Completing the

Accounting Cycle
CHAPTER 4
Objective
 Learn how to prepare a worksheet
 Prepare closing entries and a post-closing trial balance
 Explain the steps in the accounting cycle and how to prepare
correcting entries
 Identify the sections of a classified balance sheet
Worksheet
 A work sheet is a multiple-column form that may be used in the
adjustment process and in preparing financial statements.
 It is a working tool or a supplementary device for the accountant
and not a permanent accounting record.
Worksheet

4. Extend adjusted balance

1. Prepare trial 2. Enter 3. Enter to appropriate columns.
balance on the adjustment adjusted
worksheet. data. balances 5. Calculate income/loss
and complete the
worksheet.
Accounting Equation
Asset = Liabilities + Owner’s Equity

Owner’s Capital + Net profit (loss) - Drawings

(Income Summary)

Revenue - Expenses
Temporary Vs Permanent Accounts
TEMPORARY (NOMINAL) PERMANENT (REAL)
These accounts are closed These accounts are not closed

(Income Statement / Drawings (Balance Sheet Accounts)

Accounts)

All revenue accounts All asset accounts

All expense accounts All liability accounts

Owner’s drawings Owner’s capital account

Closing Process
 Updates the owner’s capital account in the ledger by transferring net income
(loss) and owner’s drawings to owner’s capital.
 Transfer the balance in each temporary revenue and expense account to the
Net Income (loss) account
 Income statement prepared after adjusting and correcting entries are made
 Reduces the balance in each income statement account to zero
• Debit the revenue accounts and credit Net Income (loss) account for the
amounts in the revenue accounts
• Credit the expense accounts and debit Net Income (loss) account for the
amounts in the expense accounts
 Transactions-Ledger
Dr Owner’s Equity Cr

Date Explanation Amount Date Explanation Amount

Oct 1 Cash 10000

Cr
Dr Cash
Date Explanation Amount Date Explanation Amount
Oct 1 Owner’s Equity 10000 Oct Drawing 500
 Transactions-Ledger
Dr
Revenue Cr
Date Explanation Amount Date Explanation Amount
Oct 1 A/R 5000

Dr Accounts Payable Cr

Date Explanation Amount Date Explanation Amount

Oct 2 Cash 900
 Transactions-Ledger
Dr Rent Expense Cr
Date Explanation Amount Date Explanation Amount
Oct 3 Cash 900

Dr Accounts Receivable Cr

Date Explanation Amount Date Explanation Amount

Oct 4 Cash 5000
 Transactions-Ledger
Dr Drawings Cr
Date Explanation Amount Date Explanation Amount
Oct 3 Cash 500 Oct 31
 Transactions-Ledger
Dr
Revenue Cr
Revenue Dr 5000
Date Explanation Amount Date Explanation Amount Income Summary Cr 5000
Oct 31 Income Summary 5000 Oct 1 A/R 5000

Dr Accounts Payable Cr

Date Explanation Amount Date Explanation Amount

Oct 2 Cash 900
 Transactions-Ledger
Dr Rent Expense Cr
Income Summary Dr 900
Date Explanation Amount Date Explanation Amount Rent Expense Cr 900
Oct 3 Cash 900 Oct 31 Income Summary 900

Dr Accounts Receivable Cr

Date Explanation Amount Date Explanation Amount

Oct 4 Cash 5000
Transactions-Journal
Date Accounts & Explanation Dr Cr
October 31 Revenue 5000

Income Summary 5000

Income Summary 900

Rent Expense 900

 Transactions-Ledger
Dr Drawings Cr
Owner’s equity Dr 500
Date Explanation Amount Date Explanation Amount Drawings Cr 500
Oct 3 Cash 500 Oct 31 OE 500

Dr Income Summary Cr
Date Explanation Amount Date Explanation Amount
Oct 31 Rent Expense 900 Oct 31 5000
Revenue
Income Summary Dr 4100 Oct 31 OE 4100
Owner’s Equity Cr 4100 5000
5000
 Transactions-Ledger
Dr Owner’s Equity Cr

Date Explanation Amount Date Explanation Amount

Oct 31 Drawings 500 Cash 10000
Oct 1
Oct 31 Income Summary 4100

Cr
Dr Cash
Date Explanation Amount Date Explanation Amount
Oct 1 Owner’s Equity 10000 Oct Drawing 500
Transactions-Journal
Date Accounts & Explanation Dr Cr
Oct 31 Owner’s Equity 500

Drawing 500

Income Summary 4100

Owner’s Equity 4100

Closing Process
(INDIVIDUAL)
EXPENSES
Normal Dr. Normal Cr.
Cr. to close Dr. to close
Balance Balance
-0- -0-

2
1

Expenses Revenues
Closing Process
4

Expenses Revenue
Net Loss Opening Balance
Drawings Net Income Dr. to close (if Cr. to close (if
4 net income) net loss)
Ending Balance

