ACCT 201
WEEK 4
Completing the
Accounting Cycle
Chapter 4
1
Prepare an accounting work sheet
2
The Accounting Work Sheet
 Used to help move data from the trial
balance to the financial statements
 An internal document – not financial
statement
3
Accounting Cycle: Process by which accountants
prepare financial statements for an entity for a
specific period of time
Journalize Transaction
Post to Accounts
Adjust Accounts
Close Accounts
Prepare
Financial Statements
4
The Accounting Cycle
 For a new business, begin by setting up
ledger accounts.
 For an established business, begin with
account balances carried over from the
previous period.
5
The Accounting Cycle
Accounts Receivable
1,350
Accounts Receivable 1,700
Service Revenue
1,700
Accounts Receivable
1,350
1,700
Accounts Receivable
1,350
1,700
3,050
6
The Accounting Cycle
Cash
Accounts
receivable
Balance
Sheet
Work Sheet
12,100
3,050
Income
Statement
7
The Accounting Cycle
Adjusting entries
Cash
12,100
Closing entries
Accounts Receivable
3,050
Postclosing Trial Balance
Cash
12,100
Accounts
receivable 3,050
8
Use the work sheet
to complete the
accounting cycle.
9
Recording the Adjusting Entries
The work sheet
helps identify
the accounts
that need
adjustments.
Actual adjustment
of the accounts
requires
journalizing
and posting
the entries.
10
Recording the Adjusting Entries
 The adjusting entries may be recorded
in the journal when they are entered on
the work sheet.
 Many accountants journalize and post
the adjusting entries just before they
make the closing entries.
11
The Accounting Work Sheet
 What is the work sheet?
 A work sheet is a multi-columned
document used by accountants to
help move data from the trial
balance to the financial statements.
 It is an internal document.
12
The Accounting Work Sheet
Trial Balance
Dr.
Cr.
12,100
1,350
250
15,500
7,500
1,200
1,100
1,500
7,200
1,000
23,700
12,000
Account Title
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
42,200 42,200
©2002 Prentice Hall, Inc.
Business Publishing
Adjustments
Dr.
Cr.
Accounting, 5/E
Adjusted
Trial Balance
Dr.
Cr.
Horngren/Harrison/Bamber
4-9
The Accounting Work Sheet
a The company has earned revenue of $1,700
which will be collected next month.
b Inventory of supplies at month end totaled
$150.
c Depreciation for the period was calculated as
$200.
14
The Accounting Work Sheet
Trial Balance
Adjustments
Account Title
Dr.
Cr.
Dr.
Cr.
Cash
12,100
Accounts receivable
a) 1,700
1,350
Supplies
b) 100
250
Equipment
15,500
Accum. depreciation
7,500
c) 200
Accounts payable
1,200
Salary payable
1,100
Unearned revenue
1,500
Capital
7,200
Withdrawals
1,000
Revenue
23,700
a) 1,700
Salary expense
12,000
Supplies expense
b) 100
Depreciation expense
c) 200
Totals
2,000
2,000
42,200 42,200
©2002 Prentice Hall, Inc.
Business Publishing
Accounting, 5/E
Adjusted
Trial Balance
Dr.
Cr.
12,100
3,050
150
15,500
7,700
1,200
1,100
1,500
7,200
1,000
25,400
12,000
100
200
44,100 44,100
Horngren/Harrison/Bamber
4 - 11
Close the revenue,
expense, and
withdrawal accounts.
16
Closing the Accounts
 Closing the accounts is the end of
period process that prepares the
accounts for recording transactions
during the next period.
17
Closing the Accounts
Closing Entries
Revenues
increase
Owner’s
Equity.
Expenses
and
Withdrawals
decrease
Owner’s
Equity.
18
Closing the Accounts
 Revenues and Expense accounts
are closed to Income Summary.
 Income Summary is closed to
Capital.
 Withdrawals are closed to Capital.
 In a corporation, Dividends are
closed to Retained Earnings.
19
Closing the Accounts
Income Summary
A debit
balance
represents
net loss.
A credit
balance
represents
net income.
20
Closing the Accounts
(Close Revenue Account)
Revenue
28,500 12,000
7,500
9,000
Salary Exp
1,500 3,300
1,800
Rent Exp
800 800
Supplies Exp
350 350
©2002 Prentice Hall, Inc.
Income
Summary
(Close Expense
4,450 28,500
Accounts)
24,050
(Close Income
Summary)
Capital
Account
24,050
2,500
(Close
Withdrawals Withdrawals
Account)
2,500 2,500
Business Publishing
Accounting, 5/E
Horngren/Harrison/Bamber
4 - 23
Postclosing Trial Balance
 The accounting cycle ends with the
postclosing trial balance.
