Completing the Accounting Cycle

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Tyrone Davidson
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1 4 Completing the Accounting Cycle 4-1

2 Closing the Books At the end of the accounting period, the company gets the accounts ready for the next period. Very similar to what happens at AHS at the end of a marking period 4-2

3 Closing the Books Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss) and owner s drawing to owner s capital. Closing entries are only at the end of the annual accounting period. 4-3

4 Journalizing and Posting Closing entries must be journalized and posted; it s a required step in the accounting cycle. Temporary revenue and expense accounts are closed to Income Summary The temporary account Owner s Drawing is closed directly to Owner s Equity 4-4

5 4-5 Closing the Books

6 Closing the Books Picture the number of revenue and expense accounts a company could have. If each one was closed directly to Owner s Equity, the OE account would be quite messy and confusing! To keep it clean and neat, we use a temporary account called Income Summary to minimize the amount of detail in the permanent OE account. 4-6

7 Closing the Books (this slide is in your notes) Note: Owner s Drawing is closed directly to Capital and not to Income Summary because Owner s Drawing is not an expense. Owner s Capital is a permanent account; all other accounts are temporary accounts. 4-7

8 Closing the Books (this slide is in your notes) Illustration 4-7 Closing entries journalized Closing Entries need to be Posted 4-8

9 Preparing a Post- Closing Trial Balance Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries. Temporary accounts will have zero balances. 4-9

10 Summary of the Accounting Cycle 1. Analyze business transactions Illustration Prepare a post-closing trial balance 2. Journalize the transactions 8. Journalize and post closing entries 3. Post to ledger accounts 7. Prepare financial statements 4. Prepare a trial balance 6. Prepare an adjusted trial balance 5. Journalize and post adjusting entries 4-10

11 Financial Statements We need to quantify our results for the accounting period in question. Sometimes, we need to report to investors or other stakeholders. We do this by creating Financial Statements: Balance Sheet; Statement of Owner s Equity; Income Statement 4-11

12 The Classified Balance Sheet Presents a snapshot at a point in time. To improve understanding, companies group similar assets and similar liabilities together. Standard Classifications Assets Current assets Long-term investments Property, plant, and equipment Intangible assets Illustration 4-17 Liabilities and Owner s Equity Current liabilities Long-term liabilities Owner s (Stockholders ) equity 4-12

13 The Classified Balance Sheet Current Assets Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer. Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers Current assets are listed in order of liquidity (the ease with which they can be turned into cash)

14 The Classified Balance Sheet Current Assets Illustration 4-19 Companies usually list current asset accounts in the order they can convert them into cash. 4-14

15 The Classified Balance Sheet Long-Term Investments Investments in stocks and bonds of other companies. 4-15

16 The Classified Balance Sheet Property, Plant, and Equipment Assets with long useful lives, currently used in operations. Remember that Depreciation is allocating the cost of assets to a number of years, and Accumulated depreciation is the total amount of depreciation expensed thus far in the asset s life. 4-16

17 The Classified Balance Sheet Property, Plant, and Equipment Illustration

18 The Classified Balance Sheet Intangible Assets Assets with no physical substance, but can be very valuable. 4-18

19 4-19

20 The Classified Balance Sheet Current Liabilities Obligations the company is to pay within the coming year. Usually list notes payable first, followed by accounts payable. Other items follow in order of magnitude. Liquidity - ability to pay obligations expected to be due within the next year. 4-20

21 The Classified Balance Sheet Current Liabilities 4-21

22 The Classified Balance Sheet Long-Term Liabilities Obligations a company expects to pay after one year. 4-22

23 The Classified Balance Sheet Owner s Equity Proprietorship - one capital account. Partnership - capital account for each partner. Corporation it s called Stockholders Equity and consists of 2 accounts: Capital Stock & Retained Earnings. 4-23

24 The Classified Balance Sheet Balance Sheet Form Usually in Report Form, with assets above the liabilities and owner s equity Sometimes in Account Form, with assets section on the left and Liabilities & Owner s Equity on the right 4-24

CHAPTER4. The Recording Process. PreviewofCHAPTER4. Using a Worksheet. Steps in Preparing a Worksheet

CHAPTER4. The Recording Process. PreviewofCHAPTER4. Using a Worksheet. Steps in Preparing a Worksheet CHAPTER4 The Recording Process 4-1 4-2 PreviewofCHAPTER4 Using a Worksheet Steps in Preparing a Worksheet Multiple-column form used in preparing financial statements. Not a permanent accounting record.