Chapter 4

Completing the accounting cycle

201044 - Completing the accounting cycle

 Learning objectives
• Prepare an accounting worksheet
• Use the worksheet to prepare financial statements
• Close the revenue, expense and drawings accounts
• Prepare the post-closing trial balance
• Classify assets and liabilities as current or non-current
• Describe the effect of various transactions on the current ratio
and the debt ratio

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 4.1. The accounting worksheet
• Accountants often use a worksheet to summarise data for
the financial statements
• It is a summary device that helps identify the accounts that
need adjustment
• The worksheet is an internal document

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 4.1. The accounting worksheet
• Step 1: Enter the account titles and their unadjusted balances in the
Trial balance columns of the worksheet and total the amounts
• Step 2: Enter the adjusting entries in the adjustments columns and
total the amounts
• Step 3: Calculate each account’s adjusted balance by combining
the trial balance and adjustment figures. Enter each account’s
adjusted amount in the adjusted trial balance columns

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 4.1. The accounting worksheet
• Step 4: Draw an imaginary line above the first revenue account.
Every account above that line (assets, liabilities and equity
accounts) is copied from the adjusted trial balance to the balance
sheet columns.
Every account below the line (revenues and expenses) is copied
from the adjusted trial balance to the income statement columns.
• Step 5: On the income statement, calculate profit or loss as total
revenues minus total expenses.
Enter profit (loss) as the balancing amount on the income statement.
Also enter profit (loss) as the balancing amount on the balance
sheet. Then total the financial statement columns.

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 4.1. The accounting worksheet
• Worksheet
SMART TOUCH LEARNING
WORKSHEET
For the month ended 30 June 201N
Accounts Trial Adjustments Adj-Trial Income Balance
Balance Balance Statement sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Cash
Supplies
Furniture
…….

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 4.1. The accounting worksheet
• Worksheet
SMART TOUCH LEARNING
WORKSHEET
For the month ended 30 June 201N
Accounts Trial Adjustments Adj-Trial Income Balance
Balance Balance Statement sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

Cash
Supplies
Furniture
…….

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 4.1. The accounting worksheet

Ex: Continuing with the example of Smart Touch Learning.

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 4.2. Completing the accounting cycle

- Preparing the financial statements from a worksheet

- Recording the adjusting entries from a worksheet

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 4.3. Closing the accounts
• Closing the accounts occurs at the end of the period
• It consists of journalising and posting the closing entries in order to
get the accounts ready for the next period
• It zeroes out all the revenues and all the expenses in order to
measure each period’s profit separately from all other periods and
updates the Capital account balance

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 4.3. Closing the accounts
Temporary accounts Permanent accounts
Closed at the end of the period Not closed at the end of the
period
Examples include Revenues, Examples include Assets,
Expenses, Drawings Liabilities, Capital
Start next period with a zero Ending balance carries forward to
balance next period

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 4.3. Closing the accounts
• Step 1: Make the revenue accounts equal zero via the Income
summary account
• Step 2: Make expense accounts equal zero via the Income
summary account
• Step 3: Make the Income summary account equal zero via the
Capital account
• Step 4: Make the Drawings account equal zero via the Capital
account

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 4.3. Closing the accounts

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 4.3. Closing the accounts

Ex: Prepare the closing entries and post to the T-

accounts for Smart Touch Learning.

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 4.4. Post-closing trial balance
• The accounting cycle can end with a post-closing trial balance
• This optional step lists the accounts and their adjusted balances
after closing
• Only assets, liabilities and capital accounts appear on the post-
closing trial balance
• No temporary accounts are included (revenues, expenses,
drawings)

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 4.4. Post-closing trial balance

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 4.5. Classifying assets and liabilities
• Assets and liabilities are usually classified in balance sheets as
either current or noncurrent
• Under each heading it is also usual to list assets and liabilities in
order of decreasing liquidity
• Liquidity is a measure of how quickly an item can be converted to
cash
• An alternative balance sheet format is to list assets and liabilities in
order of decreasing liquidity without the division into current and
non-current assets.
(AASB 101, Presentation of Financial Statements)

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 4.5. Classifying assets and liabilities
Assets
• Current assets are assets that are expected to be converted to
cash, sold or consumed during the next 12 months, or within the
business operating cycle if longer than a year
• The operating cycle is the time span during which (1) cash is used
to acquire goods and services, and (2) these goods and services
are sold to customers, from whom (3) the business collects cash
• Non-current assets are all assets other than current assets

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 4.5. Classifying assets and liabilities
Liabilities
• Current liabilities are debts that are due to be paid with cash or with
goods and services within one year, or within the business operating
cycle if longer than a year
• All liabilities that aren’t current are classified as non-current liabilities

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 4.5. Classifying assets and liabilities
The classified balance sheet

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 4.5. Classifying assets and liabilities
The classified balance sheet

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 4.6. Using accounting information in
decision making: Accounting ratios
• The current ratio measures a firm’s ability to pay its current
liabilities with its current assets
• Current ratio = Total current assets / Total current liabilities
• The debt ratio measures an organisation’s overall ability to pay its
total liabilities (debt)
• Debt ratio = Total liabilities / Total assets

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 Summary: Chapter 4
• The worksheet is a tool that puts the whole accounting process in
one place
• The formal financial statements yield the same net income or loss
that is shown on the worksheet
• Closing the accounts bring all temporary accounts back to zero
• The post-closing trial balance contains the same accounts that the
balance sheet contains
• Classification means dividing assets and liabilities between those
that will last less than a year (current) and those that will last longer
than a year (long-term)
• The different ratios give different views of a company’s financial
health

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 Tasks in class
Textbook: Chapter 4
• Quick Check
• Starters
• Exercises

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 Tasks at home
1/ Homework:
Textbook: Chapter 4
• Problems
• Apply
2/ Self-study:
Key References [2]: Chapter 4

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 The end of Chapter 4
Completing the accounting cycle

201044 - Completing the accounting cycle