COMPLETING THE

ACCOUNTING CYCLE

Chapter 4

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 COMPLETING THE ACCOUNTING
CYCLE

- Using worksheet
as a tool
- Closing process
- Accounting cycle
- Preparing finanical
statements

McGraw-Hill/Irwin Slide 2
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
errors.
required interim financial
report. statements.
Shows the
Links accounts
effects of
and their
proposed
adjustments.
transactions.
McGraw-Hill/Irwin Slide 3
 FastForward
Work Sheet
For Month Ended December 31, 2009
P1

Step
Step 1:
1: enter
enter
the
the unadjusted
unadjusted
amounts
amounts toto the
the
worksheet.
worksheet.

McGraw-Hill/Irwin Slide 4
 FastForward
Work Sheet
For Month Ended December 31, 2009
P1

Step
Step 2:
2: enter
enter
the
the
adjustments.
adjustments.

McGraw-Hill/Irwin Slide 5
 FastForward
Step
Step 3:
3: Prepare
Prepare Work Sheet
adjusted
adjusted trial
trial For Month Ended December 31, 2009
balance.
balance.

McGraw-Hill/Irwin Slide 6
 Step
Step 4:
4: Sort
Sort adjusted trial
trial balance
FastForward
adjusted balance
Work Sheet
amounts
amounts to financial
to financial
For Month statements.
statements.
Ended December 31, 2007
P1

McGraw-Hill/Irwin Slide 7
 Step FastForwardcompute income or
Step 5:
5: Total
Total statement
statement columns,
columns,
Work Sheet compute income or
loss,
loss, and
and balance
For Month balance columns.
columns.
Ended December 31, 2007
P1

McGraw-Hill/Irwin Slide 8
P1
PREPARE THE FINANCIAL STATEMENTS

Prepare the Income

Statement.

A
A work
work sheet
sheet
does
does not
not
substitute
substitute for
for
financial
financial
statements.
statements.
McGraw-Hill/Irwin Slide 9
P1

Prepare the Statement

of Owner’s Equity.

McGraw-Hill/Irwin Slide 10
 Prepare the
Balance Sheet.
FastForward
FastForward
Balance
BalanceSheet
Sheet
December
December 31,2009
31, 2009
Assets
Assets
Cash
Cash $$ 4,350
4,350
Accounts
Accountsreceivable
receivable 1,800
1,800
Supplies
Supplies 8,670
8,670
Prepaid
Prepaidinsurance
insurance 2,300
2,300
Equipment
Equipment $$26,000
26,000
Less:
Less:accum.
accum.depr.
depr. (375)
(375) 25,625
25,625
Total assets
Total assets $$42,745
42,745
Liabilities
Liabilities
Accounts
Accountspayable
payable $$ 6,200
6,200
Salaries payable
Salaries payable 210
210
Unearned
Unearnedconsulting
consultingrevenues
revenues 2,750
2,750
Total liabilities
Total liabilities $$ 9,160
9,160
Owner's
Owner'sEquity
Equity
C.Taylor,
C.Taylor,Capital
Capital 33,585
33,585
Total
Total liabilitiesand
liabilities andequity
equity $$42,745
42,745

McGraw-Hill/Irwin Slide 11
C1
CLOSING PROCESS
 Resets revenue,
expense and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the period.
Record and post
closing entries.
 Helps summarize a
period’s revenues
and expenses in the
Income Summary Prepare post-closing
account. trial balance.
McGraw-Hill/Irwin Slide 12
 TEMPORARY(NOMINAL) AND
C1
PERMANENT (REAL) 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..
McGraw-Hill/Irwin Slide 13
 TEMPORARY(NOMINAL) AND
PERMANENT (REAL) ACCOUNTS
OF A CORPORATION

McGraw-Hill/Irwin Slide 14
 P2
RECORDING CLOSING ENTRIES
Close Revenue accounts to
Income Summary.
Let’s see how
the closing
Close Expense accounts to
process works!
Income Summary.

Close Income Summary

account to Owner’s Capital.

