12/27/2016 1 Accounting Principles Lecture 9 Chapter 4: Completing the Accounting Cycle Steps of the Accounting Cycle: • Analyze business transactions. • Journalize the transactions. • Post to ledger accounts. • Prepare trial balance. • Journalize and post adjusting entries for deferrals and accruals. • Prepare an adjusted trial balance. • Prepare financial statements. – Income Statement. – Owner’s Equity Statement. – Balance Sheet. • Journalize and Post closing entries. • Prepare a post-closing trial balance. 2
12/27/2016 2 Closing the Books • At the end of the accounting period, the company makes the accounts ready for the next accounting period. This is called “closing the books” • In closing the books, it is necessary to distinguish between temporary and permanent accounts. 3 Temporary Accounts: 1. Relate to only one accounting period, 2. Include all income statement accounts (all revenue and expense accounts), and the drawing account. 3. All temporary accounts are closed at the end of the accounting period after preparation of the financial statements, 4. Closing an account means reducing the balance of the account to zero. 4
12/27/2016 3 Permanent Accounts: 1. Relate to one or more future accounting period, 2. Include all balance sheet accounts (assets, liabilities, and the capital account). They include also all contra accounts such as accumulated depreciation, 3. Permanent accounts are not closed at the end of the accounting period. 5 Preparing Closing entries: • At the end of the accounting period, the temporary account balances are transferred to the permanent owner’s equity account, the owner’s capital account through the preparation of closing entries. • Closing entries formally recognize in the ledger the transfer of net income (or net loss), and owner’s drawing to the owner’s capital account as shown in the statement of owner’s equity . • Closing entries produce a zero balance in each temporary account. • A temporary account called “Income Summary” is used in closing revenue and expense accounts and only the net income or net loss is transferred from the income summary account to the capital account. 6
12/27/2016 4 Four closing entries are required to close the books: • To close the revenue accounts: debit each revenue account for its balance and credit income summary for total revenue.