Chapter two

Summary of the accounting process.

Accounting Cycle Steps

1. Identifying and Analyzing Business Transactions

The accounting process starts with identifying and analyzing business transactions and
events. Not all transactions and events are entered into the accounting system. Only those
that pertain to the business entity are included in the process.

For example, a personal loan made by the owner that does not have anything to do with the
business entity is not accounted for.

The transactions identified are then analyzed to determine the accounts affected and the amounts
to be recorded.

The first step includes the preparation of business documents, or source documents. A business
document serves as basis for recording a transaction.

2. Recording in the Journals

A journal is a book – paper or electronic – in which transactions are recorded. Business

transactions are recorded using the double-entry bookkeeping system. They are recorded in
journal entries containing at least two accounts (one debited and one credited).

To simplify the recording process, special journals are often used for transactions that recur
frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is
used to record those that cannot be entered in the special books.

Transactions are recorded in chronological order and as they occur.

Journals are also known as Books of Original Entry.

3. Posting to the Ledger

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Also known as Books of Final Entry, the ledger is a collection of accounts that shows the
changes made to each account as a result of past transactions, and their current balances.

After the posting all transactions to the ledger, the balances of each account can now be
determined.

For example, all journal entry debits and credits made to Cash would be transferred into the Cash
account in the ledger. We will be able to calculate the increases and decreases in cash; thus, the
ending balance of Cash can be determined.

4. Unadjusted Trial Balance

A trial balance is prepared to test the equality of the debits and credits. All account balances are
extracted from the ledger and arranged in one report. Afterwards, all debit balances are added.
All credit balances are also added. Total debits should be equal to total credits.

When errors are discovered, correcting entries are made to rectify them or reverse their effect.
Take note however that the purpose of a trial balance is only test the equality of total debits and
total credits and not to determine the correctness of accounting records.

Some errors could exist even if debits are equal to credits, such as double posting or failure to
record a transaction.

5. Adjusting Entries

Adjusting entries are prepared as an application of the accrual basis of accounting. At the end of
the accounting period, some expenses may have been incurred but not yet recorded in the
journals. Some income may have been earned but not entered in the books.

Adjusting entries are prepared to update the accounts before they are summarized in the financial
statements.

Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method
or liability method), prepayments (asset method or expense method), depreciation, and
allowances.

6. Adjusted Trial Balance

An adjusted trial balance may be prepared after adjusting entries are made and before the
financial statements are prepared. This is to test if the debits are equal to credits after adjusting
entries are made.

7. Financial Statements

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When the accounts are already up-to-date and equality between the debits and credits have been
tested, the financial statements can now be prepared. The financial statements are the end-
products of an accounting system.

A complete set of financial statements is made up of: (1) Statement of Comprehensive Income
(Income Statement and Other Comprehensive Income), (2) Statement of Changes in Equity, (3)
Statement of Financial Position or Balance Sheet, (4) Statement of Cash Flows, and (5) Notes to
Financial Statements.

8. Closing Entries

Temporary or nominal accounts, i.e. income statement accounts, are closed to prepare the system
for the next accounting period. Temporary accounts include income, expense, and withdrawal
accounts. These items are measured periodically.

The accounts are closed to a summary account (usually, Income Summary) and then closed
further to the appropriate capital account. Take note that closing entries are made only for
temporary accounts. Real or permanent accounts, i.e. balance sheet accounts, are not closed.

9. Post-Closing Trial Balance

In the accounting cycle, the last step is to prepare a post-closing trial balance. It is prepared to
test the equality of debits and credits after closing entries are made. Since temporary accounts are
already closed at this point, the post-closing trial balance contains real accounts only.

*10. Reversing Entries: Optional step at the beginning of the new accounting
period

Reversing entries are optional. They are prepared at the beginning of the new accounting period
to facilitate a smoother and more consistent recording process.

In this step, the adjusting entries made for accrual of income, accrual of expenses, deferrals
under the income method, and prepayments under the expense method are simply reversed.

Summary of the Accounting Process

UNIT 2

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 SUMMARY OF THE ACCOUNTING PROCESS
4.1 INTRODUCTION
If the accounting process is to provide the users of accounting information with reliable, timely reports,
transactions during the accounting period must be recorded promptly and accurately. This transaction
should be classified, summarized and presented to users using financial statements. These financial
statements convey useful information to internal and external users. And both groups of users make
various types of decision using this information.

