4-1
CHAPTER 4
COMPLETING THE
ACCOUNTING CYCLE
Steps in Accounting Cycle
4-2
134
Analyze
source
documents.
Do post-closing
trial balance
Journalize
transactions in
the journal.
Post entries to
the accounts
in the ledger.
Prepare a trial
balance.
Journalize and
post closing
entries
Journalize and
post adjusting
entries
Prepare
financial
statements.
4-3
Expanded Accounting Equation
ASSETS + EXP. = LIAB. + S/H EQUITY + REV.
Permanent Temporary Permanent Permanent Temporary
A + E = L + S/E + R
Bal.
Dr.
Cr.
Dr.
Cr.
+
-
-
+
Bal.
4-4
A Norm, a Rule and a Question
Each revenue and expense account normally
has a balance at year-end.
Each revenue and expense must have a $0
balance at the beginning of the next year.
How do we get the revenues and expenses to
$0 balances for the beginning of the next year?
4-5
The Closing Process

Transferring (“pouring”) the balances in
revenue and expense accounts into the
Income Summary account.

Transferring the balance in Income
Summary to Retained Earnings.

Transferring the balance in the
Dividends account to Retained
Earnings.
.
4-6
The Closing Process
Close
Revenues
Close
Expenses
4-7
The Closing Process
4-8
The Closing Process
Income Summary
Temporary
account
Exists only during
the closing process
Does not appear on
any financial
statement
Close
Income
Summary
4-9
The Closing Process
4-10
The Closing Process
Summary of Steps
Close Revenues to Income
Summary
Close Expenses to Income
Summary
Close Income Summary to
Retained Earnings
Close Dividends to Retained
Earnings
Close
Dividends
Closing Journal Entries
T- Account Example
Used to bring revenue and expense
accounts to $0 balances for the start of
the next fiscal year
Revenues have a normal
balance on the credit side.
Revenues
25,000
4-11
Closing Journal Entries
T- Account Example
Used to bring revenue and expense
accounts to $0 balances for the start of
the next fiscal year
How do we bring Revenues
to a $0 balance?
Revenues
25,000
4-12
Closing Journal Entries
T- Account Example
Used to bring revenue and expense
accounts to $0 balances for the start of
the next fiscal year
How do we bring Revenues
to a $0 balance?
Remember: To reduce a
credit balance account,
debit the account.
Revenues
25,000
4-13
Closing Journal Entries
T- Account Example
Used to bring revenue and expense
accounts to $0 balances for the start of
the next fiscal year
How do we bring Revenues
to a $0 balance?
We need to debit the
account for $25,000 to
reduce the account to $0.
Revenues
25,000
4-14
Closing Journal Entries
T- Account Example
Used to bring revenue and expense
accounts to $0 balances for the start of
the next fiscal year
How do we bring Revenues
to a $0 balance?
We need to debit the
account for $25,000 to
reduce the account to $0.
Revenues
25,000
25,000
0
4-15
Closing Journal Entries
T- Account Example

In the previous example, a $25,000
debit was made to close out Revenues.

A corresponding $25,000 credit must
be made to Income Summary.
Income Summary
Revenues
25,000
25,000
0
4-16
Closing Journal Entries
T- Account Example

In the previous example, a $25,000
debit was made to close out Revenues.

