Completing the Accounting Cycle

The accounting cycle in a company is the expectation to

carry out activities, analyzes, and record every event during the
course of the company.
stages of making the accounting cycle:

1. Prepare a worksheet
A worksheet is a tool in the form of a multiple-column that is used
for process of adjusting and preparing financial report and often
companies use the excel spreadsheet application
Using a worksheet at the company is optional, if using a
worksheet, the company must prepare financial reports directly from
the worksheet. There are five steps in the row that companies must do
to produce good financial report so that the can be submit by
management and interested parties

Step 1
Prepare a trial balance on the worksheet
Enter the general ledger nominal into the balance column account in the
working paper.

Step 2
Enter the adjustment in the adjustment columns
Enter all adjustment into the adjustment column, adjust whit the
account name, if not, add it under the total account

Step 3
Enter adjust balance in the adjustment trial balance columns
Combine the trial balance and adjustment amount into the adjusting
trial balance column an the worksheet, for example the supplies balance
sheet column is 2.500 debits and the adjustment balance column is
1.500 kredit. So in the trial balance adjustment 1000 debits

Step 4
Enter adjustment trial balance amount of the appropriate financial
statement columns
Enter the nominal amount of the adjustment trial balance into income
statement and balance sheet in the appropriate place.
Step 5
Total the statement columns. Compute the net income (or net loss), and
complete the worksheet
- total each of the financial statement columns.
-the debit amount balances the income statement; the credit amount
balance the balance sheet columns.

Preparing financial statement from a worksheet

All the data required for preparation of financial statements.
- income statement
-owner’s equity statement
- balance sheet
The company has not posted some adjustment so there are some
account that do not match the financial statements.

Worksheet that have been previosly filled in cannot the used as

financial report because the format of the financial statement is
different.

Preparing adjusting entries from a worksheet

The worksheet cannot be used as a basis for posting to the general
ledger account. Must adjust and it to the general ledger enter it in the
worksheet adjustment column. Journalist and posting follow the
preparation of financial statement when sheet are used.

2. Preparing closing entries and a post closing trial balance

The company prepares to close the books that distinguishes
between temporary and permanen account.
Temporary account include income statement account at the end
of the period. Permanen account in contrast.

Preparing closing entries

At the end of the accounting period, the company transfers the
balance of the temporary account to the permanen account.
The closing formally recognizes in the general ledger the transfer
of net income (or net loss) and owner’s withdrawals to owners capital.
Closing journal also returns zero balance in the each temporary account
an ready collect data in the next accounting period the is separate from
the previous data period permanent accounts are not closed.
Closing entries illustrated

Illustrate Company prepare closing entries only at the end of the

annual accounting period.
a. first column of date
b. To the right of date is account titles and explanation
c. And the right ref, debit, and credit

Example: service revenue debit, income summary credit

Posting closing entries

Note the all temporary account have zero balances after posting the
closing entries.
Addition balance in owner’s capital represent the total equity of the
owner at the end of the period.

Closing proses, piooner totals, balances, and double underlines its

temporary accounts revenues, expenses and owner’s drawings.

Close revenues to income summary

Close expense to income summary
Close income summary to owner’s capital
Close owner’s drawings to owner’s capital

Preparing a post closing trial balance

after post closing entries, next the post closing trial balance lists
permanent account and their balances
Post-closing to prove teh equality of the permanent account balances
carried forward into the next account period. Total Permanent balance
sheet account, balance debit and credit.
Permanent account only

balance does not prove that Pioneer has recorded all transactions or
that
ledger is correct. so do double-underlined to finish
closing process.
Closing entries
the financial statements:
column:
Image of owner $15,000
Owner's capital $42,000
Net income $18,000
Prepare the closing entries on December 31 that affect owner's equity.

3.explain the steps in the accounting cycle and how to prepare

correcting entries.

Summary of the accounting cycle

1. Analyze business transactions
2. Journalize the transactions
3. Prepare a trial balance
4. Post to ledger accounts
5. Journalize and post adjusting entries: deferrals/accruals
6. Prepare an adjusted trial balance
7. Prepare financial statements: Income statement Owner’s equity
statement Balance sheet
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
There are two related steps in the accounting cycle.
Companies can use financial sheets in preparing adjusting journals and
reports
statement.

Reversing entries an optional step

Accounting firms usually make reversing entries that are the opposite of
adjusting entries made in the previous period

Correcting Entries—An Avoidable Step

The accountant must correct the entries so that the journalizing errors
can be corrected, but if the accounting records are free of errors, there
is no need for correction
the difference between correcting entries and
customization entry
 Adjusting entries are an integral part of accounting
cycle. Correcting entries, not required if the notes
error free.
 Companies journal and post adjustments at the end of the
accounting period. Instead, companies make correction entries
whenever they find an error.
 Adjusting journals always affect at least one
balance sheet account and one income statement account. On
the other hand, correcting entries may involve a combination of
accounts requiring correction. The correct entry must be posted before
the closing entry.

determine the correct entry, compare the incorrect entry with

correct entries help identify accounts and amounts to—
and can't be—fixed. accountants make entries for
fix account.
CASE 1
On May 10, Mercato Co. journal and post $50 cash collections
on credit from the customer as a debit to Cash $50 and a credit to
Service Revenue $50. It the company discovered the error on May 20,
when the customer paid the rest full balance.
The comparison reveals that:
debit to Cash $50 is correct. However, the $50 credit for Service
Revenue should be has been credited to Accounts Receivable. As a
result, Service Revenue and Accounts Receivable is overstated in the
general ledger. correcting entries will earn more
entries and posts rather than correcting entries, but it will achieve the
desired result.

