ACTG 2110

Chapter 4 – Completing the Accounting Cycle

Accounting Cycle

• 1 – Analyze Transactions

• 2 – Record transactions in general journal

• 3 – Post journal entries to general ledger

• 4 – Determine account balances and prepare a trial balance

• 5 – Prepare adjusting entries and an adjusted trial balance

• 6- Prepare financial statements

Accounting Cycle

• 7 – Close the Accounts

• 8 – Prepare a postclosing trial balance

• A worksheet can be used internally to assist in steps 4-6.

Classified Balance Sheet

• Assets– Current assets

• Plan to use up within one year or the operating cycle whichever is longer

– Long-term assets• Plan to use in the business for more than year

• Liabilities– Current liabilities –

• Due date is one year or less

– Long-term liabilities• Due date is more than one year

Closing the Accounts

• Purpose– Update capital– Adhere to accounting period principle (measure

income for a distinct period of time).

• Procedure:– Close all TEMPORARY accounts into owner’s capital

• Temporary accounts – accounts that were extensions to capital

– Revenues

– Expenses

– Withdrawals

Closing the Accounts

• 1 – Close all revenue accounts– Revenues XXX– Income Summary XXX

• 2 – Close all expense accounts– Income Summary XXX– Expenses XXX

• 3 – Close income summary– Income summary XXX– Owner, Capital XXX

Closing the Accounts

• 4 – Close withdrawals– Owner, Capital XXX– Owner, Withdrawals XXX

• Owner’s Capital will be updated for net income (net loss) and withdrawals to start the next period.

• Revenues, expenses, and withdrawals will have $0 balances to start the next period.

Postclosing Trial Balance

• ANOTHER trial balance is prepared after the closing process.

• Only the PERMANENT balance sheet accounts should have balances in them

• PERMANENT ACCOUNTS – ALL assets, ALL liabilities and the owner’s capital account.

• No revenues, expenses, or withdrawal accounts should be shown.

Fiscal Years

• The 12 month period used to report business results.

• 63% of all companies use December 31 as their year end.

• That leaves 37% to use other 12 month periods• Other common year ends include January, June

and September.• Firms pick year ends based on when their

business activity is the lowest. Hence, January 31 is often used for retail companies because inventory is low.