Chapter Four

1
Chapter Four

• Rounding Out the Accounting Cycle

2
Accounting Cycle

• Accounting Cycle Ends When
• The fiscal period has ended
• Or
• The fiscal year has ended (12 consecutive months)

3
Worksheet

• A Working paper used to record necessary
  adjustments and provide up-to-date account
  balances needed to prepare financial statements
• Columns
• Trial balance columns
• Adjustments
• Adjusted trial balance
• Income statement
• Balance sheet

4
Cost of Goods Sold

• Discussion on page 4-3 and 4-4.
• We will leave this determination for Chapter
  Five Income Statement and Internal Control

5
Steps in Accounting Cycle

• Analyze source documents
• Record business transactions in the journal
• Post journal entries to the accounts in the
  ledger
• Prepare a trial balance
• Journalize and post adjusting entries
• Complete worksheet (or adjusted trial balance)
• Journalize and post closing entries
• Financial statements
• Post-closing trial balance

6
End of Period Adjustments

• Revenue and Expense Accounts are closed to the
  Retained Earnings Account through a Journal
  Entry.
• Net Income Credit Retained Earning
• Net Loss Debit Retained Earnings
• Retained Earnings account carries no cash. It is
  simply a tally sheet showing the total revenues
  of a corporation less the total expenses (also
  reduced by any cash dividends or stock dividends
  paid out).

7
End of Period Adjustments

• Bottom line in accounting is to come up with a
  profit or loss for the period.
• Measure the revenues for the period and match
  them with the expenses for the period.
• Revenues gt Expenses Net Income
• Revenues lt Expenses Net Loss

8
Closing Entries

• The income statement is for a period of time
  (third column in heading) the revenues and
  expenses are for that period only
• Close or clear the temporary-equity or nominal
  accounts
• Revenues, expenses, and dividends (drawing)
• Definition balances apply to one period and
  accounts fall under the realm of owners equity
• Updating owners equity capital account to match
  the statement of owners equity

9
Procedure for Closing

• Balance off the accounts debit or credit an
  account so the balance is 0.
• Step One
• Close the Revenue and Expense Accounts to
  Retained Earnings.
• Step Two
• Close the dividends (drawing) account to
  Retained Earnings.
• (do not pay attention to dividend account on page
  4-7)

10
Closing Step One

• Closing Entry
• 12/31/05 Revenue Accounts 900
• Expense Accounts 1200
• What do we need to do to balance off the journal
  entry?
• Do we have a Net Income or a Net Loss for the
  period?????

11
Closing Step One

• Closing Entry
• 12/31/05 Revenue Accounts 1200
• Expense Accounts 900
• What do we need to do to balance off the journal
  entry?
• Do we have a Net Income or a Net Loss for the
  period?????

12
Closing Step Two

• Closing Entry
• 12/31/05 J. Doe, Capital 5000
• J. Doe, Draw 5000
• OR
• 12/31/05 Retained Earnings 5000
• Dividends 5000

13
Post Closing Trial Balance

• Purpose
• To verify the balances of accounts that remain
  open
• Use the final balance figures from the ledger
  accounts
• Make sure debits credits
• Accounts that are listed are all permanent
  (assets, liabilities, and capital accounts)

14
Interim Statements

• As months go by can prepare worksheet to analyze
  business, but will not journalize adjusting
  entries, closing entries, or prepare post closing
  trial balance until end of fiscal year

15
Reversing Entries

• You are not responsible for this topic.

16
Finding Errors

• You are not responsible for this topic.
• Please read through techniques of finding errors
  and apply them if you feel they will be helpful.