1. Chapter 4 The Accounting Cycle
HFT 2401
Chapter 4
The Accounting Cycle

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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