Completing the Accounting Cycle

By Rachelle Agatha, CPA, MBA

Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

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.

After studying this chapter, you should be able to:

After studying this chapter, you should be able to:

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.

Describe the flow of accounting information

from the unadjusted trial balance into the adjusted trial balance

and financial statements.

Objective 14-1

4-1

Nikki CleanersWork Sheet

For Year Ended December 31, 2008Trial Balance Adjustments Adj. T/Balance Income Statement Balance Sheet

Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 6,600 6,600 0 6,600Cleaning supplies 11,000 a 1,625 9,375 0 9,375Prepaid insurance 2,700 b 900 1,800 0 1,800Equipment 103,000 103,000 0 103,000Accumulated depr. 37,050 c 10,800 0 47,850 47,850Accounts payable 3,720 0 3,720 3,720Nikki Capital 67,800 0 67,800 67,800Nikki, Drawing 27,000 27,000 0 27,000Revenue 77,610 0 77,610 77,610Rent expense 14,250 14,250 0 14,250Wages expense 19,860 d 915 20,775 0 20,775Utilities expense 1,065 1,065 0 1,065Misc. expense 705 705 0 705

186,180 186,180Supplies expense a 1,625 1,625 0 1,625Insurance expense b 900 900 0 900Depreciation exp. c 10,800 10,800 0 10,800Wages payable d 915 0 915 915

14,240 14,240 197,895 197,895 50,120 77,610 147,775 120,285Net income 27,490 0 0 27,490

77,610 77,610 147,775 147,775

4-1Spreadsheet (Work Sheet)

Accounts Dr Cr Dr Cr Dr CrTrial Balance

Adjustments

Adjusted TB

Accounts are listed in the Trial Balance column using the

ending balance found in the general ledger.

4-1Spreadsheet (Work Sheet)

Accounts Dr Cr Dr Cr Dr CrTrial Balance

Adjustments

Adjusted TB

Adjustments are entered here. Two possibilities:

1. Deferrals – Existing balances are changed.2. Accruals – New information is entered.

4-1Spreadsheet (Work Sheet)

Accounts Dr Cr Dr Cr Dr CrTrial Balance

Adjustments

Adjusted TB

Adjustments are combined with the trial balance. Account balances are

now adjusted.

4-1Spreadsheet (Work Sheet)

Accounts Dr Cr Dr Cr Dr Cr

Revenue and expense balances in the Adjusted Trial Balance column

are extended to the Income Statement column.

Adjusted TB

Income State.

Balance Sheet

4-1Spreadsheet (Work Sheet)

Accounts Dr Cr Dr Cr Dr Cr

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

to the Balance Sheet column.

Adjusted TB

Income State.

Balance Sheet

Prepare financial statements from adjusted account

balances.

Objective 24-2

4-1

Nikki CleanersWork Sheet

For Year Ended December 31, 2008Trial Balance Adjustments Adj. T/Balance Income Statement Balance Sheet

Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 6,600 6,600 0 6,600Cleaning supplies 11,000 a 1,625 9,375 0 9,375Prepaid insurance 2,700 b 900 1,800 0 1,800Equipment 103,000 103,000 0 103,000Accumulated depr. 37,050 c 10,800 0 47,850 47,850Accounts payable 3,720 0 3,720 3,720Nikki Capital 67,800 0 67,800 67,800Nikki, Drawing 27,000 27,000 0 27,000Revenue 77,610 0 77,610 77,610Rent expense 14,250 14,250 0 14,250Wages expense 19,860 d 915 20,775 0 20,775Utilities expense 1,065 1,065 0 1,065Misc. expense 705 705 0 705

186,180 186,180Supplies expense a 1,625 1,625 0 1,625Insurance expense b 900 900 0 900Depreciation exp. c 10,800 10,800 0 10,800Wages payable d 915 0 915 915

14,240 14,240 197,895 197,895 50,120 77,610 147,775 120,285Net income 27,490 0 0 27,490

77,610 77,610 147,775 147,775

4-2

Revenue $77,610Expenses:

Wages $20,775Rent 14,250Depreciation 10,800Supplies 1,625Utilities 1,065Insurance 900Miscellaneous 705 50,120

Net income $27,490

Nikki CleanersIncome Statement

For the Year Ended December 31, 2008

Balance, J anuary 1, 2008 67,800$ Net income 27,490Less: Withdrawls (27,000)Balance, December 31, 2008 68,290$

Nikki CleanersStatement of Owner's Equity

For the Year Ended December 31, 2008

4-2

4-2

Assets Liabilities Cash $6,600 Accounts payable $3,720 Cleaning supplies 9,375 Wages payable 915 Prepaid insurance 1,800 Total liabilities $4,635 Current assets $17,775

Owner's Equity Equipment $103,000 Nikki, Capital 68,290$ Acc. Depreciation 47,850 Fixed assets $55,150

Total Liability &Total assets $72,925 Owern's Equity $72,925

Balance SheetDecember 31, 2008

Nikki Cleaners

A classified balance sheet is a balance sheet

that was expanded by adding subsections for

current assets; property, plant, and equipment; and

current liabilities.

4-2

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. Ö Cash

Ö Accounts Receivable

Ö 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.

4-2

Owner’s equity is the owner’s right to the assets of the business. Owner’s

equity is added to the total liabilities, and the total

must be equal to the total assets.

4-2

Prepare closing entries.

Objective 3

4-3

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

balances.

4-3

Accounts that are relatively permanent from year to year are called real or

permanent accounts. Accounts that report amounts for only one

period are called temporary accounts or

nominal accounts.

4-3

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 or

closed to Income Summary.

4-3

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

Debit Credit2008 Closing EntriesDec 31 Revenue 77,610

Income Summary 77,610

31 Income Summary 50,120 Salary Expense 20,775 Rent Expense 14,250 Supplies Expense 1,625 Depeciation. Expense - Equipment 10,800 Utilities Expense 1,065 Misc Expense 705 Insurance Expense 900

31 Income Summary 27,490 Nikki, Drawing 27,490

31 Nikki, Capital 27,000 Nikki, Drawing 27,000

JOURNALDate

After the closing entries are posted,

all of the temporary

accounts have zero balances.

4-2Nikki CleanersWork Sheet

For Year Ended December 31, 2008

Account Title Dr. Cr.Cash 6,600Cleaning supplies 9,375Prepaid insurance 1,800Equipment 103,000Accumulated depr. 47,850Accounts payable 3,720Wages Payable 915Nikki Capital 68,290

120,775$ 120,775$

Post Closing Trial Balance

Completion of the accounting

cycle.

Objective 4

4-4

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.

31

1. Transactions are analyzed and recorded in journal

2. Post Transaction from the Journal to the General Ledger

3. Prepare the Unadjusted Trial Balance

4. Adjustment data is gathered & Analyzed balance.

Accounting Cycle

32

5. Optional end-of-period worksheet

6. Record Adjusting Entries7. Prepare the Adjusted Trial

Balance 8. Prepare Financial Statements

balance.

Accounting Cycle, cont

9. Record Closing Entries & Post10.Prepare a Post Closing Trial

Balance

33

Accounting Periods

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.

34

Annual Accounting Period

An annual accounting period is 12 months and can be a calendar year or a fiscal

year.

35

• Optional end-of-period worksheet

• Record Adjusting Entries• Prepare the Adjusted Trial

Balance • Prepare Financial Statements

balance.

Lecture Summary

• Record Closing Entries & Post• Prepare a Post Closing Trial

Balance