4
Completing the Accounting
Cycle
1
1
Describe the flow of accounting
information from the unadjusted
trial balance into the adjusted
trial balance and financial
statements.
4-4
4-2
1-2
2
1
Exhibit 1
4-3
1-3
End-of-Period Spreadsheet (Work Sheet)
3
1
Example Exercise 4-1
Flow of Accounts into Financial Statements
The balances for the accounts listed below appear in
the Adjusted Trial Balance columns of the end-ofperiod spreadsheet (work sheet). Indicate whether
each balance should be extended to (a) an Income
Statement column or (b) a Balance Sheet column.
1. Dividends
2. Utilities Expense
3. Accumulated
Depreciation—Equipment
4. Unearned Rent
4-11
4-4
1-4
5.
6.
7.
8.
Fees Earned
Accounts Payable
Rent Revenue
Supplies
4
2
Prepare financial
statements from
adjusted account
balances.
4-13
4-5
1-5
5
2
Balance Sheet
A classified balance sheet is a
balance sheet that was expanded
by adding subsections for current
assets; property, plant, and
equipment; and current liabilities.
4-6
1-6
6
2
Cash and other assets that are expected
to be converted into cash, sold or used
up usually within a year or less,
through the normal operations of the
business, are called current assets.
• Cash
• Accounts Receivable
• Supplies
4-7
1-7
7
2
Notes receivable are written
promises by the customer to pay
the amount of the note and
possibly interest at an agreed
rate.
4-8
1-8
8
2
Property, plant, and equipment (also
called fixed assets) include assets that
depreciate over a period of time. Land
is an exception as it is not subject to
depreciation.
• Equipment
• Machinery
• Buildings
• Land
4-9
1-9
9
2
Liabilities that will be due within a
short time (usually one year or less)
and that are to be paid out of current
assets are called current liabilities.
• Accounts payable
• Wages payable
• Interest payable
• Unearned fees
4-10
1-10
10
2
Liabilities not due for a long
time (usually more than one
year) are long-term liabilities.
• Notes payable
• Mortgage payable
• Bond payable
4-11
1-11
11
2
Stockholders’ equity is the
stockholders’ right to the assets of
the business. The stockholders’
equity consists of capital stock
and retained earnings. The
stockholders’ equity is added to
the total liabilities, and the total
must be equal to the total assets.
4-12
1-12
12
2
Example Exercise 4-4
Classified Balance Sheet
The following accounts appear in the adjusted trial balance of
Hindsight Consulting. Indicate whether each account would
be reported in the (a) current asset; (b) property, plant, and
equipment; (c) current liability; (d) long-term liability; or (e)
stockholders’ equity section of the December 31, 2009
balance sheet of Hindsight Consulting.
1. Capital Stock
2. Notes Receivable (due
in 6 months)
3. Notes Payable (due in
2011)
4. Land
4-31
4-13
1-13
5. Cash
6. Unearned Rent
7. Accumulated Depr.—
Equipment
8. Accounts Payable
13
3
Prepare closing entries.
4-33
4-14
1-14
14
3
Closing Entries
Accounts that are relatively
permanent from year to year are
called real accounts. Accounts that
report amounts for only one period
are called temporary accounts or
nominal accounts.
4-15
1-15
15
3
Closing Entries
To report amounts for only one period,
temporary accounts should have zero
balances at the beginning of the
period. At the end of the period the
revenue and expense account balances
are transferred to Income Summary.
4-16
1-16
16
3
Closing Entries
The balance of Income Summary is
then transferred to Retained
Earnings. The balance of the
Dividends account is also transferred
to Retained Earnings. The entries
that transfer these balances are called
closing entries.
4-17
1-17
17
3
Exhibit 3
4-18
1-18
The Closing Process
18
3
Exhibit 4
Flowchart of Closing Entries for NetSolutions
(continued)
Debit each revenue account
for the amount of its balance,
and credit Income Summary
for the total revenue.
Fees Earned
Income Summary
16,960
16,840 Bal. 16,840
Rent Revenue
120 Bal.
4-19
1-19
120
19
3
Flowchart of Closing Entries for
NetSolutions (continued)
Exhibit 4
Wages Expense
Bal.
4,525
4,525
Rent Expense
Bal.
1,600
Income Summary
9,855
16,960
1,600
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
200
200
Debit Income Summary
for the total expenses and
credit each expense
account for its balance.
Miscellaneous Expense
4-20
1-20
Bal.
455
455
20
3
Flowchart of Closing Entries
for NetSolutions (continued)
Exhibit 4
Income Summary
9,855
7,105
16,960
Retained Earnings
Bal.
0
7,105
Debit Income
Summary for the
amount of its balance
(in this case, the net
income) and credit
Retained Earnings.
Dividends
Bal.
4-21
1-21
4,000
21
3
Flowchart of Closing Entries
for NetSolutions (continued)
Exhibit 4
Retained Earnings
4,000
Bal. 25,000
7,105
Dividends
Bal.
4-22
1-22
4,000
4,000
Debit Retained
Earnings for the
balance of the
dividends account, and
credit the dividends
account.
22
3
Exhibit 4
Flowchart of Closing Entries
for NetSolutions (summary)
Stockholders’ Equity
4-23
1-23
23
3
Exhibit 5
Closing Entries for NetSolutions
Step 1
Step 2
Step 3
4-24
1-24
Step 4
24
3
Closing Entries
After the closing entries
are posted, all of the
temporary accounts have
zero balances.
4-25
1-25
25
3
Example Exercise 4-5
Closing Entries
After the accounts have been adjusted at July 31, the end of
the fiscal year, the following balances are taken from the
ledger of Cabriolet Services Co.
Retained Earnings
$615,850
Dividends
25,000
Fees Earned
380,450
Wages Expense
250,000
Rent Expense
65,000
Supplies Expense
18,250
Miscellaneous Expense
6,200
Journalize the four entries required to close the accounts.
4-49
4-26
1-26
26
3
Post-Closing Trial
Balance
A post-closing trial balance is
prepared after the closing
entries have been posted. The
purpose of the PCTB is to
verify that the ledger is in
balance at the beginning of the
next period.
4-27
1-27
27
3
Exhibit 7
4-28
1-28
Post-Closing Trial Balance
28
4
Describe the accounting
cycle.
4-53
4-29
1-29
29
4
The accounting process that begins
with analyzing and journalizing
transactions and ends with preparing
the accounting records for the next
period’s transactions is called the
accounting cycle. There are ten steps
in the accounting cycle.
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1-30
30
4
Accounting Cycle
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.
4-31
1-31
(continued)
31
4
Accounting Cycle (continued)
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.
4-32
1-32
32
6
Explain what is meant
by the fiscal year and
the natural business
year.
4-76
4-33
1-33
33
6
Fiscal Year
The annual accounting period adopted
by a business is known as its fiscal
year. When a business adopts a fiscal
year that ends when business activities
have reached the lowest point in its
annual operation, such a fiscal year is
also called the natural year.
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1-34
34