CH 4 Completing The Accounting Cycle

Completing the Accounting Cycle
Chapter 4
Student Version
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
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Learning Objective 1
1. Describe the flow of accounting information from

the unadjusted trial balance into the adjusted
trial balance and financial statements.
2
LO 1
Flow of Accounting Information
3
LO 1
End-of-Period Spreadsheet (Work Sheet)
Unadjusted TB Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr
 Account balances are listed in the Trial

Balance column using the ending balances
found in the general ledger.
(continued)
4
LO 1

 Adjustments are entered here. Two possibilities:

 Deferrals – Existing balances are changed
 Accruals – New information is entered
(continued)
5
LO 1

 Adjustments are combined with the

trial balance amounts. Account
balances are now adjusted.
(continued)
6
LO 1
Adjusted TB Income State. Balance Sheet

 Revenue and expense balances in

the Adjusted Trial Balance column are
extended to the Income Statement
column. (continued)
7
LO 1
Adjusted TB Income State. Balance Sheet

 Asset, liability, owner’s equity, and

drawing balances in the Adjusted Trial
Balance column are extended to the
Balance Sheet column. (concluded)
8

2. Prepare financial statements from adjusted
account balances.
9
LO 2
Income Statement
 The income statement is prepared directly from

the Income Statement or Adjusted Trial Balance
columns of the end-of-period spreadsheet (work
sheet) beginning with fees earned of $16,840.
10
LO 2
Statement of Owner’s Equity
 The first item presented on the statement of

owner’s equity is the balance of the owner’s
capital account at the beginning of the period.
11
LO 2
Balance Sheet
 The balance sheet is prepared directly from the

Balance Sheet or Adjusted Trial Balance columns
of the end-of-period spreadsheet (or work sheet),
beginning with Cash of $2,065.
12
LO 2
Classified Balance Sheet
 A classified balance sheet is a balance sheet that

was expanded by adding subsections for current
assets; property, plant, and equipment; current
liabilities; and long-term liabilities.
13
LO 2
Current Assets
 Cash and other assets  Cash

that are expected to be  Accounts
converted into cash, Receivable
sold, or used up usually  Notes Receivable
within a year or less,
 Supplies
through the normal
operations of the
business, are called
current assets.
14
PT CDE Tgl Akun Debit Kredit
Pada tanggal 20 Oktober 2020 ditagih
ke PT XYZ atas jasa yang sudah 20/10 Account Receivable 10.000.000
diberikan tetapi PT XYZ, belum
Fees Earned 10.000.000
membayar. Sebesar Rp 10.000.000
Pada tanggal 1 November 2020,

diterima Note Receivable dari PT 1/11 Note Receivable 10.000.000
XYZ, atas pelunasan piutangnya
(A/R) sebesar Rp10.000.000, Jangka Account Receivable 10.000.000
Waktu 3 bulan TMT 1/11/20 s.d. 31
Januari 2021. Bunga atas note
sebesar 12% 31/12 Interest Receivable 200.000
Pada tanggal 31 Desember Interest Revenue 200.000

perusahaan mengakui
piutang/pendapatan bunga sebesar 2021
31/1 Cash 10.300.000

2/12 x 10.000.000 x 12% = 200.000
Note Receivable 10.000.000
Tanggal 31 Januari PT XYZ
membayar utangnya (N/P). Interest Receivable 200.000
Pokok Pinjaman = 10.000.000 Interest Revenue 100.000

Bunga =
permitted in a license distributed 300.000
with a certain product or service or otherwise on a password-protected website for classroom use.
PT XYZ Tgl Akun Debit Kredit
Pada tanggal 20 Oktober 2020
diterima tagihan dari PT CDE atas 20/10 Marketing Expense 10.000.000
jasa marketing yang sudah diterima
Account Payable 10.000.000
sebesar Rp 10.000.000.
Pada tanggal 1 November 2020 PT

