Chapter 4 The Accounting Cycle HFT 2401 Chapter 4 The Accounting Cycle

10 Basic Steps to the Accounting Cycle 1) Analyzing Transactions 2) Journalizing Transactions 3) Posting 4) Prepare a Trial Balance 5) Prepare Adjusting Entries 6) Post Adjusting entries 7) Prepare an Adjusted Trial Balance 8) Prepare the Financial Statements 9) Record and Post Closing Entries 10) Prepare a Post-closing Trial Balance

Adjusting Entries Initial trial balance is prepared from daily business transactions Adjusting entries are prepared and recorded An adjusted trial balance is prepared to assure balancing of debits and credits

Adjusted Trial Balance The adjusted trial balance is used to prepare the income statement and balance sheet Income statement – revenues and expenses Balance sheet – changes in assets and liabilities Net Income (Loss) – Flow to owners equity

Statement of Owners Equity A financial statement that summarizes transactions affecting the owners capital account Owners Equity (Beginning of Period) Plus: Net Income for the Period Less: Net Loss for the Period Less: Owners Withdrawal for the Period Balance: Current Owners Equity for the Period

Closing Entries Revenue and expenses are called nominal accounts, as they are sub-classifications of the owners equity account Once the financial statements are prepared, the balances in the nominal accounts are cleared to zero and transferred to owners equity These accounts are closed by recording closing entries in the general journal & then posting them to the general ledger

Closing Entries Revenues and expenses are closed to a temporary clearing account known as Income Summary The net balance of the Income Summary account is determined and then transferred to the Owner’s Equity account The Owner’s Drawing account is also closed to Equity, but directly, not through Income Summary

Three Basic Steps to the Closing Process 1) Close the revenue and expense accounts to the Income Summary account 2) Close the Income Summary to the Owner’s Equity account 3) Close the Owner’s Draw to the Owner’s Equity account

Closing Worksheet Columnar accounting paper that lists all accounts, initial trial balance, adjusting entries and closing trial balance Process Prepare the trial balance Post the adjustments Prepare the adjusted trial balance Segregate the adjusted column balances into columns for preparing the balance sheet and income statement Determine the net income (loss) for the period) See Exhibit 8 on page 118 for an example

Reversing Entries Used to record accruals / deferrals in an accounting period Usually affects expense accounts and current liability accounts (i.e. Accounts Payable, Accrued Wages) These entries are reversed at the beginning of the next accounting period Most computer accounting systems will post reversals automatically

Homework Assignment Problem 2 Problem 5 Part 2 only. Format as shown in Exhibit 8 on page 118 Problem 7