Completing the Accounting Cycle

Prepared by: C. Douglas Cloud Professor Emeritus of AccountingPepperdine University

© 2011 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.

Student VersionStudent Version

Completing the Accounting Cycle

Chapter 4Chapter 4

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2

Learning Objective 1

1. Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.


Seven Basic Steps of the Accounting Cycle

Seven Basic Steps of the Accounting Cycle

1. Transactions are analyzed and recorded in the journal.

2. Transactions are posted to the ledger.

3. A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed.

4. Financial statements are prepared.

5. Adjusting entries are journalized and posted.

6. Closing entries are journalized and posted.

7. A post-closing trial balance is prepared.


4

Flow of Accounting Information

LO 1LO 1


5

End-of-Period Spreadsheet (Work Sheet)End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB


Account balances are listed in the Trial Balance column using the ending balances found in the general ledger.

LO 1LO 1

(continued)


6





Adjustments are entered here. Two possibilities: Deferrals – Existing balances are changed Accruals – New information is entered

LO 1LO 1

(continued)

Unadjusted TB


7





Adjustments are combined with the trial balance amounts. Account balances are now adjusted.

LO 1LO 1

(continued)

Unadjusted TB


Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2011

The Unadjusted The Unadjusted Trial BalanceTrial Balance

The Unadjusted The Unadjusted Trial BalanceTrial Balance

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(a) The (a) The SuppliesSupplies account has a debit of account has a debit of P2,000. A count of supplies at the end of P2,000. A count of supplies at the end of the period reveals that P760 is on hand. the period reveals that P760 is on hand. Therefore, P1,240 in supplies was used Therefore, P1,240 in supplies was used during the two-month period.during the two-month period.

(a) The (a) The SuppliesSupplies account has a debit of account has a debit of P2,000. A count of supplies at the end of P2,000. A count of supplies at the end of the period reveals that P760 is on hand. the period reveals that P760 is on hand. Therefore, P1,240 in supplies was used Therefore, P1,240 in supplies was used during the two-month period.during the two-month period.


Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600





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(a) 1,240

(a) 1,240


(b)(b) The The Prepaid Insurance Prepaid Insurance account has a account has a debit balance of P2,400, which debit balance of P2,400, which represents prepayment of insurance for represents prepayment of insurance for 12 months beginning December 1. 12 months beginning December 1. Thus, the insurance expense for this Thus, the insurance expense for this month is P100 (P2,400 ÷ 24).month is P100 (P2,400 ÷ 24).

(b)(b) The The Prepaid Insurance Prepaid Insurance account has a account has a debit balance of P2,400, which debit balance of P2,400, which represents prepayment of insurance for represents prepayment of insurance for 12 months beginning December 1. 12 months beginning December 1. Thus, the insurance expense for this Thus, the insurance expense for this month is P100 (P2,400 ÷ 24).month is P100 (P2,400 ÷ 24).


Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100

Accounts are added as needed.

(b) 100


(c) The (c) The Unearned Rent Unearned Rent account has a credit account has a credit balance of P360, which represents the balance of P360, which represents the receipt of three-months’ rent beginning receipt of three-months’ rent beginning with December 1. Thus, the rent revenue with December 1. Thus, the rent revenue for December is P120.for December is P120.

(c) The (c) The Unearned Rent Unearned Rent account has a credit account has a credit balance of P360, which represents the balance of P360, which represents the receipt of three-months’ rent beginning receipt of three-months’ rent beginning with December 1. Thus, the rent revenue with December 1. Thus, the rent revenue for December is P120.for December is P120.

FOR REN

T


Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100

(c) 120

Rent Revenue (c) 120


(d) Wages accrued but not paid at (d) Wages accrued but not paid at the end of December total P250.the end of December total P250.

(d) Wages accrued but not paid at (d) Wages accrued but not paid at the end of December total P250.the end of December total P250.


Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

(d) 250


(e) Fees accrued at the end of (e) Fees accrued at the end of December, but not recorded, December, but not recorded, total P500.total P500.

(e) Fees accrued at the end of (e) Fees accrued at the end of December, but not recorded, December, but not recorded, total P500.total P500.


Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

(e) 500

(e) 500


(f) Depreciation of the office (f) Depreciation of the office equipment is P50 for December.equipment is P50 for December.

(f) Depreciation of the office (f) Depreciation of the office equipment is P50 for December.equipment is P50 for December.


Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250Depreciation Expense (f) 50Accum. Depreciation (f) 50



42,600 42,600





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Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

To make more space, let’s remove

the heading.

To make more space, let’s remove

the heading.



42,600 42,600



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2,260 2,260Summed Summed

and and ruledruled

Summed Summed and and

ruledruled

31


Next, the unadjusted Trial Balance columns and the Adjustments columns are

combined to determine the amounts displayed in the Adjusted Trial Balance.

Next, the unadjusted Trial Balance columns and the Adjustments columns are

combined to determine the amounts displayed in the Adjusted Trial Balance.



42,600 42,600



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2,260 2,260

33


Cash 2,065 2,065Accounts Receivable 2,220 (e) 500 2,720Supplies 2,000 (a) 1,240 760Prepaid Insurance 2,400 (b) 100 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 360 (c) 120 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,340 (e) 500 16,840Wages Expense 4,275 (d) 250 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 800 (a) 1,240 2,040Miscellaneous Expense 455 455

42,600 42,600



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Insurance Expense (b) 100 100 Rent Revenue (c) 120 120 Wages Payable (d) 250 250 Depreciation Expense (f) 50 50 Accum. Depreciation (f) 50 50

2,260 2,260 43,400 43,400

34


26

Adjusted TB


Income State. Balance Sheet


LO 1LO 1


Revenue and expense balances in

the Adjusted Trial Balance column are extended to the Income Statement column. (continued)


27

Adjusted TB


Income State. Balance Sheet



Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

LO 1LO 1

(concluded)


Cash 2,065Accounts Receivable 2,720Supplies 760Prepaid Insurance 2,300Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 240Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,840Wages Expense 4,525Rent Expense 1,600Utilities Expense 985Supplies Expense 2,040Miscellaneous Expense 455


Adjusted Trial Balance Income Statement Balance Sheet

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Insurance Expense 100 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50

43,400 43,400

38


Now, let’s extend the balances from the Adjusted Trial

Balance column.

Now, let’s extend the balances from the Adjusted Trial

Balance column.


Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455



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Insurance Expense 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50

43,400 43,400

40


These four columns are

summed.

These four columns are

summed.


Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455



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Insurance Expense 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50

43,400 43,400 9,755 16,960 33,645 26,440

42


The difference between the Income Statement column

totals is the net income (or net loss) for the period.

The difference between the Income Statement column

totals is the net income (or net loss) for the period.


The difference between the Balance Sheet column totals

is also the income (or net loss) for the period.

The difference between the Balance Sheet column totals

is also the income (or net loss) for the period.


9,755 16,960 33,645 26,4407,205 7,205

16,960 16,960 33,645 33,645

Income Statement Balance Sheet

Net IncomeNet Income Net IncomeNet Income


36



2. Prepare financial statements from adjusted account balances.


37

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 P16,840.

LO 2LO 2


NetSolutionsIncome StatementFor Two Months Ended December 31, 2011

Fees earned P16,840Rent revenue 120

Total revenues P16,960Expenses:

Wages expense P 4,525Supplies expense 2,040Rent expense 1,600Utilities expense 985Insurance expense 100Depreciation expense 50Miscellaneous expense 455

Total expenses 9,755Net income P 7,205

Every amount on this income statement was taken from the Income Statement column of the work sheet.


39

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.

