Completing the Accounting

Cycle

Chapter 4

Student Version

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2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Prepared by: C. Douglas

Cloud
Professor Emeritus of
Accounting
Pepperdine University

Learning Objective 1
Describe the flow of
accounting information
from the unadjusted trial
balance into the adjusted
trial balance and financial
statements.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1

Flow of Accounting
Information

(continued)
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1

Flow of Accounting
Information

(continued)
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 1

Flow of Accounting
Information

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

(concluded)

Learning Objective 2

Prepare financial
statements from
adjusted account
balances.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2

Income Statement
The income statement for NetSolutions 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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2

Retained Earnings Statement

The first item presented on the
retained earnings statement is the
balance of the Retained Earnings
account at the beginning of the
period.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2

Current Assets
Cash and other
assets that are
expected to be
converted into
cash, sold, or used
up usually within a
year or less,
through the normal
operations of the
business, are called
current assets.

Cash
Accounts
Receivable
Notes
Receivable
Supplies

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2

Fixed Assets
Property, plant,
and equipment
(also called fixed
assets or plant
assets) include
assets that
depreciate over a
period of time.
Land is an
exception, as it
is not subject to
depreciation.

Equipment
Machinery
Buildings
Land

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2

Current Liabilities
Liabilities that
will be due within
a short time
(usually one year
or less) and that
are to be paid
out of current
assets are called
current liabilities.

Accounts payable
Wages payable
Interest payable
Unearned fees

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2

Long-Term Liabilities
Liabilities not
due for a long
time (usually
more than one
year) are called
long-term
liabilities.

Long-term notes
payable
Mortgage payable
Bond payable

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 2

Stockholders Equity
Stockholders
equity is the
stockholders
right to the
assets of the
business. It is
presented on the
balance sheet
below the
liabilities section.

Capital stock
Retained earnings

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 3

Prepare closing
entries.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3

Closing Entries
The balance of Income Summary (net
income or net loss) is then
transferred to the Retained Earnings
account.
The balance of the Dividends account
is also transferred to the Retained
Earnings account.
The entries that transfer these
balances are called closing entries.
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.
Closing entries are recorded in the
journal and dated as of the last date
of the accounting period.
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3

Journalizing and Posting Closing

Entries

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3

Journalizing and Posting Closing

Entries

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3

Journalizing and Posting Closing

Entries

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3

Journalizing and Posting Closing

Entries

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3

Closing Entries

Step 1

Step 2

Step 3

Step 4

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 3

Temporary Account Balances

After the closing entries are posted,
all of the temporary accounts have
zero balances.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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 and ready for the next
accounting period.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 4

Describe the
accounting
cycle.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 4

Accounting Cycle
The accounting process that begins
with analyzing and journalizing
transactions and ends with preparing
the accounting records for the next
periods transactions is called the
accounting cycle. There are ten steps
in the accounting cycle.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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)
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 5

Illustrate the
accounting cycle
for one period.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5

Accounting Cycle

(continued)

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5

Accounting Cycle

(continued)
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5

Accounting Cycle

(continued)

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5

Accounting Cycle

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5

Unadjusted Trial Balance

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5

End-of-Period Spreadsheet

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 5

Adjusting Entries

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 6

Explain what is
meant by the
fiscal year and the
natural business
year.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objective 7
Describe and
illustrate the use of
working capital
and the current
ratio in evaluating
a companys
financial condition.
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 7

Working Capital and Current

Ratio
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 its
current liabilities.
Working Capital = Current Assets Current Liabilities
= $7,745 $1,390
= $6,355

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 7

Working Capital and Current

Ratio

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.

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

LO 7

Working Capital and Current

Ratio
The current ratio for NetSolutions at the end of
2011 is 5.6, computed as follows:
Current Ratio =
=
=

Current Assets
Current Liabilities
$7,745
$1,390
5.6 (rounded)

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Completing the Accounting

Cycle

The End
Prepared by: C. Douglas
Cloud
Professor Emeritus of
Accounting
Pepperdine University
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

49