Module 2

MODULE 2
Completing the
Accounting Cycle
COVERAGE:
1. Accounting Cycle
2. Work Sheet
3. Financial Statements
4. Adjusting and Closing Entries
1. Accounting Cycle
The accounting process that begins with

analyzing and journalizing transactions
and ends with summarizing and reporting
these
transactions
is
called
the
accounting cycle.
The most important output of this cycle is
the financial statements.
Seven Basic Steps of the

Accounting Cycle
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data are
assembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.
5
2. Work Sheet
The work sheet is a useful device

for understanding the flow of
accounting data from the
unadjusted trial balance to the
financial statements.
The Work Sheet
Trial Balance
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
Cr
Prepared from the general ledger.

Accounts are listed in the following
order: assets, liabilities, owners
equity, revenues, and expenses.
The Work Sheet
Trial Balance
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
Cr
Adjustments are entered here. Two

possibilities:
1. Deferrals Existing balances are
changed.
2. Accruals New information is
entered.
9
The Work Sheet
Trial Balance
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
Cr
Adjustments are combined with

the trial balance. Account
balances are now adjusted.
10
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
Debit
Credit
Adjustments
Debit
Credit
Adjusted
Trial Balance
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
The Unadjusted
Trial Balance
16,340
4,275
1,600
985
800
455
42,600
42,600
11
(a) The Supplies account has a debit of

$2,000. A count of supplies at the end of
the period reveals that $760 is on hand.
Therefore, $1,240 in supplies was used
during the two-month period.
12
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Debit
Credit
Adjustments
Debit
2,065
2,220
2,000
2,400
20,000
1,800
Credit
Adjusted
Trial Balance
Debit
Credit
(a) 1,240
900
360
25,000
4,000
16,340
4,275
1,600
985
800
455
42,600
(a) 1,240
42,600
13
(b) The Prepaid Insurance account has a

debit balance of $2,400, which
represents prepayment of insurance for
24 months beginning December 1.
Thus, the insurance expense for this
month is $100 ($2,400 24).
14
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Debit
Adjustments
Credit
Debit
2,065
2,220
2,000
2,400
20,000
1,800
Credit
Adjusted
Trial Balance
Debit
Credit
(a) 1,240
(b) 100
900
360
25,000
4,000
16,340
4,275
1,600
985
800
455
42,600
(a) 1,240
42,600
(b) 100
Accounts are added as needed.
15
(c) The Unearned Rent account has a credit

balance of $360, which represents the
receipt of three-months rent beginning
with December 1. Thus, the rent revenue
for December is $120.
FOR
RENT
16
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Debit
Credit
Adjustments
Debit
2,065
2,220
2,000
2,400
20,000
1,800
Credit
Adjusted
Trial Balance
Debit
Credit
(a) 1,240
(b) 100
900
360
25,000
(c) 120
4,000
16,340
4,275
1,600
985
800
455
42,600
(a) 1,240
42,600
(b) 100
(c) 120
17
(d) Wages accrued but not paid at

the end of December total $250.
18
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Debit
Credit
Adjustments
Debit
2,065
2,220
2,000
2,400
20,000
1,800
Credit
Adjusted
Trial Balance
Debit
Credit
(a) 1,240
(b) 100
900
360
25,000
(c) 120
4,000
16,340
4,275
1,600
985
800
455
42,600
(d)
250
(a) 1,240
42,600
(b) 100
(c) 120
(d) 250
19
(e) Fees accrued at the end of

December, but not recorded, total
$500.
20
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Debit
Adjustments
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjusted
Trial Balance
Debit
(e)
Credit
Debit
Credit
500
(a) 1,240
(b) 100
900
360
25,000
(c) 120
4,000
16,340
4,275
1,600
985
800
455
42,600
(e)
500
(d) 250
(a) 1,240
42,600
(b) 100
(c) 120
(d) 250
21
(f) Depreciation of the office

