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Completing the

AccountingCycle

Chapter 4

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Prepare an accounting

work sheet.

Objective 1

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The Accounting Cycle

The accounting cycle is the process by

which accountants prepare financial

statements for an entity for a specificperiod of time.

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For a new business, begin by setting up

ledger accounts.

For an established business, begin withaccount balances carried over from the

previous period.

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Accounts Receivable

1,350

Accounts Receivable 1,700

Service Revenue 1,700

Accounts Receivable1,350

1,700

3,050

Accounts Receivable1,350

1,700


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Work Sheet

CashAccountsreceivable

12,1003,050

BalanceSheet

IncomeStatement


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Postclosing Trial BalanceCashAccountsreceivable

12,100

3,050

Adjusting entries Closing entries

Cash Accounts Receivable

12,100 3,050


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The AccountingWork Sheet

What is the work sheet?

A work sheet is a multi-columned document

used by accountants to help move data fromthe trial balance to the financial statements.

It is an internal document.

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AdjustedTrial Balance Adjustments Trial Balance

Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSupplies

EquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense

Totals

12,1001,350

250

15,500

1,000

12,000

42,200

7,5001,2001,1001,5007,200

23,700

42,200


2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 9

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a The company has earned revenue of $1,700

which will be collected next month.

b Inventory of supplies at month end totaled$150.

c Depreciation for the period was calculated

as $200.

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AdjustedTrial Balance Adjustments Trial Balance



Totals

12,1001,350

250

15,500

1,000

12,000

42,200

7,5001,2001,1001,5007,200

23,700

42,200

a) 1,700

b) 100c) 200

2,000

b) 100

c) 200

a) 1,700

2,000

12,1003,050

150

15,500

1,000

12,000100200

44,100

7,7001,2001,1001,5007,200

25,400

44,100



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Adjusted Income BalanceTrial Balance Statement Sheet



Totals

7,7001,2001,1001,5007,200

25,400

44,100

12,100

3,050

15015,50

0

1,000

12,000

100

20044,10

12,100

3,050

15015,50

0

1,000

31,800

7,7001,2001,1001,5007,200

18,700



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Totals

7,7001,2001,1001,5007,200

25,400

44,100

12,100

3,050

15015,50

0

1,000

12,000

100

20044,10

12,100

3,050

15015,50

0

1,000

31,800

7,7001,2001,1001,5007,200

18,700

12,000100200

12,300

25,400

25,400



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TotalsNet income

7,7001,2001,1001,5007,200

25,400

44,100

12,100

3,050

15015,50

0

1,000

12,000

100

20044,10

12,100

3,050

15015,50

0

1,000

31,800

7,7001,2001,1001,5007,200

18,70013,100

31,800

12,000100200

12,30013,100

25,400

25,400

25,400

25,400



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Use the work sheet

to complete theaccounting cycle.

Objective 2

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The work sheet

helps identifythe accounts

that needadjustments.

Actual adjustment

of the accountsrequires

journalizingand postingthe entries.

Recording the

Adjusting Entries

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Recording the

Adjusting Entries The adjusting entries may be recorded in the

journal when they are entered on the work

sheet. Many accountants journalize and post the

adjusting entries just before they make the

closing entries.

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Close the revenue,

expense, andwithdrawal accounts.

Objective 3

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Closing the Accounts

Closing the accounts is the end of period

process that prepares the accounts for

recording transactions during the nextperiod.

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Closing Entries

Revenuesincrease

OwnersEquity.

Expensesand

Withdrawals

decreaseOwnersEquity.


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Revenues and Expense accounts are closed

to Income Summary.

Income Summary is closed to Capital.

Withdrawals are closed to Capital.

In a corporation, Dividends are closed to

Retained Earnings.

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Income Summary

A creditbalance

represents

net income.

A debitbalance

represents

net loss.


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RevenueIncome

Summary12,000

7,500

9,000

Salary Exp

3,300

28,500

1,500

1,800

4,450 28,500

Rent Exp

800 800

Supplies Exp

350 350

24,050

24,050

(Close RevenueAccount)

(Close ExpenseAccounts)

(Close IncomeSummary)

Withdrawals

2,500 2,500

2,500

Capital

Account

(CloseWithdrawalsAccount)



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Postclosing Trial Balance

The accounting cycle ends with the

postclosing trial balance.

The postclosing trial balance is dated asof the end of the period for which the

statements have been prepared.

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Permanent Accounts

What accounts never close?

Assets

Liabilities

Owners equity

Balances of permanent accounts carry over

to the next period.

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Classify assets and liabilities

as current or long-term.

Objective 4

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Liquidity

This is a measure of how quickly an item

can be converted into cash.

On the balance sheet, assets and liabilitiesare classified as either current or long-term

to indicate their relative liquidity.

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Current Assets

Current assets are cash, or will be converted

to cash, in one year or within the normal

business operating cycle. What are some other examples?

short-term receivables

inventoryprepaid expenses

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Current Liabilities

Current liabilities are debts or obligations

due within one year or within the operating

cycle. What are some examples?

accounts and salary payables

short-term notes payable unearned revenue

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Long-term Assets and Liabilities

Long-term assets include all other assets.

property, equipment, and intangibles

Long-term liabilities are all other debts due

in longer than one year or the entitys

operating cycle.

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Debit side

Current assets

Long-term assets

Credit side

Current liabilities

Long-term liabilities

Listed in the order

of decreasing

liquidity

Listed in the order

of how soon they

must be paid

The Classified Balance Sheet

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Assets Liabilities

Current assets: Current liabilities:Cash 12,100 Accounts payable 1,200

Accounts receivable 3,050 Salary payable 1,100

Supplies 150 Unearned revenue 1,500

Total current assets 15,300 Total liabilities 3,800

Plant assets Owners equity

Equipment 15,500 Capital 19,300

Less Accum. deprec. 7,700 7,800

Total liabilities and

Total assets 23,100 owners equity 23,100

XYZ ServicesJanuary 31, 20XX

The Classified Balance Sheet

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Report Format

AssetsLiabilities

Owners Equity

Account Format

Assets = Liabilities +Owners Equity

Different Formats of

the Balance Sheet

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Use the current ratio and the debt

ratio to evaluate a company.

Objective 5

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Comparative Financial

Statements They enhance the users ability to analyze

a companys past performance.

What are two common ratios used tomeasure liquidity?

1 Current ratio

2 Debt ratio

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Current ratio = Current assets Current liabilities

Current Ratio

This measures the ability of a business to

pay its current liabilities with its current

assets.

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Total liabilities Total assets

Debt Ratio

It indicates the proportion of a businesss

assets that are financed with debt.

It measures their ability to pay both currentand long-term debt.

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Trend Analysis

Decision makers compare various ratios

over a period of time.

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End of Chapter4

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