CHAPTER 4

Completing the Accounting Cycle

Permanent or Real Accounts the balances of the accounts reported on the balance sheet carried
forward from year to year because they are relatively permanent

Temporary or Nominal Accounts the balance reported on the income statement are not carried forward
from year to year. Also the balance of the owner’s drawing account which is reported on the statement
of owner’s equity is not carried forward because these accounts report only one period

Closing Entries temporary account balances are transferred to permanent accounts at the end of the
accounting period

Closing process the transfer process and is sometimes referred to as closing the books, it involves the
following four steps

1. Revenue account balances are transferred to an account called Income summary

2. Expenses account balances are transferred to an account called Income summary
3. The balance of Income Summary (net income or loss) is transferred to the owner’s capital
account
4. The balance of the owner’s drawing account is transferred to the owner’s capital account

Income summary is temporary account that is only used during the closing process, does not appear on
the financial statements

Four closing entries required in the closing process as a follows:

1. Debit each revenue for its balance and credit income summary for the total revenue
2. Credit each expense account for its balance and debit income summary for the total expenses
3. Debit income summary for its balance and credit the owner’s capital account
4. Debit the owner’s capital account for the balance of drawing account and credit the drawing
account

Post-Closing Trial Balance prepared after the closing entries have been posted, to verify that the ledger
is in balance at the beginning of the next period

Accounting Cycle

The accounting process that begins with analyzing and journalizing transactions and ends with
the post-closing trial balance

The steps in the accounting cycle as a follows:

1. Transactions are analyzed and recorded in the journal

2. Transactions are posted to the ledger
3. An unadjusted trial balance is prepared
 4. Adjustment data are assembled and analyzed
5. An optional end-of-period spreadsheet is prepared
6. Adjusting entries are journalized and posted to the ledger
7. An adjusted trial balance is prepared
8. Financial statements are prepared
9. Closing entries are journalized and posted to the ledger
10. A post-closing trial balance is prepared

Fiscal Year

- The annual period adopted by a business

Liquidity

- Ability to convert assets to cash

Solvency

- Ability of a business to pay its debts

Working Capital

- The excess of the current assets of a business and current liabilities

- Current assets – Current Liabilities

Current Ratio

- another means of expressing the relationship between the current assets and current liabilities.
- Current assets / Current liabilities

Spreadsheet (Work Sheet)

- Used for summarizing the effects of adjusting entries. It also aids in preparing financial
statements