equipment is $50 for December.
22
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Depreciation Expense
Accum. Depreciation
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjusted
Trial Balance
Adjustments
Debit
Credit
Debit
Credit
(e) 500
(a) 1,240
(b) 100
900
360
25,000
(c) 120
4,000
16,340
4,275
1,600
985
800
455
42,600
(e) 500
(d) 250
(a) 1,240
42,600
(b) 100
(c) 120
(d) 250
(f)
50
(f)
50
23
NetSolutions
Work Sheet
Adjustments
To make more
space,
Debit
Credit
Debit
Credit
2,065 lets remove the
2,220
(e) 500
heading.(a) 1,240
2,000
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
2,400
20,000
1,800
Adjusted
Trial Balance
Debit
Credit
(b) 100
900
360
25,000
(c) 120
4,000
16,340
4,275
1,600
985
800
455
42,600
(e) 500
(d) 250
(a) 1,240
42,600
(b) 100
(c) 120
(d) 250
(f)
50
(f)
50
24
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
Adjusted
Trial Balance
Debit
Credit
(e) 500
(a) 1,240
(b) 100
900
360
25,000
(c) 120
4,000
16,340
4,275
1,600
985
800
455
42,600
(e) 500
(d) 250
(a) 1,240
42,600
(b) 100
(c) 120
(d) 250
Summed
and
ruled
(f)
50
(f)
2,260
31
50
2,260
25
Next, the unadjusted Trial

Balance columns and the
Adjustments columns are
combined to determine the
amounts displayed in the
Adjusted Trial Balance.
26
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
Adjusted
Trial Balance
Debit
Credit
(e) 500
(a) 1,240
(b) 100
900
360
25,000
(c) 120
4,000
16,340
4,275
1,600
985
800
455
42,600
(e) 500
(d) 250
(a) 1,240
42,600
(b) 100
(c) 120
(d) 250
(f)
50
(f)
2,260
33
50
2,260
27
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
Credit
2,065
2,220
2,000
2,400
20,000
1,800
Adjustments
Debit
Credit
(e) 500
(a) 1,240
(b) 100
900
360
25,000
Debit
34
Credit
2,065
2,720
760
2,300
20,000
1,800
900
240
25,000
(c) 120
4,000
4,000
16,340
4,275
1,600
985
800
455
42,600
Adjusted
Trial Balance
(e) 500
(d) 250
16,840
4,525
1,600
985
2,040
455
(a) 1,240
42,600
(b) 100
100
(c) 120
(d) 250
(f)
50
50
(f)
2,260
120
250
50
2,260
43,400
50
43,400
28
The Work Sheet
Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
Balance Sheet
Dr
Cr
Revenue and expense balances in

the Adjusted Trial Balance column
are extended to the Income
Statement column.
29
The Work Sheet
Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
Balance Sheet
Dr
Cr
Asset, liability, owners equity, and

drawing balances in the Adjusted
Trial Balance column are extended
to the Balance Sheet column.
30
To make room on the slides for

the Income statement and
Balance Sheet columns, the Trial
Balance and Adjustments
columns have been removed.
31
Adjusted
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
Income Statement
Credit
Debit
Credit
Balance Sheet
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
900
240
25,000
4,000
16,840
4,525
1,600
985
2,040
455
100
120
250
50
43,400
38
50
43,400
32
Now, lets extend the balances

from the Adjusted Trial Balance
column.
33
Adjusted
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
40
Income Statement
Credit
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
Balance Sheet
Debit
2,065
2,720
760
2,300
20,000
1,800
900
240
25,000
900
240
25,000
4,000
4,000
16,840
16,840
4,525
1,600
985
2,040
455
4,525
1,600
985
2,040
455
100
100
120
250
50
43,400
Credit
120
250
50
50
43,400
50
34
These four
columns are
summed.
35
Adjusted
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
42
Income Statement
Credit
Debit
Credit
2,065
2,720
760
2,300
20,000
1,800
Balance Sheet
Debit
2,065
2,720
760
2,300
20,000
1,800
900
240
25,000
900
240
25,000
4,000
4,000
16,840
16,840
4,525
1,600
985
2,040
455
4,525
1,600
985
2,040
455
100
100
120
250
50
43,400
Credit
120
250
50
50
43,400
9,755
16,960
33,645
50
26,440
36
The difference between the