4.2 THE ACCOUNTING PROCESS

The accounting process can be described as a set of procedures used in identifying, recording, classifying,
and interpreting information related to the transactions and other events of a business enterprise. The
accounting process consists of three major parts:

1. the recording of transactions during an accounting period.

2. the summarizing of information at the end of the period.
3. The preparation of financial statements.

During an accounting period business transactions and events are recorded as they occur, and at the end
of each period the accounting records are summarized in order to prepare financial statements. After an
unadjusted trial balance is prepared, adjusting entries are required to bring the accounting records up to
date. When the accounting records have been made as complete, accurate and up – to – date as possible,
accountants prepare financial statements reflecting the financial position and the results of operations.
4.3. RECORDING BUSINESS TRANSACTIONS AND EVENTS
Business transactions and other events cause changes in the assets, liabilities and owners’ equity of a
business enterprise. Transactions and events may be classified into two broad groups:

1. External transactions and events – exchange of resources and obligations between the reporting
firm and outside parties.

E.g. Purchase of goods.

Sales of goods

1. Internal events – events within the firm that affect its resources or obligations. Examples are
recognition of depreciation and amortization of Long – lived assets, the recognition of estimated
doubtful accounts expense, and the use of inventory for production

4.3.1. SUPPORTING DOCUMENTS

Transactions are often accompanied by a source document, generally a paper record that describes the
exchange, the parties involved, the date and the birr amount. Examples are sales invoices, freight bills,
and cash register receipts. Certain events (such as the accrual of interest) are not signaled by a separate
transaction or source document. Recording these transactions requires reference to the underlying contract
supporting the original exchange of resources. Source documents are essential for the initial recording of

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transactions in a journal and are also used for subsequent tracing and verification, for evidence in legal
proceedings, and for audits of financial statements.
4.3.2. Double – Entry System
The standard accounting model for accumulated data in a business enterprise consists of the double –
entry system based on the basic accounting equation. Double – entry system is a system of accounting in
which each transaction affects and is recorded in two or more accounts with equal debits and credits.
The double – entry system has various advantages:

1. It gives built – in controls that automatically call attention to many types of errors and after
assurance that once assets are recorded, they will not be forgotten or overlooked.
2. facilitates the preparation of a complete set of financial statements as frequently as desired.

4.3.3 Accounting Period

To be useful, information must reach decision makers frequently and promptly. Otherwise, problems
cans arise and opportunities can be missed while they wait for the information. To provide frequent and
prompt information, accounting systems are designed to produce periodic reports at regular intervals. As
a result, the accounting process is based on the time period principle. According to this principle, an
organization’s activities are identified with specific time periods, such a month, a quarter, or a year.
Then, the financial statements or other reports are prepared for each reporting period. The time periods
covered by the reports are called accounting periods. Most organization use one year as their primary
accounting period. As a result, they prepare annual financial statements. However, nearly all
organizations also prepare interim financial reports that cover one or three months of activity.
The annual reporting period is not always the same as the calendar year ending December 31. In fact; an
organization can adopt a fiscal year consisting of any 12 consecutive months. Companies that do not
experience much seasonal variation in sales volume within the year often choose the calendar year as
their fiscal year. On the other hand, companies that experience major seasonal variations in sales often
choose a fiscal year that corresponds to their natural business year. The natural business year ends when
sales activities are at their lowest point during the year.
4.3.4 Accounting Cycle
The accounting cycle is a complete sequence of accounting procedures that are repeated in the same order
during each accounting period. The cycle in a traditional manual system (and with modifications in a
computerized system includes the following steps:

1. Recording business transactions and events in the journal.

2. Classifying data by posting from the journals to the ledger.
3. summarizing data from the ledger in an unadjusted trial balance (first pair of columns in the
worksheet)
4. Adjusting, correcting, and updating recorded data; completion of the worksheet.
5. summarizing adjusted and corrected worksheet data in the form of financial statements.
6. closing the accounting records (normal accounts) to summarize the operations of the accounting
period
7. preparation of a post – closing trial balance.
8. Reversing certain adjusting Entries to facilitate the recording process in the subsequent
accounting period.

When these steps are completed, the cycle begins again for the next accounting period.

