Chapter 4
Completing the Accounting Cycle
Financial Statements
After the adjusted trial balance is prepared, the financial statements are compiled.
There are four financial statements prepared in the following order:
1. Income Statement – shows results of operations for a period of
time
Brady Corporation
Income Statement
December 31, 2001
Revenue
Fees earned
$50,000
Expenses
Salaries expense
Rent expense
Supplies expense
Total expense
$
$
$
Net Income
12,000
15,800
7,200
$
35,000
$
15,000
2. Statement of Retained earnings – shows the changes in the
earnings of the corporation. Reflects distributions to owners and
profit or losses.
Brady Corporation
Statement of Retained earnings
December 31, 2001
Beginning Retained Earnings, January 1, 2001
Add: net income
Deduct: dividends
Ending Retained earnings, December 31, 2001
Fall, 2007
Prepared by Maria Mari
1
$ 9,875.00
$15,000.00
$24,875.00
$10,000.00
$14,875.00
Chapter 4
Completing the Accounting Cycle
3. Balance Sheet
a. Assets – divided into
i. Current assets - cash and other assets expected to
be converted to cash or sold or used up usually
within one year or less.
ii. Property, Plant & Equipment – fixed assets and
related accumulated depreciation
b. Liabilities – divided into
i. Current liabilities – due in less than one year
ii. Long term liabilities – due in more than one year
c. Stockholder’s Equity
i. Retained earnings from the Statement of Retained
Earnings
ii. Capital stock
Brady Corporation
Balance Sheet
December 31, 2001
Assets
Cash
Accounts receivable
Supplies
Fixed Assets
Total assets
$12,705.00
$ 5,400.00
$ 1,250.00
$15,100.00
$34,455.00
Liabilities
Accounts payable
Loans payable
Total liabilities
$ 7,280.00
$ 9,800.00
$17,080.00
Stockholder's Equity
Capital stock
Retained earnings
Total stockholder's equity
$ 2,500.00
$14,875.00
$17,375.00
Total liabilities and Stockholder's Equity
Fall, 2007
Prepared by Maria Mari
2
$34,455.00
Chapter 4
Completing the Accounting Cycle
4. Statement of Cash Flows
a. Discusses sources and uses of cash
b. Divided into operating, investing, and financing.
Closing Entries
Real accounts – the balances of accounts reported on the balance sheet are
carried forward from year to year.
Temporary accounts or nominal accounts – the balance of accounts
reported on the income statement are not carried forward from year to
year.
Have zero balances at the beginning of the year
Also dividends
Closing Entries: there are four entries in the closing process
Income Summary – a clearance account used to process the
closing entries.
Disappears after the closing entries are posted.
1. Closing revenues: each revenue account is closed by DEBITING the
account for its balance and CREDITING income summary.
2. Closing expenses: each expenses account is closed by CREDITING
the account for its balance and DEBITING income summary.
3. Closing the balance of income summary: Income summary is
DEBITED and retained earnings are CREDITED for the balance of
income summary (net income) for the period.
4. Closing dividends: dividend account is closed by CREDITING the
account for its balance and DEBITING retained earnings.
Example: the following accounts are found in the general ledger
Fees earned
Rent expense
Wages expense
Dividends
Retained earnings
Fall, 2007
Prepared by Maria Mari
$10,000
2,000
6,000
4,000
$12,000
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Chapter 4
Completing the Accounting Cycle
Close Revenues:
Date
Dec 31
Account
Fees earned
Income Summary
PR
Debit
$10,000
Credit
$10,000
Close Expenses:
Date
Dec 31
Account
Income Summary
Rent expense
Wages expenses
PR
Debit
$8,000
Credit
$2,000
6,000
Close Income Summary:
Income Summary
_________________________________
Expenses $8,000
$10,000Revenues
$2,000 balance in account
Date
Dec 31
Account
Income Summary
Retained Earnings
PR
Debit
$2,000
Credit
$2,000
Close Dividends:
Date
Dec 31
Account
Retained earnings
Dividends
PR
Debit
$4000
Credit
$4000
After closing entries are completed only RETAINED EARNINGS are left open
with a balance.
Dividends
Fall, 2007
Prepared by Maria Mari
Retained Earnings
___________________________
$12,000 Beginning balance
$4,000
2,000
Net income
10,000 Ending balance
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Chapter 4
Completing the Accounting Cycle
Example 1:
Fees earned
Rent expense
Wages expense
Miscellaneous expense
Retained earnings
Dividends
Date
$20,000
6,000
8,000
$10,000
$8,000
3,000
Account
PR
Debit
Credit
After closing entries are recorded in the journal and posted in the general
ledger then POST CLOSING TRIAL BALANCE is prepared.
Accounting year:
Calendar year – ends on December 31st
Fiscal year – ends other than December 31st
Fall, 2007
Prepared by Maria Mari
5
Chapter 4
Completing the Accounting Cycle
Example 1:
Retained earnings
Dividends
Professional fees
Rent expense
Supplies expense
Cash
$35,000
$6,000
$15,000
$5,000
$3,000
$45,000
Example 2:
Retained earnings
Dividends
Professional fees
Rent expense
Supplies expense
$15,000
$2,000
$31,500
$15,000
$13,000
Example 3:
Retained earnings
Dividends
Professional fees
Rent expense
Supplies expense
Fall, 2007
Prepared by Maria Mari
$23,500
$8,000
$76,000
$45,000
$33,000
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