Chapter 04 lecture - Chapter 4 Completing the Accounting...

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Chapter 4 Completing the Accounting Cycle ______________________________________________ It is not sufficient to record adjusting entries only on the work sheet. These entries must be journalized and posted to make them a part of a company's accounting records. After studying the chapter, you should be able to: 1. Review the seven basic steps of the accounting cycle. 2. Prepare a work sheet. 3. Prepare financial statements from a work sheet. 4. Prepare the adjusting and closing entries from a work sheet. 5. Explain what is meant by the fiscal year and the natural business year. 6. Analyze and interpret the financial solvency of a business by computing working capital and the current ratio. KEY TERM: Accounting Cycle The accounting cycle is the same for all businesses, no matter how complex or how simple. The accounting cycle is repeated each period in which financial statements are prepared. Closing Entries : One primary purpose of preparing closing entries is to reset the revenue, expense, and drawing accounts (the temporary accounts) to a zero balance. The second purpose of closing entries is to move the balance of all revenue, expense, and drawing accounts to the owner's capital account. In Chapter 1, all revenue, expense, and withdrawal transactions were recorded in the owner's capital account, because they affect owner's equity. In Chapter 2, you began recording these transactions in separate accounts to make it easier to prepare financial statements. Now it is time to move those transactions back to the capital account. When preparing closing entries, accountants first move the balances of all revenue and expense accounts to Income Summary. If all revenue and expense accounts are correctly transferred to
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This note was uploaded on 06/22/2009 for the course ACCOUNTING 1A taught by Professor Seyedin during the Fall '08 term at Foothill College.

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Chapter 04 lecture - Chapter 4 Completing the Accounting...

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