Close Withdrawals to
Owner’s Capital.

McGraw-Hill/Irwin Slide 15
 P2

Using the
adjusted trial
balance,
balance let’s
prepare the
closing
entries for
FastForward.

McGraw-Hill/Irwin Slide 16
 P2

Close
Revenue
accounts to
Income
Summary.

McGraw-Hill/Irwin Slide 17
 P2  CLOSE 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.
=> Close credit balances
McGraw-Hill/Irwin Slide 18
 P2  CLOSE REVENUE ACCOUNTS
TO INCOME SUMMARY

Consulting Revenue
7,850 7,850

Income Summary
8,150
Rental Revenue
300 300

McGraw-Hill/Irwin Slide 19
 P2

Close Expense
accounts to
Income Summary.

McGraw-Hill/Irwin Slide 20
 P2  CLOSE 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.

McGraw-Hill/Irwin
=> Close debit balances Slide 21
 P2  CLOSE EXPENSE ACCOUNTS
TO INCOME SUMMARY
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Income Summary
Salaries Expense Supplies Expense 4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
McGraw-Hill/Irwin Slide 22
 P2

Close Income
Summary to
Owner’s Capital.

McGraw-Hill/Irwin Slide 23
 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.
Net income increases capital => credit capital
Net loss decreases capital => debit capital
McGraw-Hill/Irwin Slide 24
 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

McGraw-Hill/Irwin Slide 25
 P2

Close
Withdrawals to
Owner’s
Capital.

McGraw-Hill/Irwin Slide 26
 P2  CLOSE WITHDRAWALS
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.
Withdrawals decrease Capital

McGraw-Hill/Irwin Slide 27
 P2  CLOSE WITHDRAWALS
TO OWNER’S CAPITAL

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

- 33,585

McGraw-Hill/Irwin Slide 28
 PREPARING CLOSING ENTRIES

McGraw-Hill/Irwin Slide 29
 EXAMPLE OF A CORPORATION

McGraw-Hill/Irwin Slide 30
 FOUR-STEP CLOSING PROCESS

McGraw-Hill/Irwin Slide 31
 P3
POST-CLOSING TRIAL BALANCE

 List of permanent Let’s look at

accounts and their FastForward’s
post-closing trial
balances after posting balance.
closing entries.

 Total debits and

credits must be equal.

McGraw-Hill/Irwin Slide 32
 GENERAL LEDGER AFTER CLOSING
PROCESS

McGraw-Hill/Irwin Slide 33
McGraw-Hill/Irwin Slide 34
 P3
POST-CLOSING TRIAL BALANCE

McGraw-Hill/Irwin Slide 35
 QUICK CHECK
1. Revenues, expenses, and withdrawals accounts, which are closed
at the end of each accounting period are:
A. Real accounts.
B. Temporary accounts.
C. Closing accounts.
D. Permanent accounts.
E. Balance sheet accounts.

2. Which of the following statements is incorrect?

A. Permanent accounts is another name for nominal accounts.
B. Temporary accounts carry a zero balance at the beginning of each
accounting period.
C. The Income Summary account is a temporary account.
D. Real accounts remain open as long as the asset, liability, or equity
items recorded in the accounts continue in existence.
E. The closing process applies only to temporary accounts

McGraw-Hill/Irwin Slide 36
 QUICK CHECK
3. Assets, liabilities, and equity accounts are not closed; these
accounts are called:
A. Nominal accounts.
B. Temporary accounts.
C. Permanent accounts.
D. Contra accounts.
E. Accrued accounts.

4. Another name for temporary accounts is:

A. Real accounts.
B. Contra accounts.
C. Accrued accounts.
D. Balance column accounts.
E. Nominal accounts.

McGraw-Hill/Irwin Slide 37
 QUICK CHECK
5. Journal entries recorded at the end of each accounting period to
prepare the revenue, expense, and withdrawals accounts for the
upcoming period and to update the owner's capital account for the
events of the period just finished are referred to as:
A. Adjusting entries.
B. Closing entries.
C. Final entries.
D. Work sheet entries.
E. Updating entries.

