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Page 1
Completing the Accounting Cycle
Page 2
JOIN KHALID AZIZ
• COACHING CLASSES OF CA MODULE B & D.
• FA, ECONOMICS & COST ACCOUNTING.
• CONTACT NOW.
• 0322-3385752
Page 3
JOIN KHALID AZIZ
• MA ECONOMICS EXTERNAL COACHING CLASSES.
• MICRO ECONOMICS, STATISTICS & MACRO ECONOMICS.
• GUESS PAPERS AND NOTES ARE AVAILABLE
• 0322-3385752
Page 4
JOIN KHALID AZIZ
• ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
• FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
• COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
• CONTACT:• 0322-3385752• R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN
Page 5
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.
Page 6
Accounting Cycle
1.Analyze 1.Analyze TransactionsTransactions
1.Analyze 1.Analyze TransactionsTransactions
2. 2. JournalizeJournalize
2. 2. JournalizeJournalize 3. Post 3. Post 3. Post 3. Post
4. Unadjusted 4. Unadjusted trial balancetrial balance
4. Unadjusted 4. Unadjusted trial balancetrial balance
5. Adjust5. Adjust 5. Adjust5. Adjust
6. Adjusted 6. Adjusted trial balancetrial balance
6. Adjusted 6. Adjusted trial balancetrial balance
7. Prepare 7. Prepare finance finance
statementsstatements
7. Prepare 7. Prepare finance finance
statementsstatements
8.Close8.Close 8.Close8.Close Start the Start the
next cyclenext cycle
Page 7
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
Let’s start Let’s start from the from the
worksheetworksheet
Page 8
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.
Page 9
A Blank Worksheet
Page 10
Steps in preparation of the worksheet
AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000
Short-term investment 100000
Accounts Receivable 36000
Interest receivable
Prepaid Expense 20000
Inventory 20000
Plant and Equipmemt 250000
Accumulated Depreciation
Accounts Payable 50000
Wages payable
Unearned Revenue 50000
Paid Capital 500000
Sales Revenue 36000
Interest Revenue
Cost of Sales 30000
Operating expenses 9000
total 636000 636000
Smith Inc.Work Sheet
For Year ended Dec.31 2004
Balance Sheet andStatement of Owner's
Equity
Unadjusted TrialBalance
Adjustments Adjusted Trial
Balance Income Statement
AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000
Short-term investment 100000
Accounts Receivable 36000
Interest receivable
Prepaid Expense 20000
Inventory 20000
Plant and Equipmemt 250000
Accumulated Depreciation
Accounts Payable 50000
Wages payable
Unearned Revenue 50000
Paid Capital 500000
Sales Revenue 36000
Interest Revenue
Cost of Sales 30000
Operating expenses 9000
total 636000 636000
Smith Inc.Work Sheet
For Year ended Dec.31 2004
Balance Sheet andStatement of Owner's
Equity
Unadjusted TrialBalance
Adjustments Adjusted Trial
Balance Income Statement
Step 1:Step 1:Enter the Enter the
accounts and accounts and unadjusted unadjusted trial balancetrial balance
Step 1:Step 1:Enter the Enter the
accounts and accounts and unadjusted unadjusted trial balancetrial balance
Page 11
Steps in preparation of the worksheet
AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000
Short-term investment 100000
Accounts Receivable 36000
Interest receivable 2916.67
Prepaid Expense 20000 10000
Inventory 20000
Plant and Equipmemt 250000
Accumulated Depreciation 2600
Accounts Payable 50000
Wages payable 35000
Unearned Revenue 50000 25000.00
Paid Capital 500000
Sales Revenue 36000 25000
Interest Revenue 2916.67
Cost of Sales 30000
Operating expenses 9000 47600.00
total 636000 636000 75516.67 75516.67
Smith Inc.Work Sheet
For Year ended Dec.31 2004
Balance Sheet andStatement of Owner's
Equity
Unadjusted TrialBalance
Adjustments Adjusted Trial
Balance Income Statement
AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000
Short-term investment 100000
Accounts Receivable 36000
Interest receivable 2916.67
Prepaid Expense 20000 10000
Inventory 20000
Plant and Equipmemt 250000
Accumulated Depreciation 2600
Accounts Payable 50000
Wages payable 35000
Unearned Revenue 50000 25000.00
Paid Capital 500000
Sales Revenue 36000 25000
Interest Revenue 2916.67
Cost of Sales 30000
Operating expenses 9000 47600.00
total 636000 636000 75516.67 75516.67
Smith Inc.Work Sheet
For Year ended Dec.31 2004
Balance Sheet andStatement of Owner's
Equity
Unadjusted TrialBalance
