Ch4 - Chapter 4 - Completing the accounting cycle CHAPTER...

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Chapter 4 - Completing the accounting cycle CHAPTER OVERVIEW Chapter 4 introduces you to the final steps in the accounting cycle. Using the information you learned in the previous three chapters you are now ready to complete the accounting cycle, thereby preparing the financial records for the next accounting period. The learning objectives for this chapter are to: 1. Prepare an accounting work sheet. 2. Use the work sheet to complete the accounting cycle. 3. Close the revenue, expense and drawings accounts. 4. Classify assets and liabilities as current or non-current. 5. Use the current and debt ratios to evaluate a business. CHAPTER REVIEW The accounting cycle is the process by which companies produce financial statements for a specific period. The accounting cycle can be subdivided into two categories: work performed during the period and work performed at the end of the period. We start with the ledger account balances at the beginning of the period. During the period: 1. journalise transactions; and 2. posting to the ledger. End of the period: 1. adjust the accounts, including journalising and posting the adjusting entries; 2. close the accounts, including journalising and posting the closing entries; and 3. prepare the financial statements (I/S, statement of changes in equity and B/S). Objective 1 - Prepare an accounting worksheet. A work sheet is an optional tool the accountant often uses to prepare financial statements. It is not part of a formal accounting system. Remember in Chapter 3 you learned how to prepare an adjusted trial balance using the following steps: 1. Prepare the unadjusted trial balance. 2. Enter the adjustments. 3. Calculate the adjusted account balances. The work sheet is completed using the following steps: 1. Extend the adjusted revenue and expense account balances to the Income Statement columns, which are located to the right of the Adjusted Trial Balance columns. Extend the adjusted asset, liability, and owner’s equity account balances to the Balance Sheet columns, which are located to the right of the Income Statement columns. 2. Enter net profit or net loss as a balancing amount on both the Income Statement and the Balance Sheet columns, and compute the adjusted column totals. Completing the accounting cycle 1
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You should review Exhibits 4-2 through to 4-6 in your text to be sure you understand the preparation of the adjusted trial balance. Once the adjusted trial balance has been prepared (Steps 1-3), the adjusted asset, liability, and owner’s equity account balances are transferred to the Balance Sheet columns, and the adjusted revenue and expense account balances are transferred to the Income Statement columns (Step 4). Note that each account will appear in either the Income Statement columns, or the Balance Sheet
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Ch4 - Chapter 4 - Completing the accounting cycle CHAPTER...

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