 The postclosing trial balance is
dated as of the end of the period
for which the statements have been
prepared.
22
Permanent Accounts
 What accounts never close?
– Assets
– Liabilities
– Owner’s equity
 Balances of permanent accounts
carry over to the next period.
23
Classify assets and liabilities
as current or long-term.
24
Liquidity
 This is a measure of how quickly an
item can be converted into cash.
 On the balance sheet, assets and
liabilities are classified as either
current or long-term to indicate their
relative liquidity.
25
Current Assets
 Current assets are cash, or will be
converted to cash, in one year or
within the normal business
operating cycle.
 What are some other examples?
– short-term receivables
– inventory
– prepaid expenses
26
Current Liabilities
 Current liabilities are debts or
obligations due within one year or
within the operating cycle.
 What are some examples?
– accounts and salary payables
– short-term notes payable
– unearned revenue
27
Long-term Assets and Liabilities
 Long-term assets include all other
assets.
– property, equipment, and intangibles
 Long-term liabilities are all other debts
due in longer than one year or the
entity’s operating cycle.
28
The Classified Balance Sheet
Debit side
Current assets
Long-term assets
Credit side
Current liabilities
Long-term liabilities
Listed in the order
of decreasing
liquidity
Listed in the order
of how soon they
must be paid
29
The Classified Balance Sheet
XYZ Services
January 31, 20XX
Assets
Current assets:
Cash
12,100
Accounts receivable
3,050
Supplies
150
Total current assets
15,300
Plant assets
Equipment
15,500
Less Accum. deprec.
7,700 7,800
Total assets
23,100
Liabilities
Current liabilities:
Accounts payable
Salary payable
Unearned revenue
Total liabilities
Owner’s equity
Capital
Total liabilities and
owner’s equity
1,200
1,100
1,500
3,800
19,300
23,100
30
Different Formats of Balance Sheet
Report Format
Assets
Liabilities
Owner’s Equity
Account Format
Assets = Liabilities +
Owner’s Equity
31
Use the current ratio and the debt
ratio to evaluate a company.
32
Comparative Financial Statements
 They enhance the user’s ability to analyze
a company’s past performance.
 What are two common ratios used to
measure liquidity?
1 Current ratio
2 Debt ratio
33
Current Ratio
 This measures the ability of a
business to pay its current liabilities
with its current assets.
Current ratio = Current assets ÷ Current liabilities
34
Debt Ratio
 It indicates the proportion of a
business’s assets that are financed
with debt.
 It measures their ability to pay both
current and long-term debt.
Total liabilities ÷ Total assets
35
Trend Analysis
 Decision makers compare various
ratios over a period of time.
36
Closing the Accounts
 Prepares accounts for recording transactions
during next period
 Updates retained earnings account
 Permanent Accounts
 Temporary Accounts
37
Four Closing Entries
Close all income statement accounts to Income
Summary
Entry 1: Close revenue accounts to Income Summary
Entry 2: Close expense accounts to Income Summary
38
Four Closing Entries
Revenue
500
Expense
500
200
Bal
0
Bal
200
0
Income Summary
200
500
Bal
Revenues – Expenses =
Net Income
300
39
Four Closing Entries
Entry 3: Close Income Summary to Retained
Earnings
Entry 4: Close Dividends to Retained Earnings
40
Four Closing Entries
Income Summary
200
300
Dividends
500
100
Bal
Bal
300
0
Bal
100
0
Retained Earnings
100
1,000 Beginning balance
300
1,200
Ending balance
41
Income Summary Account
 Debit balance = Net Loss
 Credit balance = Net Income
42
Post-Closing Trial Balance
 List of permanent accounts and
their balances after posting closing
entries
 Total debits and credits must be
equal
43
Current Assets
 Cash
 Receivables
 Prepaid expenses
Current Liabilities
 Accounts payable
 Accrued liabilities
Long-term Assets
 Equipment
 Buildings
 Accumulated
depreciation
Long-term liabilities
 None
44
EXAMPLE
Current Assets:
Current Liabilities:
Cash
$3,000 Accounts
payable
$4,000
Accounts
receivable
6,000 Salary payable 2,000
Prepaid rent
2,000
Total
$6,000
Supplies
1,000
Total
$12,000
Current Ratio: Current assets/ Current liabilities =
$12,000 / $6,000 = 2
45
EXAMPLE
Total Assets:
Cash
$3,000
Accounts
receivable 6,000
Prepaid rent 2,000
Supplies
1,000
Equipment 12,000
Total
$24,000
Total Liabilities:
Accounts
payable
$4,000
Salary payable 2,000
Note payable
9,000
Total
$15,000
Debt Ratio: Total liabilities/Total assets =
$15,000 / $24,000 = 0.63
46
REVISION QUESTIONS
47
The worksheet helps accountants
with all of the following except:
 Post to the accounts
 Prepare financial statements
 Close the accounts
 Make adjusting entries
48
Answer: 1
The worksheet is a tool that helps accountants
organize the end-of-year activities – preparing
adjusting and closing entries and the financial
statements.
