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ACTG 2110

ACTG 2110. Chapter 4 – Completing the Accounting Cycle. Accounting Cycle. 1 – Analyze Transactions 2 – Record transactions in general journal 3 – Post journal entries to general ledger 4 – Determine account balances and prepare a trial balance

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ACTG 2110

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  1. ACTG 2110 Chapter 4 – Completing the Accounting Cycle

  2. Accounting Cycle • 1 – Analyze Transactions • 2 – Record transactions in general journal • 3 – Post journal entries to general ledger • 4 – Determine account balances and prepare a trial balance • 5 – Prepare adjusting entries and an adjusted trial balance • 6- Prepare financial statements

  3. Accounting Cycle • 7 – Close the Accounts • 8 – Prepare a postclosing trial balance • A worksheet can be used internally to assist in steps 4-6.

  4. Classified Balance Sheet • Assets • Current assets • Plan to use up within one year or the operating cycle whichever is longer • Long-term assets • Plan to use in the business for more than year • Liabilities • Current liabilities – • Due date is one year or less • Long-term liabilities • Due date is more than one year

  5. Closing the Accounts • Purpose • Update capital • Adhere to accounting period principle (measure income for a distinct period of time). • Procedure: • Close all TEMPORARY accounts into owner’s capital • Temporary accounts – accounts that were extensions to capital • Revenues • Expenses • Withdrawals

  6. Closing the Accounts • 1 – Close all revenue accounts • Revenues XXX • Income Summary XXX • 2 – Close all expense accounts • Income Summary XXX • Expenses XXX • 3 – Close income summary • Income summary XXX • Owner, Capital XXX

  7. Closing the Accounts • 4 – Close withdrawals • Owner, Capital XXX • Owner, Withdrawals XXX • Owner’s Capital will be updated for net income (net loss) and withdrawals to start the next period. • Revenues, expenses, and withdrawals will have $0 balances to start the next period.

  8. Postclosing Trial Balance • ANOTHER trial balance is prepared after the closing process. • Only the PERMANENT balance sheet accounts should have balances in them • PERMANENT ACCOUNTS – ALL assets, ALL liabilities and the owner’s capital account. • No revenues, expenses, or withdrawal accounts should be shown.

  9. Fiscal Years • The 12 month period used to report business results. • 63% of all companies use December 31 as their year end. • That leaves 37% to use other 12 month periods • Other common year ends include January, June and September. • Firms pick year ends based on when their business activity is the lowest. Hence, January 31 is often used for retail companies because inventory is low.

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