Study Notes on Completing the Accounting Cycle chpt 6

Overview of College Accounting

• Publication: Cengage Learning, 22nd Edition

• Content Scope: Completing the accounting cycle for a service business, including financial statements, closing entries, and the post-closing trial balance.

Learning Objectives

• Learning Objective 1: Prepare financial statements with the aid of a work sheet.

• Learning Objective 2: Journalize and post closing entries.

• Learning Objective 3: Prepare a post-closing trial balance.

• Learning Objective 4: List and describe the steps in the accounting cycle.

Main Concepts

1. The Work Sheet

• Primary Uses:

  • Journalizing adjusting entries

  • Preparing financial statements

  • Journalizing closing entries

2. Financial Statements

A. Preparation Steps

1. Prepare the Income Statement

2. Prepare the Owner’s Equity Statement

3. Prepare the Balance Sheet

B. Example Financial Statements

1. Income Statement Example (Rohan's Campus Delivery)

• For Month Ended: June 30, 20--

• Revenues: Delivery Fees - $2,150

• Expenses:

  • Wages Expense: $700

  • Rent Expense: $200

  • Supplies Expense: $60

  • Phone Expense: $50

  • Insurance Expense: $25

  • Depreciation Expense (Delivery Equipment): $100

• Total Expenses: $1,015

• Net Income: $1,135

2. Statement of Owner’s Equity

• For Month Ended: June 30, 20--

• Owner’s Capital (Beginning balance): $2,000

• Add: Net Income for June: $1,135

• Less: Withdrawals for June: $150

• Ending Capital: $2,865

C. Balance Sheet Example (Rohan's Campus Delivery)

• As of: June 30, 20--

• Assets:

  • Current Assets: $1,215

  • Cash: $370

  • Accounts Receivable: $650

  • Supplies: $20

  • Prepaid Insurance: $175

  • Property, Plant, and Equipment: $3,500

  • Delivery Equipment: $3,600

  • Less Accumulated Depreciation: $100

• Total Assets: $4,715

• Liabilities:

  • Current Liabilities:

  • Accounts Payable: $1,800

  • Wages Payable: $50

  • Total Current Liabilities: $1,850

• Owner's Equity:

  • Rohan Macsen, Capital: $2,865

3. The Closing Process

• Purpose: To reset temporary account balances to zero for the new accounting period.

• Steps Involved:

  1. Close Revenue Accounts to Income Summary.

  2. Close Expense Accounts to Income Summary.

  3. Close Income Summary to Owner's Capital Account.

  4. Close Drawing Account to Owner's Capital Account.

4. Permanent vs. Temporary Accounts

A. Permanent Accounts

• Reported on the balance sheet (assets, liabilities, and owner’s equity).

• Not Closed: Results of all transactions are retained indefinitely.

B. Temporary Accounts

• Include revenues, expenses, and drawing accounts.

• Closed: Information is reset for the next accounting period.

5. Post-Closing Trial Balance

• Purpose: Prepared after closing entries to verify that total debits equal total credits in the permanent accounts.

• Account Breakdown:

  • Cash: $370

  • Accounts Receivable: $650

  • Supplies: $20

  • Delivery Equipment: $3,600

  • Accumulated Depreciation: ($100)

  • Accounts Payable: $1,800

  • Wages Payable: $50

  • Rohan Macsen’s Capital: $2,865

• Total: All accounts sum up to verified totals.

6. Steps in the Accounting Cycle

A. Detailed Steps:

1. Analyze source documents.

2. Journalize transactions.

3. Post to the general ledger accounts.

4. Prepare a trial balance.

5. Determine and prepare adjustments on the work sheet.

6. Complete an end-of-period work sheet.

7. Journalize and post adjusting entries.

8. Prepare financial statements.

9. Journalize and post closing entries.

10. Prepare a post-closing trial balance.

B. Importance of Each Step

• Each step is crucial for maintaining proper accounting records and ensuring that financial statements accurately reflect the financial position of the business.