Chapter 4: Completing the Accounting Cycle

Prepare Financial Statements & Classified Balance Sheet

• Financial Statements: Income Statement, Statement of Retained Earnings, Balance Sheet.
  • Prepared from the adjusted trial balance.
• Interrelationships:
  • Net Income/Loss (Income Statement) $\rightarrow$ Statement of Retained Earnings.
  • Ending Retained Earnings (Statement of Retained Earnings) $\rightarrow$ Balance Sheet.
• Classified Balance Sheet: Categorizes assets and liabilities.
  • Assets (order of liquidity):
    • Current Assets: Converted to cash, sold, or used within 12 months or operating cycle. (e.g., Cash, Accounts Receivable, Supplies).
    • Long-term Assets: Not converted/used within 1 year or operating cycle.
      • Long-term Investments, Property, Plant, & Equipment (e.g., Land, Building), Intangible Assets (e.g., Patent).
  • Liabilities (order of payment):
    • Current Liabilities: Paid within 1 year or operating cycle. (e.g., Accounts Payable, Salaries Payable).
    • Long-term Liabilities: Not paid within 1 year or operating cycle.
  • Stockholders' Equity: Common Stock and Retained Earnings.

Explain Closing Entries

• Closing Process Purpose:
  • Zeroes out temporary accounts (Revenues, Expenses, Dividends).
  • Updates Retained Earnings for net income/loss and dividends.
  • Prepares accounts for the next period.
• Account Types:
  • Temporary Accounts: Closed at period end (Revenues, Expenses, Income Summary, Dividends).
  • Permanent Accounts: Not closed (Assets, Liabilities, Common Stock, Retained Earnings).
• Income Summary Account: Temporary account to summarize net income/loss before transfer to Retained Earnings.
• Closing Entry Steps:
  1. Dr. Revenue, Cr. Income Summary.
  2. Dr. Income Summary, Cr. Expenses (individual or compound).
  3. Dr. Income Summary, Cr. Retained Earnings (for net income); or Dr. Retained Earnings, Cr. Income Summary (for net loss).
  4. Dr. Retained Earnings, Cr. Dividends.

Prepare Post-Closing Trial Balance

• A list of accounts and their balances after journalizing and posting closing entries.
• Includes only permanent accounts.
• Verifies debit/credit equality of permanent accounts.

Describe the Accounting Cycle

• The process companies follow to produce financial statements for a specific period.
• Steps:
  1. Start with beginning account balances.
  2. Analyze and journalize transactions.
  3. Post journal entries.
  4. Prepare unadjusted trial balance.
  5. Journalize and post adjusting entries.
  6. Prepare adjusted trial balance.
  7. Prepare financial statements.
  8. Journalize and post closing entries.
  9. Prepare post-closing trial balance.