Income Statement column
totals is the net income (or net
loss) for the period.
37
The difference between the

Balance Sheet column totals is
also the income (or net loss)
for the period.
38
Income Statement
Balance Sheet
9,755 16,960 33,645

7,205
16,960 16,960 33,645
Net Income
26,440
7,205
33,645
Net Income
39
3. Financial Statements
40
NetSolutions
Income Statement
For Two Months Ended December 31, 2005
Fees earned
Rent revenue
Total revenues
Expenses:
Wages expense
Supplies expense
Rent expense
Utilities expense
Insurance expense
Depreciation expense
Miscellaneous expense
Total expenses
Net income
$16,840
120
$16,960
$ 4,525
2,040
1,600
985
100
50
455
9,755
$ 7,205
Every amount on this income statement was taken from the

Income Statement column of the work sheet.
41
NetSolutions
Statement of Owners Equity
Chris Clark, Capital, November 1, 2005
Investment on November 1, 2005
Net income for November and December
$25,000
7,205
$32,205
4,000
Less withdrawals
Fromfrom
the28,205
Either
the
Increase in owners equity
Sheet
Chris Clark, Capital, December 31, 2005Balance
$28,205
income
debit
column
of
statement
or the
thework
worksheet.
sheet.
42
NetSolutions
Balance Sheet
AssetsDecember 31, 2005
Current assets:
Cash
$ 2,065
Accounts receivable
2,720
Supplies
760
Prepaid insurance
2,300
Total current assets $ 7,845
Property, plant, and
equipment:
Land
$20,000
Office equip. $1,800
Less accum.
depreciation
50 1,750
Total property, plant
and equipment
21,750
Total assets
$29,595
Liabilities
Current liabilities:
Accounts payable
Wages payable
Unearned rent
Total liabilities
Owners Equity
Total liabilities and
owners equity
$900
From the
250
240
Statement
$ 1,390
of Owners
Equity
28,205
$29,595
43
Assets are commonly divided into classes

and that two of these classes are current
assets and property, plant, and equipment.
44
Thats correct. Cash and other

assets that are expected to be
converted into cash, sold, or
used up usually in less than a
year are current assets.
45
There are some exceptions, but

thats basically correct. Assets such
So,
assets
that
have
a
life
as office equipment, machinery,
over
a
year
are
listed
under
buildings, and land would appear
property,
plant,
and
under that heading.
equipment.
46
Liabilities due usually within one

year or less and that are to be paid
out of current assets are called
current liabilities.
Accounts payable
Wages payable
Interest payable
Unearned fees
47
Liabilities not due for

more than a year usually
are long-term liabilities.
Mortgage note
payable
Mortgage payable
Bond payable
48
4. Adjusting and Closing Entries
49
Adjusting and Closing Entries

Adjusting entries are recorded
in the journal at the end of the
accounting period.
50

If a work sheet has been
prepared, the data for
these entries are in the
Adjustments columns.
51
The Closing Process

Income Summary
Expenses are
transferred to
Income Summary
Revenues are
transferred to
Income Summary
Net Income or Net Loss is

transferred to Owners Capital
OWNERS CAPITAL
Drawings are transferred to

Owners Capital
52

Income Summary
Expenses are
transferred to
Income Summary
Revenues are
transferred to
Income Summary
The
Summary
Net Income
Income or
Net Loss is
transferred
to Owners
account
does not
appearCapital
on
the financial statements.
OWNERS CAPITAL
Drawings are transferred to

Owners Capital
53
The Closing Process

Fees Earned
Wages Expense
Bal.
Income Summary
4,525
Rent Expense
Bal.
Bal. 16,840
Rent Revenue
1,600
Bal.
120
Bal.
50
Utilities Expense
Bal.
985

Bal. 25,000
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Bal.
455
Bal.
4,000
Note: The
balances shown
are adjusted
balances before
closing. The
following
sequence
demonstrates the
closing process.
54
The Closing Process

Fees Earned
Wages Expense
Bal.
Income Summary
4,525
16,960
Rent Expense
Bal.
1,600
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Bal.
50
Utilities Expense
Bal.
985