XYZ membayar A/P dengan Note 1/11 Account Payable 10.000.000
Payable, Jangka Waktu 3 bulan TMT
1/11/20 s.d. 31 Januari 2021. Bunga Nate Payable 10.000.000
atas note sebesar 12%
Pada tanggal 31 Desember PT XYZ 31/12 Interest expense 200.000

mengakui beban/utang bunga
sebesar Interest Payable 200.000
2/12 x 10.000.000 x 12% = 200.000
2021
Tanggal 31 Januari PT XYZ
31/1 Note Payable 10.000.000
membayar utangnya (N/P).
Interest Payable 200.000
Pokok Pinjaman = 10.000.000
Bunga = 300.000 Interest Expense 100.000
Cash 10.300.000
LO 2
Notes Receivable
 Notes receivable are written promises by the

customer to pay the amount of the note and
possibly interest at an agreed rate.
17
LO 2
Fixed Assets
 Property, plant, and  Equipment

equipment (also called  Machinery
fixed assets or plant  Buildings
assets) include assets
 Land
that depreciate over a
period of time. Land
is an exception, as it is
not subject to
depreciation.
18
LO 2
Current Liabilities
 Liabilities that will be  Accounts payable

due within a short  Wages payable
time (usually one year  Interest payable
or less) and that are
 Unearned fees
to be paid out of
current assets are
called current
liabilities.
19
LO 2
Long-Term Liabilities
 Liabilities not due for  Short-term notes

a long time (usually payable
more than one year)  Mortgages payable
are called long-term  Bonds payable
liabilities.
20
LO 2
Owner’s Equity
 Owner’s equity is the owner’s right to the assets

of the business. Owner’s equity is added to the
total liabilities, and this total must be equal to the
total assets.
21

account balances.
3. Prepare closing entries.
22
LO 3
Closing Entries
 Accounts that are relatively permanent from year

to year are called permanent accounts or real
accounts. These accounts are carried forward
from year to year.
23
LO 3
Closing Entries
 Accounts that report amounts for only one period
are called temporary accounts or nominal
accounts. Temporary accounts are not carried
forward because they relate to only one period.
24
LO 3
Closing Entries
 To report amounts for only one period,

temporary accounts should have zero balances at
the beginning of the next period.
 To achieve this, the revenue and expense account
balances are transferred to Income Summary at
the end of the period.
25
LO 3
Closing Entries
 The balance of Income Summary (net income or

net loss) is then transferred to the owner’s capital
account.
 The balance of the owner’s drawing account is
also transferred to the owner’s capital account.
 The entries that transfer these balances are called
closing entries.
26
LO 3
Closing Entries
 Income Summary is a temporary account that is
only used during the closing process.
 At the end of the closing process, the Income
Summary account will have a zero balance.
 Income Summary is sometimes called a clearing
account.
27
LO 3
Journalizing and Posting Closing Entries
28
LO 3
29
LO 3
30
LO 3
31
LO 3
Closing Entries
Step 1
Step 2
Step 3
Step 4
32
LO 3
Temporary Account Balances
 After the closing entries are posted, all of the

temporary accounts have zero balances.
LO 3
Post-Closing Trial Balance
 A post-closing trial balance is prepared after the

closing entries have been posted. The purpose of
the post-closing (after closing) trial balance is to
verify that the ledger is in balance at the
beginning of the next period.

account balances.
4. Describe the accounting cycle.
LO 4
Accounting Cycle
 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.
LO 4
Accounting Cycle
1. Transactions are analyzed and recorded in the

journal.
2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
4. Adjustment data are assembled and analyzed.
5. An optional end-of-period spreadsheet (work
sheet) is prepared.
(continued)
LO 4
Accounting Cycle
6. Adjusting entries are journalized and posted to

the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and posted to
the ledger.
10. A post-closing trial balance is prepared.

