COMPLETION OF THE COMPLETION OF THE ACCOUNTING CYCLEACCOUNTING CYCLE

UNITUNIT

44

A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements.

It is a working tool or a supplementary device for the accountant and not a permanent accounting record.

Use of a work sheet should make the preparation of adjusting entries and financial statements easier.

WORK SHEETWORK SHEETWORK SHEETWORK SHEET

ILLUSTRATION ILLUSTRATION 4-14-1 WORK SHEETWORK SHEET

ILLUSTRATION ILLUSTRATION 4-14-1 WORK SHEETWORK SHEET

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit CreditBalance SheetTrial Balance Adjustments Adjusted Trial Balance Income Statement

1. Prepare trial balance

on the worksheet.

2. Enter adjustment

data.

3. Enter adjusted balances

4. Extend adjusted balance to appropriate

columns.5. Calculate income/loss

and complete the worksheet.

PURPOSE OF CLOSING ENTRIESPURPOSE OF CLOSING ENTRIESPURPOSE OF CLOSING ENTRIESPURPOSE OF CLOSING ENTRIES

1. Updates the owner’s capital account in the ledger by transferring net income (loss) and owner’s drawings to owner’s capital.

2. Prepares the temporary accounts (revenue, expense, drawings) for the next period’s postings by reducing their balances to zero.

ILLUSTRATION ILLUSTRATION 4-24-2 TEMPORARY VERSUS TEMPORARY VERSUS

PERMANENT ACCOUNTSPERMANENT ACCOUNTS

ILLUSTRATION ILLUSTRATION 4-24-2 TEMPORARY VERSUS TEMPORARY VERSUS

PERMANENT ACCOUNTSPERMANENT ACCOUNTSTEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed

All revenue accounts All asset accounts

All expense accounts All liability accounts

Owner’s drawings Owner’s capital account

(Balance Sheet Accounts)(Income Statement / Drawings Accounts)

ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS

ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS

(INDIVIDUAL) REVENUES

1

1 Debit each revenue account for its balance, and credit the owner’s capital account for total revenues.

2 Debit the owner’s capital account for total expenses, and credit each expense account for its balance.

1 Debit each revenue account for its balance, and credit the owner’s capital account for total revenues.

2 Debit the owner’s capital account for total expenses, and credit each expense account for its balance.

(INDIVIDUAL)EXPENSES

Normal Dr. Balance

Normal Cr. Balance

Cr. to close Dr. to close

- 0 - - 0 -

OWNER’SCAPITAL

Expenses Revenues

Opening Balance

2

ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS

ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS

3

3 Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s drawings for the same amount.

3 Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s drawings for the same amount.

OWNER’SDRAWINGS

Normal Dr. Balance

Cr. to close

- 0 -

OWNER’SCAPITAL

Expenses

Revenues

Opening BalanceDrawings

Ending Balance

CLOSING ENTRIESCLOSING ENTRIESCLOSING ENTRIESCLOSING ENTRIES

STOP AND CHECK

1. Does the balance in your Owner’s Capital account equal the ending capital balance reported in the Balance Sheet and Statement of Owner’s Equity?

2. Are all of your temporary account balances zero?

POST-CLOSING TRIAL BALANCEPOST-CLOSING TRIAL BALANCEPOST-CLOSING TRIAL BALANCEPOST-CLOSING TRIAL BALANCE

After all closing entries have been journalized and posted, a post-closing trial balance is prepared.

The purpose of this trial balance is to prove the equality of the permanent (balance sheet) account balances that are carried forward into the next accounting period.

Debit CreditCash 15,200$ Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000 Accumulated Amortization 83$ Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 800 Salaries Payable 1,200 Interest Payable 25 C.R. Byrd, Capital 12,342

21,950$ 21,950$

After Adjustment

Pioneer Advertising AgencyPost-Closing Trial Balance

October 31, 2002

ILLUSTRATION ILLUSTRATION 4-84-8 POST-CLOSING TRIAL BALANCEPOST-CLOSING TRIAL BALANCE

ILLUSTRATION ILLUSTRATION 4-84-8 POST-CLOSING TRIAL BALANCEPOST-CLOSING TRIAL BALANCE

The post-closing trial balance is prepared from the permanent

accounts in the ledger.

The post-closing trial balance is prepared from the permanent

accounts in the ledger.

The post-closing trial balance provides evidence that the journalizing and posting of closing entries

has been properly completed.

The post-closing trial balance provides evidence that the journalizing and posting of closing entries

has been properly completed.

1. Analyse transactions 2. Journalize the

transactions

3. Post to ledger accounts

4. Prepare a trial balance

5. Journalize and post adjusting entries

6. Prepare adjusted trial

balance

7. Prepare financial

statements

8. Journalize and post

closing entries

9. Prepare post-closing trial balance

STEPS IN THE ACCOUNTING CYCLESTEPS IN THE ACCOUNTING CYCLESTEPS IN THE ACCOUNTING CYCLESTEPS IN THE ACCOUNTING CYCLE

A reversing entry is made at the beginning of the next accounting period.

A reversing entry reverses certain adjusting entries made in the previous period. Opening balances can then be ignored when preparing year-end adjusting entries.

This topic is illustrated in Appendix 4A.

REVERSING ENTRIES REVERSING ENTRIES (OPTIONAL STEP)(OPTIONAL STEP)

REVERSING ENTRIES REVERSING ENTRIES (OPTIONAL STEP)(OPTIONAL STEP)

CORRECTING ENTRIESCORRECTING ENTRIESCORRECTING ENTRIESCORRECTING ENTRIES

Errors that occur in recording transactions should be corrected as soon as they are discovered by preparing correcting entries.

Correcting entries are unnecessary if the records are free of errors; they can be journalized and posted whenever an error is discovered.

They involve any combination of balance sheet and income statement accounts.