A corresponding $25,000 credit must
be made to Income Summary.
Income Summary
25,000
Revenues
25,000
25,000
0
4-17
4-18
Closing Journal Entries
General Journal Example
Closing Journal Entries use the same
format as other journal entries:
GENERAL JOURNAL
1
Page:
Date
MM/DD
Description
Account Name
Account Name
To record closing entry
PR
###
###
Debit
Credit
$$$
$$$
4-19
Closing Journal Entries
General Journal Example
On 12/31/99, Revenues has a $25,000
balance at year-end. Prepare the journal
entry to close the account.
GENERAL JOURNAL
97
Page:
Date
Description
PR
Debit
Credit
4-20
Closing Journal Entries
General Journal Example
On 12/31/99, Revenues has a $25,000
balance at year-end. Prepare the journal
entry to close the account.
GENERAL JOURNAL
97
Page:
Date
Description
31-Dec Revenues
Income Summary
to close Revenues
PR
Debit
Credit
25,000
25,000
4-21
Closing Journal Entries
General Journal Example
Post the entry to the Revenue account.
GENERAL JOURNAL
97
Page:
Date
Description
PR
Debit
31-Dec Revenues
Income Summary
to close Revenues
25,000
25,000
ACCOUNT NAME: REVENUES
Date
Description
End of Year Balance
Credit
ACCOUNT No.
PR
Debit
400
Credit
Balance
25,000
25,000
4-22
Closing Journal Entries
General Journal Example
Post the entry to the Revenue account.
GENERAL JOURNAL
97
Page:
Date
Description
31-Dec Revenues
Income Summary
to close Revenues
Description
End of Year Balance
31-Dec Close to Income Summary
Debit
400
25,000
Credit
25,000
ACCOUNT NAME: REVENUES
Date
PR
ACCOUNT No.
PR
G97
Debit
25,000
400
Credit
Balance
25,000
25,000
0
4-23
Closing Journal Entries
General Journal Example
Also, post to the Income Summary account.
GENERAL JOURNAL
97
Page:
Date
Description
31-Dec Revenues
Income Summary
to close Revenues
ACCOUNT NAME: INCOME SUMMARY
Date
Description
31-Dec To close Revenues
PR
G97
PR
Debit
400
600
25,000
Credit
25,000
ACCOUNT No.
Debit
600
Credit
Balance
25,000
25,000
4-24
Closing Journal Entries
General Journal Example
On 12/31/99, Rent Expense was $8,000 and
Salaries Expense was $15,000. Prepare
the closing journal entry.
GENERAL JOURNAL
97
Page:
Date
Description
PR
Debit
Credit
4-25
Closing Journal Entries
General Journal Example
On 12/31/99, Rent Expense was $8,000 and
Salaries Expense was $15,000. Prepare
the closing journal entry.
GENERAL JOURNAL
97
Page:
Date
Description
31-Dec Income Summary
Rent Expense
Salaries Expense
to close expenses
PR
Debit
Credit
23,000
8,000
15,000
4-26
Closing Journal Entries
General Journal Example
After posting, the Rent Expense and Salaries
Expense accounts have $0 balances.
ACCOUNT NAME: RENT EXPENSE
Date
Description
31-Dec Balance
31-Dec Income Summary
ACCOUNT No.
PR
Description
31-Dec Balance
31-Dec Income Summary
Credit
8,000
G97
ACCOUNT NAME: SALARIES EXPENSE
Date
Debit
PR
8,000
ACCOUNT No.
Debit
Credit
15,000
G97
15,000
515
Balance
8,000
0
507
Balance
15,000
0
4-27
Closing Journal Entries
General Journal Example
After posting, the Income Summary account has a $2,000
balance that must be closed to Retained Earnings.
ACCOUNT NAME: INCOME SUMMARY
Date
Description
31-Dec To close Revenues
31-Dec To close Expenses
ACCOUNT No.
PR
G97
G97
Debit
Credit
25,000
23,000
GENERAL JOURNAL
600
Balance
25,000
2,000
Page:
97
Page:
Date
Description
PR
Debit
Credit
4-28
Closing Journal Entries
General Journal Example
After posting, the Income Summary account has a $2,000
balance that must be closed to Retained Earnings.
ACCOUNT NAME: INCOME SUMMARY
Date
Description
31-Dec To close Revenues
31-Dec To close Expenses
ACCOUNT No.
PR
G97
G97
Debit
Credit
25,000
23,000
GENERAL JOURNAL
600
Balance
25,000
2,000
97
97
Page:
Page:
Date
Description
31-Dec Income Summary
Retained Earnings
PR
600
Debit
Credit
2,000
2,000
4-29
Closing Journal Entries
General Journal Example
After posting, the Income Summary account has a $2,000
balance that must be closed to Retained Earnings.
ACCOUNT NAME: INCOME SUMMARY
Date
Description
