Chapter 4:

Completing the Accounting Cycle

Note:
• Information included in this presentation was taken from the 17ce PowerPoint slides
belonging to the following textbook:

Dieckmann, H.; Harris, J.; and Larson, K.D. (2022) Larson Fundamental Accounting
Principles 3.0 Print Custom Textbook with Connect Online Access (17 Canadian ed.).
Mc-Graw-Hill Ryerson Ltd. ISBN: 9781265230869.
Learning Objectives

1.5 Prepare financial statements from an adjusted trial balance

1.6 Record post-closing entries

The Accounting Cycle

Step 1: Analyze transactions​

Step 2: Journalize​ Chapter 2
Step 3: Post​
Step 4: Prepare unadjusted trial balance​
Step 5: Adjust​
Chapter 3
Step 6: Prepare adjusted trial balance​
Step 7: Prepare statements​
Step 8: Close​ Chapter 4
Step 9: Prepare post-closing trial balance
Closing Process

• Once financial statements have been prepared we need to get ready for next
accounting period.
• Closing entries will be made to reset revenues, expenses, and owner
withdrawal accounts to zero.
• Owner’s capital account to reflect:
a) Increases from profits (or decreases from losses), and
b) Decreases from withdrawals from the period just ending.

3-step closing process:

1) Identify accounts for closing.

2) Record and post the closing entries.

3) Prepare the post-closing trial balance.

Step 1) Identify Accounts for Closing

Temporary Accounts Permanent Accounts

Revenues Assets
Expenses Liabilities
Income Summary Owner’s Capital
Withdrawals

Close these accounts Do not close these accounts

Step 2) Record and Post Closing Entries
Revenue Expense
Accounts Accounts

Income
Summary

Owner’s
Capital

Withdrawal
Accounts
 Step 2) Record and Post Closing Entries

1) Close revenue accounts to Income Summary.

Revenue Expense
Dr. Revenue
Accounts Accounts Cr. Income Summary

2) Close expense accounts to Income Summary.

Income
Summary
Dr. Income Summary
Cr. Expense
Owner’s
Capital

Withdrawal
Accounts
Step 2) Record and Post Closing Entries

3) Close Income Summary to Owner’s Capital.

Does Income Summary have a net debit or credit balance after closing revenue and
expense accounts?

• If it has a debit balance, then we need to credit Income Summary to make the
balance zero.
Dr. Owner’s Capital
Cr. Income summary
• If it has a credit balance, then we need to debit Income Summary to make the
balance zero.
Dr. Income Summary
Cr. Owner’s Capital
 Step 2) Record and Post Closing Entries

Revenue Expense
Accounts Accounts 4) Close withdrawal accounts to Owner’s Capital.
• Withdrawal accounts have a normal debit balance
so need to be credited to bring to $0.
Income
Summary
Dr. Owner, Capital
Cr. Owner, Withdrawals
Owner’s
Capital

Withdrawal
Accounts
 Step 3) Prepare a Post-Closing Trial Balance
Organico, Post-Closing Trial Balance, March 31, 2023
• A list of permanent Debit Credit
Cash $8,070
accounts and their Accounts receivable 1,800
balances after all closing Supplies 2,550

entries are journalized Prepaid Insurance

Equipment
2,300
6,000
and posted. Accumulated depreciation, equipment $200
Accounts payable 200
Interest payable 35

• Notice how all revenue, Salaries payable

Unearned food services revenue
140
2,750
expense, and withdrawal Notes payable 6,000
accounts are now $0. Hailey Walker, capital 11,395
Totals $20,720 $20,720

EXHIBIT 4.7
In-Class Exercises

• QS 4-3, 4-17
• Problem 4-4B, 4-5B
 Exhibit 4.11

Classified Balance Sheet

• Putting balance sheet accounts

into different groupings
provides financial statement
users with better information.
• Such as:
• Which liabilities are due in the near
future?
• What are the Company’s total short-
term and long-term assets?

• This detail makes it easier to

calculate financial ratios.
Current Assets

• Include all assets such as cash and other resources that are expected to
be sold, collected, or used within the longer of one year of the
company’s balance sheet date or the company’s operating cycle.

• Examples: Cash, accounts receivable, short-term investments, inventory,

prepaid expenses, current portion of notes receivable…

EXHIBIT 4.10
Non-Current Investments

• Include all investments management intends to hold to maturity.

• The distinction between current and non-current classification is

determined largely by management’s strategic intent to keep the
instrument to maturity.

• Examples: bonds, loans outstanding, non-current notes receivable,

equity ownership (shares) in another company, land not
being used in operations…
Property, Plant and Equipment (PPE)

• Tangible assets of which the company has legal ownership as a result of

a past business transaction and can use for more than one accounting
period to produce or sell products and services.

• All PPE items are expected to be used in the business to carry out its
operations and are not intended to be sold.

• Examples: machinery, vehicles, computer hardware, buildings, land…

Intangible Assets

• Resources that lack physical form and have benefits that flow to the
company for more than one accounting period, result from a past
transaction for which the company has the legal right, and are expected
to provide future benefits.

• These intangibles add value to the company and are used to produce or
sell products and services.
• Their value comes from the privileges or rights granted to or held by the owner.

• Examples: patents, trademarks, copyrights, and franchise rights…

Current Liabilities

• Obligations due to be settled within the longer of one year of the

Company’s balance sheet date or its normal operating cycle.

• Any portion of a non-current liability due to be settled within the

longer of one year or the operating cycle is classified as a current
liability.

• Examples: accounts payable, notes payable, wages payable,

taxes payable, interest payable, unearned revenues…
Non-Current Liabilities

• Obligations due beyond the longer of one year or the Company’s

normal operating cycle.

• The portion due within the year immediately following the balance
sheet date must be separated and shown as a current liability on
the balance sheet.

• Examples: notes payable, mortgages payable, bonds payable,

lease obligations…
Equity

• The owner’s claim on the assets of a company.

• In a sole proprietorship, it is reported in the equity section with an

owner’s capital account.

• The equity sections of a partnership and corporation are

discussed in detail in later chapters.
 EXHIBIT 4A.2

Worksheets

• An optional working
paper that can
simplify the
accountant’s efforts
in preparing financial
statements.

• Helps avoid errors

when working with a
lot of information in
accounting systems.
In-Class Exercises

• Problem 4-10A (Required 1 and 2)

Additional Practice:
• Exercise 4-2
• Problem 4-4A, 4-5A, 4-6A, 4-7A, 4-9A
• Connect Ch4
Summary

• Temporary accounts need to be closed at the end of each fiscal year.

1) Revenue accounts are closed to Income Summary.
2) Expense accounts are closed to Income Summary.
3) Income Summary is closed to Owner’s Capital.
4) Withdrawal accounts are closed to Owner’s Capital.

• A classified balance sheet is used to provide financial statement users

with more useful information to aid in decision-making.