4-1

Completing the
Chapter 4 Accounting Cycle
Learning Objectives
After studying this chapter, you should be able to:

1. Explain the process of closing the books.

2. Describe the content and purpose of a post-closing trial balance.
3. State the required steps in the accounting cycle.
4. Identify the sections of a classified statement of financial position.

4-2
 Summary of the Accounting Cycle
Illustration 4-12

1.
1. Analyze
Analyze business
business transactions
transactions

9.
9. Prepare
Prepare aa post-closing
post-closing 2.
2. Journalize
Journalize the
the
trial
trial balance
balance transactions
transactions

8.
8. Journalize
Journalize and
and post
post 3.
3. Post
Post to
to ledger
ledger accounts
accounts
closing
closing entries
entries

7.
7. Prepare
Prepare financial
financial 4.
4. Prepare
Prepare aa trial
trial balance
balance
statements
statements

6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial 5.
5. Journalize
Journalize and
and post
post
balance
balance adjusting
adjusting entries
entries

4-3 LO 4 State the required steps in the accounting cycle.

 The Adjusted Trial Balance

Adjusted Trial Balance

 Prepared after all adjusting entries are journalized and
posted.
 Purpose is to prove the equality of debit balances and
credit balances in the ledger.
 Is the primary basis for the preparation of financial
statements.

4-4 LO 7 Describe the nature and purpose of an adjusted trial balance.

 Illustration 3-25

4-5
 Preparing Financial Statements

Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
fromthe
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.

Retained Statement
Income
Earnings of Financial
Statement
Statement Position

4-6 LO 7 Describe the nature and purpose of an adjusted trial balance.

 Illustration 3-26
4-7
LO 7
 Illustration 3-27
4-8
LO 7
 Closing the Books

At the end of the accounting period, the company makes

the accounts ready for the next period.
Illustration 4-5

4-9 LO 2 Explain the process of closing the books.

 Closing the Books

Preparing Closing Entries

Closing entries formally recognize, in the general ledger, the
transfer of
 net income (or net loss) and
 dividends
to retained earnings.

Closing entries are only made at the end of the annual

accounting period.

4-10 LO 2 Explain the process of closing the books.

 Closing the Books

Note:
Dividends are closed directly Illustration 4-6

to retained earnings and not

to Income Summary because
Retained earnings is a
dividends are not an permanent account; all
other accounts are
expense. temporary accounts.

4-11 LO 2
 Closing the Books

Preparing Closing Entries

Closing entries produce a zero balance in each temporary account

4-12 LO 2 Explain the process of closing the books.

 Closing the Books

Preparing Closing Entries

Closing entries produce a zero balance in each temporary account

4-13 LO 2 Explain the process of closing the books.

 Illustration 3-25

4-14
 Closing the Books

Preparing Closing Entries for Pioneer Advertising Agency Inc.

4-15 LO 2 Explain the process of closing the books.

 Closing the Books

Preparing Closing Entries for Pioneer Advertising Agency Inc.

4-16 LO 2 Explain the process of closing the books.

 Closing the Books

Posting
Closing
Entries

Illustration 4-8

4-17 LO 2
 Closing the Books

1. In order to close the Dividends account, the

a. income summary account should be debited.
b. income summary account should be credited.
c. retained earnings account should be credited.
d. retained earnings account should be debited.

2. In preparing closing entries

a. each revenue account will be credited.
b. each expense account will be credited.
e. the retained earnings account will be debited if there is net income
for the period.
f. the dividends account will be debited.

4-18 LO 2 Explain the process of closing the books.

 Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account

balances after journalizing and posting of closing entries.

Illustration 4-9

4-19 LO 3
 The Classified Statement of Financial Position

 Presents a snapshot at a point in time.

 To improve understanding, companies group similar
assets and similar liabilities together.

Standard Classifications
Illustration 4-17

4-20 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Illustration
4-18

4-21 LO 6
 The Classified Statement of Financial Position

Illustration
4-18

4-22 LO 6
 The Classified Statement of Financial Position

Intangible Assets
 Assets that do not have physical substance.
Illustration 4-19

4-23 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Property, Plant, and Equipment

 Long useful lives.
 Currently used in operations.
 Depreciation - allocating the cost of assets to a number
of years.
 Accumulated depreciation - total amount of
depreciation expensed thus far in the asset’s life.

4-24 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Property, Plant, and Equipment

Illustration 4-20

4-25 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Long-Term Investments
 Investments in ordinary shares and bonds of other
companies.
 Investments in non-current assets such as land or buildings
that a company is not using in its operating activities.
Illustration 4-21

4-26 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Assets
 Assets that a company expects to convert to cash or
use up within one year or the operating cycle, whichever
is longer.
 Operating cycle is the average time it takes from the
purchase of inventory to the collection of cash from
customers.

4-27 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Assets Illustration 4-22

Usually listed in the reverse order they expect to convert them into cash.

4-28 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Equity
 Proprietorship - one capital account.
 Partnership - capital account for each partner.
 Corporation – Share Capital and Retained Earnings.

Illustration 4-23

4-29 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Non-Current Liabilities
 Obligations a company expects to pay after one year.
Illustration 4-24

4-30 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Liabilities
 Obligations company is to pay within the coming year or
its operating cycle, whichever is longer.
 Usually list notes payable first, followed by accounts
payable. Other items follow in order of magnitude.
 Liquidity - ability to pay obligations expected to be due
within the next year.

4-31 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Liabilities
Illustration 4-25

4-32 LO 6 Identify the sections of a classified statement of financial position.

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