Chapter 1 Completing the Accounting Cycle

Chapter 1

Completing the

Accounting Cycle

• multiple-column form used for the adjustment process and preparing financial statements

• working tool for the accountant

• not a permanent accounting record

• Eases preparation of adjusting entries and financial statements

What is a Worksheet?

Example of a Work Sheet

Remember:

• A work sheet is not a permanent accounting record

• When it is used:

– financial statements are prepared from the work sheet

– adjustments are journalized and posted from the work sheet after financial statements, so management can receive the financial statements more quickly

To Prepare A Work Sheet:

1 Prepare the trial balance

2 Enter adjustments in the adjustments columns

3 Enter adjusted balances in adjusted trial balance columns

4 Extend adjusted trial balance amounts to the appropriate financial statement columns

5 Total the statement columns, compute net income (loss), and complete the work sheet

Dr. Cr. Dr. Cr. Dr. Cr.

Cash 3,950

Accounts receivable -

Supplies 9,720

Prepaid insurance 2,400

Equipment 26,000

Accum. depr. - Equip. -

Accounts payable 6,200

Salaries payable -

Unearned revenue 3,000

C. Taylor, Capital 30,000

C. Taylor, Withdrawals 600

Consulting revenue 5,800

Rental revenue 300

Depr. expense -

Salaries expense 1,400

Insurance expense -

Rent expense 1,000

Supplies expense -

Utilities expense 230

Totals 45,300 45,300

Adjusted

Trial BalanceAdjustments

Unadjusted

Trial Balance

FastForwardWork Sheet

For Month Ended December 31, 2011

First, enter the unadjusted

trial balance amounts to

the worksheet!

Here are our adjusting entries for December

a) Insurance expense 100

Prepaid insurance 100

b) Supplies expense 1050

Supplies 1050

c) Depreciation expense 375

Accum. Depr. – Equip. 375

Here Are More Adjusting Entries for December

d) Unearned revenue 250

Consulting Revenue 250

e) Salaries Expense 210

Salaries Payable 210

f) Accounts Receivable 1,800

Consulting Revenue 1,800


Cash 3,950

Accounts receivable - f 1,800

Supplies 9,720 b 1,050

Prepaid insurance 2,400 a 100

Equipment 26,000

Accum. depr. - Equip. - c 375

Accounts payable 6,200

Salaries payable - e 210

Unearned revenue 3,000 d 250



Consulting revenue 5,800 d 250

f 1,800

Rental revenue 300

Depr. expense - c 375

Salaries expense 1,400 e 210

Insurance expense - a 100

Rent expense 1,000

Supplies expense - b 1,050


Totals 45,300 45,300 3,785 3,785

Adjusted


Unadjusted

Trial Balance

Next, enter the adjustments!




Cash 3,950 3,950

Accounts receivable - f 1,800 1,800

Supplies 9,720 b 1,050 8,670

Prepaid insurance 2,400 a 100 2,300

Equipment 26,000 26,000

Accum. depr. - Equip. - c 375 375

Accounts payable 6,200 6,200

Salaries payable - e 210 210

Unearned revenue 3,000 d 250 2,750

C. Taylor, Capital 30,000 - 30,000

C. Taylor, Withdrawals 600 600

Consulting revenue 5,800 d 250 7,850

f 1,800

Rental revenue 300 300

Depr. expense - c 375 375

Salaries expense 1,400 e 210 1,610

Insurance expense - a 100 100

Rent expense 1,000 1,000

Supplies expense - b 1,050 1,050

Utilities expense 230 230

Totals 45,300 45,300 3,785 3,785 47,685 47,685

Adjusted


Unadjusted

Trial Balance

Prepare the adjusted trial

balance!





Then, extend the adjusted trial balance amounts to the financial statements!


Cash 3,950 3,950

Accounts receivable 1,800 1,800

Supplies 8,670 8,670

Prepaid insurance 2,300 2,300

Equipment 26,000 26,000

Accum. depr. - Equip. 375 375


Salaries payable 210 210

Unearned revenue 2,750 2,750

C. Taylor, Capital 30,000 30,000


Consulting revenue 7,850 7,850


Depr. expense 375 375

Salaries expense 1,610 1,610

Insurance expense 100 100


Supplies expense 1,050 1,050


Totals 47,685 47,685 4,365 8,150 43,320 39,535

Balance Sheet &

Statement of EquityStatement

Adjusted

Trial Balance

Income


Cash 3,950 3,950

Accounts receivable 1,800 1,800

Supplies 8,670 8,670

Prepaid insurance 2,300 2,300

Equipment 26,000 26,000

Accum. depr. - Equip. 375 375


Salaries payable 210 210

Unearned revenue 2,750 2,750

C. Taylor, Capital 30,000 30,000


Consulting revenue 7,850 7,850


Depr. expense 375 375

Salaries expense 1,610 1,610

Insurance expense 100 100


Supplies expense 1,050 1,050


Totals 47,685 47,685 4,365 8,150 43,320 39,535

Net income 3,785 3,785

8,150 8,150 43,320 43,320

Balance Sheet &

Statement of EquityStatement

Adjusted

Trial Balance

Income



Total statement columns, compute income or loss, and balance columns.

