Completing the Accounting Cycle 4

From Transactions to Financial Statements OBJECTIVE 1: Describe the accounting cycle and the role of closing entries in the preparation of financial statements.

Figure 1: Overview of the Accounting Cycle

Figure 2: Overview of the Closing Process

From Transactions to Financial Statements There are six steps in the accounting cycle: –1- Analyze transactions from source documents to decide which account(s) to debit and which account(s) to credit. –2- Journalize transactions. –3- Post entries to the ledger and prepare a trial balance.

From Transactions to Financial Statements –4- Make end-of-period adjustments and prepare an adjusted trial balance. –5- Prepare financial statements. –6- Close the accounts and prepare a post- closing trial balance.

From Transactions to Financial Statements Closing entries serve two purposes: –They clear all temporary accounts. –They transfer net income or loss to the Capital account. The Income Summary account is a temporary account. Its purpose is to provide a place to summarize all revenues and expenses. It is used only in the closing process and never appears in the financial statements.

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Preparing Closing Entries OBJECTIVE 2: Prepare closing entries.

Exhibit 1: Preparing Closing Entries from the Adjusted Trial Balance

Exhibit 2: Posting the Closing Entry of a Credit Balance to the Income Summary Account

Exhibit 3: Posting the Closing Entry of Debit Balances to the Income Summary Account

Exhibit 4: Posting the Closing Entry of the Income Summary Account Balance to the Owner’s Equity Account

Exhibit 5: Posting the Closing Entry of the Withdrawals Account Balance to the Owner’s Capital Account

Exhibit 6: Post-Closing Trial Balance

Preparing Closing Entries There are four closing entries: –Close revenue accounts. –Close expense accounts. –Close the Income Summary account. –Close the Withdrawals account.

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Reversing Entries: An Optional First Step OBJECTIVE 3: Prepare reversing entries.

Reversing Entries: An Optional First Step Reversing entry –A reversing entry is the opposite of an adjusting entry. –Reversing entries are never required. –Reversing entries are dated the beginning of the new accounting period. –Reversing entries enable the bookkeeper to continue making routine journal entries at the beginning of the new period (show how). –Only accruals may be reversed.

Reversing Entries: An Optional First Step

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The Work Sheet: An Accountant’s Tool OBJECTIVE 4: Prepare and use a work sheet.

Exhibit 7: The Work Sheet

Exhibit 8: Adjustments from the Work Sheet Entered in the General Journal

The Work Sheet: An Accountant’s Tool A work sheet is a working paper that facilitates the preparation of financial statements.

The Work Sheet: An Accountant’s Tool There are five steps in the preparation of a work sheet: –Enter ledger account balances into the Trial Balance columns. –Enter and key adjustments into the Adjustments columns. –Crossfoot the first two sets of columns to produce the Adjusted Trial Balance columns.

The Work Sheet: An Accountant’s Tool There are five steps in the preparation of a work sheet (cont.): –Extend account balances to either the Income Statement columns or the Balance Sheet columns. –Enter net income (or loss) as a balancing figure for the Income Statement columns and the Balance Sheet columns.

The Work Sheet: An Accountant’s Tool A work sheet is used to perform three principal tasks: –Record the adjusting entries in the general journal. –Record the closing entries in the general journal. –Prepare the financial statements.

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