49
On the work sheet, in the balance sheet
columns, if the total credits are $600 and
total debits are $200, then
 An error has been made
 Net loss is $400
 Total assets are $400
 Net income is $400
50
Answer: 2
The difference between the debit and credit
columns is the amount of net income or loss,
which is used to balance the columns. In this
case, $400 is needed in the debit column to
balance them. A debit indicates that capital is
decreasing.
51
Granite Company had revenues of
$600 and expenses of $200 during
the year. The owner’s beginning
capital balance was $1,000, and the
owner made no additional
investments during the year. What is
the balance in the capital account on
Granite Company’s worksheet?
52
Answer: $1,000
The capital balance on the worksheet is the
amount in the account before closing entries. If
the beginning balance was $1,000 and there were
no additional investments, $1,000 would appear in
the worksheet.
53
The purpose of closing entries is to
 Get the accounts ready for the next period
 Verify that the balances in the accounts
are correct
 Ensure that debits equal credits
 Bring the accounts up to date so that
financial statements can be prepared
54
Answer: 1
Closing entries zero out the temporary accounts
and transfers their balances to the owner’s capital
account. The temporary accounts are now ready
to begin measuring activity for the next accounting
period.
55
Which of the following accounts
would not be closed?




Utilities Expense
Accumulated Depreciation
Service Revenue
Withdrawals
56
Answer: 2
Accumulated depreciation is a permanent account
and is reported on the balance sheet. Permanent
account balances carry forward into the next
period.
57
Which of the following is a
permanent account?
 Fees earned
 Unearned revenue
 Depreciation expense
 Income summary
58
Answer: 2
Unearned revenue is a liability. It’s balance carries
forward into the next accounting period.
59
Revenues for an accounting period are
$900 and expenses are $500. The
balance in the income summary account
before closing it to capital would be
 $500
 $900
 $400
 $400
debit
credit
credit
debit
60
Answer: 3
Revenues are closed by debiting revenues and
crediting income summary. Expenses are closed
by debiting income summary and crediting
expenses.
Income Summary
900
500
400 Bal
61
Which account would not appear
in the postclosing trial balance?
 Cash
 Prepaid Insurance
 Fees earned
 E. Morgan, Capital
62
Answer: 3
Fees earned is a temporary account and would
have been closed before the postclosing trial
balance was prepared.
63
In what order are assets listed on a
classified balance sheet?




In the order of their liquidity
Alphabetically
In ascending dollar amounts
In descending dollars amounts
64
Answer: 1
65
Mica Company has the following assets:
Land
$600
Building
800
Inventory
300
Accumulated depreciation, Building200
Prepaid rent
400
Cash
100
How much are total current assets?
66
Answer: $800
Current assets:
Cash
Prepaid rent
Inventory
$100
400
300
$800
67
Mica Company has the following assets:
Land…………………………….
$600
Building…………………………
800
Inventory………………………..
300
Accumulated depreciation,
building…………………………. 200
Prepaid rent…………………….
400
Cash…………………………….
How much are total plant assets?
100
68
Answer: $1,200
Current assets:
Land
Building
Less Accumulated depreciation
$600
800
(200)
600
$1,200
69
At the end of the accounting period,
Quartz Company has a note payable
of $82,000. Quartz Company pays
$1,000 per month on the principal
amount of the note. The company
also has $3,000 in accounts payable.
How much are total current
liabilities?
70
Answer: $15,000
Current liabilities:
Accounts payable
Currently maturing portion
of long-term note
$3,000
12,000
$15,000
71
A 2:1 current ratio indicates that
 Current assets are two times greater than
current liabilities
 Total assets are two times greater than
total liabilities
 Current liabilities are two times greater
than current assets
 Total liabilities are two times greater than
total assets
72
Answer: 1
The current ratio is current assets ÷ current
liabilities.
73
A high debt ratio is
 Safer than a low debt ratio
 Riskier than a low debt ratio
 Indicates high profitability
 Indicates that total assets are
considerably higher than total liabilities
74
Answer: 2
The debt ratio is computed by dividing total
liabilities by total assets. The debt ratio indicates
the proportion of a company’s assets that are
financed with debt. A low debt ratio is safer than a
high debt ratio.
75