31-Dec To close Revenues
31-Dec To close Expenses
31-Dec To close R/E
ACCOUNT No.
PR
G97
G97
G97
Debit
Credit
25,000
23,000
2,000
600
Balance
25,000
2,000
0
GENERAL JOURNAL
97
Page:
Date
Description
31-Dec Income Summary
Retained Earnings
PR
600
Debit
Credit
2,000
2,000
4-30
Closing Journal Entries
General Journal Example
On 12/31/99, the Dividends account has a
$1,300 balance. Prepare the closing entry.
GENERAL JOURNAL
97
Page:
Date
Description
PR
Debit
Credit
4-31
Closing Journal Entries
General Journal Example
On 12/31/99, the Dividends account has a
$1,300 balance. Prepare the closing entry.
GENERAL JOURNAL
97
Page:
Date
Description
31-Dec Retained Earnings
Dividends
to close dividends
PR
Debit
Credit
1,300
1,300
4-32
Closing Journal Entries
General Journal Example
Assuming Retained Earnings had a pre-closing
ending balance of $7,000, ...
ACCOUNT NAME: Retained Earnings
Date
Description
31-Dec Balance
31-Dec To close Income Summary
31-Dec To close Dividends
ACCOUNT No.
PR
G97
G97
Debit
Credit
7,000
2,000
1,300
310
Balance
7,000
9,000
7,700
… after posting the closing of the Income
Summary and Dividends accounts, the ending
balance is $7,700.
Closing Journal Entries
4-33
Once More!
Expenses
Bal. 18,100
Revenues
Overview of
accounts
affected.
Income Summary
25,000 Bal.
Retained Earnings
7,000 Beg. bal.
Closing Journal Entries
Once More!
Expenses
Bal. 18,100
Income Summary
Revenues
25,000 Bal.
Owner’s
Capital
Once
more,
close
out Revenues
with a
$ 7,000
debit to Revenues
and a credit to
Income Summary.
4-34
Closing Journal Entries
Once More!
Expenses
Revenues
25,000
Bal. 18,100
Income Summary
25,000
25,000 Bal.
Owner’s
Capital
Once
more,
close
out Revenues
with a
$ 7,000
debit to Revenues
and a credit to
Income Summary.
4-35
Closing Journal Entries
Once More!
Expenses
Revenues
25,000
Bal. 18,100
Income Summary
25,000
25,000 Bal.
Owner’syou
Capital
In effect,
have
“poured”
the
$ 7,000
Revenues credit
balance into the
Income Summary.
4-36
Closing Journal Entries
Once More!
Expenses
Revenues
25,000
Bal. 18,100
Income Summary
25,000
25,000 Bal.
Close out Expenses
with a credit to
Expenses and a
debit to Income
Summary.
4-37
Closing Journal Entries
Once More!
Expenses
Bal. 18,100
Revenues
18,100
Income Summary
18,100
25,000
25,000
25,000 Bal.
Owner’s
Capital
Close
out Expenses
with a credit
to
$ 7,000
Expenses and a
debit to Income
Summary.
4-38
Closing Journal Entries
Once More!
Expenses
Bal. 18,100
Revenues
18,100
Income Summary
18,100
25,000
25,000
25,000 Bal.
Owner’syou
Capital
In effect,
have
“poured”
the
$ 7,000
Expenses debit
balance into the
Income Summary.
4-39
Closing Journal Entries
Once More!
Expenses
Bal. 18,100
Revenues
18,100
Income Summary
18,100
25,000
25,000
25,000 Bal.
Owner’s Capital
Determine the
$ 7,000 in
ending balance
Income Summary.
4-40
Closing Journal Entries
Once More!
Expenses
Bal. 18,100
Revenues
18,100
Income Summary
18,100
25,000
6,900
25,000
25,000 Bal.
Owner’s Capital
Determine the
$ 7,000 in
ending balance
Income Summary.
4-41
Closing Journal Entries
4-42
Once More!
Expenses
Bal. 18,100
Revenues
18,100
Then, close Income
Summary to
Retained Earnings.
Income Summary
18,100
25,000
25,000
6,900 bal.
25,000 Bal.
Retained Earnings
7,000 Beg. bal.
Closing Journal Entries
4-43
Once More!
Expenses
Bal. 18,100
Revenues
18,100
Then, close Income
Summary to
Retained Earnings.
Income Summary
18,100
6,900
$ 25,000
25,000
25,000
6,900 bal.
25,000 Bal.
Retained Earnings
7,000 Beg. bal.
6,900
Closing Journal Entries
4-44
Once More!
Expenses
Bal. 18,100
Revenues
18,100
The $6,900 credit to
Retained Earnings
represents what?
Income Summary
18,100
6,900
25,000
25,000
6,900 bal.
25,000 Bal.
Retained Earnings
7,000 Beg. bal.
6,900
Closing Journal Entries
4-45
Once More!
Expenses
Bal. 18,100
Revenues
18,100
25,000
25,000 Bal.
Net Income!
Income Summary
18,100
6,900
25,000
6,900 bal.
Retained Earnings
7,000 Beg. bal.
6,900
Closing Journal Entries
4-46
Once More!

