The Accounting Cycle
Reporting Financial Results
Chapter 5
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2012 The McGraw-Hill Companies, Inc.5-1
THE ACCOUNTING CYCLE
Process by which accountants prepare
financial statements for an entity for a
specific period of time
5-2
Accounting Cycle
Journalize Transaction
Post to Accounts
Adjust Accounts
Close Accounts
Prepare
Financial Statements
5-3
Review – Accounting Cycle
1.
2.
3.
4.
5.
6.
7.
8.
Analyze transactions.
Prepare general journal entries, and post to
general ledger.
Prepare unadjusted trial balance.
Prepare adjusting journal entries, and post to
general ledger.
Prepare adjusted trial balance.
Prepare financial statements.
Prepare closing journal entries, and post to
general ledger.
Prepare post-closing trial balance.
5-4
A) Preparing Financial Statements
Publicly owned companies – those with shares listed on a
stock exchange – have obligations to release annual and
quarterly information to their stockholders and to the public.
The annual report includes comparative financial statements and
other information relating to the company’s financial position,
business operations, and future prospects.
The financial statements contained in the annual report must be
audited by a firm of certified public accountants (CPAs).
5-5
JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2011
Cash
$
Accounts receivable
3,925
75
Tools & equipm ent
Accum ulated depreciation: tools &
equipm ent
2,650
$
Truck
15,000
Accum um lated depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Dividends
200
Sales revenue
750
Gasoline expense
50
Depreciation expense: tools & equipm ent
50
Depreciation expense: truck
Total
50
250
$
22,200
$
22,200
Now, let’s prepare the financial statements for
JJ’s Lawn Care Service for May.
5-6
1) The Income Statement
JJ's Lawn Care Service
Income Statement
For the month ending May 31, 2011
Sales revenue
$
750
Operating expenses:
Gasoline expense
Depreciation: tools & equipment
Depreciation: truck
Net income
$
50
50
250
350
$
400
Net income also appears on the
Statement of Retained Earnings.
5-7
2) The Statement of Retained
Earnings
Summarizes the increases and decreases
in Retained Earnings during the period.
Business
Earnings
Dividends
Business
Losses
5-8
The Statement of Retained
Earnings
JJ's Lawn Care Service
Statement of Retained Earnings
For the Month Ended May 31, 2011
Retained earnings, May 1
Add: Net income
Subtotal
Less: Dividends
Retained earnings, May 31
$
400
$ 400
200
$ 200
Now, let’s prepare the Balance Sheet.
5-9
3) The Balance Sheet
JJ's Lawn Care Service
Balance Sheet
May 31, 2011
Assets
Cash
Accounts receivable
Tools & equipment
$
2,650
Less: Accumulated depreciation
50
Truck
$
15,000
Less: Accumulated depreciation
250
Total assets
Liabilities & Stockholders' Equity
Liabilities:
Notes payable
Accounts payable
Total liabilities
Stockholders' equity:
Capital stock
$
8,000
Retained earnings
200
Total stockholders' equity
Total liabilities & stockholders' equity
$
3,925
75
2,600
$
$
14,750
21,350
$
13,000
150
13,150
$
8,200
21,350
5-10
Relationships Among the Financial
Statements
JJ's Lawn Care Service
Income Statement
For the month ending May 31, 2011
JJ's Lawn Care Service
Balance Sheet
May 31, 2011
Assets
Cash
Accounts receivable
Tools & equipment
$
2,650
Less: Accumulated depreciation
50
Truck
$
15,000
Less: Accumulated depreciation
250
Total assets
Liabilities & Stockholders' Equity
Liabilities:
Notes payable
Accounts payable
Total liabilities
Stockholders' equity:
Capital stock
$
8,000
Retained earnings
200
Total stockholders' equity
Total liabilities & stockholders' equity
$
3,925
75
2,600
$
$
$
$
14,750
21,350
13,000
150
13,150
8,200
21,350
Sales revenue
Operating expenses:
Gasoline expense
Depreciation: tools & equipment
Depreciation: truck
Net income
$
$
750
$
350
400
50
50
250
JJ's Lawn Care Service
Statement of Retained Earnings
For the month ending May 31, 2011
Retained earnings, May 1
Add: Net Income
Subtotal
Less: Dividends
Retained Earnings, May 31
Net income
$
400
$400
200
$200
$200
5-11
Drafting the Notes that
Accompany Financial Statements
Examples of Items Disclosed
Notes to the
Financial Statements
Lawsuits pending
Scheduled plant closings
Governmental investigations
Significant events occurring
after the balance sheet date
Specific customers that
account for a large portion of
revenue
Unusual transactions and
related party transactions
5-12
B) Closing the Temporary Accounts
1.Close Revenue accounts
to Income Summary.
2.Close Expense accounts
to Income Summary.
The closing process
gets the temporary
accounts ready for the
next accounting
period.
3.Close Income Summary
account to Retained
Earnings.
4.Close Dividends to
Retained Earnings.
5-13
Closing the Temporary Accounts
JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2011
Cash
$
3,925
Accounts receivable
75
Tools & equipment
2,650
Accum. depreciation: tools & eq.
$
50
Truck
15,000
Accum. depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Dividends
200
Sales revenue
750
Gasoline expense
50
Depreciation exp.: tools & eq.
50
Depreciation exp.: truck
250
Total
$
22,200 $ 22,200
5-14
Closing Entries for Revenue
Accounts
Since Sales Revenue has a credit balance,
the closing entry requires a debit to the Sales
Revenue account.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Sales Reveune
Income Summary
Debit
Credit
750
750
To close the revenue account.
5-15
Closing Entries for Revenue
Accounts
Income Summary
750
Sales Revenue
750
750
-
750
5-16
Closing Entries for Expense
Accounts
Since expense accounts have a debit
balance, the closing entry requires a credit to
the expense accounts.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Income Summary
Debit
Credit
350
Gasoline Expense
50
Depreciation Exp.: Tools & Equipment
50
Depreciation Exp.: Truck
250
To close the expense accounts.
5-17
Closing Entries for Expense
Accounts
Gasoline Exp.
50
50
Depr. Exp.: Tools &
Equipment
50
50
-
Depr. Exp.: Truck
250
250
-
Income Summary
350
750
400
Net Income
5-18
Closing the Income Summary
Account
Since Income Summary has a $400 credit
balance, the closing entry requires a debit to
Income Summary.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Income Summary
Retained Earnings
Debit Credit
400
400
To close Income Summary.
5-19
Closing the Income Summary
Account
Retained Earnings
400
Income Summary
350
750
400
-
400
The balance in Income
Summary is now zero.
5-20
Closing the Dividends Account
Since the Dividends account has a debit
balance, the closing entry requires a credit
to the Dividends account.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Retained Earnings
Dividends
Debit Credit
200
200
To close the Dividends account.
5-21
Closing the Dividends Account
Dividends
200
200
-
Retained Earnings
200
400
200
5-22
C) AFTER-CLOSING TRIAL BALANCE

