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# 06/01/2014

Accounting Principles
Completing the accounting cycle

Learning objectives

## Describe the effect of various transactions on the current ratio

and the debt ratio

## Accountants often use a worksheet to summarise data for the

financial statements

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## Step 1: Enter the account titles and their unadjusted balances

in the Trial balance columns of the worksheet and total the
amounts

and total the amounts

## Step 3: Calculate each accounts adjusted balance by

combining the trial balance and adjustment figures. Enter each

## Step 4: Draw an imaginary line above the first revenue

account. Every account above that line (assets, liabilities and
equity accounts) is copied from the adjusted trial balance to the
balance sheet columns. Every account below the line (revenues
and expenses) is copied from the adjusted trial balance to the
income statement columns

## Step 5: On the income statement, calculate profit or loss as

total revenues minus total expenses. Enter profit (loss) as the
balancing amount on the income statement. Also enter profit
(loss) as the balancing amount on the balance sheet. Then total
the financial statement columns

## It consists of journalising and posting the closing entries in

order to get the accounts ready for the next period

It zeroes out all the revenues and all the expenses in order to
measure each periods profit separately from all other periods
and updates the Capital account balance

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## Closing the accounts

Temporary accounts

Permanent accounts

period

## Examples include Revenues,

Expenses, Drawings

## Examples include Assets,

Liabilities, Capital

balance

next period

## Closing the accounts

Step 1: Make the revenue accounts equal zero via the Income
summary account

## Step 2: Make expense accounts equal zero via the Income

summary account

Step 3: Make the Income summary account equal zero via the
Capital account

Step 4: Make the Drawings account equal zero via the Capital
account

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## The accounting cycle can end with a post-closing trial balance

This optional step lists the accounts and their adjusted balances
after closing

Only assets, liabilities and capital accounts appear on the postclosing trial balance

## Assets and liabilities are usually classified in balance sheets as

either current or noncurrent

## Under each heading it is also usual to list assets and liabilities in

order of decreasing liquidity

to cash

## An alternative balance sheet format, recommended by AASB

101, Presentation of Financial Statements, is to list assets and
liabilities in order of decreasing liquidity without the division into
current and non-current assets

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Assets

## Current assets are assets that are expected to be converted to

cash, sold or consumed during the next 12 months, or within
the business operating cycle if longer than a year

The operating cycle is the time span during which (1) cash is
used to acquire goods and services, and (2) these goods and
services are sold to customers, from whom (3) the business
collects cash

## Non-current assets are all assets other than current assets

Liabilities

Current liabilities are debts that are due to be paid with cash or
with goods and services within one year, or within the business
operating cycle if longer than a year

liabilities

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## Using accounting information in decision making:

Accounting ratios

## The current ratio measures a firms ability to pay its current

liabilities with its current assets

## The debt ratio measures an organisations overall ability to pay

its total liabilities (debt)

Summary:

in one place

## The formal financial statements yield the same net income or

loss that is shown on the worksheet

## The post-closing trial balance contains the same accounts that

the balance sheet contains

## Classification means dividing assets and liabilities between

those that will last less than a year (current) and those that will
last longer than a year (long-term)

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