Completing the
Accounting Cycle
By Rachelle Agatha, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve,
Duchac
After studying this chapter, you
should be able to:
1. Describe the flow of accounting
information from the unadjusted
trial balance into the adjusted trial
balance and financial statements.
2. Prepare financial statements
from adjusted account
balances.
3. Prepare closing entries.
After studying this chapter, you
should be able to:
4. Describe the accounting
cycle.
5. Illustrate the accounting cycle
for one period.
6. Explain what is meant by the
fiscal year and the natural
business year.
Objective 1
Describe the flow of
accounting information
from the unadjusted trial
balance into the adjusted
trial balance and financial
statements.
4-1
Account Title
Cash
Cleaning supplies
Prepaid insurance
Equipment
Accumulated depr.
Accounts payable
Nikki Capital
Nikki, Drawing
Revenue
Rent expense
Wages expense
Utilities expense
Misc. expense
Supplies expense
Insurance expense
Depreciation exp.
Wages payable
Trial Balance
Dr.
Cr.
6,600
11,000
2,700
103,000
37,050
3,720
67,800
27,000
77,610
14,250
19,860
d
1,065
705
186,180 186,180
a
b
c
Nikki Cleaners
Work Sheet
For Year Ended December 31, 2008
Adjustments
Adj. T/Balance
Dr.
Cr.
Dr.
Cr.
6,600
0
a
1,625
9,375
0
b
900
1,800
0
103,000
0
c
10,800
0
47,850
0
3,720
0
67,800
27,000
0
0
77,610
14,250
0
915
20,775
0
1,065
0
705
0
1,625
900
10,800
d
14,240
Net income
915
14,240
1,625
900
10,800
0
197,895
0
0
0
915
197,895
4-1
Income Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
6,600
9,375
1,800
103,000
47,850
3,720
67,800
27,000
77,610
14,250
20,775
1,065
705
1,625
900
10,800
50,120
27,490
77,610
77,610
0
77,610
147,775
0
147,775
915
120,285
27,490
147,775
4-1
Spreadsheet (Work Sheet)
Trial Balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Adjusted TB
Dr
Accounts are listed in the
Trial Balance column using
the ending balance found
in the general ledger.
Cr
4-1
Spreadsheet (Work Sheet)
Trial Balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Adjusted TB
Dr
Cr
Adjustments are entered here. Two
possibilities:
1. Deferrals – Existing balances are changed.
2. Accruals – New information is entered.
4-1
Spreadsheet (Work Sheet)
Trial Balance
Accounts
Dr
Cr
Adjustments
Dr
Cr
Adjusted TB
Dr
Cr
Adjustments are combined with the trial
balance. Account balances are now
adjusted.
4-1
Spreadsheet (Work Sheet)
Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
Balance Sheet
Dr
Cr
Revenue and expense balances in the
Adjusted Trial Balance column are
extended to the Income Statement
column.
4-1
Spreadsheet (Work Sheet)
Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
Balance Sheet
Dr
Cr
Asset, liability, owner’s equity, and drawing
balances in the Adjusted Trial Balance
column are extended to the Balance Sheet
column.
4-2
Objective 2
Prepare financial
statements from
adjusted account
balances.
Account Title
Cash
Cleaning supplies
Prepaid insurance
Equipment
Accumulated depr.
Accounts payable
Nikki Capital
Nikki, Drawing
Revenue
Rent expense
Wages expense
Utilities expense
Misc. expense
Supplies expense
Insurance expense
Depreciation exp.
Wages payable
Trial Balance
Dr.
Cr.
6,600
11,000
2,700
103,000
37,050
3,720
67,800
27,000
77,610
14,250
19,860
d
1,065
705
186,180 186,180
a
b
c
Nikki Cleaners
Work Sheet
For Year Ended December 31, 2008
Adjustments
Adj. T/Balance
Dr.
Cr.
Dr.
Cr.