Dividends must also be closed to
Retained Earnings at the end of the year.
Dividends
2,000
Retained Earnings
7,000 B. bal.
6,900 N.I.
Closing Journal Entries
4-47
Once More!

Dividends must also be closed to
Retained Earnings at the end of the year.
Dividends
Retained Earnings
2,000
7,000 B. bal.
6,900 N.I.
Close Dividends with a
credit to Dividends and
a debit to Retained
Earnings.
Closing Journal Entries
4-48
Once More!

Dividends must also be closed to
Retained Earnings at the end of the year.
Dividends
2,000
2,000
Retained Earnings
2,000
Close Dividends with a
credit to Dividends and
a debit to Retained
Earnings.
7,000 B. bal.
6,900 N.I.
Closing Journal Entries
4-49
Once More!

Dividends must also be closed to
Retained Earnings at the end of the year.
Dividends
2,000
2,000
Retained Earnings
Div. 2,000
Determine the ending
balance in Retained
Earnings.
7,000 B. bal.
6,900 N.I.
Closing Journal Entries
4-50
Once More!

Dividends must also be closed to
Retained Earnings at the end of the year.
Dividends
2,000
2,000
Retained Earnings
Div. 2,000
Determine the ending
balance in Retained
Earnings.
7,000 B. bal.
6,900 N.I.
11,900 E. bal.
4-51
Maybe I’ll just do a
little account
closing of my own!
4-52
The Work Sheet

It is a columnar spreadsheet for
summarizing information needed to
adjust and close the books.

It is only an accounting tool and not
part of the formal accounting records.

