Completing theAccounting
CycleChapter 4
Prepare an accounting
work sheet.
Objective 1
The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.
The Accounting Cycle
For a new business, begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.
Accounts Receivable 1,350
Accounts Receivable 1,700 Service Revenue 1,700
Accounts Receivable 1,350 1,700 3,050
Accounts Receivable 1,350 1,700
The Accounting Cycle
Work Sheet
CashAccountsreceivable
12,100
3,050
BalanceSheet
IncomeStatement
The Accounting Cycle
Postclosing Trial Balance
CashAccountsreceivable
12,100
3,050
Adjusting entries Closing entries
Cash Accounts Receivable12,100 3,050
The Accounting Cycle
The Accounting Work Sheet
What is the work sheet? A work sheet is a multi-columned
document used by accountants to help move data from the trial balance to the financial statements.
It is an internal document.
Adjusted Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
12,1001,350
25015,500
1,000
12,000
42,200
7,5001,2001,1001,5007,200
23,700
42,200
The Accounting Work Sheet
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The Accounting Work Sheet
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.
Adjusted Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
12,1001,350
25015,500
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
15015,500
1,000
12,000100200
44,100
7,7001,2001,1001,5007,200
25,400
44,100
The Accounting Work Sheet
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Adjusted Income Balance Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
7,7001,2001,1001,5007,200
25,400
44,100
12,100
3,050150
15,500
1,000
12,000
100200
44,100
12,100
3,050150
15,500
1,000
31,800
7,7001,2001,1001,5007,200
18,700
The Accounting Work Sheet
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Adjusted Income Balance Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense
Totals
7,7001,2001,1001,5007,200
25,400
44,100
12,100
3,050150
15,500
1,000
12,000
100200
44,100
12,100
3,050150
15,500
1,000
31,800
7,7001,2001,1001,5007,200
18,700
12,000100200
12,300
25,400
25,400
The Accounting Work Sheet
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Adjusted Income Balance Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.CashAccounts receivableSuppliesEquipmentAccum. depreciationAccounts payableSalary payableUnearned revenueCapitalWithdrawalsRevenueSalary expenseSupplies expenseDepreciation expense
TotalsNet income
7,7001,2001,1001,5007,200
25,400
44,100
12,100
3,050150
15,500
1,000
12,000
100200
44,100
12,100
3,050150
15,500
1,000
31,800
31,800
7,7001,2001,1001,5007,200
18,70013,10031,800
12,000100200
12,30013,10025,400
25,400
25,400
25,400
The Accounting Work Sheet
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Use the work sheet
to complete theaccounting cycle.
Objective 2
The work sheethelps identifythe accounts
that needadjustments.
Actual adjustmentof the accounts
requiresjournalizingand postingthe entries.
Recording theAdjusting Entries
Recording theAdjusting 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.
Close the revenue,expense, andwithdrawal
accounts.
Objective 3
Closing the Accounts
Closing the accounts is the end of period process that prepares the accounts for recording transactions during the next period.
Closing Entries
RevenuesincreaseOwner’s Equity.
Expenses and
WithdrawalsdecreaseOwner’s Equity.
Closing the Accounts
Closing the Accounts
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.
Income Summary
A credit balance
represents net income.
A debit balance
represents net loss.
Closing the Accounts
RevenueIncome
Summary12,000
7,5009,000
Salary Exp3,300
28,500
1,5001,800
4,450 28,500
Rent Exp800 800
Supplies Exp350 350
24,050
24,050
(Close RevenueAccount)
(Close ExpenseAccounts)
(Close IncomeSummary)
Withdrawals2,500 2,500
2,500
CapitalAccount
(CloseWithdrawalsAccount)
Closing the Accounts
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Postclosing Trial Balance
The accounting cycle ends with the postclosing trial balance.
The postclosing trial balance is dated as of the end of the period for which the statements have been prepared.
Permanent Accounts
What accounts never close?– Assets– Liabilities– Owner’s equity Balances of permanent accounts carry over
to the next period.
Classify assets and liabilities
as current or long-term.
Objective 4
Liquidity
This is a measure of how quickly an item can be converted into cash.
On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their relative liquidity.
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– inventory– prepaid expenses
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
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 entity’s operating cycle.
Debit sideCurrent assets
Long-term assets
Credit sideCurrent liabilities
Long-term liabilities
Listed in the orderof decreasing
liquidity
Listed in the orderof how soon they
must be paid
The Classified Balance Sheet
Assets LiabilitiesCurrent assets: Current liabilities:Cash 12,100 Accounts payable 1,200Accounts receivable 3,050 Salary payable 1,100Supplies 150 Unearned revenue 1,500 Total current assets 15,300 Total liabilities 3,800Plant assets Owner’s equity Equipment 15,500 Capital 19,300 Less Accum. deprec. 7,700 7,800 Total liabilities and
Total assets 23,100 owner’s equity 23,100
XYZ ServicesJanuary 31, 20XX
The Classified Balance Sheet
Report Format
AssetsLiabilities
Owner’s Equity
Account Format
Assets = Liabilities + Owner’s Equity
Different Formats ofthe Balance Sheet
Use the current ratio and the debt
ratio to evaluate a company.
Objective 5
Comparative Financial Statements They enhance the user’s ability to analyze
a company’s past performance. What are two common ratios used to
measure liquidity?1 Current ratio2 Debt ratio
Current ratio = Current assets ÷ Current liabilities
Current Ratio
This measures the ability of a business to pay its current liabilities with its current assets.
Total liabilities ÷ Total assets
Debt Ratio
It indicates the proportion of a business’s assets that are financed with debt.
It measures their ability to pay both current and long-term debt.
Trend Analysis
Decision makers compare various ratios over a period of time.
End of Chapter 4