LO 2LO 2


NetSolutionsStatement of Owner’s EquityFor the Two Months Ended December 31, 2011

Chris Clark, Capital, November 1, 2011 P 0Investment on November 1, 2011 P25,000Net income for November and December 7,205

P32,205Less withdrawals 4,000Increase in owner’s equity 28,205Chris Clark, Capital, December 31, 2011 $28,205Either from the Either from the

income income statement or the statement or the

work sheet.work sheet.

Either from the Either from the income income

statement or the statement or the work sheet.work sheet.

From the From the Balance Sheet Balance Sheet

debit column of debit column of the work sheet.the work sheet.

From the From the Balance Sheet Balance Sheet

debit column of debit column of the work sheet.the work sheet.


41

Balance Sheet

The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the end-of-period spreadsheet (or work sheet), beginning with Cash of $2,065.

LO 2LO 2


NetSolutionsBalance SheetDecember 31, 2005

Assets LiabilitiesCurrent assets: Current liabilities:

Cash P 2,065 Accounts payable $900Accounts receivable 2,720 Wages payable 250Supplies 760 Unearned rent 240Prepaid insurance 2,300 Total liabilitiesP 1,390 Total current assets P 7,845

Property, plant, and equipment:

Land P20,000Office equip. P1,800Less accum.

depreciation 50 1,750 Owner’s Equity Total property, plant Chris Clark, Capital 28,205

and equipment 21,750 Total liabilities and

Total assets P29,595 owner’s equityP29,595

Assets LiabilitiesCurrent assets: Current liabilities:

Cash P 2,065 Accounts payable $900Accounts receivable 2,720 Wages payable 250Supplies 760 Unearned rent 240Prepaid insurance 2,300 Total liabilitiesP 1,390 Total current assets P 7,845

Property, plant, and equipment:

Land P20,000Office equip. P1,800Less accum.

depreciation 50 1,750 Owner’s Equity Total property, plant Chris Clark, Capital 28,205

and equipment 21,750 Total liabilities and

Total assets P29,595 owner’s equityP29,595

From the From the Statement Statement

of Owner’s of Owner’s EquityEquity

From the From the Statement Statement

of Owner’s of Owner’s EquityEquity


43

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; and long-term liabilities.

LO 2LO 2


44

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 Supplies

LO 2LO 2


45

Notes Receivable

Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

LO 2LO 2


46

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

LO 2LO 2


47

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

Wages payable Interest payable Unearned fees

LO 2LO 2


48

Long-Term Liabilities

Liabilities not due for a long time (usually more than one year) are called long-term liabilities.

Short-term notes payable

Mortgages payable

Bonds payable

LO 2LO 2


49

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.

LO 2LO 2


50




3. Prepare closing entries.


51

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.

LO 3LO 3


52

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.

LO 3LO 3


53

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.

LO 3LO 3


54

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.

LO 3LO 3


55

Closing EntriesLO 3LO 3

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.


56

LO 3LO 3

Journalizing and Posting Closing Entries


OWNER’S CAPITALOWNER’S CAPITAL

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

Income Summary

11Revenues are transferred to Income Summary22

Expenses are transferred to Income Summary

33 Net Income or Net Loss is transferred to Owner’s Capital

44Drawings are transferred to Owner’s Capital


OWNER’S CAPITALOWNER’S CAPITAL

Income Summary

11Revenues are transferred to Income Summary22

Expenses are transferred to Income Summary

33 Net Income or Net Loss is transferred to Owner’s Capital

44Drawings are transferred to Owner’s Capital

The The Income Summary Income Summary account does not appear on account does not appear on

the financial statements.the financial statements.

The The Income Summary Income Summary account does not appear on account does not appear on

the financial statements.the financial statements.

Adjusting and Closing EntriesAdjusting and Closing EntriesAdjusting and Closing EntriesAdjusting and Closing Entries


Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Chris Clark, Capital

Bal. 25,000

Chris Clark, Drawing

Bal. 4,000

Income Summary

Note: Note: The The balances shown balances shown

are adjusted are adjusted balances before balances before

closing. The closing. The following following sequence sequence

demonstrates the demonstrates the closing process.closing process.

Note: Note: The The balances shown balances shown

are adjusted are adjusted balances before balances before

closing. The closing. The following following sequence sequence

demonstrates the demonstrates the closing process.closing process.



Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600


Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120


Bal. 25,000


Bal. 4,000

Income Summary

Debit each revenue account for the amount of its

balance, and credit Income Summary

for the total revenue.

16,840

120

16,960



Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600


Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Debit Income Summary for the total expenses and credit each expense

account for its balance.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525



Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600


Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Debit Income Summary for the

amount of its balance (in this

case, the net income) and credit the capital account.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

7,205



Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600


Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Debit the capital account for the balance of the

drawing account, and credit drawing

for the same amount.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

7,205

4,000

4,000



Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600


Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,480

120

16,9609,775

445

100

2,040

985

50

1,600

4,525

7,205

7,205

4,000

4,000

Close RevenuesClose Revenues

Close ExpensesClose Expenses

Close Income SummaryClose Income Summary

Close DrawingClose Drawing

16,84016,840

120120

16,96016,960

4,5254,525

1,6001,600

5050

985985

2,0402,040

100100

455455

9,7759,775

7,2057,205

7,2057,205

4,0004,000

4,0004,000

Review of the Closing ProcessReview of the Closing ProcessReview of the Closing ProcessReview of the Closing Process


65

Step 1

Step 2

Step 3

LO 3LO 3

Closing Entries

Step 4


Temporary Account Balances

After the closing entries are posted, all of the temporary accounts have zero balances.

LO 3LO 3


Post-Closing Trial Balance

A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance at the beginning of the next period.

LO 3LO 3


Post-closing Trial BalancePost-closing Trial BalancePost-closing Trial BalancePost-closing Trial Balance

NetSolutionsPost-Closing Trial Balance

December 31, 2011Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 28 205 00

29 645 00 29 645 00





3. Prepare closing entries.4. Describe the accounting cycle.


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.

LO 4LO 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)

LO 4LO 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.

LO 4LO 4

10.A post-closing trial balance is prepared.





3. Prepare closing entries.4. Describe the accounting cycle.5. Illustrate the accounting cycle for

one period.


74

Accounting Cycle

LO 5LO 5

(continued)


75

Accounting CycleLO 5LO 5

(continued)


76

LO 5LO 5

Accounting Cycle

(concluded)


77

LO 5LO 5

Accounting Cycle


78

LO 5LO 5

Unadjusted Trial Balance


79

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Adjusting Entries


80

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Adjusted Trial Balance


81




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.


82

Accounting Period

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 business year.

LO 6LO 6


83


6. Explain what is meant by the fiscal year and the natural business year.

7. Describe and illustrate the use of working capital and the current ratio in evaluating a company’s financial condition.


84

Working Capital and Current Ratio

The ability to convert assets into cash is called liquidity.

The ability of a business to pay its debts is called solvency.

Working capital is the excess of the current assets of a business over its current liabilities.

LO 7LO 7


85


LO 7LO 7

Working Capital = Current Assets – Current liabilities

= P7,745 – p1,390

= P6,355

NetSolutions’ working capital at the end of 2011 is $6,355 as computed below. This amount of working capital implies that NetSolutions is able to pay it current liabilities.


86

Working Capital and Current Ratio The current ratio is another means of

expressing the relationship between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities.

LO 7LO 7


87


LO 7LO 7

The current ratio for NetSolutions at the end of 2011 is 5.6, computed as follows:

Current Ratio = Current Assets

Current Liabilities

= P7,745

P1,390

= 5.6 (rounded)

Prepared by: C. Douglas Cloud Professor Emeritus of AccountingPepperdine University


Student VersionStudent Version

Completing the Accounting Cycle

The EndThe End

Date post:	03-Jan-2016
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Completing the Accounting Cycle

Documents