1. Prepared by: Keri Norrie, Camosun College
ACCOUNTING PRINCIPLES
Third Canadian Edition
Prepared by: Keri Norrie, Camosun College

2. COMPLETION OF THE ACCOUNTING CYCLE
CHAPTER 4
COMPLETION OF THE ACCOUNTING CYCLE

3. WORK SHEET
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.

4. WORK SHEET (Illustration 4-1)
4. Extend adjusted balance to appropriate columns.
5. Calculate income/loss and complete the worksheet.
1. Prepare trial balance on the worksheet.
2. Enter adjustment data.
3. Enter adjusted balances

5. PURPOSE 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.

6. TEMPORARY VERSUS PERMANENT ACCOUNTS (Illustration 4-2)
These accounts are closed
PERMANENT
These accounts are not closed
All revenue accounts
All expense accounts
Owner’s drawings account
All asset accounts
All liability account
Owner’s capital account

7. DIAGRAM OF CLOSING PROCESS Illustration 4-31
(INDIVIDUAL)
EXPENSES
Normal Dr. Balance
Normal Cr. Balance
Cr. to close
Dr. to close
- 0 - 2
Opening Balance
Net Income
Dr. Expenses
Cr. Revenues
Cr. Balance = Net Income 3
1. Debit each revenue account for its balance, and credit the income summary account for total revenues.
2. Debit the income summary account for total expenses, and credit each expense account for its balance.
3. Credit the income summary account for the amount of net income.

8. DIAGRAM OF CLOSING PROCESS Illustration 4-3
Opening Balance
Drawings
Ending Balance
Net Income 4
4. Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s drawings for the same amount.
OWNER’S
DRAWINGS
Normal Dr. Balance
Cr. to close
- 0 -

9. CLOSING 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?

10. POST-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.

11. POST-CLOSING TRIAL BALANCE Illustration 4-5
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.

12. STEPS IN THE ACCOUNTING CYCLE
1. Analyse transactions
9. Prepare post-closing trial balance
2. Journalize the transactions
3. Post to ledger accounts
8. Journalize and post closing entries
4. Prepare a trial balance
5. Journalize and post adjusting entries
7. Prepare financial statements
6. Prepare adjusted trial balance

13. REVERSING ENTRIES (Optional Step)
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 4B.

14. CORRECTING 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.

15. STANDARD BALANCE SHEET CLASSIFICATIONS
Financial statements become more useful when the elements are classified into significant subgroups.
A classified balance sheet generally has the following standard classifications:
Current Assets
Long-Term Investments Property, Plant and Equipment Intangible Assets
Assets Liabilities and Equities
Current Liabilities
Long-Term Liabilities
Owner’s/ Partners’/ Shareholders’ Equity

16. CURRENT ASSETS
Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company’s operating cycle, whichever is longer.
Listed in the order of liquidity.
Examples of current assets are cash, temporary investments, accounts receivable, inventory, and prepaids.

17. LONG-TERM INVESTMENTS
Long-term investments are resources that can be realized in cash, but the conversion into cash is not expected within one year or the operating cycle, whichever is longer.
Examples include investments in shares or bonds of another company or investment in land held for resale.
100
XYZ shares

18. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are long-lived tangible resources that are used in the business and not intended for sale.
Examples of property, plant, and equipment include land, buildings, and machinery.

19. INTANGIBLE ASSETS
Intangible assets are noncurrent resources that do not have physical substance.
Examples include patents, copyrights, trademarks, or trade names that give the holder exclusive right of use for a specified period of time.

20. CURRENT LIABILITIES
Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer.
Examples include accounts payable, unearned revenue, interest payable, and current maturities of long-term debt.

21. LONG-TERM LIABILITIES
Obligations expected to be paid after one year are classified as long-term liabilities.
Examples include long-term notes payable, bonds payable, mortgages payable, and lease liabilities.

22. EQUITY
The content of the equity section varies with the form of business organization.
In a proprietorship, there is a single owner’s equity account called (Owner’s Name), Capital.
In a partnership, there are separate capital accounts for each partner.
For a corporation, owners’ equity is called shareholders’ equity, and it consists of two accounts: Share Capital and Retained Earnings.

23. CLASSIFIED BALANCE SHEET IN REPORT FORM (Illustration 4-14)
A classified balance sheet helps the financial statement user determine:
• The availability of assets to meet debts as they come due, and
• The claims of short- and long-term creditors on total assets.
The balance sheet is most often presented in the report form, with the assets shown above the liabilities and owner’s equity.

24. Working capital is one important measure of liquidity.
Liquidity measures ability to pay short-term obligations when they come due.
Working capital is one important measure of liquidity.
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

25. CURRENT RATIO
The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability. It is calculated by dividing current assets by current liabilities and is a more dependable indicator of liquidity than working capital.
CURRENT ASSETS CURRENT RATIO = ——————————— CURRENT LIABILITIES

26. COPYRIGHT
Copyright © 2004 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.