Completing the Accounting Cycle 4. From Transactions to Financial Statements OBJECTIVE 1: Describe...
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Transcript of Completing the Accounting Cycle 4. From Transactions to Financial Statements OBJECTIVE 1: Describe...
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Completing the Accounting Cycle 4
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From Transactions to Financial Statements
OBJECTIVE 1: Describe the accounting cycle and the role of closing entries in the preparation of financial statements.
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Figure 1: Overview of the Accounting Cycle
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Figure 2: Overview of the Closing Process
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From Transactions to Financial Statements
• There are six steps in the accounting cycle:– 1- Analyze transactions from source documents to
decide which account(s) to debit and which account(s) to credit.
– 2- Journalize transactions.– 3- Post entries to the ledger and prepare a trial
balance.
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From Transactions to Financial Statements
– 4- Make end-of-period adjustments and prepare an adjusted trial balance.
– 5- Prepare financial statements. – 6- Close the accounts and prepare a post-
closing trial balance.
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From Transactions to Financial Statements
• Closing entries serve two purposes:– They clear all temporary accounts.– They transfer net income or loss to the Capital
account.• The Income Summary account is a temporary account.
• Its purpose is to provide a place to summarize all revenues and expenses.
• It is used only in the closing process and never appears in the financial statements.
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©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
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Preparing Closing Entries
OBJECTIVE 2: Prepare closing entries.
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Exhibit 1: Preparing Closing Entries from the Adjusted Trial Balance
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Exhibit 2: Posting the Closing Entry of a Credit Balance to the Income Summary Account
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Exhibit 3: Posting the Closing Entry of Debit Balances to the Income Summary Account
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Exhibit 4: Posting the Closing Entry of the Income Summary Account Balance to the Owner’s Equity Account
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Exhibit 5: Posting the Closing Entry of the Withdrawals Account Balance to the Owner’s Capital Account
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Exhibit 6: Post-Closing Trial Balance
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Preparing Closing Entries
• There are four closing entries:– Close revenue accounts.– Close expense accounts.– Close the Income Summary account.– Close the Withdrawals account.
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©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
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Reversing Entries: An Optional First Step
OBJECTIVE 3: Prepare reversing entries.
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Reversing Entries: An Optional First Step
• Reversing entry – A reversing entry is the opposite of an adjusting entry.
– Reversing entries are never required.
– Reversing entries are dated the beginning of the new accounting period.
– Reversing entries enable the bookkeeper to continue making routine journal entries at the beginning of the new period (show how).
– Only accruals may be reversed.
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Reversing Entries: An Optional First Step
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Reversing Entries: An Optional First Step
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Reversing Entries: An Optional First Step
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©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.
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The Work Sheet: An Accountant’s Tool
OBJECTIVE 4: Prepare and use a work sheet.
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Exhibit 7: The Work Sheet
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Exhibit 8: Adjustments from the Work Sheet Entered in the General Journal
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The Work Sheet: An Accountant’s Tool
• A work sheet is a working paper that facilitates the preparation of financial statements.
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The Work Sheet: An Accountant’s Tool
• There are five steps in the preparation of a work sheet:– Enter ledger account balances into the Trial
Balance columns.– Enter and key adjustments into the
Adjustments columns.– Crossfoot the first two sets of columns to
produce the Adjusted Trial Balance columns.
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The Work Sheet: An Accountant’s Tool
• There are five steps in the preparation of a work sheet (cont.):– Extend account balances to either the Income
Statement columns or the Balance Sheet columns.
– Enter net income (or loss) as a balancing figure for the Income Statement columns and the Balance Sheet columns.
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The Work Sheet: An Accountant’s Tool
• A work sheet is used to perform three principal tasks:– Record the adjusting entries in the general
journal.– Record the closing entries in the general
journal.– Prepare the financial statements.
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©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicate, or posted to a publicly accessible website, in whole or in part.