Completing the Accounting Cycle

4 Completing the Accounting Cycle Student Version

1 Describe the flow of accounting information from the unadjusted trial balance into the adjusted trial balance and financial statements. 4-2

1 Exhibit 1 End-of-Period Spreadsheet (Work Sheet)

2 Prepare financial statements from adjusted account balances. 4-4

Exhibit 2 2 Financial Statements Prepared from Work Sheet to retained earnings statement

Exhibit 2 2 Financial Statements Prepared from Work Sheet (continued) from the income statement to the balance sheet

2 Balance Sheet A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

2 • 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. • 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. (continued)

2 • 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. • Liabilities not due for a long time (usually more than one year) are long-term liabilities. • Stockholders’ equity is the stockholders’ right to the assets of the business.

Exhibit 2 2 Financial Statements Prepared from Work Sheet (continued) from the retained earnings statement

3 Prepare closing entries. 4-11

3 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.

Fees Earned Bal. 16,840 3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue. Step 1: 16,840 Income Summary Step 1 16,960 Rent Revenue Bal. 120 120

Bal. 4,525 4,525 Bal. 1,600 1,600 Bal. 50 50 Bal. 985 985 Bal. 2,040 2,040 Insurance Expense 200 Bal. 200 Miscellaneous Expense 455 Bal. 455 3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 Wages Expense Income Summary Rent Expense 9,855 16,960 Depreciation Expense Utilities Expense Step 2 Debit Income Summary for the total expenses and credit each expense account for its balance. Supplies Expense

Step 3 Debit Income Summary for the amount of its balance (in this case, the net income) and credit Retained Earnings. Retained Earnings Bal. 0 Dividends Bal. 4,000 3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 Income Summary 9,855 16,960 7,105 7,105

Step 4 Debit Retained Earnings for the balance of the dividends account, and credit the dividends account. Retained Earnings Bal. 25,000 7,105 Dividends Bal. 4,000 3 Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4 4,000 4,000

3 Exhibit 5 Closing Entries for NetSolutions Step 1 Step 2 Step 3 Step 4

3 Closing Entries After the closing entries are posted, all of the temporary accounts have zero balances.

3 Post-Closing Trial Balance A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.

Exhibit 7 3 Post-Closing Trial Balance

4 Describe the accounting cycle. 4-21

4 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.

4 Accounting Cycle • Transactions are analyzed and recorded in the journal. • Transactions are posted to the ledger. • An unadjusted trial balance is prepared. • Adjustment data are assembled and analyzed. • An optional end-of-period spreadsheet (work sheet) is prepared. (continued)

4 Accounting Cycle (continued) • Adjusting entries are journalized and posted to the ledger. • An adjusted trial balance is prepared. • Financial statements are prepared. • Closing entries are journalized and posted to the ledger. • A post-closing trial balance is prepared.

5 Illustrate the accounting cycle for one period. 4-25

Exhibit 9 5 Journal entries for April, Kelly Consulting, P.C. (continued)

Exhibit 9 5 Journal entries for April, Kelly Consulting, P.C. (concluded)

Exhibit 10 5 Unadjusted Trial Balance, Kelly Consulting

Exhibit 11 5 End-of-Period Spreadsheet (Work Sheet) 4-29

Exhibit 12 5 Adjusting Entries, Kelly Consulting, P.C.

Exhibit 13 5 Adjusted Trial Balance, Kelly Consulting, P.C.

Exhibit 14 5 Financial Statements, Kelly Consulting, P.C. (continued)

Exhibit 14 5 Financial Statements, Kelly Consulting, P.C. (concluded)

Exhibit 15 5 Closing Entries, Kelly Consulting, P.C.

Exhibit 16 5 Post-Closing Trial Balance, Kelly Consulting, P.C.

6 Explain what is meant by the fiscal year and the natural business year. 4-37

6 Fiscal 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.

6 Financial History of a Business

Appendix 1: End-of-Period Spreadsheet (Work Sheet) 4-40

Trial Balance Adjustments Trial Balance Adjusted Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash 2,065 2,065 Accounts Receivable 2,220 2,720 Supplies 2,000 760 Prepaid Insurance 2,400 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accumulated Depr. 50 Accounts Payable 900 900 Wages Payable 250 Unearned Rent 360 240 Capital Stock 25,00025,000 Dividends 4,000 4,000 Fees Earned 16,340 16,840 Rent Revenue 120 Wages Expense 4,275 4,525 Rent Expense 1,600 1,600 Depreciation Expense 50 Utilities Expense 985 985 Supplies Expense 800 2,040 Insurance Expense 200 Miscellaneous Exp. 455 455 42,600 42,60043,400 43,400 (d) 500 (a) 1,240 (b) 200 (f) 50 (c) 120 (d) 500 (c) 120 (e) 250 (f) 50 (a) 1,240 (b) 200 2,360 2,360 4-41

Trial Balance Income Statement Balance Sheet Adjusted Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash 2,065 2,065 Accounts Receivable 2,220 2,720 Supplies 2,000 760 Prepaid Insurance 2,400 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accumulated Depr. 50 Accounts Payable 900 900 Wages Payable 250 Unearned Rent 360 240 Capital Stock 25,000 25,000 Dividends 4,000 4,000 Fees Earned 16,340 16,840 Rent Revenue 120 Wages Expense 4,275 4,525 Rent Expense 1,600 1,600 Depreciation Expense 50 50 Utilities Expense 985 985 Supplies Expense 800 2,040 Insurance Expense 200 Miscellaneous Exp. 455 455 42,600 42,600 9,855 16,960 33,545 26,440 4-42 The four columns are summed.

Income Statement Balance Sheet 9,855 16,960 33,545 26,440 7,105 7,105 16,960 16,960 33,545 33,545 Net Income The difference between the Income Statement columns totals is the net income (or net loss) for the period.

Trial Balance Income Statement Balance Sheet Adjusted Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash 2,065 2,065 Accounts Receivable 2,220 2,720 Supplies 2,000 760 Prepaid Insurance 2,400 2,200 Land 20,000 20,000 Office Equipment 1,800 1,800 Accumulated Depr. 50 Accounts Payable 900 900 Wages Payable 250 Unearned Rent 360 240 Capital Stock 25,000 25,000 Dividends 4,000 4,000 Fees Earned 16,340 16,840 Rent Revenue 120 Wages Expense 4,275 4,525 Rent Expense 1,600 1,600 Depreciation Expense 50 50 Utilities Expense 985 985 Supplies Expense 800 2,040 Insurance Expense 200 Miscellaneous Exp. 455 455 42,600 42,600 9,855 16,960 33,545 26,440 Net income 7,105 7,105 16,960 16,960 33,545 33,545 4-44

Completing the Accounting Cycle