Completing the
Accounting
Cycle
Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
Learning Objectives
1. State all the steps in the accounting
cycle.
2. Explain and prepare closing entries.
3. Prepare the post-closing trial balance.
4. Prepare reversing entries as
appropriate.
5. Prepare and use a work sheet.
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4. Adjust
5. Close
6. Prepare
financial statements
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Output
Accounting System
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Discussion
Q. Is it necessary to complete all six
steps in the accounting cycle?
A. Yes. All six steps must be accomplished
to complete the accounting cycle.
However, the order of these steps can
vary somewhat depending on the system
in place
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Closing Entries
Objective 2
Explain and prepare closing entries
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Temporary accounts
Income statement accounts (revenues and
expenses)
Also called nominal accounts
Begin each accounting period with a zero balance
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Closing Entries
Two purposes
1. Clear revenue, expense, and Withdrawal
accounts (temporary accounts) of their balances
2. Summarize a period's revenues and expenses
Revenue and expense accounts must begin each
new period with zero balances for the income
statement to present the activity of a single period
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Step 2
Step 3
Revenue Accounts
XXX Bal. XXX
Bal.
-0Expense Accounts
Bal.
XXX
XXX
Bal.
-0Income Summary
XXX
XX Bal.
Bal.
XXX
XX
-0-
Capital
XX
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Step 4
XX
-0-
Revenue Accounts
XXX Bal. XXX
Bal. -0Expense Accounts
Bal. XXX
XXX
Bal.
-0Income Summary
Bal.
XXX
XX
Bal.
-0-
XXX
XX
Capital
XX
XX
XX
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Income Summary
July 31 4,800 July 31 6,800
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Income Summary
July 31 4,800 July 31 6,800
2,000 Bal.
Bal.
2,000
-0-
-0-
200
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Discussion
Q. Could the Income Summary account
have a debit balance when the income
statement accounts are closed to it?
A. Yes, if a net loss has been incurred
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Discussion
Q. What is the significance of the postclosing trial balance?
A. The post-closing trial balance checks that
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Reversing Entries
Are made to reverse adjusting entries
recorded at the end of the previous accounting
period
Simplify the bookkeeping process
Are optional
Are made on the first day of the new
accounting period
Only adjustments for accruals are reversed
Reversing deferrals would not simplify the
bookkeeping process
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Payment of wages
If no reversing entry was made, the amount of wages expense
must be determined for the current period ($1,200 - $360)
If a reversing entry was made, the entire amount of wages paid
is entered as an expense
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Wages Expense
360 (2)Jul 31
-0- (3)Aug 1
(4)Aug 9 1,200
(4) Entry to
record payment
of wages:
Full amount of
payment is
recorded as an
expense
Bal.
840
(3) Reversing
Entry:
Reduces Wages
Expense account
by the amount of
accrued expense
that was recorded
for July
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Wages Expense
July 31 360 Jul 31
360
Aug 1
Wages Payable
July 31 360
-0-
Wages Expense
July 31 360 Jul 31
360
Aug 1
-0- Aug 1
360
Aug 9 1,200
Bal.
840
Wages Payable
Aug 1
360 July 31 360
Bal.
-0-
Accounts Receivable
July 31 200
-0-
Accounts Receivable
July 31 200 Aug 1
200
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Discussion
Q. What is the purpose of reversing
entries?
A. To simplify the bookkeeping process
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Working Papers
Relevant data collected by accountants
Calculations to determine the amount of
Prepaid insurance that has expired
Depreciation
Inventory of supplies on hand
Accrued wages
Analyses
Preliminary drafts of financial statements
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Crossfooting
Adding or subtracting a group of numbers horizontally
Pay attention to debits and credits
The $500 credit adjustment to Art Supplies decreases the
$1,800 debit balance to an adjusted $1,300 debit balance
The $360 debit adjustment to Wages Expense increases the
$2,400 debit balance to an adjusted $2,760 debit balance
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5,200
1,600
6,800
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Step 1
Enter Wages Expense account balance
in the Trial Balance column
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Step 2
Enter the adjustments in the
Adjustments column
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Step 3
Enter the adjusted account balances in
the Adjusted Trial Balance column
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Step 4
Extend the account balances from the
Adjusted Trial Balance columns to the
appropriate Income Statement or
Balance Sheet columns
Income
Statement
Account
Balance
Sheet
Account
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Discussion
Q. Do the Income Statement columns and the
Balance Sheet columns of the work sheet
balance after the amounts from the
Adjusted Trial Balance columns are
extended?
A. No, they do not balance by the amount of net
income or loss for the period
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