Bal. 25,000
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Bal.
455
Bal.
4,000
Debit each revenue

account for the
amount of its
balance, and credit
Income Summary
for the total
revenue. 55
The Closing Process

Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
Rent Expense
Bal.
1,600
16,960
1,600
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Bal.
50
50
Utilities Expense
Bal.
985
985

Bal. 25,000
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Bal.
455
455

Bal.
4,000
Debit Income
Summary for the
total expenses and
credit each expense
account for its
balance.
56
The Closing Process

Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
7,205
Rent Expense
Bal.
1,600
1,600
16,960
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Bal.
50
50
Utilities Expense
Bal.
985
985

Bal. 25,000
7,205
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Bal.
455
455

Bal.
4,000
Debit Income
Summary for the
amount of its
balance (in this
case, the net
income) and credit
the capital account.
57
The Closing Process

Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
Rent Expense
Bal.
1,600
16,960
7,205
1,600
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Bal.
50
50
Utilities Expense
Bal.
985
985

4,000 Bal. 25,000
7,205
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Bal.
455
455

Bal.
4,000
4,000
Debit the capital

account for the
balance of the
drawing account,
and credit drawing
for the same
amount. 58
Review of the Closing Process

Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
4,525
9,775
7,205
Rent Expense
Bal.
1,600
1,600
1,600
16,960
16,960
16,480 Bal. 16,840

16,840
Rent Revenue
120 Bal.
120
120
Bal.
50
50
50
Utilities Expense
Bal.
985
985
985

4,000 Bal. 25,000
4,000
7,205
7,205
Supplies Expense
Bal.
2,040
2,040
2,040
Close Revenues
Close Expenses
Close Income Summary
Insurance Expense
Bal.
100
100
100
Bal.
455
455
445
Close Drawing
Bal.
4,000
4,000
59
After the closing entries

are posted, all of the
temporary accounts have
zero balances.
60
Post-closing Trial Balance

NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash
2 065 00
Accounts Receivable
2 720 00
Supplies
760 00
Prepaid Insurance
2 300 00
Land
20 000 00
Office Equipment
1 800 00
Accumulated Depreciation
50 00
Accounts Payable
900 00
Wages Payable
250 00
Unearned Rent
240 00
28 205 00
29 645 00 29 645 00
61
MODULE 2
The End
62

Module 2 - Completing The Accounting Cycle Discussion

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Module 2 - Completing The Accounting Cycle Discussion

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The accounting process that begins with

Seven Basic Steps of the

The work sheet is a useful device

The Work Sheet

Prepared from the general ledger.

The Work Sheet

Adjustments are entered here. Two

The Work Sheet

Adjustments are combined with

(a) The Supplies account has a debit of

(b) The Prepaid Insurance account has a

Accounts are added as needed.

(c) The Unearned Rent account has a credit

(d) Wages accrued but not paid at

(e) Fees accrued at the end of

(f) Depreciation of the office

Next, the unadjusted Trial

The Work Sheet

Revenue and expense balances in

The Work Sheet

Asset, liability, owners equity, and

To make room on the slides for

Now, lets extend the balances

The difference between the

The difference between the

9,755 16,960 33,645

Every amount on this income statement was taken from the

Assets are commonly divided into classes

Thats correct. Cash and other

There are some exceptions, but

Liabilities due usually within one

Liabilities not due for

4. Adjusting and Closing Entries

Adjusting and Closing Entries

Adjusting and Closing Entries

The Closing Process

Net Income or Net Loss is

Drawings are transferred to

Adjusting and Closing Entries

Drawings are transferred to

The Closing Process

Chris Clark, Capital

The Closing Process

16,840 Bal. 16,840

Chris Clark, Capital

Debit each revenue

The Closing Process

16,840 Bal. 16,840

Chris Clark, Capital

Chris Clark, Drawing

The Closing Process

16,840 Bal. 16,840

Chris Clark, Capital

Chris Clark, Drawing

The Closing Process

16,840 Bal. 16,840

Chris Clark, Capital

Chris Clark, Drawing

Debit the capital

Review of the Closing Process

16,480 Bal. 16,840

Chris Clark, Capital