4 – Completing the Accounting Cycle
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.
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.
1
Objective 1 - Describe the flow of
accounting information from the
unadjusted trial balance into the
adjusted trial balance and financial
statements.
4-1
&
4-2
Objective 2 - Prepare financial statements
from adjusted account balances.
2
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.
3
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
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
4-2
Property, plant, and equipment (also called
fixed 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
5
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
Notes payable
Wages payable
Interest payable
Unearned fees
4-2
Liabilities not due for a long
time (usually more than one
year) are long-term liabilities.
 Notes payable
 Mortgage payable
 Bond payable
6
4-2
Example
The following accounts appear in the adjusted trial balance of
Hindsight Consulting. Indicate whether each account would be
reported in the (a) current asset; (b) property, plant, and
equipment; (c) current liability, (d) long-term liability; or (e)
owner’s equity section of the December 31, 2007 balance sheet
of Hindsight Consulting.
1. Jason Corbin, Capital
2. Notes Receivable (due
in 6 months)
3. Notes Payable (due in
2009)
4. Land
5. Cash
6. Unearned Rent
months)
7. Accumulated Depr.—
Equipment
8. Accounts Payable
7
Objective 3 - Prepare closing entries
4-3
Accounts that are relatively
permanent from year to year are
called real accounts. Accounts
that report amounts for only one
period are called temporary
accounts or nominal accounts.
8
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 to
Income Summary.
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.
4-3
9
4-3
Debit each revenue account
for the amount of its balance,
and credit Income Summary
for the total revenue.
Fees Earned
Income Summary
16,960
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
10
4-3
Wages Expense
Bal.
4,525
4,525
9,855
Rent Expense
Bal.
1,600
Income Summary
16,960
1,600
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
200
Bal.
455
200
Miscellaneous Expense
Debit Income Summary
for the total expenses
and credit each expense
account for its balance.
455
11
4-3
Income Summary
9,855
7,105
16,960
Chris Clark, Capital
Bal. 25,000
7,105
Chris Clark, Drawing
Bal.
Debit Income
Summary for the
amount of its balance
(in this case, the net
income) and credit the
capital account.
4,000
12
4-3
Chris Clark, Capital
4,000
Bal. 25,000
7,105
Chris Clark, Drawing
Bal.
4,000
4,000
Debit the capital
account for the
balance of the
drawing account,
and credit drawing
for the same
amount.
13
4-3
Step 1
Step 2
Step 3
Step 4
14
4-3
After the closing entries
are posted, all of the
temporary accounts have
zero balances.
15
4-3
Example Exercise
After the accounts have been adjusted at July 31, the end of the
fiscal year, the following balances are taken from the ledger of
Cabriolet Services Co.
Terry Lambert, Capital
Terry Lambert, Drawing
Fees Earned
Wages Expense
Rent Expense
Supplies Expense
Miscellaneous Expense
$615,850
25,000
380,450
250,000
65,000
18,250
6,200
Journalize the four entries required to close the accounts.
16
4-3
Example
July 31
Fees Earned
Income Summary
380,450
31 Income Summary
Wages Expense
Rent Expense
Supplies Expense
Miscellaneous Expense
339,450
31 Income Summary
Terry Lambert, Capital
41,000
31 Terry Lambert, Capital
Terry Labert, Drawing
25,000
For Practice: PE 4-5A, PE 4-5B
380,450
250,000
65,000
18,250
6,200
41,000
25,000
17
4-3
Exhibit 7 Post-Closing Trial Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2008
Cash
2 065 00
Accounts Receivable
2 720 00
Supplies
760 00
Prepaid Insurance
2 200 00
Land
20 000 00
Office Equipment
1 800 00
Accumulated Depreciation
50
Accounts Payable
900
Wages Payable
250
Unearned Rent
240
Chris Clark, Capital
28 105
29 545 00 29 545
00
00
00
00
00
00
18
4-4
Objective 4
Describe the
accounting cycle.
19
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.
Note – Not all steps are mandatory and in
practice a few of the steps are combined
20
The Accounting Cycle Steps
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.
4-4
Continued
21
4-4
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.
22
4-5
Objective 5
Illustrate the accounting
cycle for one period.
Refer to the textbook for
this extended illustration.
23
Objective 6 – Explain what is meant by the
fiscal year and the natural business year
4-6
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.
24