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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
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
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
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
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.