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1. Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

2. Prepare financial statements from adjusted account balances.

3. Prepare closing entries.

After studying this chapter, you should be able to:

4 – Completing the Accounting 4 – Completing the Accounting CycleCycle

5. Illustrate the accounting cycle for one period.6. Explain what is meant by the fiscal year and

the natural business year.

4. Describe the accounting cycle.

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4-1

&

4-2

Objective 1 - Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements.

Objective 2 - Prepare financial statements from adjusted account balances.

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A classified balance sheet is a balance sheet that was expanded by adding subsections for current

assets; property, plant, and equipment; and current liabilities.

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Cash and other assets that are expected to be converted into cash, sold or used

up usually within a year or less, through the normal operations of the business are called current assets.

Cash Accounts Receivable Notes Receivable Supplies

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Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an

agreed rate.

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Property, plant, and equipment (also called fixed assets) include assets that depreciate

over a period of time. Land is an exception as it is not subject to depreciation.

Equipment Machinery Buildings Land

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6

Liabilities that will be due within a short time (usually one year or less) and that are to be paid out

of current assets are called current liabilities.

Accounts payable Notes payable Wages payable Interest payable Unearned fees

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Liabilities not due for a long time (usually more than one

year) are long-term liabilities.

Notes payableMortgage payableBond payable

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Example

The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007 balance sheet of Hindsight Consulting.

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1. Jason Corbin, Capital 5. Cash2. Notes Receivable (due 6. Unearned Rent

in 6 months) months)3. Notes Payable (due in 7. Accumulated

Depr.—2009) Equipment

4. Land 8. Accounts Payable

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4-3Objective 3 - Prepare closing entries

Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one

period are called temporary accounts or nominal accounts.

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To report amounts for only one period, temporary accounts should have zero

balances at the beginning of the period. At the end of the period the revenue and

expense account balances are transferred to Income Summary.

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The balance of Income Summary is then transferred to the owner’s capital account. The balance of the owner’s drawing account is also transferred to the owner’s capital account. The

entries that transfer these balances are called closing entries.

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Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Income Summary 16,840

120

16,960

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Wages Expense

Rent Expense

Depreciation Expense

Utilities Expense

Supplies Expense

Insurance Expense

Bal. 200

Miscellaneous Expense

Bal. 455

Income Summary

Debit Income Summary for the total expenses

and credit each expense account for its balance.

16,9609,855

Bal. 4,525

Bal. 1,600

Bal. 50

Bal. 985

Bal. 2,040

455

200

2,040

985

50

1,600

4,525

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Chris Clark, Capital

Bal. 25,000

Chris Clark, Drawing

Bal. 4,000

Income Summary

16,9609,8557,105

7,105

Debit Income Summary for the

amount of its balance (in this case, the net

income) and credit the capital account.

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Chris Clark, Capital

Bal. 25,0007,105

Chris Clark, Drawing

Bal. 4,000 4,000

4,000 Debit the capital account for the balance of the

drawing account, and credit drawing

for the same amount.

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Step 4Step 4

Step 3Step 3

Step 2Step 2

Step 1Step 1

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After the closing entries are posted, all of the

temporary accounts have zero balances.

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Example Exercise

After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co.

Terry Lambert, Capital

$615,850Terry Lambert, Drawing

25,000Fees Earned

380,450Wages Expense

250,000Rent Expense

65,000Supplies Expense

18,250Miscellaneous Expense

6,200

Journalize the four entries required to close the accounts.

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July 31 Fees Earned 380,450Income Summary 380,450

31 Income Summary 339,450Wages Expense 250,000Rent Expense 65,000Supplies Expense 18,250Miscellaneous Expense 6,200

31 Income Summary 41,000Terry Lambert, Capital 41,000

31 Terry Lambert, Capital 25,000Terry Labert, Drawing 25,000

Example

For Practice: PE 4-5A, PE 4-5B

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4-3Exhibit 7 Post-Closing Trial Balance

NetSolutionsPost-Closing Trial Balance

December 31, 2008Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 200 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 28 105 00

29 545 00 29 545 00

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Describe the accounting cycle.

Objective 4Objective 4Objective 4Objective 4

4-4

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The accounting process that begins with analyzing and journalizing

transactions and ends with preparing the accounting records for the next period’s transactions is called the

accounting cycle. There are ten steps in the accounting cycle.

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Note – Not all steps are mandatory and in practice a few of the steps are combined

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2. Transactions are posted to the ledger.

3. An unadjusted trial balance is prepared.

4. Adjustment data are assembled and analyzed.

5. An optional end-of-period spreadsheet (work sheet) is prepared.

1. Transactions are analyzed and recorded in the journal.

The Accounting Cycle Steps

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Continued

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7. An adjusted trial balance is prepared.

8. Financial statements are prepared.

9. Closing entries are journalized and posted to the ledger.

10. A post-closing trial balance is prepared.

6. Adjusting entries are journalized and posted to the ledger.

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Objective 5Objective 5Objective 5Objective 5

4-5

Illustrate the accounting cycle for one period.

Refer to the textbook for this extended illustration.

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4-6Objective 6 – Explain what is meant by the

fiscal year and the natural business year

The annual accounting period adopted by a business is known as its fiscal

year. When a business adopts a fiscal year that ends when business activities

have reached the lowest point in its annual operation, such a fiscal year is

also called the natural year.