriate
columns.
5. Calculate income/loss
and complete the
worksheet.
Closing the Accounts
At the end of the fiscal period, we must prepare the accounts for recording
the transactions for the next period.
Nominal (temporary) accounts are closed each fiscal period.
These include Revenue, Expenses, Drawings.
Real (permanent) accounts are NOT closed. These include
Assets, Liabilities and Capital.
3 Steps to Closing Accounts
1. Transfer the sum of the Revenues to Capital.
DR. Revenue
CR. Capital
2. Transfer the sum of the Expenses to Capital.
DR. Capital
CR. Amortization Expense
CR. Salary Expense
3. Transfer the Drawings to Capital.
DR. Capital
CR. Drawings