6,600
0
a
1,625
9,375
0
b
900
1,800
0
103,000
0
c
10,800
0
47,850
0
3,720
0
67,800
27,000
0
0
77,610
14,250
0
915
20,775
0
1,065
0
705
0
1,625
900
10,800
d
14,240
Net income
915
14,240
1,625
900
10,800
0
197,895
0
0
0
915
197,895
4-1
Income Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
6,600
9,375
1,800
103,000
47,850
3,720
67,800
27,000
77,610
14,250
20,775
1,065
705
1,625
900
10,800
50,120
27,490
77,610
77,610
0
77,610
147,775
0
147,775
915
120,285
27,490
147,775
4-2
Nikki Cleaners
Income Statement
For the Year Ended December 31, 2008
Revenue
Expenses:
$77,610
Wages
Rent
Depreciation
Supplies
Utilities
Insurance
Miscellaneous
Net income
$20,775
14,250
10,800
1,625
1,065
900
705
50,120
$27,490
4-2
Nikki Cleaners
Statement of Owner's Equity
For the Year Ended December 31, 2008
Balance, January 1, 2008
Net income
Less: Withdrawls
Balance, December 31, 2008
$ 67,800
27,490
(27,000)
$ 68,290
4-2
Nikki Cleaners
Balance Sheet
December 31, 2008
Assets
Cash
Cleaning supplies
Prepaid insurance
Current assets
Equipment
Acc. Depreciation
Fixed assets
Total assets
$6,600
9,375
1,800
$17,775
$103,000
47,850
$55,150
$72,925
Liabilities
Accounts payable
Wages payable
Total liabilities
Owner's Equity
Nikki, Capital
Total Liability &
Owern's Equity
$3,720
915
$4,635
$ 68,290
$72,925
4-2
A classified balance sheet is
a balance sheet that was
expanded by adding
subsections for current assets;
property, plant, and
equipment; and current
liabilities.
4-2
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
4-2
Notes receivable are
written promises by the
customer to pay the
amount of the note
and possibly interest at
an agreed rate.
4-2
Owner’s equity is the
owner’s right to the assets of
the business. Owner’s
equity is added to the total
liabilities, and the total must
be equal to the total assets.
4-3
Objective 3
Prepare closing
entries.
4-3
After the closing
entries are posted,
all of the temporary
accounts have zero
balances.
4-3
Accounts that are relatively
permanent from year to year
are called real or permanent
accounts. Accounts that
report amounts for only one
period are called temporary
accounts or nominal
accounts.
4-3
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 or
closed to Income Summary.
4-3
The balance of Income
Summary is then transferred to
the owner’s capital account.
The balance of the owner’s
drawing account is also
transferred to the owner’s
capital account. The entries
that transfer these balances
are called closing entries.
JOURNAL
Date
2008
Closing Entries
Dec
31 Revenue
Income Summary
Debit
Credit
77,610
77,610
31 Income Summary
Salary Expense
Rent Expense
Supplies Expense
Depeciation. Expense - Equipment
Utilities Expense
Misc Expense
Insurance Expense
50,120
31 Income Summary
Nikki, Drawing
27,490
31 Nikki, Capital
Nikki, Drawing
27,000
20,775
14,250
1,625
10,800
1,065
705
900
27,490
27,000
After the closing
entries are posted,
all of the temporary
accounts have zero
balances.
Nikki Cleaners
Work Sheet
For Year Ended December 31, 2008
Account Title
Cash
Cleaning supplies
Prepaid insurance
Equipment
Accumulated depr.
Accounts payable
Wages Payable
Nikki Capital
Post Closing Trial
Balance
Dr.
Cr.
6,600
9,375
1,800
103,000
47,850
3,720
915
68,290
$ 120,775
$ 120,775
4-2
4-4
Objective 4
Completion of
the accounting
cycle.
4-4
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.
Accounting Cycle
1. Transactions are analyzed and
recorded in journal
2. Post Transaction from the
Journal to the General Ledger
3. Prepare the Unadjusted Trial
Balance
4. Adjustment data is gathered &
Analyzed balance.
31
Accounting Cycle, cont
5. Optional end-of-period worksheet
6. Record Adjusting Entries
7. Prepare the Adjusted Trial
Balance
8. Prepare Financial Statements
9. balance.
Record Closing Entries & Post
10. Prepare a Post Closing Trial
Balance
32
Accounting Periods
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.
33
Annual Accounting Period
An annual accounting period is
12 months and can be a
calendar year or a fiscal year.
34
Lecture Summary
• Optional end-of-period worksheet
• Record Adjusting Entries
• Prepare the Adjusted Trial
Balance
• Prepare Financial Statements
• balance.
Record Closing Entries & Post
• Prepare a Post Closing Trial
Balance
35