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4.4. ADJUSTING AND CLOSING ENTRIES
Financial reporting on an annual, quarterly, or monthly basis requires accountants to summarize the
operations of a business enterprise for a specific time period. The two types of end – of period adjusting
entries are those (1) to apportion prepayment of expenses and revenue, and (2) to record accrued expenses
and revenue. Transactions that were recorded during an accounting period in balance sheet or income
statement ledger accounts may affect two or more periods, and an end – of – period adjustment may be
needed. Some financial events not recognized on a day – to – day basis must be recorded through
adjusting entries at the end of the period to bring the accounting recorded up to date. If one should
choose to record depreciation expense daily or to accrue interest expense daily, no adjustment for
depreciation or interest expense would be needed at the end of the accounting period.
Note that every adjusting entry effects both a balance sheet and an income statement account. This
characteristic of adjusting entries reflects their dual purpose: (1) to measure all assets and liabilities
accurately, and (2) to measure net income correctly by matching expired costs (expenses) with realized
revenue.
4.4.1 Apportionment of Recorded Costs and Revenue
Costs that will benefit more than one accounting period frequently are incurred. These costs must be
apportioned between periods in a manner that approximates the usefulness derived from the goods and
services in the realization of revenue; this apportionment process is a necessary step under the matching
principle to determine net income of each period. Recording periodic depreciation expense is an example
of a cost – apportionment adjusting entry. Cost apportionment also is involved in accounting for all types
of prepayments’ However, the adjusting entry will vary depending on the accounting procedure followed
in recording the original transaction. To illustrate assume that office supplies are acquired during the
accounting period at the cost of Br.5000. At the end of the period a physical inventory reveals that
supplies on hand cost Br.550. At the time the supplies were acquired, the Br.5000 may have been debited
to an asset account or an expense account. The required adjusting entry for each approach is :
A) Prepayment debited to asset
account.
The adjusting entry required is to transfer the expired portion
of the cost to an expense account
Office supplies expense……….4450
Office supplies……………….4450.
B) Prepayment debited to expense account.
The adjusting entry required is to transfer the unexpired portion of the cost to an asset account.
Office supplies expense………550
Office supplies Expense………….550.
Under either approach, the final result is the same.
When a business enterprise receives payment for goods and services before the goods are delivered or the
services are performed, a liability exists until performance takes place.
If cash is received, the original transaction maybe recorded by a credit to either a liability account or a
revenue account. For example, assume that customers paid Br. 500,000 for magazine subscriptions
during the current accounting period; however, Br. 75,000 represented payments for magazines to be

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delivered in subsequent periods. The adjusting entries for each of the two methods of recording cash
receipts are:
A) Liability account credited on receipts of cash.
The required adjusting entry to record the earned revenue for the period is
Unearned subscriptions………425,000
Subscriptions revenue…………425,000
B) Revenue account credited on receipt of cash
The required adjusting entry to transfer the unearned revenue to a liability account is
Subscriptions revenue…………..75,000.
Unearned subscriptions………….75,000.
Under either approach, the adjusted amount of the liability is Br. 75,000 and the adjusted amount of the
revenue is Br. 425,000
4.4.2 Accrual Of Unrecorded Expenses And Revenue
The incurring of certain expenses is related to the passage of time. These expenses generally are not
recorded until payment is made, unless the end of an accounting period comes before the required date of
payment. Interest and salaries are typical of the expenses that accrue with the passage of time and are
recorded only when paid, except when the end of a period occurs between the time the expense was
incurred and the payment is due. In order to measure expenses accurately for a period, an adjusting entry
is necessary to record the accrued expense and the corresponding liability.
For example, assume that interest of Br. 18,000 on a Br. 400,000 note payable is paid on March 1 and
September 1 of each year. If expenses and liabilities are to be reported accurately on December 31, the
following year end adjusting entry is required:
Interest Expense……….12,000
Interest Payable………..12,000
Revenue that has been realized but not recognized at the end of an accounting period. For example,
revenue that is realized on assets leased to others or on interest – bearing loans seldom is recognized until
the cash is received, except at the end of a period. In order to measure accurately the results of operations
under the matching principle, revenue is recognized in the period earned. For example, assume that rent
totaling Br.625 that has been realized but not collected for the month of December has not been recorded.
The following adjusting entry on December 31 is required to measure the assets and revenue accurately:
Rent receivable ……… 625
Rent revenue……………625
4.4.3 Valuation of Accounts Receivable
A policy of making sales on credit almost inevitably results is some accounts receivable that are
uncollectible. To achieve a satisfactory matching of revenue and expenses, the estimated expense arising
from sales on credit should be recorded in the accounting period in which sales occur. This estimate of
probable expense from the granting of credit requires an end – of – period adjusting entry to revise the
valuation originally assigned to accounts receivable. For example, if doubtful accounts expense estimated
at Br. 2,500 ,the following adjusting entry is made:

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Doubtful Accounts expense………2,500
Allowance for Doubtful Accounts………2,500
4.4.4 Closing Revenue And Expense Accounts
Revenue and expense ledger accounts are closed at the end of each accounting period by transferring the
balance of these ledger accounts to a summary ledger account, Income summary. Revenue and expense
accounts are extensions of owners’ equity and are used to measure periodic net income. Once this
information has been summarized, the revenue and expense have served their purposes and the net
increase or decrease in owners equity is transferred to an appropriate owners’ equity ledger account.
Thus, the closing of the revenue and expense accounts keeps separate the operating results of each period.
After all revenue and expenses (including the cost of goods sold) have been closed, the balance of the
income summary ledger account indicates the net income or net loss for the year. A credit balance in the
Income summary account indicates a profitable year and an increase in owners’ equity;. The Income
summary account is closed by transferring its balance to the Retained earning (capital) account.
4.4.5 Closing Inventories And Related Ledger Accounts
When the periodic inventory system is used, the journal entry to establish the cost of goods sold and the
ending inventory balance for the accounting period may be viewed as an adjusting entry; however,
because there may be little need for a ledger account for cost of goods sold, the adjusting and closing
entries for inventories may be combined. This procedure is accomplished by closing the beginning
inventory, ending inventory purchases, and all related ledger accounts to the income summary account.
At this point, the balance in the Income summary account represents the cost of goods sold for the period.
To illustrate, assume the following for 1990 beginning inventory, Br.80,000; purchases, Br.275,000;
Freight –in, Br- 40,000 purchases returns and allowances, Br. 2,500; ending inventory , including
applicable freight – In, Br. 60,000. The journal Entry to close the accounts and to record the ending
inventory is:
Inventory (ending)………………………..…….60,000
Purchases Returns and Allowances……… .2,500
Income summary………………………………332,500
Inventory (beginning)……………………………80,000
Purchases………………………………………..275,000
Freight – In……………………………………… 40,000
To close beginning inventory, and net purchase for the period, and to record ending inventory.
Some merchandising enterprises prefer to use a separate ledger account, cost of goods sold, to summarize
the merchandising accounts when the periodic inventory system is used. The journal entry (which may be
viewed as an adjusting entry) reflecting cost of goods sold in a separate ledger account is
Inventory (ending)………………………60,000
Purchases Returns and Allowances…2,500
Cost of goods sold…….……………… 332,500
Inventory (beginning)………………..80,000
Purchases……………………………275,000

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 Freight – in………………………….. 40,000
When the perpetual inventory system is used, cost of goods sold is debited and Inventory is credited
during an accounting period as sales are made. An adjusting entry may be required if the carrying amount
of inventory differs from the amount determined by physical count. At the end of the period, cost of
goods sold is closed to income summary, along with other revenue and expense accounts.
4.5 CORRECTING AND REVERSING ENTRIES

4.5.1. Correcting Entries

Correcting entries are not considered adjusting entries because their function is to correct errors of
omission or commission. For example, the failure to record a transaction would be rectified by a journal
entry as it should have been made originally; the improper recording of a transaction requires a journal
entry to ensure that ledger accounts are stated properly.
When an error is made in one accounting period but discovered in a subsequent period, the effect of the
error on the net income of the earlier periods is closed to the Retained earnings ledger account. When an
error is discovered in the period in which the error occurs, but before the accounting records are closed,
revenue and expense accounts may require correction and the Retained earning account generally is not
affected.
For example, assume that the following two errors were made in 1990 and were discovered at the end of
the year when the worksheet for the year was being prepared:

1. A purchase of merchandise for Br. 500 cash was erroneously recorded by a debit of Br. 50 to
cash.
2. An acquisition of equipment for cash of Br. 4000 on April 1, 1990 was recorded as a purchase of
merchandise. The equipment had an economic life of 10 years with no residual value, and was
depreciated by the straight-line method for 9 months in 1990. The required correcting entries are
as follow:

4.5.2 Reversing Entries

After the accounting records have been adjusted and closed at the end of an accounting period, reversing
entries may be made on the first day of the next period. The purpose of the reversing entries is to
simplify the recording of routine transactions by disposing of the accrued items (assets and liabilities) that
were entered in balance sheet accounts through adjusting entries. A reversing entry, as the name implies,
is the exact reverse of an adjusting entry. It consists of the same ledger accounts and birr amounts as the
adjusting entry, but the debits and credits are reversed, and the date is the beginning of the next period.
When policies of using reversing entries are adopted, the following general rules are followed.

