1. Lesson 5 Completing the Accounting Cycle Task Team of FUNDAMETAL ACCOUNTING School of Business, Sun Yat-sen University

2. Outline Describe the preparation of adjusted trial balance Describe and prepare a worksheet and describe its usefulness. Describe the closing process and explain why temporary accounts are closed each period. Prepare closing entries. 2

3. Accounting Cycle 3 1.Analyze Transactions 2.Journalize2.Journalize 3. Post 4. Unadjusted trial balance 5. Adjust 6. Adjusted trial balance 7. Prepare finance statements 8.Close8.Close Start the next cycle

4. What We Have Done? So far we have discussed the following steps in the accounting cycle: – Analyzing – Recording – Posting – Unadjusted trial balance – Adjusting – Adjusted trial balance 4 Let’s start from the worksheet

5. What are on the Worksheet? A worksheet includes following columns: – Unadjusted trial balance. – Adjusting entries – Adjusted trial balance. – income statement – Balance sheet Worksheet can be used to simplify the preparation of financial statements. 5

6. A Blank Worksheet 6

7. Steps in preparation of the worksheet 7 Step 1: Enter the accounts and unadjusted trial balance Step 1: Enter the accounts and unadjusted trial balance

8. Steps in preparation of the worksheet 8 Step2: Entry the adjusting entries’ Step2:

9. Steps in preparation of the worksheet 9 Step3: Entry the adjusted trial balance Step3:

10. Steps in preparation of the worksheet 10 Step4: Entry Adjusted Amounts to Income Statement Columns Step4:

11. Steps in preparation of the worksheet 11 Step5: Entry Adjusted Amounts to Balance sheet Columns Step5:

12. Preparing the Financial Statements Financial Statements can be prepared easily using the completed worksheet. The nature and the preparation of Financial Statement will be discussed in lesson 9 12

13. Closing Process The closing process occurs at the end of an accounting period after financial statements are prepared. Reasons for closing entries: – Resets revenue and expense account balances to zero at the end of the period. – Updates the retained earnings account to reflect net income and distributions. 13

14. Temporary and Permanent Accounts Temporary accounts are also called nominal accounts. They are opened at the beginning of a period, used to record events for that period and closed at the end of the period. They accumulate data related to one accounting period only. 14

15. 15 Income Summary Revenues Expenses The closing process applies only to temporary accounts. Temporary Accounts

16. Permanent Accounts 16AssetsLiabilities Owner’s Capital The closing process does not apply to permanent accounts.

17. Steps in the Closing Process Set an Income Summary account. Close Revenue accounts to Income Summary. Close Expense accounts to Income Summary. Close Income Summary account to Retained Earnings 17

18. Close R evenue Accounts to Income Summary 18 The entries : Dr. Sales Revenue 61000 Interest Revenue 2917 Cr. Income Summary 63917 The entries : Dr. Sales Revenue 61000 Interest Revenue 2917 Cr. Income Summary 63917

19. Close Expense Accounts to Income Summary 19 The entries: Dr. Income 86600 Cr. Cost of Sales 30000 Operating Expense 56600 The entries: Dr. Income 86600 Cr. Cost of Sales 30000 Operating Expense 56600

20. Close Income Summary to Retained Earnings 20 The Entries: Dr. Income Summary 22683 Cr. Retained Earnings 22683 The Entries: Dr. Income Summary 22683 Cr. Retained Earnings 22683

21. The Closing Entries Close r evenue accounts to Income Summary. The entries are: Dr. All Revenue Cr. Income Summary 21

22. The Closing Entries Close expense accounts to Income Summary. The entries are: Dr. Income Summary Cr. All Expenses 22

23. The Closing Entries Close I ncome Summary account to Retained Earnings. – If there is a profit, the entries are: Dr. Income Summary Cr. Retained Earnings – If there is a loss, the entries are: Dr. Retained Earnings Cr. Income Summary 23

24. Post-Closing Trial Balance Post-Closing Trial Balance is a list of balances for all accounts that not closed. The purpose of a post-closing trial balance is to verifies that: – Total debits = total credits for permanent accounts. – All temporary accounts have zero balances 24

25. Post-Closing Trial Balance 25

26. The End of Lesson 5