When completed, information for
preparing financial statements can be
taken directly from the Work Sheet.
4-53
The Work Sheet
The work sheet format is illustrated below:
Account Title
COMPANY NAME
Work Sheet
For the Year Ended December 31, 1999
Trial Balance
Adjustments
Debit
Credit
Debit
Credit
Adjusted T/B
Debit
Credit
4-54
The Work Sheet
The work sheet format is illustrated below:
Account Title
COMPANY NAME
Work Sheet
For the Year Ended December 31, 1999
Trial Balance
Adjustments
Debit
Credit
Debit
Credit
Adjusted T/B
Debit
Credit
The information in
these columns
comes from the
general ledger.
4-55
The Work Sheet
The work sheet format is illustrated below:
Account Title
COMPANY NAME
Work Sheet
For the Year Ended December 31, 1999
Trial Balance
Adjustments
Debit
Credit
Debit
Credit
The adjustments
are entered initially
here and are
journalized and
posted later.
Adjusted T/B
Debit
Credit
4-56
The Work Sheet
The work sheet format is illustrated below:
Account Title
COMPANY NAME
Work Sheet
For the Year Ended December 31, 1999
Trial Balance
Adjustments
Debit
Credit
Debit
Credit
This information is
determined
mathematically
from the previous
two sets of
columns.
Adjusted T/B
Debit
Credit
4-57
The Work Sheet
There are three additional sets of
columns that are normally present on
the work sheet for a corporation.
Adjusted T/B
Debit
Credit
COMPANY NAME
Work Sheet
For the Year Ended December 31, 1999
Income Stmt
Stmt of R/E
Debit
Credit
Debit
Credit
Balance Sheet
Debit
Credit
4-58
The Work Sheet
There are three additional sets of
columns that are normally present on
the work sheet for a corporation.
COMPANY NAME
Work Sheet
The Income
For the Year Ended December 31, 1999
Adjusted T/B
Income Stmt
Stmt of R/E
Balance Sheet
Statement
columns
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
are used to facilitate
preparation of the
formal Income
Statement.
4-59
The Work Sheet
There are three additional sets of
columns that are normally present on
the work sheet for a corporation.
The Statement of
COMPANY NAME
Work Sheet
Retained Earnings
For the Year Ended December 31, 1999
Adjusted T/B
Income Stmt
Stmt of R/E
Balance Sheet
columns
are
used
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
to facilitate
preparation of the
formal Statement of
Retained Earnings.
4-60
The Work Sheet
There are three additional sets of
columns that are normally present on
the work sheet for a corporation.
COMPANY NAME
Work SheetSheet
The Balance
For the Year Ended December 31, 1999
Adjusted T/B
Income Stmt
Stmt of R/E
Balance Sheet
columns
are used
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
to facilitate
preparation of the
formal Balance
Sheet.
4-61
The Work Sheet
There are three additional sets of
columns that are normally present on
the work sheet for a corporation.
COMPANY NAME
Work Sheet
Are work
sheets
For the Year Ended December 31, 1999
Adjusted T/B
Income
Stmt when
Stmt of R/E
Balance Sheet
used
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
accounting is
computerized?
4-62
The Work Sheet
There are three additional sets of
columns that are normally present on
the work sheet for a corporation.
COMPANY NAME
Work Sheet
Are work
sheets
For the Year Ended December 31, 1999
Adjusted T/B
Income
Stmt when
Stmt of R/E
Balance Sheet
used
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
accounting is
computerized?
(Listen for the
answer on the
video.)
4-63
ROLL ‘EM !
Video #1
Video #2
(Approx. 7 min.)
(Approx. 7 min.)
Accounting Systems:
Manual to Computerized
144 to 148
4-64
4-65
Let’s move on
to a discussion
of the Classified
Balance Sheet.
4-66
Classified Balance Sheet


Contains the same three major categories
as before:

Assets

Liabilities

Stockholders’ Equity
However, the major categories are
subdivided to provide more useful
information.
Classified Balance Sheet
Subdivisions of Assets

