Chapter 4 Powerpoint.pptx - Chapter 4 Completing the...

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Chapter 4 Completing the Accounting Cycle
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2 In this chapter we review the basic steps in the accounting cycle, with a focus on what is done at the end of a period. During the year, transactions have been happening and that has resulted in journal entries reflecting those transactions. Perhaps assets have been purchased, sales have been made, liabilities incurred. All of these activities hopefully have been recorded through use of journal entries. At the end of a period, a trial balance is run showing the current balance of accounts since they were last adjusted. This is called the unadjusted Trial Balance. We now have to make some adjustments to these accounts at the end of the year so the balances are correct as of the end of the year, or at 12/31. The Accounting cycle
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3 After we have made the necessary year end adjustments we then run another trial balance, called the adjusted trial balance. The accounts now should show the proper balance at year end. After reviewing the adjusted trial balance for errors, we will then summarize the income and expense accounts into one account (net income) and then post that to retained earnings. If dividends have been paid we will post that to retained earnings as well. This updates shareholders equity in the balance sheet. First I summarize the process using charts in the following slides and then we take a look at a few of the accrual entries that need to be done to update the various accounts in order to obtain the adjusted trial balance referred to above. The Accounting cycle
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Unnecessary if accounting records are free of errors. Made whenever an error is discovered. Must be posted before closing entries. Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry . Correcting Entries—An Avoidable Step LO 3
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Closing entries formally recognize in the ledger the transfer of net income (or net loss) and Dividends to Retained Earnings. Companies generally journalize and post closing entries only at the end of the annual accounting period. Closing entries produce a zero balance in each temporary account. Preparing Closing Entries LO 2
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Retained earnings is a permanent account. All other accounts are temporary accounts.
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