The final Trial Balance after closing will
display only permanent, balance sheet
accounts.

The Retained Earnings in this Trial Balance
is the ENDING retained earnings for the
period and includes the effects of all the
revenues, expenses, and dividends for the
period.
5-23
After-Closing Trial Balance
List of permanent accounts and their
balances after posting closing entries
 Total debits and credits must be equal

5-24
After-Closing Trial Balance
JJ's Lawn Care Service
After-Closing Trial Balance
May 31, 2011
Cash
$
3,925
Accounts receivable
75
Tools & equipment
2,650
Accum. depreciation: tools & eq.
$
50
Truck
15,000
Accum. depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Retained earnings
200
Total
$
21,650 $ 21,650
5-25
EVALUATING THE BUSINESS
Evaluating
Profitability
Evaluating
Liquidity
Net Income
Net Income
=
Percentage
Total Revenue
Working
Current Assets –
=
Capital
Current Liabilities
Return on
Equity
Current
Current Assets
=
Ratio
Current Liabilities
=
Net Income
Avg. Stockholders’
Equity
5-26
Preparing Financial Statements
Covering Different Periods of Time
Many companies prepare financial
statements at various points throughout
the year.
Annually
Interim
Financial
Statements
Quarterly
Monthly
Jan. 1
Dec. 31
5-27
End of Chapter 5
5-28