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Chpt 4: Completing the Accounting Cycle, Lecture notes of Accounting

University of Detroit MercyAccounting

Chpt 4: Completing the Accounting Cycle. 3. STEPS TO CLOSING THE BOOKS. STEP 1: Close credit balances in revenue accounts to INCOME SUMMARY.

Typology: Lecture notes

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Chpt 4 11th Ed
Chpt 4: Completing the Accounting Cycle
1
LO 1 Prepare a worksheet
Below is a table demonstrating the basic form of a worksheet and the five steps for preparing it. Each
step is performed in sequence – see steps 1 – 5 in graph below. The use of a worksheet is optional.
A worksheet is not a journal, and it cannot be used as a basis for posting to ledger
accounts.
To adjust the accounts, the company must journalize the adjustments and post them to the
ledger.
The adjusting entries are prepared from the adjustments columns of the
worksheet.
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Chpt 4: Completing the Accounting Cycle

LO 1 Prepare a worksheet

Below is a table demonstrating the basic form of a worksheet and the five steps for preparing it. Each step is performed in sequence – see steps 1 – 5 in graph below. The use of a worksheet is optional. A worksheet is not a journal, and it cannot be used as a basis for posting to ledger accounts. To adjust the accounts, the company must journalize the adjustments and post them to the ledger. The adjusting entries are prepared from the adjustments columns of the worksheet.

Chpt 4: Completing the Accounting Cycle

LO 2 : Prepare closing entries and post close trial balance

CLOSING THE BOOKS

*CLOSE (ZERO OUT) TEMPOARY ACCOUNTS SUCH AS REVENUES, EXPENSES, AND DIVIDENDS.

* PERMANENT ACCOUNTS (BALANCE SHEET ACCOUNTS) ARE NOT CLOSED AT THE END OF THE PERIOD

AND ARE CARRIED FORWARD FROM YEAR TO YEAR.

Think “RED” when trying to remember which accounts are temporary which means they get

“Closed Out.”

  • Revenue
  • Expenses
  • Dividends

Chpt 4: Completing the Accounting Cycle

STEP 4: Close dividends account to RETAINED EARNINGS ACCOUNT. Debit the retained earnings

account for the balance of the dividends account and credit the dividends account. ***After the closing entries are posted, ALL OF THE TEMPORARY ACCOUNTS HAVE ZERO BALANCES and they ARE NOT SHOWN ON THE POST-CLOSING TRIAL BALANCE.

  • Income Summary: temporary account that is ONLY used during the closing process. o After the closing entries are posted, ALL OF THE TEMPORARY ACCOUNTS HAVE ZERO BALANCES. o During the closing process, revenue and expense accounts are cleared by debiting or crediting Income Summary for their amounts.

Chpt 4: Completing the Accounting Cycle

Post-Closing Trial Balance

  • Proves the equality of the permanent account balances that the company carries forward into the next accounting period
  • All temporary accounts will have zero balances.

Post-closing trial balance

Harper Inc.

Adjusted Trial Balance

January 31, 202 1

Debit Credit

Cash $15,

Accounts Receivable 200

Supplies 1,

Prepaid Insurance 550

Equipment 5,

Accumulated Depreciation—Equipment $ 40

Notes Payable 5,

Accounts Payable 2,

Unearned Service Revenue 800

Salaries and Wages Payable 1,

Interest Payable 50

Common Stock 10,

Retained Earnings 2,

  • Harper prepares the post-closing trial balance from the permanent accounts in the

ledger. The example above shows the permanent accounts in Harper’s general

ledger.

Chpt 4: Completing the Accounting Cycle

Example: On July 4th, Harper Co. journalized and posted a $ 1 50 cash collection on

account from a customer as a debit to Cash $ 1 50 and a credit to Service Revenue $ 150

(see below ).

The company discovered the error on July 31, when the customer paid the remaining

balance in full.

1. Comparison of entries

Incorrect Entry (July 4) Correct Entry (July 31)

Cash 150 Cash 150

Service Revenue 150 Accounts Receivable 150

Comparison of the incorrect entry with the correct entry reveals that the debit to Cash

$ 1 50 is correct.

However , the $ 1 50 credit to Service Revenue should have been credited to

Accounts Receivable.

As a result, both Service Revenue and Accounts Receivable are overstated in the ledger.

Harper makes the correcting entry.

2. Correcting Entry Necessary

Correcting entry

July 31 Dr Service Revenue 150

Cr Accounts Receivable 150

(To correct entry of July 4 )

Chpt 4: Completing the Accounting Cycle

LO 4: Identify the sections of a classified balance sheet.

  • Describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time.
  • Example: A balance sheet would be prepared “As of December 31, 20XX” because it gives a snapshot of the company’s financial position as of that date.
  • Basic Accounting Equation : ASSETS = LIABILITIES + STOCKHOLDERS’EQUITY

***Notice that Assets = Liabilities + Stockholders’ Equity. Everything is balanced.