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 1. When an adjusting entry affects an asset or a liability account that normally is not used during an
accounting period, a reversing entry is required. Thus, adjustments to accrue revenue and
expenses are reversed because asset and liability accounts such as Rent Receivable and Interest
payable are not used in the normal course of accounting during a period. Similarly, if payments
for insurance and supplies during a period are recorded in expense accounts, or if revenue
received in advance during a period is recorded in revenue accounts, the adjusting entries would
have to be reversed because asset and liability accounts normally not used during the period
would be affected by the adjusting entries.
2. When an adjusting entry adjusts an asset or liability account that normally is used to record
transactions during a period, no reversing entry is required.

4.6. WORKSHEET
To expedite the accounting cycle, many firms use a worksheet as a mechanical aid. A worksheet is a
multi column work space that provides an organized format for performing several end – of – period
accounting cycle and for preparing financial statements before posting adjusting journal entries. It also
provides evidence, for audit trail purposes, of an organized and structured accounting process that can be
more easily reviewed than other methods of analysis.
Use of worksheet is optional. The worksheet is not part of the basic accounting records. Worksheets
assist with only a portion of the accounting cycle.

4.6.1. Worksheet for a manufacturing Enterprise

The procedures for preparing worksheet for a manufacturing enterprise are similar to those used for a
merchandising enterprise. The addition of a pair of columns to summarize the manufacturing operation is
the major difference.
The following data are the basis for the adjusting entries included in the worksheet for Addis Company
for the year ended December 31,1990.
Illustration of work sheet for a manufacturing enterprise
The procedures for preparing a work sheet for manufacturing enterprise are similar to those used for
merchandising enterprise. The addition of a pair of columns to summarize the manufacturing operation is
the major difference. These columns allow for one more step in the classification of the data. The
adjusted trial balance; which is an optional step, is omitted from this illustration.
The following data are the basis for the adjusting entries included in the worksheet for Addis
manufacturing company for the year ended December 31 1990

a. Doubtful accounts expense for 1990 is estimated to be Br. 3,000.

b. A three – year insurance policy was acquired on July 1,1989 at a cost of Br 1,800. The insurance
expense is allocated to other factory costs and other general expenses in a 4:1 ratio.
c. The wages accrued since the last pay period is direct labor Br. 1,800 and paid on the last day of
each month.
d. Interest of Br. 1,125 has accrued on notes payable.
e. Depreciation expense for the plant assets is computed by the straight – line method based on the
following information.

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 f. The power bill for December has not been received as of December 31,1990 Based on past
experience, the cost applicable to December is estimated to be Br 1,450. All heat, light, and power costs
relate to the factory.
g. An inventory of factory supplies on December 31 1990 indicates that supplies costing Br. 850 are
on hand.
h. The income taxes expense for 1990 is estimated at Br. 3,500
i. Inventories on December 31, 1990 are as follows.
Finished goods………………….Br. 41,500
Goods in process…………………26,350
Raw material……………………….12,650
MANUFACTURING COMPANY
Work sheet
Ended December 31,1990

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Work sheet and year – end procedures – The journal entries for closing the manufacturing ledger
accounts, for adjusting the inventory balances, for closing the revenue and expense accounts, and for
closing the dividends account are illustrated below.
ADDIS MANUFACTURING COMPANY
Closing Entries

December 31,1990
Raw material inventory (Dec. 31,1990)………………....12,650
Good-in-process inventory (Dec,31 1990).. ……………26,350
Purchase return and Allowance………………………… 4,000
Cost of Finished good manufactured……………………434,770

