STUDY GUIDE FOR TEST ON ACCOUNTING CYCLE
STEPS 6 TO 9
*Besides this packet, you should also review your own notes, handouts,
quizzes, and textbook chapters 8-10. You can also study all of the practice
examples you did in class and for homework.
Accounting Cycle Step 6 - Preparing the Worksheet
- The first step performed at the end of an accounting cycle
- Worksheet - a working paper used to collect info from the ledger accounts in 1 place
- Used to prepare the financial statements and other end-of-period activities
- Broken up into 5 sections: 1) Heading - Company name, worksheet, period, 2) account name,
3) trial balance, 4) income statement, 5) balance sheet
- Account name section in order from ledger; start with asset, liabilities, OE, revenue, expenses
- All ledger accounts are listed even if they have a zero balance
- The trial balance columns are completed just like the trial balance after completing ledger
accounts
- Ruling - "drawing a line" - single line = entries above are to be added or subtracted,
double line = amounts just above are totals and not other entries will be made in that column
- Balance sheet columns are for the assets, liability, and owner's equity accounts
- After the trial balance is proved, the next step is to extend (transfer) the appropriate amounts to
the balance sheet section
- Take any asset, liability, or OE balance, and extend it into the same column under the balance
sheet
- Next you will extend amounts into the income statement section which are the revenue and
expense accounts
- Extend the balances of the revenue and asset accounts to the same column under the income
statement
- Then total the columns under each section of the income statement and balance sheet using a
single rule (line). These numbers will not be equal yet until the net income or net loss for the
period is added.
- Matching principle - expenses incurred in an accounting period are matched with the revenue
earned during the same period; you always want revenue to be greater than expense
- Total expenses (debit column) are subtracted from total revenue (credit column) to give net
income (the amount of revenue the remains after expenses are subtracted)
- Steps to enter net income on the work sheet: 1) skip a line after the last account and write net
income in the account name column, 2) on the same line, put the net income amount in the
income statement debit column, 3) on the same line, put the net income amount in the balance
sheet credit column (transferring temporary capital)
- Steps to complete the work sheet: 1) on the line under net income, draw a single rule (line)
across the 4 columns, 2) in the income statement debit column add the net income to the previous
total (bring down credit amount, they should now be equal), 3) in the balance sheet credit column
add the net income to the previous total (bring down debit amount, they should now be equal), 4)
draw a double rule (2 lines) across the bottom of the 4 columns
Steps in preparing a 6 column work sheet:
1) write the heading on the work sheet
2) in the account name and trial balance sections, enter the account numbers, names, and
balances for all accounts in the ledger
3) prove that the debit balances equal the credit balances (trial balance)
4) extend ALOE amounts to the balance sheet and extend revenue and expense amounts to the
income statement columns
5) add up all of the balance sheet and income statement columns
6) determine the amount of net income or loss for the period
7) enter the net income in the income statement debit column and the balance sheet credit
column
8) add up and rule the columns of the income statement and balance sheet columns (they should
now be equal)
Accounting Cycle Step 7 - Preparing Financial Statements & Ratio Analysis
INCOME STATEMENT
Heading - Company name, income statement, period
Revenue
List all types of revenue (if more than 1 type, put balances in left column then single rule)
Total revenue (put total in right column)
Expenses
List all types of expenses (put balances in left column then single rule)
Total expenses (put total in right column then single rule)
Net Income (+) or Loss (-) (revenue - expenses, put result in right column then double rule)
STATEMENT OF CHANGES IN OWNER'S EQUITY
Heading - Company name, statement of changes in owner's equity, period
Beginning capital,1st day of period (if there is capital being carried over, place in right column)
Add: Investments by owner (left column; usually the capital amount from the work sheet)
Net income (left column then single rule)
Total increase in capital (right column then single rule)
Subtotal (add any increase to beginning capital in right column)
Less: Withdrawals by owner (left column)
Net Loss (left column; you will only have net loss if there is no net income; never both)
Total decrease in capital (right column then single rule)
Ending capital, last day of period (subtotal - decreases, put in right column then double rule)
BALANCE SHEET A = L + OE
Heading - company name, balance sheet, last day of period (only looks at 1 day)
Assets
List all assets with balances in left column, single rule after last asset account
Total assets (total of all asset account in right column then double rule)
Liabilities
List all liabilities with balances in left column, single rule after last liability account
Total liabilities (total of all liability account in right column)
Owner's Equity
List capital account with new balance from statement of changes in OE in right column
Total L & OE (add total L and total OE in right column then double rule)
RATIO ANALYSIS
- compares 2 amounts on a financial statement and the relationship between those amounts
- Profitability ratio - used to evaluate earnings performance of a business during the accounting
period
- Return on sales - ratio that examines the portion of each sales dollar that
represents profit (NET INCOME / REVENUE)
- Return on investment – examines portion of each sales dollar compared to value
put in to the company by the owner; can be calculated
overall and by period (N.I./CAP.)
- Liquidity ratio - a measure of the ability of a business to pay its current debts as they become
due and for unexpected needs of cash
- Current ratio - the relationship between current assets (cash, AR, supplies) and
current liabilities (AP) (CURRENT ASSETS / CURRENT LIA.)
- a ratio of 2:1 or higher is considered favorable by creditors
- Quick ratio - a measure of the relationship between short-term assets (cash and
AR) and current liabilities (CASH & AR / CURRNT LIA.)
- a ratio of 1:1 is considered adequate
NOTES FOR STEPS 8 & 9 CAN BE FOUND ON THE POWERPOINT SLIDES
HANDED OUT IN CLASS.
STUDY THE EXAMPLE ATTACHED TO THE NOTES AND THE EXAMPLE FROM
CLASS ON MONDAY.
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Closing journal and ledger entries
o 4 journal entries
o Ledger entries – Income summary (3), Capital (2), all revenues, all expenses,
and withdrawals (1 each)
The income summary account
Post-closing trial balance
Calculating and explaining Return on OE
ALSO KNOW THE STEPS OF THE ACCOUNTING CYCLE IN ORDER FROM 1-9 AND
WHAT KIND OF BUSINESS ORGANIZATION & OPERATION WE HAVE BEEN
STUDYING!