account balances.
5. Illustrate the accounting cycle for one period.
LO 5
Accounting Cycle
(continued)
40
LO 5
Accounting Cycle
(continued)41
LO 5
Accounting Cycle
42
(concluded)
LO 5
Accounting Cycle
43
LO 5
Unadjusted Trial Balance
44
LO 5
Adjusting Entries
45
LO 5
Adjusted Trial Balance
46
1. Describe the flow of accounting information from the

unadjusted trial balance into the adjusted trial balance
and financial statements.
2. Prepare financial statements from adjusted account
balances.
5. Illustrate the accounting cycle for one period.
6. Explain what is meant by the fiscal year and the natural
business year.
47
LO 6
Accounting Period
 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 business year.
48
6. Explain what is meant by the fiscal year and the
natural business year.
7. Describe and illustrate the use of working capital
and the current ratio in evaluating a company’s
financial condition.
49
LO 7
Working Capital and Current Ratio
 The ability to convert assets into cash is called

liquidity.
 The ability of a business to pay its debts is called
solvency.
 Working capital is the excess of the current assets
of a business over its current liabilities.
50
LO 7
NetSolutions’ working capital at the end of 2011 is

$6,355 as computed below. This amount of working
capital implies that NetSolutions is able to pay it
current liabilities.
Working Capital = Current Assets – Current liabilities
= $7,745 – $1,390
= $6,355
51
LO 7

 The current ratio is another means of expressing
the relationship between current assets and
current liabilities. The current ratio is computed
by dividing current assets by current liabilities.
52
LO 7
The current ratio for NetSolutions at the end of 2011 is 5.6, computed as
follows:
Current Assets
Current Ratio =
Current Liabilities
$7,745
=
$1,390
= 5.6 (rounded)
53
Completing the Accounting Cycle
The End
Student Version
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University

CH 4 Completing The Accounting Cycle

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Completing the Accounting Cycle

1. Describe the flow of accounting information from

End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB Adjustments Adjusted TB

 Account balances are listed in the Trial

End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB Adjustments Adjusted TB

 Adjustments are entered here. Two possibilities:

End-of-Period Spreadsheet (Work Sheet)

Unadjusted TB Adjustments Adjusted TB

 Adjustments are combined with the

End-of-Period Spreadsheet (Work Sheet)

Adjusted TB Income State. Balance Sheet

 Revenue and expense balances in

End-of-Period Spreadsheet (Work Sheet)

Adjusted TB Income State. Balance Sheet

 Asset, liability, owner’s equity, and

1. Describe the flow of accounting information from

 The income statement is prepared directly from

 The first item presented on the statement of

 The balance sheet is prepared directly from the

 A classified balance sheet is a balance sheet that

 Cash and other assets  Cash

Pada tanggal 1 November 2020,

Pada tanggal 31 Desember Interest Revenue 200.000

31/1 Cash 10.300.000

Pokok Pinjaman = 10.000.000 Interest Revenue 100.000

Pada tanggal 1 November 2020 PT

Pada tanggal 31 Desember PT XYZ 31/12 Interest expense 200.000

 Notes receivable are written promises by the

 Property, plant, and  Equipment

 Liabilities that will be  Accounts payable

 Liabilities not due for  Short-term notes

 Owner’s equity is the owner’s right to the assets

1. Describe the flow of accounting information from

 Accounts that are relatively permanent from year

 To report amounts for only one period,

 The balance of Income Summary (net income or

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

Journalizing and Posting Closing Entries

 After the closing entries are posted, all of the

 A post-closing trial balance is prepared after the

1. Describe the flow of accounting information from

 The accounting process that begins with

1. Transactions are analyzed and recorded in the

6. Adjusting entries are journalized and posted to

1. Describe the flow of accounting information from

Adjusted Trial Balance

1. Describe the flow of accounting information from the

 The ability to convert assets into cash is called

NetSolutions’ working capital at the end of 2011 is

Working Capital and Current Ratio

Working Capital and Current Ratio

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