FastForward

Income Statement

For the Month Ended December 31, 2011

Revenues:

Consulting revenue 7 850$

Rental revenue 300

Total revenues 8 150

Operating expenses:

Depr. expense - Equip. 375$

Salaries expense 1 610

Insurance expense 100

Rent expense 1 000

Supplies expense 1 050


Total expenses 4 365

Net income 3 785$

Prepare the IncomeStatement.

Prepare the Financial Statements

A work sheet does not

substitute for financial

statements.

Prepare the Statement of Changes in Owner’s Equity.

FastForward

Income Statement


Revenues:

Consulting revenue 7 850$

Rental revenue 300

Total revenues 8 150

Operating expenses:

Depr. expense - Equip. 375$



Rent expense 1 000



Total expenses 4 365

Net income 3 785$ FastForward

Statement of Changes in Owner's Equity


C. Taylor, Capital 12/1/04 $ -0-

Add: Net income 3 785$

Investment by owner 30 000 33 785

Total 33 785

Less: Withdrawal by owner 600

C. Taylor, Capital 12/31/04 33 185$

FastForward

Balance Sheet

December 31, 2011

AssetsCash 3 950$

Accounts receivable 1 800

Supplies 8 670

Prepaid insurance 2 300

Equipment 26 000$

Less: accum. depr. (375) 25 625

Total assets 42 345$

LiabilitiesAccounts payable 6 200$

Salaries payable 210

Unearned consulting revenues 2 750

Total liabilities 9 160$

Owner's EquityC.Taylor, Capital 33 185

Total liabilities and equity 42 345$

Prepare the Balance Sheet.

FastForward

Statement of Changes in Owner's Equity


C. Taylor, Capital 12/1/04 $ -0-

Add: Net income 3 785$

Investment by owner 30 000 33 785

Total 33 785

Less: Withdrawal by owner 600

C. Taylor, Capital 12/31/04 33 185$

Which of these characteristics are true about a work sheet?

– a permanent accounting record

– an optional device used by accountants

– a part of the general ledger

– a part of the journal

Answer!

– permanent accounting record

– optional device used by accountants

– part of the general ledger

– part of the journal

Although it’s optional, the work sheet is a very useful tool!

TEMPORARY VS.

PERMANENT ACCOUNTS

TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed

All revenue accounts All asset accounts

All expense accounts All liability accounts

Owner’s drawing Owner’s capital account

Now, let’s talk about closing entries and income summary!

CLOSING ENTRIES

• Closing entries– Transfer net income (loss) and owner’s drawings to

owner’s capital

– Journalizing and posting is a required step in the accounting cycle

• Income Summary– A temporary account

– Used in closing revenue and expense accounts

– Minimizes the details in the permanent owner’s capital account

Closing Process

• Resets revenue, expense and withdrawal account balances to zero at the end of the period.

• Helps summarize a period’s revenues and expenses in the Income Summary account.

Identify accounts for closing.

Record and post closing entries.

Prepare post-closing trial balance.

Temporary Accounts

Revenues

Income Summary

Exp

en

ses

With

draw

als

Permanent Accounts

Assets

Liab

iliti

es O

wn

er’s

Cap

ital

The closing process applies only to

temporary accounts.

Temporary and Permanent Accounts

Recording Closing Entries

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.

Balances before closing.

Income Summary

Owner's Capital

30,000

30,000

Revenue Accounts

25,000

25,000

Withdrawals Account

5,000

5,000

Expense Accounts

10,000

10,000

Closing Process

Income Summary

25,000

25,000

Close Revenue accounts to Income

Summary.

Owner's Capital

30,000

30,000

Revenue Accounts

25,000 25,000

-

Withdrawals Account

5,000

5,000

Expense Accounts

10,000

10,000

Closing Process

Income Summary

10,000 25,000

15,000 Owner's Capital

30,000

30,000

Revenue Accounts

25,000 25,000

-

Withdrawals Account

5,000

5,000

Close Expense accounts to Income

Summary.