Adjustments Adjusted Trial
Balance Income Statement
Step2:Step2:Entry the Entry the adjusting adjusting entries’entries’
Step2:Step2:Entry the Entry the adjusting adjusting entries’entries’
Page 12
Steps in preparation of the worksheet
AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000 171000Short-term investment 100000 100000Accounts Receivable 36000 36000
Interest receivable 2916.67 2916. 67
Prepaid Expense 20000 10000 10000
Inventory 20000 20000
Plant and Equipmemt 250000 250000
Accumulated Depreciation 2600 2600
Accounts Payable 50000 50000
Wages payable 35000 35000
Unearned Revenue 50000 25000.00 25000. 00
Paid Capital 500000 500000
Sales Revenue 36000 25000 61000
Interest Revenue 2916.67 2916. 67
Cost of Sales 30000 30000
Operating expenses 9000 47600.00 56600. 00
total 636000 636000 75516.67 75516.67 676516. 67 676516. 67
Smith Inc.Work Sheet
For Year ended Dec.31 2004 Balance Sheet and
Statement of Owner's Unadjusted Trial
BalanceAdjustments
Adjusted TrialBalance
Income StatementAccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000 171000Short-term investment 100000 100000Accounts Receivable 36000 36000
Interest receivable 2916.67 2916. 67
Prepaid Expense 20000 10000 10000
Inventory 20000 20000
Plant and Equipmemt 250000 250000
Accumulated Depreciation 2600 2600
Accounts Payable 50000 50000
Wages payable 35000 35000
Unearned Revenue 50000 25000.00 25000. 00
Paid Capital 500000 500000
Sales Revenue 36000 25000 61000
Interest Revenue 2916.67 2916. 67
Cost of Sales 30000 30000
Operating expenses 9000 47600.00 56600. 00
total 636000 636000 75516.67 75516.67 676516. 67 676516. 67
Smith Inc.Work Sheet
For Year ended Dec.31 2004 Balance Sheet and
Statement of Owner's Unadjusted Trial
BalanceAdjustments
Adjusted TrialBalance
Income Statement
Step3:Step3:Entry the Entry the adjusted adjusted
trial balancetrial balance
Step3:Step3:Entry the Entry the adjusted adjusted
trial balancetrial balance
Page 13
Steps in preparation of the worksheet
AccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000 171000
Short-term investment 100000 100000
Accounts Receivable 36000 36000
Interest receivable 2916.67 2916. 67
Prepaid Expense 20000 10000 10000
Inventory 20000 20000
Plant and Equipmemt 250000 250000
Accumulated Depreciation 2600 2600
Accounts Payable 50000 50000
Wages payable 35000 35000
Unearned Revenue 50000 25000.00 25000. 00
Paid Capital 500000 500000
Sales Revenue 36000 25000 61000 61,000
Interest Revenue 2916.67 2916. 67 2,917
Cost of Sales 30000 30000 30,000
Operating expenses 9000 47600.00 56600. 00 56,600
total 636000 636000 75516.67 75516.67 676516. 67 676516. 67 86,600 63,917
Net Income (22,683)
Smith Inc.Work Sheet
For Year ended Dec.31 2004 Balance Sheet and
Statement of Owner's Unadjusted Trial
BalanceAdjustments
Adjusted TrialBalance
Income StatementAccountDr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 171000 171000
Short-term investment 100000 100000
Accounts Receivable 36000 36000
Interest receivable 2916.67 2916. 67
Prepaid Expense 20000 10000 10000
Inventory 20000 20000
Plant and Equipmemt 250000 250000
Accumulated Depreciation 2600 2600
Accounts Payable 50000 50000
Wages payable 35000 35000
Unearned Revenue 50000 25000.00 25000. 00
Paid Capital 500000 500000
Sales Revenue 36000 25000 61000 61,000
Interest Revenue 2916.67 2916. 67 2,917
Cost of Sales 30000 30000 30,000
Operating expenses 9000 47600.00 56600. 00 56,600
total 636000 636000 75516.67 75516.67 676516. 67 676516. 67 86,600 63,917
Net Income (22,683)
Smith Inc.Work Sheet
For Year ended Dec.31 2004 Balance Sheet and
Statement of Owner's Unadjusted Trial
BalanceAdjustments
Adjusted TrialBalance
Income Statement
Step4:Step4:Entry Adjusted Entry Adjusted
Amounts to Amounts to Income Statement Income Statement
ColumnsColumns
Step4:Step4:Entry Adjusted Entry Adjusted
Amounts to Amounts to Income Statement Income Statement
ColumnsColumns
Page 14
Steps in preparation of the worksheet
Step5:Step5:Entry Adjusted Entry Adjusted
Amounts to Amounts to Balance sheet Balance sheet
ColumnsColumns
Step5:Step5:Entry Adjusted Entry Adjusted
Amounts to Amounts to Balance sheet Balance sheet
ColumnsColumns
Page 15
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
Page 16
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.
