Chapter 4

Completing the Accounting Cycle

What is a Worksheet

• A multi-column form used in the adjustment process and a tool for preparing the financial statements—– Balance Sheet– Income Statement– Owner’s Equity Statement

Steps in Preparing a Worksheet

• Trial Balance Columns– Get all balances from the ledger

• Make necessary adjustments• Do an adjusted trial balance– Check to see if debits=credits

• Transfer Revenue and Expense amounts to Income Statement Columns

• Transfer Assets, Liabilities and Capital to Balance Sheet Columns

Let’s Look

• Go to Chapter 4• Plastic Inserts• Notice the Trial Balance Columns should equal• Notice the Adjustments and Adjusted Trial Balance

Accounts should equal• The Income Statement columns will not equal– The Difference will be the Net Income or Loss

• The Balance Sheet Columns will not equal– The Difference should be the same as the Income

Statement Columns

Financial Statements

• Income Statement– Use the revenue– Use the expenses– Put in Proper Form– Income or Loss will be the same as the worksheet

Financial Statements

• Balance Sheet– Use the Assets and Liability amounts from the

balance sheet columns– The new capital amount is made up of:• The capital amount on the worksheet + net income

amount• The capital amount on the worksheet – net loss amount

Part 2Closing the Books

• After the worksheet and the preparation of the financial statements, the company must make the books ready for the next period.

Temporary vs. Permanent Accounts

• Temporary–Expenses–Revenue–Drawing

• Permanent–Assets–Liabilities–Capital

We Need to Close the Following Accounts

• Revenue• Expenses• Drawing

Closing Entries

• Need to bring temporary accounts to “0”• How do you think we do this??

Use of a Temporary Account

• An account we use for closing entries only is: Income Summary

Closing the Revenue

Service Revenue (Debit) Income Summary (Credit)

Closing the Expenses

Income Summary (Debit) Advertising Expense (Credit) Depreciation Expense (Credit) Insurance Expense (Credit) Salaries Expense (Credit) Interest Expense (Credit) Utilities Expense (Credit)

Closing the Income Summary

• When there is a net income Income Summary (Debit) Capital (Credit)

• When there is a net loss Capital (Debit) Income Summary (Credit)

Closing the Drawing Account

Capital (Debit) Drawing (Credit)

Post all the Closing Entries

• When you post all the closing entries– These accounts will have a “0” balance• Revenue• Expenses• Drawing

Finally

• Prepare a Post Closing Trial Balance• The only accounts with balances will be:– Assets– Liabilities– Capital

Correcting Entries

• There are times when a mistake is made in the journal or ledger.

• If a mistake is caught before it is posted, you can draw a line through the entry and write the correct account

• Once it is posted, you must do a correcting entry

Example

• Let’s say that you posted $100 to Salary Expense and it was suppose to go to Utility Expense

• 1. Put it in Utility Expense• 2. Take it out of Salary Expense

Utility Expense (Debit) 100 Salary Expense (Credit) 100

Accounting Cycle

• Analyze Transaction• Enter into a Journal• Post to a Ledger• Make Adjusting Entries/Post• Complete a Worksheet• Do Financial Statements: Income Statement,

OE Statement and Balance Sheet• Do Closing, Reversing and Correcting

Entries/Post

Test Review• Define

– Worksheet– Closing Entries– Correcting Entries– Income Summary– Temporary Accounts– Permanent Accounts

• Analyze– How do you determine net income or net loss?– What does the post-closing trial balance tell you?– Why do you need to do a correcting entry?– What are the financial statements?

• Apply– Problem similar to 4-1A