1. 4 Completing the Accounting Cycle and Classifying Accounts CHAPTER
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College

2. © 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Describe and prepare a worksheet and explain its usefulness. (LO1)
Describe the closing process and explain why temporary accounts are closed each period. (LO2)
Prepare closing entries. (LO3)
Explain and prepare a post-closing trial balance. (LO4)
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3. © 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Complete the steps in the accounting cycle. (LO5)
Explain and prepare a classified balance sheet. (LO6)
Prepare reversing entries and explain their purpose. (Appendix 4A) (LO7)
Calculate the current ratio and describe what it reveals about a company’s financial condition. (Appendix 4B) (LO8)
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4. © 2013 McGraw-Hill Ryerson Limited.
The Accounting Cycle
Prepare
post-closing
trial balance
Analyze
transactions 1 9
Journalize 2
Close 8
Post 3
Prepare
statements 7
Prepare
unadjusted
trial balance 4
Prepare
adjusted
trial balance 6
Adjust 5
LO 1
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5. © 2013 McGraw-Hill Ryerson Limited.
The Worksheet
An optional working paper that can be used to simplify the preparation of financial statements.
It is:
Prepared before adjusting entries are made.
Not distributed to decision makers.
Helpful in preventing errors.
Often used by auditors.
LO 1
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A Blank Worksheet
Steps:
Enter unadjusted trial balance.
Enter adjustments.
Prepare adjusted trial balance.
Extend adjusted trial balance columns.
Enter net income (or loss) and balance financial statement columns.
Prepare financial statements.
LO 1
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7. Prepare Unadjusted Trial Balance
Step 1
Prepare Unadjusted Trial Balance
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LO 1

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Step 2
Enter Adjustments
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LO 1

9. Prepare Adjusted Trial Balance
Step 3
Prepare Adjusted Trial Balance
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LO 1

10. Extend Adjusted Amounts to Statement Columns
Step 4
Extend Adjusted Amounts to Statement Columns
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LO 1

11. Enter net income (or loss) and balance financial statement columns.
Step 5
Enter net income (or loss) and balance financial statement columns.
LO 1
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12. Prepare financial statements from worksheet information.
Step 6
Prepare financial statements from worksheet information.
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LO 1

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The Closing Process
The closing process occurs at the end of an accounting period after financial statements are prepared.
Closing entries:
Reset revenue, expense and withdrawal account balances to zero at the end of the period.
Update the capital account to reflect net income (or loss) and drawings from the period just ending.
LO 2
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14. Four-Step Closing Process (REID)
Close Revenue accounts to Income Summary account.
Close Expense accounts to Income Summary account.
Close Income Summary account to Owner’s Capital account.
Close Drawings (Withdrawals) account to the Capital account.
LO 3
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15. Four-Step Closing Process (REID)
Example
Please see the Adjusted Trial Balance illustration in the textbook.
LO 3
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16. Step 1: Close Revenue accounts to Income Summary
Teaching Revenue ,850
Equip. Rental Revenue
Income Summary ,150
LO 3
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17. Step 2: Close Expense Accounts to Income Summary
Depreciation Expense
Salaries Expense ,470
Interest Expense
Insurance Expense
Rent Expense ,000
Supplies Expense ,050
Utilities Expense
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LO 3

18. Step 3: Close Income Summary to Capital
Virgil Klimb, Capital ,065
LO 3
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19. Step 4: Close Drawings to Capital
Virgil Klimb, Capital
Virgil Klimb, Withdrawals
LO 3
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20. Account Balances after Closing
All temporary accounts (revenue, expense, and withdrawal accounts will have zero balances.
The capital account will be updated to reflect net income (or loss) and withdrawals from the period just ending.
All other accounts will be unchanged.
LO 4
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21. Post-Closing Trial Balance
A list of permanent accounts and their balances after closing entries are journalized and posted.
It verifies that:
Total debits = total credits for permanent accounts.
All temporary accounts have zero balances.
LO 4
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22. © 2013 McGraw-Hill Ryerson Limited.
The Accounting Cycle
Prepare
post-closing
trial balance
Analyze
transactions 1 9
Journalize 2
Close 8
Post 3
Prepare
statements 7
Prepare
unadjusted
trial balance 4
Prepare
adjusted
trial balance 6
Adjust 5
LO 2
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23. © 2013 McGraw-Hill Ryerson Limited.
Mini-Quiz
Closing the temporary accounts at the end of each accounting period:
   A) Serves to transfer the effects of these accounts to the proper equity account on the balance sheet.
 B)Prepares the withdrawals account for use in the next period.
 C)Gives the revenue and expense accounts zero balances.
 D)Both A and C.
 E)All of the above.
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24. © 2013 McGraw-Hill Ryerson Limited.
Mini-Quiz
Closing the temporary accounts at the end of each accounting period:
   A) Serves to transfer the effects of these accounts to the proper equity account on the balance sheet.
 B)Prepares the withdrawals account for use in the next period.
 C)Gives the revenue and expense accounts zero balances.
 D)Both A and C.
 E)All of the above.
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25. Classified Balance Sheet
A classified balance sheet:
Organizes assets and liabilities into important subgroups.
Provides users with more useful information for decision making.
LO 6
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Current assets are assets that are expected to be sold, collected, or used within the longer of one year or the company’s operating cycle.
LO 6
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Long-term investments are held for more than one year or the operating cycle.
LO 6
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Property, plant and equipment are tangible assets used for more than one accounting period to produce or sell products and services.
LO 6
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Intangible assets are long-term resources used to produce or sell products and services. They lack physical form.
LO 6
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Current liabilities are obligations due to be paid or settled within the longer of one year or the company’s operating cycle.
LO 6
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Long-term liabilities are obligations due beyond the longer of one year or the company’s operating cycle.
LO 6
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32. Equity is the owner’s claim on the assets of a company.
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LO 6

33. © 2013 McGraw-Hill Ryerson Limited.
Review
What classes of assets and liabilities are shown on a typical classified balance sheet?
Current assets, long-term investments, PP&E, intangible assets, current liabilities, long-term liabilities
LO 6
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34. Appendix 4A Reversing Entries
Optional entries used to simplify record keeping.
They are:
Prepared on the first day of the new accounting period.
Prepared for adjusting entries that created accrued assets and liabilities.
LO 7
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35. Reversing Entries - Example
DP Company rents unused office space to a tenant for $2,400 per month. The company had not received October’s rent payment from the tenant by October 31. Payment is expected on November 3.
The entry to record the accrued revenue would be:
Oct Accounts Receivable ,400
Rent Revenue ,400
LO 7
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36. © 2013 McGraw-Hill Ryerson Limited.
Appendix 4A
Reversing Entries are Not used Reversing Entries are Used
Oct Accounts Receivable 2,400 Accounts Receivable 2,400
Rent Revenue , Rent Revenue ,400
LO 7
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37. © 2013 McGraw-Hill Ryerson Limited.
Appendix 4A
Reversing Entries are Not used Reversing Entries are Used
Nov. 1 No entry Rent Revenue ,400
Accounts Receivable 2,400
Nov.3 Cash , Cash , Accounts Receivable , Rent Revenue ,400
LO 7
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38. Appendix 4B Using the Information
Current ratio: A ratio that is used to evaluate a company’s ability to pay its short-term obligations.
Current ratio =
Current assets
Current liabilities
LO 8
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39. Appendix 4B Using the Information
Current ratio =
Current assets
Current liabilities
This ratio:
Should not be used in isolation as a measure of liquidity.
Will vary from industry to industry.
May be tracked over time to spot trends.
May be used to compare to industry norms.
LO 8
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End of Chapter
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