OWNER’S
DRAWINGS
Normal Dr. Cr. to close
Balance
-0-
Transactions-Post closing Trial Balance
Post closing Trial Balance
October 31, 2017
Accounts Dr Cr
Owner’s Equity 13600
Cash 9500
A/P 900
A/R 5000

Total 14500 14500

Steps in Accounting Cycle
1. Analyze
9. Prepare post- transactions 2. Journalize the
closing trial transactions
balance
3. Post to ledger
accounts

8. Journalize
and post closing 4. Prepare a trial
entries balance

5. Journalize
7. Prepare 6. Prepare and post
financial adjusted trial adjusting
statements balance entries
Steps in Accounting Cycle
 Reversing Entries (Optional Step)
• A reversing entry is made at the beginning of the next accounting period.
• A reversing entry reverses certain adjusting entries made in the previous period.
Opening balances can then be ignored when preparing year-end adjusting entries
Correcting Entries (Avoidable step)
• Errors that occur in recording transactions should be corrected as soon as they are
discovered by preparing correcting entries.
• Correcting entries are unnecessary if the records are free of errors; they can be
journalized and posted whenever an error is discovered.
 Transactions-Ledger
Dr Owner’s Equity Cr OE Dr 13600
Date Explanation Date Explanation Amount Balance Cr 13600
Amount
Oct 31 Drawings 500 Cash 10000
Oct 1 Balance Dr 13600
Oct 31 Balance c/d 13600 Oct 31 Income Summary 4100 OE Cr 13600
14100 14100
Nov 1 Balance b/d 13600
Dr Cash Cr

Date Explanation Amount Date Explanation Amount

Oct 1 Owner’s Equity 10000 Oct Drawing 500
10000 Oct 31 Balance c/d 9500
Nov 1 Balance b/d 9500 10000
 Transactions-Ledger
Dr
Revenue Cr
Date Explanation Amount Date Explanation Amount
Oct 31 Income Summary 5000 Oct 1 A/R 5000

5000 5000
Dr Accounts Payable Cr

Date Explanation Amount Date Explanation Amount

Oct 31 Balance c/d 900
Oct 2 Cash 900
900 900
Nov 1 Balance b/d 900
 Transactions-Ledger
Dr Rent Expense Cr
Date Explanation Amount Date Explanation Amount
Oct 3 Cash 900 Oct 31 Income Summary 900

900 900

Dr Accounts Receivable Cr

Date Explanation Amount Date Explanation Amount

Oct 4 Cash 5000 Oct 31 Balance c/d 5000

5000 5000
Nov 1 Balance b/d 5000
 Transactions-Ledger
Dr Drawings Cr
Date Explanation Amount Date Explanation Amount
Oct 3 Cash 500 Oct 31 OE 500
500 500

Dr Income Summary Cr
Date Explanation Amount Date Explanation Amount
Oct 31 Rent Expense 900 Oct 31 5000
Revenue
Oct 31 OE 4100

5000 5000
Correcting Entries
Provided 5000 taka service for cash

Correct Entry: Error:

Cash Dr 5000 Equipment Dr 5000
Revenue Cr 5000 Revenue Cr 5000

Correcting Entry:
Cash Dr 5000
Equipment Cr 5000
Sections of a classified Balance Sheet
 Assets
• Current Assets : Convert to cash within the operating cycle

• Long term investments: investments in stock and bonds held for many years,
land/building company not currently using, long term notes receivable
• Property Plant and Equipment: assets with long useful lives that the company
is currently using
• Intangible Asset: valuable assets with no physical substance
Sections of a classified Balance Sheet
 Liabilities and Owner’s Equity
• Current Liabilities: obligation that needs to be paid within the operating cycle

• Long term Liabilities: obligation that can be paid after one year

• Owner’s Equity: what the owner owns

Sections of a classified Balance Sheet
Home task: Prepare closing entries
 page 118-125 (Pioneer Advertising example)
Transactions-Journal
Date Accounts & Explanation Dr Cr
October 31 Income Summary 900

Rent Expense 900

Oct 31 Income Summary 6000

Salaries and Wages Expense 6000

Oct 31 Service Revenue 10400

Income Summary 10400

Transactions-Journal
Date Accounts & Explanation Dr Cr
Oct 31 Income Summary 50

Insurance Expense 50

Oct 31 Income Summary 50

Interest Expense 50
Transactions-Journal
Date Accounts & Explanation Dr Cr
Oct 31 Owner’s Equity 500

Drawings 500

Oct 31 Income Summary 3400

Owner’s Equity 3400

 Post Closing Trial Balance
Pioneer Advertising
October 31, 2017
Account Dr Cr
Cash 15200
Owner’s Equity 12900
Equipment 5000
Notes Payable 5000
Prepaid Insurance 550
Supplies 2500
Accounts Payable 2500
Interest Payable 50
Salaries and Wages Payable 2000