Lesson 5Completing the Accounting Cycle Task Team of FUNDAMETAL ACCOUNTING School of Business, Sun Yat-sen University
Outline • Describe the preparation of adjusted trial balance • Describe and prepare a worksheet and describe its usefulness. • Describe the closing process and explain why temporary accounts are closed each period. • Prepare closing entries.
3. Post 2. Journalize 1.Analyze Transactions 4. Unadjusted trial balance Start the next cycle 8.Close 5. Adjust 7. Prepare finance statements 6. Adjusted trial balance Accounting Cycle
What We Have Done? • So far we have discussed the following steps in the accounting cycle: • Analyzing • Recording • Posting • Unadjusted trial balance • Adjusting • Adjusted trial balance Let’s start from the worksheet
What are on the Worksheet? • A worksheet includes following columns: • Unadjusted trial balance. • Adjusting entries • Adjusted trial balance. • income statement • Balance sheet • Worksheet can be used to simplify the preparation of financial statements.
Steps in preparation of the worksheet Step 1: Enter the accounts and unadjusted trial balance
Steps in preparation of the worksheet Step2: Entry the adjusting entries’
Steps in preparation of the worksheet Step3: Entry the adjusted trial balance
Steps in preparation of the worksheet Step4: Entry Adjusted Amounts to Income Statement Columns
Steps in preparation of the worksheet Step5: Entry Adjusted Amounts to Balance sheet Columns
Preparing the Financial Statements • Financial Statements can be prepared easily using the completed worksheet. • The nature and the preparation of Financial Statement will be discussed in lesson 9
Closing Process • The closing process occurs at the end of an accounting period after financial statements are prepared. • Reasons for closing entries: • Resets revenue and expense account balances to zero at the end of the period. • Updates the retained earnings account to reflect net income and distributions.
Temporary and Permanent Accounts • Temporary accounts are also called nominal accounts. They are opened at the beginning of a period, used to record events for that period and closed at the end of the period. They accumulate data related to one accounting period only.
Expenses Revenues The closing process applies only to temporary accounts. Income Summary Temporary Accounts
Assets Permanent Accounts Owner’s Capital Liabilities The closing process does not apply to permanent accounts. Permanent Accounts
Steps in the Closing Process • Set an Income Summary account. • Close Revenue accounts to Income Summary. • Close Expense accounts to Income Summary. • Close Income Summary account to Retained Earnings
The entries : Dr. Sales Revenue61000 Interest Revenue 2917 Cr. Income Summary63917 Close Revenue Accounts to Income Summary
The entries: Dr. Income 86600 Cr. Cost of Sales 30000 Operating Expense 56600 Close Expense Accounts to Income Summary
The Entries: Dr. Income Summary 22683 Cr. Retained Earnings 22683 Close Income Summary to Retained Earnings
The Closing Entries • Close revenue accounts to Income Summary. The entries are: Dr. All Revenue Cr. Income Summary
The Closing Entries • Close expense accounts to Income Summary.The entries are:Dr. Income Summary Cr. All Expenses
The Closing Entries • Close Income Summary account to Retained Earnings. • If there is a profit, the entries are:Dr. Income Summary Cr. Retained Earnings • If there is a loss, the entries are:Dr. Retained Earnings Cr. Income Summary
Post-Closing Trial Balance • Post-Closing Trial Balance is a list of balances for all accounts that not closed. • The purpose of a post-closing trial balance is to verifies that: • Total debits = total credits for permanent accounts. • All temporary accounts have zero balances