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 Raw material inventory (Jan 1,1990)………………………16,000
Good in process inventory (Jan.1,1990)…………………..21,000
Raw material purchase………………………………………125, 000
Freight – in……………………………………………………. 3,500
Direct labor cost………………………………………………194,300
Indirect labor cost……………………………………………..73,550
Heat, light and power…………………………………………13,750
Other factory cost………………………………………………14,630
Deprecation of building………………………………………..3,000
Deprecation of machinery and equipment…………………13,000
Deprecation of furniture and fixture………………………….40
To record cost of Good manufactured and ending inventory of row material and good in process
Finished Goods inventory (Des 31,1990)………….41,500
Cost of good sold…………………………………….441,270
Cost of finished good manufactured………………434,770
Finished good inventory (Jan 1, 1990)……………..48,000
To record ending finished goods inventory and cost of good sold
Sales……………………………………….633,600
Cost of Good sold………………………441,270
Sales return and allowance………….. 3,600
Advertising Expense………………........35,000
Sales salaries expense……………...…42,000
Delivery expense………………......…….8,000
Administrative salaries expense………50,000
Office salaries expense…………………20,000
Telephone and Telegraph expense……1,800
Other general expense ………………. 2,920
Interest expense………………………….4,500
Doubtful account expense……………....3,000
Deprecation of Building…………………....360
Deprecation of furniture and fixture…... . 750
Income tax expense …………………….. 3,500

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 Income summary ………………………..16,900
To close Revenue and Expense accounts

Income summary……….…16,900
Retained earning…………..16,900
To close income summary account

Retained Earnings……….. 6,000

Dividends…………………6,000
To close dividends account.

4.6.2. Statement Of Cost Of Finished Foods Manufactured

The cost of goods completed during an accounting period is summarized in a statement of cost of finished
foods manufactured. The information for this statement is taken from the manufacturing columns of the
worksheet.
Addis Company
Statement of cost of finished foods manufactured
For the year ended December 31, 1990
Goods in process inventory (January 1,1990)……………………………Br. 21,000
Raw material used
Raw material inventory (Jan.1,1990……………………..Br. 16,000
Raw material purchases (net)…………………………….124,500
Cost of raw materials available for use………………….140,500
Less: Raw material inventory (Dec 31, 1990) ………….12,650
Cost of raw material used…………………………………127,850
Direct labor costs …………………………………………………..194,300
Factory overhead costs……………………………………………..117,970

Total manufacturing costs…………………………………………… 440,120

Total cost of goods in process during 1990 ………………………………. 461,120
Less: Goods in process inventory (Dec 31,1990) ………………………. 26,350
Cost of finished gods manufactured ………………………………………. 434,770

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4.6 Summary
The accounting process can be described as a set of procedures used in identifying, recording, classifying,
and interpreting information related to the transactions and other events of a business enterprise.
The first step in the accounting cycle is analysis of transactions and selected other events. The purpose of
this analysis is to determine which event represent transactions that should be recorded. Two criteria
must be met before an event can be considered a transaction and included in the accounting process. The
event must be capable of being objectively measured in financial terms and it must affect the financial
position of the enterprise.
Events can be classified as external or internal. External events are those between the enterprise and other
entities, whereas internal events relate to transactions totally within the enterprise being accounted for.
Once an event has been identified as a transaction, it must be recorded in the journals, sometimes referred
to as the book of original entry. The second step in the accounting cycle involves transferring amounts
entered in the journal to the general ledger. The ledger is a book that usually containe a separate page for
each account. Transferring amounts from a journal to the ledger is called posting.
The third step in the accounting cycle is the preparation of a trial balance. A trial balance is a list of all
open accounts in the general ledger and their balances. Preparation of adjusting journal entries is the
fourth step in the accounting cycle. Adjusting entries are entries made at the end of the accounting period
to bring all accounts up to date on an accrual accounting basis so that correct financial statements can be
prepared. After adjusting entries are recorded and posted, an adjusted trial balance is prepared. This trial
balance serves as a basis for the preparation of financial statements.
After financial statements have been prepared, nominal accounts should be reduced to zero in preparation
for recording the transactions of the next period. This closing process requires recording and posting
closing entries.
A third trial balance may be prepared after the closing entries are recorded and posted. This post –
closing trial balance shows that equal debits and credits have been posted properly to the income
summary account.
Preparation and posting of reversing entries is the final step in the accounting cycle. A reversing entry is
made at the beginning of the next accounting period and is the exact opposite of the adjusting entry made
in the previous period.
A work sheet serves as an aid to the accountant in adjusting the account balance4s and in preparing the
financial statements. The worksheet provides an orderly format for the accumulation of information
necessary for preparation of financial statements. Use of worksheet does not replace any financial
statements, nor does it alter any of the steps in the accounting cycle.

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