Completing the

Accounting Cycle
Chapter 4

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 Objective 1

Prepare an accounting worksheet

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 The Accounting Cycle
• Process by which accountants prepare
financial statements for an entity for a
specific period of time

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 Accounting Cycle
Journalize Transaction

Post to Accounts

Adjust Accounts

Close Accounts

Prepare
Financial Statements
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 The Accounting Worksheet
• Used to help move data from the trial
balance to the financial statements
• An internal document – not financial
statement

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 Objective 2

Use the worksheet

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 COMPANY NAME
Work Sheet
For the Month Ended December 31, 1997
Balance Sheet
and Statement of
Unadjusted Trial Adjusted Trial Changes in
Account Title Balance Adjustments Balance Income Statement Owner's Equity
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Step 1 Step 2 Step 3Step 4

Prepare Unadjusted
Plan Adjustments
Sort
Adjusted
Adjusted
TrialAmounts
Balance to Statement
Trial Balance Columns
 Exercise 4-13
Wireless Solutions
Worksheet
30-Nov-06
Trial Balance Adjustments Adjusted T/B Income Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,500
Accounts receivable 3,400
Prepaid rent 1,200
Supplies 3,300
Equipment 34,100
Accum. Depreciation 1,800
Accounts payable 5,100
Salary payable
C. Voss, Capital 36,000
C. Voss, Withdrawals 2,000
Service revenue 7,100
Depreciation expense
Salary expense 1,800
Rent expense
Utilities expense 700
Supplies expense
Total 50,000 50,000
 Wireless Solutions
Worksheet
30-Nov-06
Trial Balance Adjustments Adjusted T/B Income Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,500 3,500
Accounts receivable 3,400 a. 300 3,700
Prepaid rent 1,200 d. 800 400
Supplies 3,300 e.1,600 1,700
Equipment 34,100 34,100
Accum. Depreciation 1,800 b. 100 1,900
Accounts payable 5,100 5,100
Salary payable c. 500 500
C. Voss, Capital 36,000 36,000
C. Voss, Withdrawals 2,000
2,000
Service revenue 7,100 a. 300 7,400
Depreciation expense b. 100 100
Salary expense 1,800 c. 500 2,300
Rent expense d. 800 800
Utilities expense 700 700
Supplies expense e. 1,600 1,600
Total 50,000 50,000 3,300 3,300 50,900 50,900 5,500 7,400 45,400 43,500
Net Income 1,900 1,900
7,400 7,400 45,400 45,400
 Recording Adjusting Entries
• Work sheet helps identify accounts that
need adjustments
• Actual adjustment of accounts requires
journalizing and posting entries

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 Exercise 4-14
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Nov 30 Accounts Receivable 300

Service Revenue 300

30 Depreciation Expense,
Equipment 100
Accumulated Depreciation,
Equipment 100

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 Exercise 4-14
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Nov 30 Salary Expense 500

Salary Payable 500

30 Rent Expense 800

Prepaid Rent 800

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 Exercise 4-14
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Nov 30 Supplies Expense 1,600

Supplies 1,600

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 Objective 3

Close the revenue, expense, and

withdrawal accounts

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 Closing the Accounts
• Prepares accounts for recording
transactions during next period
• Updates owner’s capital account

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 Closing the Accounts
• Permanent Accounts
• Temporary Accounts

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 Four Closing Entries
Close all income statement accounts to
Income Summary
Entry 1: Close revenue accounts to
Income Summary
Entry 2: Close expense accounts to
Income Summary

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 Four Closing Entries
Revenue Expense
500 500 200 200
Bal 0 Bal 0

Income Summary
200 500
Bal 300

Revenues – Expenses =
Net Income
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 Four Closing Entries
Entry 3: Close Income Summary to Capital
Entry 4: Close Withdrawals to Capital

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 Four Closing Entries
Income Summary Withdrawals
200 500 100 100

300 Bal 300 Bal 0

Bal 0

Capital
1,000 Beginning balance
100 300
1,200 Ending balance

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 Exercise 4-14
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Nov 30 Service Revenue 7,400

Income Summary 7,400
To close revenue accounts

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 Notice: Only income
Exercise 4-14 statement accounts are
closed to income
summary
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Nov 30 Income Summary 5,500

Depreciation Expense 100
Salary Expense 2,300
Rent Expense 800
Utilities Expense 700
Supplies Expense 1,600
To close expense accounts

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 Exercise 4-14
GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT

Nov 30 Income Summary 1,900

C. Voss, Capital 1,900
To close income summary

30 C. Voss, Capital 2,000

C. Voss, Withdrawals 2,000
To close withdrawals

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 Exercise 4-15
Accounts Receivable Prepaid Rent
3,400 1,200 Adj. 800
Adj. 300 Bal. 400
Bal. 3,700

Supplies Accumulated Depreciation

3,300 Adj. 1,600 1,800
Bal. 1,700 Adj. 100
Bal. 1,900

Salary Payable Gail Pfeiffer, Capital

Adj. 500 36,000
Bal. 500 Clo. 2,000 Clo. 1,900
Bal. 35,900

Gail Pfeiffer, Withdrawals Income Summary

2,000 Clo. 2,000 Clo. 5,500 Clo. 7,400
Clo. 1,900 Bal. 0
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 Exercise 4-15
Service Revenue Depreciation Expense
7,100 Adj. 100
Adj. 300 Bal. 100 Clo. 100
Clo. 7,400 Bal. 7,400

Salary Expense Rent Expense

1,800 Adj. 800
Adj. 500 Bal. 800 Clo. 800
Bal. 2,300 Clo. 2,300

Utilities Expense Supplies Expense

700 Adj. 1,600
Bal. 700 Clo. 700 Bal. 1,600 Clo. 1,600

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 Income Summary Account
• Debit balance = Net Loss
• Credit balance = Net Income

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 Post-Closing Trial Balance
• List of permanent accounts and their
balances after posting closing entries
• Total debits and credits must be equal

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 Only Balance Sheet
E4-16 accounts remain on the
Post-Closing Trial Balance.
Wireless SolutionsAll other accounts have a -
Postclosing Trial Balance $0- balance
November 30, 2006
ACCOUNT DEBIT CREDIT
Cash $ 3,500
Accounts receivable 3,700
Prepaid rent 400
Supplies 1,700
Equipment 34,100
Accumulated depreciation $ 1,900
Accounts payable 5,100
Salary payable 500
Gail Pfeiffer, capital               35,900
Total $43,400 $43,400

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 Objective 4

Classify assets and liabilities as

current or long-term

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 Liquidity
• Measure of how quickly an item can be
converted into cash
• On the balance sheet, assets and liabilities
are classified as either current or long-
term to indicate their relative liquidity

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 Current Assets
• Cash, or assets that will be converted to
cash or used up, in one year or within
normal business operating cycle
• Examples
– Short-term receivables
– Inventory
– Prepaid expenses

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 Current Liabilities
• Debts or obligations due within one year or
within operating cycle
• Examples
– Accounts and salary payables
– Short-term notes payable
– Unearned revenue

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 Long-term Assets and
Liabilities
• Long-term assets - all other assets
– Property, equipment
– Intangibles
• Long-term liabilities - all other debts due in
longer than one year or entity’s operating
cycle

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The Classified Balance Sheet
Debit side Credit side
Current assets Current liabilities
Long-term assets Long-term liabilities

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 S4-9
Current Assets Current Liabilities
• Cash • Accounts payable
• Receivables
• Accrued liabilities
• Prepaid expenses

Long-term Assets
• Equipment Long-term liabilities
• Buildings • None
• Accumulated depreciation
 Different Formats of
the Balance Sheet
• Account Format
• Report Format

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 Objective 5

Use the current ratio and the debt

ratio to evaluate a company

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 Comparative Financial
Statements
• Enhance user’s ability to analyze
company’s past performance
• Two common ratios used to measure
liquidity
1. Current ratio
2. Debt ratio

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 Current Ratio
• Measures ability of a business to pay its
current liabilities with its current assets

Current assets ÷ Current liabilities

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 Debt Ratio
• Indicates the proportion of a business’s
assets that are financed with debt
• Measures business’s ability to pay both
current and long-term debt

Total liabilities ÷ Total assets

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 S4-11
Current Assets: Current Liabilities:
Cash Accounts payable $4,000
$3,000 Salary payable 2,000
Accounts receivable Total $6,000
6,000
Prepaid rent
2,000
Supplies Ratio: Current assets/ Current liabilities =
Current
1,000
$12,000 / $6,000 =
Total
2
$12,000

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 S4-11
Total Assets: Total Liabilities:
Cash Accounts payable $4,000
$3,000
Accounts receivable Salary payable 2,000
6,000 Note payable 9,000
Prepaid rent Total $15,000
2,000
Supplies
1,000
Equipment
Debt Ratio: Total liabilities/Total assets =
12,000
Total $15,000 / $24,000 =
$24,000
.625
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End of Chapter 4

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