Task Team of FUNDAMENTAL ACCOUNTING L Notes Lesson 5 Completing the Accounting Cycle Learning objectives 1. Describe and prepare a worksheet and describe its usefulness 2. Describe the closing process and explain why temporary accounts are closed ch d atrie Teaching h Students major in acc 5 hours Othe 2 he Teaching contents: Before we start this lesson let recall what we have studied analyzing transaction Journalizing the transactions Posting Unadjusted trial balance Adjusting Adjusted trial balanc What is worksheet A worksheet is a working paper used by an accountant to organize accounting information for preparing the financial statements and adjusting entries What the worksheet is used for? The worksheet is used to gather information on adjustments and account baland from the financial statements. This helps reduce the chance of error, omission, duplication, and assures mathematical accuracy prior to the actual preparation of the formal financial statements. The worksheet is useful in preparing interim financial statements. The adjustments are reflected on the worksheet only, and not yet recorded in the journal or ledger accounts. Interim statements can provid useful monthly or quarterly data without disrupting the routine record keeping. The worksheet facilitates the record ing of adjusting and closing entries What does the worksheet include? normally. a worksheet has 5 sets of double column 1. Unad justed trial balance column: the accounts and their balances are taken from the ledger and entered in these columns 2. Adjustments: adjusting entries are recorded in these columns. The worksheet is not a journal but a worksheet It is used only for gathering the ad justment data The adjusted trial balance is prepared by combining the adjustments with the
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University Lesson Notes Lesson 5 Completing the Accounting Cycle Learning objectives 1. Describe and prepare a worksheet and describe its usefulness. 2. Describe the closing process and explain why temporary accounts are closed each period. 3. Prepare closing entries. Teaching hours Students major in accounting: 5 hours Others: 2 hours Teaching contents: Before we start this lesson, let recall what we have studied: – Analyzing transactions – Journalizing the transactions – Posting – Unadjusted trial balance – Adjusting – Adjusted trial balance What is worksheet ? A worksheet is a working paper used by an accountant to organize accounting information for preparing the financial statements and adjusting entries. What the worksheet is used for? The worksheet is used to gather information on adjustments and account balances from the financial statements. This helps reduce the chance of error, omission, duplication, and assures mathematical accuracy prior to the actual preparation of the formal financial statements. The worksheet is useful in preparing interim financial statements. The adjustments are reflected on the worksheet only, and not yet recorded in the journal or ledger accounts. Interim statements can provide useful monthly or quarterly data without disrupting the routine record keeping. The worksheet facilitates the recording of adjusting and closing entries. What does the worksheet include? Normally, a worksheet has 5 sets of double columns: 1. Unadjusted trial balance column: the accounts and their balances are taken from the ledger and entered in these columns; 2. Adjustments: adjusting entries are recorded in these columns. The worksheet is not a journal but a worksheet. It is used only for gathering the adjustment data. The adjusted trial balance is prepared by combining the adjustments with the
Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University unad justed balances 3. Adjusted trial balance: the results of combining the unadjusted trial balance and adjustments columns are entered here 4. Income statement. those accounts that belong on the income statement are extended from the adjusted trial balance columns to the income statement columns 5. Balance sheet and statement of owner's equity: those accounts that belong or these financial statements are extended from the ad justed trial balance into last two columns of the worksheet How to prepare the worksheet The procedure for preparing worksheets is as follows 1. enter the unadjusted trial balance and ascertain the equal ity of debits and cred its If the trial balance is in balance, it suggests accuracy in the accounts, although this not a guarantee 2. Enter the necessary adjustments into the two adjustments columns. Be sure that debits equal credits for each adjustment. It is common practice to use an identify ing letter to relate the debit to the cred it of each adjustment. Remember that the purpose of adjusting entries is to bring the accounts to their proper balances and to ensure that expenses are recorded in the period that they are incurred and revenues are recorded when they are earned 3. Enter the correct amounts in the adjusted trial balance columns by summing the amounts in the unadjusted trial balance columns with the amounts in the adjustment columns. The amounts int the adjusted trial balance are the same as those in the accounts of the financ ial statements as a check, you should foot the two ad justed trial balance columns and ensure that total debits still equal total credits 4. Extent the adjusted accounts to the income statement or balance sheet columns For each item, decide if it is a balance sheet account or an income statement account. Then copy debit balances to the appropriate debit column and credit balances to the appropriate credit column 5. Footing of the income statement and balance sheet columns There are three different situations The income statement columns are equal, means that revenues equal expenses and there is no net income or net loss. In this case there is no change in owners equity The income statement cred it column exceeds the debit column the difference represents net income for the period The income statement debit column exceeds the credit column the difference represents a net loss
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University unadjusted balances. 3. Adjusted trial balance: the results of combining the unadjusted trial balance and adjustments columns are entered here. 4. Income statement: those accounts that belong on the income statement are extended from the adjusted trial balance columns to the income statement columns. 5. Balance sheet and statement of owner’s equity : those accounts that belong on these financial statements are extended from the adjusted trial balance into the last two columns of the worksheet. How to prepare the worksheet? The procedure for preparing worksheets is as follows. 1. enter the unadjusted trial balance and ascertain the equality of debits and credits. If the trial balance is in balance, it suggests accuracy in the accounts, although this not a guarantee. 2. Enter the necessary adjustments into the two adjustments columns. Be sure that debits equal credits for each adjustment. It is common practice to use an identifying letter to relate the debit to the credit of each adjustment. Remember that the purpose of adjusting entries is to bring the accounts to their proper balances and to ensure that expenses are recorded in the period that they are incurred and revenues are recorded when they are earned. 3. Enter the correct amounts in the adjusted trial balance columns by summing the amounts in the unadjusted trial balance columns with the amounts in the adjustment columns. The amounts int the adjusted trial balance are the same as those in the accounts of the financial statements as a check, you should foot the two adjusted trial balance columns and ensure that total debits still equal total credits. 4. Extent the adjusted accounts to the income statement or balance sheet columns. For each item, decide if it is a balance sheet account or an income statement account. Then copy debit balances to the appropriate debit column and credit balances to the appropriate credit column. 5. Footing of the income statement and balance sheet columns. There are three different situations: The income statement columns are equal, means that revenues equal expenses and there is no net income or net loss. In this case there is no change in owner’s equity. The income statement credit column exceeds the debit column. the difference represents net income for the period. The income statement debit column exceeds the credit column ,the difference represents a net loss
Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University The difference between revenues and expenses is added directly to the statement of owner's equity. Net income is added to the retained earnings How to use the worksheet for preparing financial statements The financial statement can be prepared by rearranging the items on the worksheet The income statement is typically prepared first and then the balance sheet Notice: the worksheet does not eliminate the need to journalize and post the adjusting journal entries. This must still be done in order for the information to enter the accounting system Journalizing and posting the adjusting journal entries will bring the ledger into agreement with the adjusted trial balance amounts shown What is Temporary and permanent accounts? beginning of a period, used to record events for that period and closed at the end of the period. They accumulate data related to one accounting period only Permanent accounts are those accounts that their balances are carried forward from one accounting period to the next What is closing entries? entries are entries that transfer the balances in the temporary accounts to a balance sheet equity account The purpose of closing entries. An the end of an accounting period, an income statement is prepared. The revenue and expense accounts have served their purpose in determining the periods net income. New revenue and expense accounts will be needed for the next accounting period. Closing entries can give the temporary accounts a zero balance How to prepare the closing entries First of all, we need to set a closing account called"Income Summar Then the revenues and expenses are transferred to owner's equity account through the Income Summary account. The balance in the Income Summary account after closing the revenues and expenses must equal the net income or net loss, it is used to confirm that revenues and expenses have been closed properly Once the net income or loss has been proved, the balance in the Income Summary is transferred to the owners equity account Four typical closing entries are 1. Close revenue to income summary which will debit all revenue accounts and
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University The difference between revenues and expenses is added directly to the statement of owner’s equity. Net income is added to the retained earnings. How to use the worksheet for preparing financial statements? The financial statement can be prepared by rearranging the items on the worksheet. The income statement is typically prepared first and then the balance sheet. Notice: the worksheet does not eliminate the need to journalize and post the adjusting journal entries. This must still be done in order for the information to enter the accounting system .Journalizing and posting the adjusting journal entries will bring the ledger into agreement with the adjusted trial balance amounts shown on the worksheet. What is Temporary and Permanent Accounts? Temporary accounts are also called nominal accounts. They are opened at the beginning of a period, used to record events for that period and closed at the end of the period. They accumulate data related to one accounting period only. Permanent accounts are those accounts that their balances are carried forward from one accounting period to the next. What is closing entries? Closing entries are entries that transfer the balances in the temporary accounts to a balance sheet equity account. The purpose of closing entries. An the end of an accounting period, an income statement is prepared. The revenue and expense accounts have served their purpose in determining the period’s net income. New revenue and expense accounts will be needed for the next accounting period. Closing entries can give the temporary accounts a zero balance. How to prepare the closing entries? First of all, we need to set a closing account called “Income Summary”. Then the revenues and expenses are transferred to owner’s equity account through the Income Summary account. The balance in the Income Summary account after closing the revenues and expenses must equal the net income or net loss, it is used to confirm that revenues and expenses have been closed properly. Once the net income or loss has been proved, the balance in the Income Summary is transferred to the owner’s equity account. Four typical closing entries are: 1. Close revenue to income summary which will debit all revenue accounts and
Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University credit income summary accounts Close expenses to income summary which will debit income summary accounts and credit all expenses accounts 3. close income summary to the owner's equity account which will debit income summary( if there is a net income)and cred it the owners equity account. Or debit owners equity account( if there is a net loss) and cred it the income summary account Why post-closing trial balance is needed? Post-closing trial balance is needed to ensure that the journalizing and posting of closing entries have been done properly. That is to ensure that total debits still equal total cred its in the remaining permanent accounts. The income statement accounts should have zero balances because they have been closed. Only balance sheet accounts will appear in the post-closing trial balance Key 1. The understanding and preparation of worksheet 2. The Closing process Reading material 1. Philip E Fess and Carl S. Warren, Accounting Principles, South-Western Publishing Co 1987
Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University credit income summary accounts; 2. Close expenses to income summary which will debit income summary accounts and credit all expenses accounts; 3. close income summary to the owner’s equity account which will debit income summary ( if there is a net income) and credit the owner’s equity account. Or debit owner’s equity account ( if there is a net loss) and credit the income summary account. Why post-closing trial balance is needed? Post-closing trial balance is needed to ensure that the journalizing and posting of closing entries have been done properly. That is to ensure that total debits still equal total credits in the remaining permanent accounts. The income statement accounts should have zero balances because they have been closed. Only balance sheet accounts will appear in the post-closing trial balance. Key points 1. The understanding and preparation of worksheet. 2. The Closing process. Reading material 1. Philip E. Fess and Carl S. Warren, Accounting Principles, South-Western Publishing Co., 1987