CHAPTER 4

COMPLETING THE ACCOUNTING CYCLE

The accounting cycle:

• Throughout the period --- Analyze transactions - Journalize in the journal - Post to the general ledger



• At the end of the period --- Prepare a trial balance - adjust the accounts - prepare an adjusted trial balance - prepare financial statements - close the accounts - prepare a postclosing trial balance

• Objective - transfer the balances in all temporary (income statement) accounts to owners' equity. After closing all temporary accounts have a zero balance.



• Uses the Income Summary account (which is created and zeroed out during the closing process). This account never appears on any trial balance or financial statement.



• Required steps (always the same steps)

• Close all revenue/other credit balance accounts to Income Summary (dr. All revenue/other accounts, cr. Income summary)



• Close all expense/other debit balance accounts to Income Summary (dr. Income summary, cr. All expense/other accounts)



• Close Income Summary to the Capital account. If the company had net income, this will require dr. Income Summary, cr. Capital. If the company had net loss, this will require dr. Capital, cr. Income Summary.



• Close Withdrawals to the Capital account. (dr. Capital, cr. Withdrawals)

• Only contains balance sheet accounts because all other accounts have a zero balance.



• Note: Prior to closing entries, the balance in the owners' capital account will be equal to its balance at the beginning of the year (plus investments during the year). After closing, the balance in this account equals the ending balance shown on the statement of owners' equity.

• The worksheet is an accounting tool. It is not a formal business record (unlike the journal, ledger, trial balance, etc.)



• See detailed example provided in objective 6.



• Really helpful when set up as an electronic spreadsheet using software like Lotus, Excel, etc.



• Use of the worksheet to record adjusting and closing entries does not replace the need to record the entries in the journal and post to the ledger.

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