Completing the Accounting Cycle
12e
PRINCIPLES OF FINANCIAL ACCOUNTING
24e
PRINCIPLES OF ACCOUNTING
Chapter 4
2e
ACCOUNTING PRINCIPLES
Student Version
Using excel for Success
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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
© 2012
Cengage
All Rightswith
Reserved.
May
not be or
copied,
scanned,
or duplicated,
in whole or in part,
except
use as use.
permitted
in aLearning.
license distributed
a certain
product
service
or otherwise
on a password-protected
website
forfor
classroom
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Prepared by: C. Douglas Cloud
Prepared
Professorby:
Emeritus
C. Douglas
of Accounting
Cloud
Professor
Pepperdine
Emeritus
University
of Accounting
Pepperdine University
Reeve Warren Duchac
Learning Objective 1
1. Describe the flow of accounting
information from the unadjusted trial
balance into the adjusted trial balance and
financial statements.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Flow of Accounting Information
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Unadjusted TB
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
Cr
 Account balances are listed in the
Trial Balance column using the ending
balances found in the general ledger.
(continued)
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 1
Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Unadjusted TB
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
 Adjustments are entered here. Two possibilities:
 Deferrals – Existing balances are changed
(prepaid expenses & unearned revenues)
 Accruals – New information is entered (accrued
expenses & accrued revenues)
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cr
(continued)
LO 1
Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Unadjusted TB
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
 Adjustments are combined with
the trial balance amounts.
Account balances are now
adjusted.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cr
(continued)
LO 1
Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
 Revenue and expense balances in
the Adjusted Trial Balance column
are extended to the Income
Statement column.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Balance Sheet
Dr
Cr
(continued)
LO 1
Flow of Accounting Information
End-of-Period Spreadsheet (Work Sheet)
Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
 Asset, liability, owner’s equity, and
drawing balances in the Adjusted
Trial Balance column are extended
to the Balance Sheet column.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Balance Sheet
Dr
Cr
(concluded)
Learning Objective 2
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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Liability
Income statement
Current / Fixed Currant O.E
(Revenue- Expenses)
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Income Statement
 The income statement is prepared directly from
the Income Statement or Adjusted Trial Balance
columns of the end-of-period spreadsheet (work
sheet) beginning with fees earned of $16,840.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Statement of Owner’s Equity
 The first item presented on the statement of
owner’s equity is the balance of the
owner’s capital account at the beginning
of the period.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Balance Sheet
 Asset, liability, owner’s equity, and drawing
balances in the Adjusted Trial Balance column
are extended to the Balance Sheet column(in the
spreadsheet/work sheet) in order to use these
accounts in preparing the balance sheet
statement, beginning with Cash of $2,065.
classified balance sheet
 A classified balance sheet is a balance sheet that
was expanded by adding subsections for current
assets; property, plant, and equipment; current
liabilities, long-term liabilities; and Owners equity.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Classified Balance Sheet
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Current Assets
 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
 Notes Receivable: are written promises by the customer to
pay the amount of the note and possibly interest at an agreed rate
 Supplies
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Fixed Assets
 Property, plant, and equipment (also called
fixed assets or plant 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
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Current Liabilities
 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
 Short-term note payable
 Wages payable
 Interest payable
 Unearned fees
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Long-Term Liabilities
 Liabilities not due for a long time (usually more
than one year) are called long-term liabilities.
 Long-term notes payable
 Mortgages payable
 Bonds payable
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 2
Owner’s Equity
 Owner’s equity is the owner’s right to the
assets of the business. Owner’s equity is
added to the total liabilities, and this total
must be equal to the total assets.
 In other words, (Owner’s equity is the
residual value after deducting total assets
from total liabilities)
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 3
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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Closing Entries
 Accounts that are relatively permanent
from year to year are called permanent
accounts or real accounts. These accounts
are carried forward from year to year.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Closing Entries
 Accounts that report amounts for only one
period are called temporary accounts or
nominal accounts. Temporary accounts are
not carried forward because they relate to
only one period.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Closing Entries
 To report amounts for only one period,
temporary accounts should have zero
balances at the beginning of the next
period.
 To achieve this, the revenue and expense
account balances are transferred to
Income Summary at the end of the period.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Closing Entries
 The balance of Income Summary (net
income or net loss) 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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Closing Entries
 Income Summary is a temporary account
that is only used during the closing process.
 At the end of the closing process, the
Income Summary account will have a zero
balance.
 Income Summary is sometimes called a
clearing account.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 3
Closing Entries
Step 1
Step 2
Step 3
Step 4
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
30
LO 3
Journalizing and Posting Closing Entries
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
31
LO 3
Journalizing and Posting Closing Entries
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
32
LO 3
Journalizing and Posting Closing Entries
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
33
LO 3
Journalizing and Posting Closing Entries
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
34
LO 3
Temporary Account Balances
 After the closing entries are posted, all of
the temporary accounts have zero
balances.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective 4
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.
4. Describe the accounting cycle.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Accounting Cycle
 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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 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.
(continued)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO 4
Accounting Cycle
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.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.