Completing The Accounting Cycle

Completing the Accounting Cycle  Revenues
 Expenses
Work Sheet as a Tool
 Owner, Withdrawals
Benefits of a Work Sheet (Spreadsheet)  Income Summary
Work sheet – document that is used internally by companies to Permanent Accounts – reflects activities related to one or more
help with adjusting and closing accounts with preparing future periods; balance sheet accounts whose balances are
financial statements. It is an internal accounting aid and is not not closed.
a substitute for journals, ledgers, or financial statements.  Assets
 Liabilities
 Helps in preparing financial statements.
 Owner, Capital
 Reduces the risk of errors when working with many
accounts and adjustments. Recording Closing Entries
 Links accounts and adjustments to financial
statements. 1. Close Credit Balances in Revenue Accounts to Income
 Shows the effects of proposed or “what-if” Summary.
transactions. 2. Close Debit Balances in Expense accounts to Income
Summary.
Use of a Work Sheet 3. Close Income Summary account to Owner’s Capital.
4. Close Withdrawals to Owner’s Capital.
Step 1: Enter Unadjusted Trial Balance
Green section.
Step 2: Enter Adjustments
Yellow section.
Step 3: Prepare Adjusted Trial Balance
Blue section.
Step 4: Sort Adjusted Trial Balance Amounts to Financial
Statements
Orange section.
Step 5: Total Statement Columns, Compute Income or Loss,
and Balance Columns Post-Closing Trial Balance
Purple section. List of permanent accounts and their balances after all closing
Closing Process entries.
Closing Process – occurs at the end of an accounting period Accounting Cycle

after financial statements are completed.
1. Identify accounts for closing
2. Record and post the closing entries
3. Prepare a post-closing trial balance
Two Purposes of Closing Process
1. Resets revenue, expense, and withdrawals account
balances to zero at the end of each period.
2. It helps summarize a period’s revenues and
expenses.
Temporary and Permanent Accounts
Temporary Accounts – used to record revenues, expenses,
and withdrawals (dividends for a corporation); they are closed
at the end of each period.
Plant Assets – tangible long-lived assets used to produce or
sell products and services.
Classified Balance Sheet

Intangible Assets – long-term assets used to produce or sell
A classified balance sheet organizes assets and liabilities into
products and services and that lack physical form. (E.g.,
subgroups that provide more information to decision makers.
patents, trademarks, copyrights, franchises, and goodwill)
An unclassified balance sheet broadly groups accounts into
Current Liabilities – liabilities due within the longer of one year
assets, liabilities, and equity.
or the company’s operating cycle.
Classification Structure
Long-term Liabilities – liabilities not due within the longer of
one year or the company’s operating cycle.
Equity – owner’s claim on the assets.
Decision Analysis
Current Ratio – measure of a company’s ability to pay its short-
term obligations.
Current Assets
Current Ratio =
Current Liabilities
Reversing Entries
Optional entries recorded at the beginning of a period that
prepare the accounts for the usual journal entries as if
adjusting entries had not occurred in the prior period.
Salaries Expense xx
Salaries Payable xx
Reversing
Salaries Payable xx (For the current year)
Salaries Expense xx
Salaries Expense xx (Current Year + Last Year)
Cash xx
Accounting without Reversing Entries
We record payment with a compound entry that debits both the
Current Assets – expected to be sold, collected, or used within expense and liability accounts and credits cash.
one year or the company’s operating cycle.
Accounting with Reversing Entries
Operating Cycle – time span from when cash is used to
We record payment with only debiting the expense (current +
acquire goods and services until cash is received from the sale
last year) and credits cash.
of goods and services.
Long-term Investments – expected to be held for more than
one year or the operating cycle.

Completing The Accounting Cycle

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Completing The Accounting Cycle

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Completing the Accounting Cycle  Revenues

Closing Process – occurs at the end of an accounting period Accounting Cycle

Classified Balance Sheet

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