Chapter 4

Completing the Accounting Cycle

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Winston Kwok, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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P1

Benefits of a Work Sheet

Aids the Assists in
preparation of planning and
financial organizing an
statements. audit.

Helps in
Reduces Not a preparing
possibility of required interim financial
errors.
report. statements.
Shows the
Links accounts
effects of
and their
proposed
adjustments.
transactions.
 4-3
FastForward
Worksheet
P1 For the Month Ended December 31, 2011

Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet and
Balance Balance Statement of
Changes in Equity
 4-4
FastForward
Worksheet
P1 For the Month Ended December 31, 2011

Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet and
Balance Balance Statement of
Changes in Equity
 4-5
FastForward
Worksheet
P1 For the Month Ended December 31, 2011

Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet and
Balance Balance Statement of
Changes in Equity
 4-6
FastForward
Worksheet
P1 For the Month Ended December 31, 2011

Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet and
Balance Balance Statement of
Changes in Equity
 4-7
FastForward
Worksheet
P1 For the Month Ended December 31, 2011

Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet and
Balance Balance Statement of
Changes in Equity
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P1

Preparing the Financial Statements

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C1

Recording Closing Entries

1. Resets revenue,
expense and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the
Record and post
period.
closing entries.
2. Helps summarize a
period’s revenues
and expenses in the Prepare post-closing
Income Summary trial balance.
account.
 4 - 10

C1 Temporary and
Permanent Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
The closing
closing process
process
applies
applies only
only to
to
temporary
temporary accounts.
accounts.
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P2

Recording Closing Entries

Close Credit Balances in
Revenue Accounts to IncomeLet’s see how
Summary. the closing
Close Debit Balances in Expense
process works!
accounts to Income Summary.
Close Income Summary account
to Owner’s Capital.
Close Withdrawals to Owner’s
Capital.
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P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies
Prepaid insurance
8,670
2,300
Using the
Equipment
Accumulated depreciation-Equip.
26,000
$ 375
adjusted trial
Accounts payable 6,200 balance, let’s
Salaries payable 210
Unearned consulting revenue 2,750 prepare the
C. Taylor, Capital
C. Taylor, Withdrawals 200
30,000
closing
Consulting revenue
Rental revenue
7,850
300
entries for
Depreciation expense-Equipment 375 FastForward.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
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P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
1. Close Credit
Accounts payable 6,200 Balances in
Salaries payable 210
Unearned consulting revenue 2,750
Revenue
C. Taylor, Capital 30,000 Accounts to
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Income
Rental revenue 300 Summary.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 4 - 14

P2

 Close Credit Balances in

Revenue Accounts to Income Summary
      Dr. Cr.
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.
 4 - 15

P2

 Close Credit Balances in

Revenue Accounts to Income Summary
Consulting Revenue
7,850 7,850

Income Summary
8,150
Rental Revenue
300 300

-
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P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 2. Close Debit
Accounts payable 6,200
Salaries payable 210
Balances in
Unearned consulting revenue 2,750 Expense Accounts
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
to Income
Consulting revenue 7,850 Summary.
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
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P2

 Close Debit Balances in Expense

Accounts to Income Summary
Dr. Cr.
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Now, let’s look at the ledger accounts

after posting this closing entry.
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P2

 Close Debit Balances in Expense

Accounts to Income Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Salaries Expense Supplies Expense Income Summary

4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
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P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 3. Close Income
Accounts payable 6,200
Salaries payable 210
Summary to
Unearned consulting revenue 2,750 Owner’s Capital.
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
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P2
 CLOSE INCOME SUMMARY
TO OWNER’S CAPITAL

Dr. Cr.
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785

Now, let’s look at the ledger accounts

after posting this closing entry.
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P2
 CLOSE INCOME SUMMARY
TO OWNER’S CAPITAL

C. Taylor, Capital Income Summary

30,000 4,365 8,150
3,785 3,785
-
33,785
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P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 4. Close
Accounts payable 6,200
Salaries payable 210 Withdrawals
Unearned consulting revenue
C. Taylor, Capital
2,750
30,000
Account to
C. Taylor, Withdrawals 200 Owner’s
Consulting revenue 7,850
Rental revenue 300 Capital.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 4 - 23

P2  CLOSE WITHDRAWALS ACCOUNT

TO OWNER’S CAPITAL

Dr. Cr.
Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200

Now, let’s look at the ledger accounts

after posting this closing entry.
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P2
 CLOSE WITHDRAWALS ACCOUNT
TO OWNER’S CAPITAL

C. Taylor,
Withdrawals C. Taylor, Capital
200 200 200 30,000
3,785

- 33,585
 4 - 25

Summary of the Closing Process

1. Close Credit Balances in Revenue Accounts
to Income Summary.
2. Close Debit Balances in Expense Accounts to
Income Summary.
3. Close Income Summary to Owner’s Capital.
4. Close Withdrawals Account to Owner’s
Capital.
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P3

Post-Closing Trial Balance

List of permanent accounts and

their balances after posting
closing entries.

Totaldebits and credits must be

equal.
 4 - 27

Post-Closing Trial Balance

P3

FastForward
Post-Closing Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 33,585
C. Taylor, Withdrawals -
Consulting revenue -
Rental revenue -
Depreciation expense-Equipment -
Salaries expense -
Insurance expense -
Rent expense -
Supplies expense -
Utilities expense -
Totals $ 43,120 $ 43,120
 4 - 28

C2

Accounting Cycle
 4 - 29

C3

Classified Balance Sheet

Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current assets Current liabilities
Noncurrent assets Noncurrent liabilities
Long-term investments Equity
Property, plant and equipment
Intangible assets

Current items are those expected to come due (both

collected and owed) within the longer of one year or the
company’s normal operating cycle.
 4 - 30

C3

Current assets are expected to be sold,

collected, or used within one year or the
company’s operating cycle.
 4 - 31

C3

Long-term financial assets or investments are

expected to be held for more than one year or
the operating cycle.
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C3

Property, plant and equipment are tangible

long-term assets used to produce or sell
products and services.
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C3

Intangible assets are long-term resources

used to produce or sell products and services
and that lack physical form.
 4 - 34

C3

Current liabilities are obligations due within the

longer of one year or the company’s operating
cycle.
 4 - 35

C3

Long-term liabilities are obligations not due

within the longer of one year or the company’s
operating cycle.
 4 - 36

C3

Equity
Equity is
is the
the owner’s
owner’s claim
claim on
on the
the assets.
assets.
 4 - 37

A1

Current Ratio
Helps assess the company’s ability to pay
its debts in the near future
         
Current Assets
Current Ratio =
  Current Liabilities  
         

Limited Brands, Inc.

$ in millions 2009 2008 2007 2006
Current assets $ 2,867 $ 2,919 $ 2,771 $ 2,784
Current liabilities 1,225 1,374 1,709 1,575
Current ratio 2.3 2.1 1.6 1.8
Industry current ratlo 2.0 2.1 2.3 2.4
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P4

4A – REVERSING ENTRIES
Reversing entries are optional. They are recorded in
response to accrued assets and accrued liabilities that were
created by adjusting entries at the end of a reporting period.
The purpose of reversing entries is to simplify a company’s
recordkeeping.

Let’s see how the accounting for our payroll

accrual will be handled with and without
reversing entries.
 4 - 39

P4
 4 - 40

P4

Without Reversing Entries With Reversing Entries

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END OF CHAPTER 4