6. Which of the following is the usual final step in the accounting

cycle?
A. Journalizing transactions.
B. Preparing an adjusted trial balance.
C. Preparing a post-closing trial balance.
D. Preparing the financial statements.
E. Preparing a work sheet.
McGraw-Hill/Irwin Slide 38
 QUICK CHECK
7. A company shows a $600 balance in Prepaid Insurance in the
Unadjusted Trial Balance columns of the work sheet. The
Adjustments columns show expired insurance of $200. This
adjusting entry results in: (BAN ĐẦU CỤC BẢO HIỂM CHƯA DÙNG
LÀ 600 ĐÔ, SAU ĐẤY DÙNG 200  EXPENSE TĂNG 200 ĐÔ  NET
INCOME GIẢM 200
A. $200 decrease in net income.
B. $200 increase in net income.
C. $200 difference between the debit and credit columns of the
Unadjusted Trial Balance.
D. $200 of prepaid insurance.
E. An error in the financial statements.

8. Closing entries are required:

A. if management has decided to cease operating the business.
B. only if the company adheres to the accrual method of accounting.
C. if a company's bookkeeper forgets to prepare reversing entries.
D. if the temporary accounts are to reflect correct amounts for each
accounting period.
McGraw-Hill/Irwin Slide 39
 QUICK CHECK
9. The following items appeared on a company's December 31 work
sheet for the current period. Based on the following information,
what is net income for the current period?

A. $1,400.
B. $1,855.
C. $1,905.
D. $2,060.
E. $4,670.

McGraw-Hill/Irwin Slide 40
 C2 Steps in the Accounting Cycle

McGraw-Hill/Irwin Slide 41
 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
Plant assets
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.

McGraw-Hill/Irwin Slide 42
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Current assets are expected to
Notes receivable be sold,
1,500
Investments in stocks and bonds
18,000
collected, or used within one 48,000
year or the
Land held for future expansion
Total investments 67,500
company’s operating cycle.
Plant assets
Equipment $ 33,200
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 43
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Plant assets
Long-term investments are
Equipment expected to be held
$ 33,200
for more than one year or170,000
Buildings
the operating
203,200
Less accumulated depreciation
53,000
cycle.
150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 44
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Plant assets are tangible long-lived assets used
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
to produce or sell products and services.
Total investments 67,500
Plant assets
Equipment $ 33,200
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 45
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
C3 ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Intangible assets are long-term resources
Plant assets
Equipment $ 33,200
used to produce or sell products
Buildings 170,000 and services
203,200
and that lack physical form.
Less accumulated depreciation
Land
53,000 150,200
73,200
Intangible assets 10,000
Total assets $ 343,800

McGraw-Hill/Irwin Slide 46
 Snowboarding Components
Balance Sheet (Partial)
C3
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Current liabilities are obligations due within
150,000the
Notes payable (net of current portion)
longer of one year or the company’s operating
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital cycle. 164,800
Total liabilities and equity $ 343,800

McGraw-Hill/Irwin Slide 47
 Snowboarding Components
Balance Sheet (Partial)
C3
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
Long-term liabilities are obligations not due
EQUITY
within the longer of one year or the company’s
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800
operating cycle.

McGraw-Hill/Irwin Slide 48
 Snowboarding Components
Balance Sheet (Partial)
C3
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Equity
Equity is
is the
the owner’s
owner’s claim
claim on
on the
the assets.
assets.

McGraw-Hill/Irwin Slide 49
 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 2007 2006 2005 2004
Current assets $ 2,771 $ 2,784 $ 2,684 $ 4,433
Current liabilities 1,709 1,561 1,451 1,388
Current ratio 1.6 1.8 1.8 3.2
Industry current ratlo 2.3 2.4 2.5 2.7
McGraw-Hill/Irwin Slide 50
 QUICK CHECK
1. A company had revenues of $75,000 and expenses of $62,000 for
the accounting period. Which of the following entries could NOT be a
closing entry? 

A.