Current Assets

Property, Plant, and Equipment

Long-Term Investments

Intangibles
4-67
Classified Balance Sheet
4-68
Current Assets
Cash and other assets that a business can
convert to cash or use up within one year
(or one operating cycle, whichever is
longer).
Short-term
Investments
Accounts
Receivable
Cash
Examples
?
Shown in what order on the
Prepaid
Expenses
Balance
Inventory
Sheet?
Classified Balance Sheet
Property, Plant & Equipment
Assets with useful lives of more than one
year acquired for use in the business
rather than for resale.
Alternative, informal term used for
Property, Plant & Equipment?
Land
Examples ?
“Fixed Assets”
Natural
Resources
Leasehold
Improvements
Equipment
Buildings
4-69
Classified Balance Sheet
Long-Term Investments
Consists of securities of another
company held with the intention of
holding the securities for more than
one year.
4-70
Classified Balance Sheet
Intangible Assets
Rights or economic benefits that are not
physical in nature.
Goodwill
Patents
Examples ?
Trademarks
Copyrights
4-71
Classified Balance Sheet
Assets Section Example
ASSETS
Current Assets
Cash
Accounts Receivable (net)
Merchandise Inventories
Total Current Assets
Similar p.149
$
75,000
100,000
80,000
$ 255,000
Property and Equipment
Land
Buildings
Less: Accumulated Depreciation
$ 200,000
300,000
(150,000)
Net Property and Equipment
Investment in Other Company
Patents
$ 350,000
250,000
10,000
Total Assets
$ 865,000
4-72
Classified Balance Sheet
Liabilities

Current Liabilities

Long-Term Liabilities
4-73
Classified Balance Sheet
4-74
Current Liabilities
Debts due within one year (or one operating
cycle, whichever is longer).
Usually paid with current assets.
Accounts
Payable
Shown
Wages
Payable
Taxes
Payable
the
in what order on
Balance
Sheet?
(p.
152)
Short-term
Examples ?
Notes
Payable
Unearned
Revenues
Classified Balance Sheet
Long-Term Liabilities
Debts that are due more than one year
after the Balance Sheet date.
Due dates should appear on the
Balance Sheet.
Mortgages
Payable
Long-term
Notes
Payable
Examples ?
Bonds
Payable
4-75
Classified Balance Sheet
Liabilities Section Example
Similar p.149
LIABILITIES
Current Liabilities
Accounts Payable
Unearned Revenues
Wages Payable
Total Current Liabilities
Long-Term Liabilities
Notes Payable (Due 12/31/99)
Bonds Payable (Due 12/31/2021)
Total Long-Term Liabilities
Total Liabilities
$
125,000
1,000
10,000
$
136,000
$
$
90,000
200,000
290,000
$
426,000
4-76
4-77
Classified Balance Sheet
Stockholders’ Equity

Paid-In Capital
Amounts paid into the company by the
owners as investments.
 Includes: Common Stock and
Preferred Stock.


Retained Earnings

The cumulative income of the company since
its inception less the amounts distributed to
the owners in the form of dividends since its
inception.
4-78
Classified Balance Sheet
Stockholders’ Equity Section Example
STOCKHOLDERS' EQUITY
Common Stock
Additional Paid-In Capital
Retained Earnings
$
300,000
95,000
44,000
Total Stockholders' Equity
$
439,000
Similar p.149
4-79
Classified Balance Sheet
Stockholders’ Equity Section Example
STOCKHOLDERS' EQUITY
Common Stock
Additional Paid-In Capital
Retained Earnings
$
300,000
95,000
44,000
Total Stockholders' Equity
$
439,000
A = L + SE
865,000 = 426,000 + 439,000
4-80
About Test #1
Will be challenging because the material
covered is challenging
 Most questions are T/F or M/C

Questions are 5-pt., 3-pt. & 1-pt.

No tricks such as patterns in answers
Order of answers is random
Coverage is even over the 4 chapters
and introduction
 Time allowed: 75 minutes

4-81
About Test #1

Best way to study
Notes first
 Study guide and/or Hermanson tutorials

Calculators will be provided
 Must wait outside classroom
 Have your questions ready for next
actual class
 See course home page for office hours

4-82
Chapter 4 Wrap Up
Let’s wrap up
Chapter 4 with some
virtual keypad questions.
Click the keypad!