Page 17
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.
Page 18
Temporary AccountsTemporary Accounts
Income Income SummarySummary
Rev
enu
esR
even
ues
Exp
ense
sE
xpen
ses
The closing process The closing process applies only to applies only to
temporary accounts.temporary accounts.
The closing process The closing process applies only to applies only to
temporary accounts.temporary accounts.
Page 19
Permanent Accounts
Permanent Permanent AccountsAccounts
AssetsAssets
LiabilitiesLiabilities Owner’s Owner’s CapitalCapital
The closing process does The closing process does not apply to permanent not apply to permanent
accounts.accounts.
The closing process does The closing process does not apply to permanent not apply to permanent
accounts.accounts.
Page 20
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
Page 21
Close Revenue Accounts to Income Summary
Income Summary63,917
63,917
Income Summary63,917
63,917
…61,000 61,000
Sales Revenue…
61,000 61,000
Sales Revenue
2,917 2,917
-
Interest Revenue2,917 2,917
-
Interest RevenueThe 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
Page 22
Close Expense Accounts to Income Summary
…30,000 30,000
-
Cost of Sales…
30,000 30,000 -
Cost of Sales
Income Summary86,600 63,917
(22,683)
Income Summary86,600 63,917
(22,683)
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
…56,600 56,600
-
Operating Expense…
56,600 56,600 -
Operating Expense
Page 23
Close Income Summary to Retained Earnings
Retained Earnings…
(22,683)
Retained Earnings…
(22,683)
Income Summary86,600 63,917
(22,683)
(22,683) -
Income Summary86,600 63,917
(22,683)
(22,683) - The Entries:
Dr. Income Summary 22683 Cr. Retained Earnings 22683
The Entries:
Dr. Income Summary 22683 Cr. Retained Earnings 22683
Page 24
The Closing Entries
• Close revenue accounts to Income Summary.
The entries are:
Dr. All Revenue
Cr. Income Summary
Page 25
The Closing Entries
• Close expense accounts to Income Summary.The entries are:Dr. Income Summary Cr. All Expenses
Page 26
The Closing Entries
• Close Income 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
Page 27
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
Page 28
Post-Closing Trial Balance
Account
Dr Cr
Cash 171000Short-term investment 100000Accounts Receivable 36000Interest receivable 2916. 67Prepaid Expense 10000Inventory 20000Plant and Equipmemt 250000Accumulated Depreciation 2600Accounts Payable 50000Wages payable 35000Unearned Revenue 25000Paid Capital 500000Retained Earnings (22683)Sales Revenue
Interest Revenue
Cost of Sales
Operating expenses
total 589,917 589,917
Smith Inc.
Post-Closing Trial Balance
For Year ended Dec.31 2004
Balance SheetAccount
Dr Cr
Cash 171000Short-term investment 100000Accounts Receivable 36000Interest receivable 2916. 67Prepaid Expense 10000Inventory 20000Plant and Equipmemt 250000Accumulated Depreciation 2600Accounts Payable 50000Wages payable 35000Unearned Revenue 25000Paid Capital 500000Retained Earnings (22683)Sales Revenue
Interest Revenue
Cost of Sales
Operating expenses
total 589,917 589,917
Smith Inc.
Post-Closing Trial Balance
For Year ended Dec.31 2004
Balance Sheet
Page 29
ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM,
BBA, MBA & PIPFA.COST ACCOUNTING OF ICMAP STAGE 2,3
ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT:KHALID AZIZ0322-3385752
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN