Completing The Accounting Cycle

Completing the Accounting Cycle
Learning Objective 1
Describe the flow of
accounting information from
the unadjusted trial balance
into the adjusted trial
balance and financial
statements.
Chapter 4
Student Version
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Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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LO 1
Flow of Accounting Information
LO 1
(continued)
(continued)
LO 1
Prepare financial
statements from
adjusted account
balances.
(concluded)
LO 2
LO 2
Income Statement
Retained Earnings Statement
The income statement for NetSolutions 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.
The first item presented on the retained

earnings statement is the balance of the
Retained Earnings account at the beginning
of the period.
LO 2
LO 2
Balance Sheet
Classified 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.
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 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.
LO 2
Notes Receivable
Cash
Accounts
Receivable
Notes
Receivable
Supplies
Notes receivable are written promises by

the customer to pay the amount of the note
and possibly interest at an agreed rate.
LO 2
Fixed Assets
LO 2
Current Liabilities
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
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 2
Long-Term Liabilities
Liabilities not due
for a long time
(usually more than
one year) are
called long-term
liabilities.
LO 2
Stockholders Equity
Long-term notes
payable
Mortgage payable
Bond payable
Stockholders
equity is the
stockholders right
to the assets of the
business. It is
presented on the
balance sheet
below the liabilities
section.
Capital stock
Retained earnings
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.
Prepare closing
entries.
LO 3
LO 3
Closing Entries
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.
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 3
LO 3
Closing Entries
Closing Entries
The balance of Income Summary (net

income or net loss) is then transferred to the
Retained Earnings account.
The balance of the Dividends account is
also transferred to the Retained Earnings
account.
The entries that transfer these balances are
called 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.
Closing entries are recorded in the journal
and dated as of the last date of the
accounting period.
LO 3
Journalizing and Posting Closing Entries
LO 3
LO 3
LO 3
LO 3
Closing Entries
LO 3
Temporary Account Balances

After the closing entries are posted, all of
the temporary accounts have zero
balances.
Step 1
Step 2
Step 3
Step 4
LO 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 and ready for the next
accounting period.
Describe the
accounting cycle.
LO 4
Accounting Cycle
LO 4
Accounting Cycle
The accounting process that begins with

analyzing and journalizing transactions and
ends with preparing the accounting records
for the next periods transactions is called
the accounting cycle. There are ten steps in
the 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 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.
Illustrate the
accounting cycle
for one period.
LO 5
Accounting Cycle
LO 5
Accounting Cycle
(continued)
(continued)
LO 5
Accounting Cycle
LO 5
Accounting Cycle
(continued)
LO 5
Unadjusted Trial Balance
LO 5
End-of-Period Spreadsheet
LO 5
Adjusting Entries
Explain what is
meant by the fiscal
year and the
natural business
year.
LO 6
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.
Describe and
illustrate the use of
working capital and
the current ratio in
evaluating a
companys financial
condition.
LO 7
Working Capital and Current Ratio
LO 7
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.
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 its
current liabilities.
Working Capital = Current Assets Current Liabilities
= $7,745 $1,390
= $6,355
LO 7
LO 7
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.
The current ratio for NetSolutions at the end of

2011 is 5.6, computed as follows:
Current Ratio =
=
=
Current Assets
Current Liabilities
$7,745
$1,390
5.6 (rounded)
Completing the Accounting Cycle
The End
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
49

Completing The Accounting Cycle

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Completing the Accounting Cycle

Prepared by: C. Douglas Cloud

Flow of Accounting Information

Flow of Accounting Information

Flow of Accounting Information

Retained Earnings Statement

The income statement for NetSolutions is prepared

The first item presented on the retained

Classified Balance Sheet

The balance sheet is prepared directly from the

A classified balance sheet is a balance

Notes receivable are written promises by

Property, plant, and

Liabilities that will

Accounts that report amounts for only one

To report amounts for only one period,

The balance of Income Summary (net

Income Summary is a temporary account

At the end of the closing process, the

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

Temporary Account Balances

Post-Closing Trial Balance

The accounting process that begins with

1. Transactions are analyzed and recorded

6. Adjusting entries are journalized and posted

Unadjusted Trial Balance

The annual accounting period adopted by

Working Capital and Current Ratio

Working Capital and Current Ratio

The ability to convert assets into cash is

NetSolutions working capital at the end of 2011 is

Working Capital and Current Ratio

Working Capital and Current Ratio

The current ratio is another means of

The current ratio for NetSolutions at the end of

Completing the Accounting Cycle

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