B.

C.

D.

E. All of these are possible closing entries.

McGraw-Hill/Irwin Slide 51
 QUICK CHECK
2. The special account used only in the closing process to
temporarily hold the amounts of revenues and expenses before the
net difference is added to (or subtracted from) the owner's capital
account is the:
A. Income Summary account.
B. Closing account.
C. Balance column account.
D. Contra account.
E. Nominal account.
3. A 10-column spreadsheet used to draft a company's unadjusted
trial balance, adjusting entries, adjusted trial balance, and financial
statements, and which is an optional tool in the accounting process
is a(n) :
A. Adjusted trial balance.
B. Work sheet.
C. Post-closing trial balance.
D. Unadjusted trial balance.
E. General ledger.
McGraw-Hill/Irwin Slide 52
 QUICK CHECK
4. The current ratio:
A. Is calculated by dividing current assets by current liabilities.
B. Helps to assess a company's ability to pay its debts in the near future.
C. Can reveal problems in a company if it is less than 1.
D. Can affect a creditor's decision about whether to lend money to a
company.
E. All of these.

5. Two common subgroups for liabilities on a classified balance

sheet are:
A. current liabilities and intangible liabilities.
B. present liabilities and operating liabilities.
C. general liabilities and specific liabilities.
D. intangible liabilities and long-term liabilities.
E. current liabilities and long-term liabilities.

McGraw-Hill/Irwin Slide 53
 QUICK CHECK
6. A classified balance sheet:
A. Measures a company's ability to pay its bills on time.
B. Organizes assets and liabilities into important subgroups.
C. Presents revenues, expenses, and net income.
D. Reports operating, investing, and financing activities.
E. Reports the effect of profit and withdrawals on owner's capital.

7. The J. Godfrey, Capital account has a credit balance of $17,000

before closing entries are made. If total revenues for the period are
$55,200, total expenses are $39,800, and withdrawals are $9,000,
what is the ending balance in the J. Godfrey, Capital account after all
closing entries are made? SỐ DƯ CUỐI KỲ OC = SỐ DƯ ĐẦU KỲ + R
– E – OW =
A. $ 8,000.
B. $15,400.
C. $23,400.
D. $17,000.
E. $32,400.
McGraw-Hill/Irwin Slide 54
 QUICK CHECK
8. Dina Kader withdrew a total of $35,000 from her business during
the current year. The entry needed to close the withdrawals account
is: 
ĐÓNG OW VỀ 0, ĐÓNG VÀO TÀI KHOẢN OC
CR OW 35,000 VÀ DR OC 35,000
A. Debit Income Summary and credit Cash for $35,000.
B. Debit Dina Kader, Withdrawals and credit Cash for $35,000.
C. Debit Income Summary and credit Dina Kader, Withdrawals for $35,000.
D. Debit Dina Kader, Capital and credit Dina Kader, Withdrawals for
$35,000. OWNER CAPITAL = DINA CAPITAL
OWNER WITHDRAWAL = DINA WITHDRAWAL
E. Debit Dina Kader, Withdrawals and credit Dina Kader, Capital for
$35,000.
9. It is obvious that an error occurred in the preparation and/or
posting of closing entries if: 
A. all revenue and expense accounts have zero balances.
B. the owner's capital account is debited for the amount of the net loss for
the period.
C. the income summary account is debited for the amount of net income for
the period.
D. all balance sheet accounts have zero balances.
McGraw-Hill/Irwin Slide 55
E. only permanent accountS appear on the post-closing trial balance.
 QUICK CHECK
10. A company's ledger accounts and their end-of-period balances
before closing entries are posted are shown below. What amount will
be posted to Tricia DeBarre, Capital in the process of closing the
Income Summary account? (Assume all accounts have normal
balances.)

A. $16,780 debit.
B. $ 7,180 credit.
C. $16,780 credit.
D. $18,280 credit.
E. $23,780 credit.

McGraw-Hill/Irwin Slide 56
 END OF CHAPTER 4

McGraw-Hill/Irwin Slide 57