Expense Accounts

10,000 10,000

-

Closing Process

The balance in Income Summary equals net

income.

Owner's Capital

30,000

15,000

45,000

Owner's Capital

30,000

15,000

45,000

Withdrawals Account

5,000

5,000

Withdrawals Account

5,000

5,000

Close Income Summary to Owner’s

Capital.

Revenue Accounts

25,000 25,000

-

Expense Accounts

10,000 10,000

-

Income Summary

10,000 25,000

15,000

-

Closing Process

Owner's Capital

30,000

15,000

45,000

Owner's Capital

5,000 30,000

15,000

40,000

Withdrawals Account

5,000

5,000

Withdrawals Account

5,000 5,000

-

Revenue Accounts

25,000 25,000

-

Expense Accounts

10,000 10,000

-

Income Summary

10,000 25,000

15,000

-

Closing Process

Close Withdrawals account to Owner’s

Capital.

FastForward

Adjusted Trial Balance

December 31, 2011

Cash 3 950$


Supplies 8 670


Equipment 26 000

Accumulated depreciation-Equip. 375$

Accounts payable 6 200


Unearned consulting revenue 2 750

C. Taylor, Capital 30 000


Consulting revenue 7 850

Rental revenue 300

Depreciation expense-Equipment 375



Rent expense 1 000



Totals 47 685$ 47 685$

Using the adjusted trial balance, let’s prepare the

closing entries for

FastForward.

Close Revenue accounts to Income

Summary.

FastForward


December 31, 2011

Cash 3 950$


Supplies 8 670


Equipment 26 000








Rental revenue 300




Rent expense 1 000



Totals 47 685$ 47 685$

Close Revenue Accounts to Income Summary

Dec. 31 Consulting revenue 7,850

Rental revenue 300

Income summary 8,150

Now, let’s look at the ledger accounts after posting this closing entry.


Close Expense Accounts to Income Summary

Dec. 31 Income summary 4,365


Salaries expense 1,610


Rent expense 1,000

Supplies expense 1,050


Income Summary

4,365 7,850

300

3,785

Utilities Expense

230 230

-

Rent Expense

1,000 1,000

-

Net Income

Close Expense Accounts to Income Summary

Supplies Expense

1,050 1,050

-

Depreciation

Expense- Eq.

375 375

-

Salaries Expense

1,610 1,610

-

Insurance Expense

100 100

-

Close Income Summary to Owner’s

Capital.

FastForward


December 31, 2011

Cash 3 950$


Supplies 8 670


Equipment 26 000








Rental revenue 300




Rent expense 1 000



Totals 47 685$ 47 685$


Close Income Summary to Owner’s Capital

Dec. 31 Income summary 3,785


C. Taylor, Capital

30,000

3,785

33,785



Income Summary

4,365 7,850

3,785 300

-

Close Withdrawals to Owner’s Capital.

FastForward


December 31, 2011

Cash 3 950$


Supplies 8 670


Equipment 26 000








Rental revenue 300




Rent expense 1 000



Totals 47 685$ 47 685$


Close Withdrawals to Owner’s Capital

Dec. 31 C. Taylor, Capital 600


C. Taylor, Capital

600 30,000

3,785

33,185

C. Taylor,

Withdrawals

600 600

-

Close Withdrawals to Owner’s Capital

ABOUT CLOSING ENTRIES

Be Careful!

•Avoid doubling revenue and expense balances – watch debits and credits

•Remember: owner’s drawing does not move to the Income Summary account. Owner’s drawing is not an expense and it is not a factor in determining net income.

RESULTS OF POSTING

CLOSING ENTRIES

• Temporary accounts– All temporary accounts will have zero balances after

posting the closing entries– Temporary accounts (revenues and expenses) are

totaled, balanced and double ruled• Owner’s capital

– Total equity of the owner at the end of the accounting period

– No entries are journalized and posted to owner’s capital during the year

• Permanent accounts (assets, liabilities, and owner’s capital) are not closed

POST-CLOSING TRIAL BALANCE

After all closing entries have been journalized the post-closing trial balance is prepared from the ledger.

The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.

Post-Closing Trial Balance

• List of permanent accounts and their balances after posting closing entries.

• Total debits and credits must be equal.

FastForward


December 31, 2011

Cash 3 950$


Supplies 8 670


Equipment 26 000

Accumulated depreciation-Equipment 375$




C.Taylor, Capital 33 185

Totals 42 720$ 42 720$


Post-closing Trial Balance

Chapter 1 Completing the Accounting Cycle

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