Correcting Entries

Correct the errors without reversing the incorrect entry.

Action Plan
✔ Compare the incorrect
entry with correct entry.
✔ After comparison,
make an entry to correct the accounts.
4.Identify the sections of a classified balance sheet.
improve the user's understanding of the company's financial position,
the company classifies the balance sheet.
Classified balance sheet groups
together similar assets and similar liabilities, using standardized
classification amounts and sections. standard classification
Assets
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets

Liabilities and Owner’s Equity

Current liabilities
Long-term liabilities
Owner’s (Stockholders’) equity

help readers of financial statements determine such things as:

(1) does the company have sufficient assets to pay its debts as they fall
due,and
(2) claims from short-term and long-term creditors for the total assets of
the company.
The basis of the accounting equation is Assets = Liabilities + Owner's
Equity

Current assets
Current assets are assets that are expected to be converted into cash or
used by the company within one year or its operating cycle, whichever is
longer.
For example, accounts receivable are current assets because the
company will collect them and turn them into cash within a year.

The company uses a period of more than one year to classify current
assets and liabilities and less than one year depending on the type of
business of the company.
The common types of current assets are:
(1) cash,
(2) investments (such as short-term US government securities),
(3) receivables (notes receivable, receivables, and interest receivables),
(4) inventory, and
(5) prepaid expenses (supplies and insurance).
On balance sheets, companies usually list these:
items in the order in which they hope to turn them into cash.
a company’s current assets are important
in assessing its short-term debt-paying ability.

Long-Term Investments
Long-term investments are generally
(1) investments in stocks and bonds of
other companies that are normally held for many years,
(2) long-term assets such
as land or buildings that a company is not currently using in its operating
activities, and
(3) long-term notes receivable. In Illustration 4-21, Franklin Company
reported total long-term investments of $7,200 on its balance sheet.

Long-term investments
Investments in securities $90,266

The categories of land, buildings, machinery and equipment, shipping

equipment, and furniture are assets with a relatively long useful life that
used by the company in conducting its business.
Illustration, Franklin Company reporting property, plant, and equipment
for $29,000. Depreciation is the practice of allocating the cost of an asset
to the number of years. the company systematically assigns a portion of
the cost of the asset as an expense each year (rather than charging the
cost of the asset). full purchase price in the year of purchase). The
company's depreciated assets are reported on the balance sheet at cost
less accumulated depreciation. The accumulated depreciation account
shows: the total amount of depreciation the company has incurred so
far asset life.

Property, Plant, and Equipment

Property, plant, and equipment is sometimes called fi xed assets or plant

assets.

Intangible Assets
Intangible assets are long-lived assets that do not yet have a physical
form, often very valuable,a trade name that gives the company exclusive
use rights for a certain period of time. In the Illustration, Franklin
Company reports an intangible asset of $3,100. such as goodwill. Others
include patents, copyrights and trademarks. sometimes intangible assets
are reported under a broader heading called “Other Assets.”.

Current Liability
Current liabilities are obligations that the company must pay within the
next year or its operating cycle, whichever is longer. Examples are
accounts payable, salaries and wages payable, notes payable, interest
payable, and income tax payable. Also included as current liabilities are
the current maturities of long-term liabilities—payments must be made
within next year on long-term liabilities. Illustration, Franklin Company
reported five different types of current liabilities, totaling $16,050.

the financial statements show the relationship between the flow of

assets and current liabilities to evaluate the company's liquidity—its
ability to pay obligations that are expected to mature in the near future.
year. When current assets exceed current liabilities, the possibility of
paying liabilities is favorable. When the opposite is true, short-term
creditors may not
paid, and the company could eventually be forced into bankruptcy

Owner's equity
Owner's equity varies with the form of business organization. In
ownership, there is one capital account. In a partnership, there is a
capital account for each partner.

The company divides owner's equity into two:

1. account—Common Stock (sometimes referred to as Capital Stock) and
2. Withheld Income.
The corporation records the shareholder's investment in the company
by debiting the asset account and crediting the Common Stock account.
They record in Retained Earnings the account earnings are retained for
use in the business. The corporation combines the Common Stock and
Retained Earnings accounts and reports them on the balance sheet as
shareholder equity.
5 APPENDIX 4A: Prepare reversing entries.

After preparing the financial statements and closing the books,

the next entry is reversing. Companies make reversing entries at the
beginning of the next accounting period. Each reverse entry is the
reverse of the adjusting entry made in the previous period and is an
optional step in the accounting cycle.
The purpose of reversing entries is to simplify subsequent
recording of transactions related to adjusting entries. For example,
payroll after adjusting entries result in two debits: one to Salaries and
Wages Payable and others for Salaries and Wages Expense. With reverse
entry, the company can debit all subsequent payments to Sala Expense
and Wages. The use of reversing entries does not change the amounts
reported in the financial statements. What it does is simplify the
recording of subsequent transactions.