PRINCIPLES OF

ACCOUNTING

Hanoi School of Business & Management

Nguyen Thi Hang Nga
4 Completing the Accounting Cycle

Learning Objectives

After studying this chapter, you should be able to:

[1] Define the steps in accounting cycle

[2] Discuss the presentation and the role of work sheets

[3] Describe and prepare clossing entries, post closing trial balance and reversing entries

[4] Analyze firm’s finance conditions by using classified balance statements.

 Benefits of a Work Sheet
P1

Aids the Assists in

preparation of planning and
financial organizing an
statements. audit.

Helps in
Reduces Not a preparing
possibility of required interim financial
errors.
report. statements.
Shows the
Links accounts
effects of
and their
proposed
adjustments.
transactions.
 FastForward
Worksheet
P1 For the Month Ended December 31, 2011
 FastForward
Worksheet
P1 For the Month Ended December 31, 2011
 FastForward
Worksheet
P1 For the Month Ended December 31, 2011
 FastForward
Worksheet
P1 For the Month Ended December 31, 2011
 FastForward
Worksheet
P1 For the Month Ended December 31, 2011
 Preparing the Financial Statements
P1
 Preparing the Financial Statements
P1
 C1

Recording Closing Entries

1. Resets revenue,
expense and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the
period. Record and post
closing entries.
2. Helps summarize a
period’s revenues
and expenses in the
Income Summary Prepare post-closing
account. trial balance.
Temporary and
C1

Permanent Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The closing process
applies only to
temporary accounts.
 P2

Recording Closing Entries

Close Credit Balances in
Revenue Accounts to Income Let’s see how
Summary. the closing
Close Debit Balances in process works!
Expense accounts to Income
Summary.
Close Income Summary
account to Owner’s Capital.
Close Withdrawals to Owner’s
Capital.
P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies
Prepaid insurance
8,670
2,300
Using the
Equipment
Accumulated depreciation-Equip.
26,000
$ 375
adjusted trial
Accounts payable 6,200 balance, let’s
Salaries payable 210
Unearned consulting revenue 2,750 prepare the
C. Taylor, Capital
C. Taylor, Withdrawals 200
30,000
closing
Consulting revenue
Rental revenue
7,850
300
entries for
Depreciation expense-Equipment 375 FastForward.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment
Accumulated depreciation-Equip.
26,000
$ 375
Close Credit
Accounts payable 6,200 Balances in
Salaries payable 210
Unearned consulting revenue 2,750
Revenue
C. Taylor, Capital 30,000 Accounts to
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Income
Rental revenue 300 Summary.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
  Close Credit Balances in
P2

Revenue Accounts to Income

Summary
Dr. Cr.
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150

Now, let’s look at the ledger accounts after

posting this closing entry.
  Close Credit Balances in
P2

Revenue Accounts to Income

Summary
Consulting Revenue
7,850 7,850

Income Summary
8,150
Rental Revenue
300 300

-
P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 Close Debit
Accounts payable 6,200
Salaries payable 210
Balances in
Unearned consulting revenue 2,750 Expense Accounts
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200 to Income
Consulting revenue 7,850 Summary.
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
P2

 Close Debit Balances in Expense

Accounts to Income Summary
Dr. Cr.
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Now, let’s look at the ledger accounts

after posting this closing entry.
P2

 Close Debit Balances in Expense

Accounts to Income Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Salaries Expense Supplies Expense Income Summary

4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 Close Income
Accounts payable 6,200
Salaries payable 210
Summary to
Unearned consulting revenue 2,750 Owner’s Capital.
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 Close Income Summary
P2

to Owner’s Capital
Dr. Cr.
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785

Now, let’s look at the ledger accounts

after posting this closing entry.
 Close Income Summary
P2

to Owner’s Capital

C. Taylor, Capital Income Summary

30,000 4,365 8,150
3,785 3,785
-
33,785
P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 Close
Accounts payable 6,200
Salaries payable 210 Withdrawals
Unearned consulting revenue
C. Taylor, Capital
2,750
30,000
Account to
C. Taylor, Withdrawals 200 Owner’s
Consulting revenue 7,850
Rental revenue 300 Capital.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
P2  Close Withdrawals Account
to Owner’s Capital
Dr. Cr.
Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200

Now, let’s look at the ledger accounts

after posting this closing entry.
P2  Close Withdrawals Account
to Owner’s Capital

C. Taylor,
Withdrawals C. Taylor, Capital
200 200 200 30,000
3,785

- 33,585
Summary of the Closing Process
1. Close Credit Balances in Revenue Accounts
to Income Summary.
2. Close Debit Balances in Expense Accounts
to Income Summary.
3. Close Income Summary to Owner’s Capital.
4. Close Withdrawals Account to Owner’s
Capital.
 P3

Post-Closing Trial Balance

List of permanent Let’s look at
accounts and their FastForward’s
balances after posting post-closing trial
closing entries. balance.

Total debits and credits

must be equal.
 Post-Closing Trial Balance
P3

FastForward
Post-Closing Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 33,585
C. Taylor, Withdrawals -
Consulting revenue -
Rental revenue -
Depreciation expense-Equipment -
Salaries expense -
Insurance expense -
Rent expense -
Supplies expense -
Utilities expense -
Totals $ 43,120 $ 43,120
 C2

Accounting Cycle
 C3

Classified Balance Sheet

Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current assets Current liabilities
Noncurrent assets Noncurrent liabilities
Long-term investments Equity
Plant assets
Intangible assets

Current items are those expected to come due (both

collected and owed) within the longer of one year or the
company’s normal operating cycle.
C3

Current assets are expected to be sold,

collected, or used within one year or the
company’s operating cycle.
C3

Long-term investments are expected to be held

for more than one year or the operating cycle.
C3

Plant assets are tangible long-lived assets used

to produce or sell products and services.
C3

Intangible assets are long-term resources

used to produce or sell products and services
and that lack physical form.
C3

Current liabilities are obligations due within the

longer of one year or the company’s operating cycle.
C3

Long-term liabilities are obligations not due

within the longer of one year or the company’s
operating cycle.
C3

Equity is the owner’s claim on the assets.

Global View
The definition of an asset is similar under U.S. GAAP and IFRS and involves
three basic criteria:
(1) the company owns or controls the right to use the item,
(2) the right arises from a past transaction or event, and
(3) the item can be reliably measured.

Both systems define the initial asset value as historical cost for nearly all assets.

The definition of a liability is similar under U.S. GAAP and IFRS and involves
three basic criteria:
(1) the item is a present obligation requiring a probable future resource outlay,
(2) the obligation arises from a past transaction or event, and
(3) the obligation can be reliably measured.
 A1

Current Ratio
Helps assess the company’s ability to pay
its debts in the near future

Current Assets
Current Ratio =
Current Liabilities

Limited Brands, Inc.

$ in millions 2009 2008 2007 2006
Current assets $ 2,867 $ 2,919 $ 2,771 $ 2,784
Current liabilities 1,225 1,374 1,709 1,575
Current ratio 2.3 2.1 1.6 1.8
Industry current ratlo 2.0 2.1 2.3 2.4
P4

4A – Reversing Entries
Reversing entries are optional. They are recorded in
response to accrued assets and accrued liabilities that were
created by adjusting entries at the end of a reporting period.
The purpose of reversing entries is to simplify a company’s
recordkeeping.

Let’s see how the accounting for our payroll

accrual will be handled with and without
reversing entries.
P4
P4

Without Reversing Entries With Reversing Entries