Completing the Accounting Cycle ACG 2021 Chapter 4 Completing the Cycle Record entries in the journal Post to the ledger Prepare trial balance Record and post adjusting entries Prepare adjusted trial balance Prepare financial statements Income Statement Statement of Retained earnings Balance Sheet Statement of Cash Flows Financial Statements Income statement Shows results of operations for a period of time Brady Corp Income Statement December 31 2001 Revenues Fees earned 50 000 Expenses Salaries exp 12 000 Rent expense 15 800 Supplies exp 7 200 Total Net income 35 000 15 000 Financial Statements Statement of Retained Earnings Shows the changes in the earnings of the corporation Brady Corp Statement of Retained Earnings Dec 31 2001 Beg RE 9 875 Add Net income 15 000 24 875 Deduct dividends 10 000 Ending RE 14 875 Financial Statements Balance sheet Shows that the accounting equation holds true Snapshot of a moment in time Three sections Assets Liabilities Shareholder s Equity Balance Sheet Brady Corporation Balance Sheet Dec 31 2001 Assets Cash Liabilities 12 705 Accts pay 7280 Accts rec 5 400 Loans pay 9800 Supplies 1 250 Fixed assets 15 100 Total 34 455 Total 17 080 Stockholder s Equity Capital stock 2 500 Retained earn 14 875 Total TOTAL 17 375 34 455 Financial Statements Statement of Cash Flows sources and uses of cash Operating Investing Financing Always prepared in the same order Closing Entries Real accounts Balances of accounts reported on the balance sheet are carried forward from year to year Temporary Balances of accounts reported on the income statement not carried forwarded We ZERO the account Closing Entries Income Summary Clearance account used to process the closing entries Four entries Close revenues Close expenses Close income summary Close dividends Example Fees earned 10 000 Rent expense 2 000 Wages expense 6 000 Dividends 4 000 Retained earnings 12 000 Close Revenues Date Dec 31 Account PR Debit Fees earned 10000 Income summary Credit 10 000 Close Expenses Date Dec 31 Account Income summary Rent expense Wages expenses PR Debit Credit 8000 2000 6000 Close income summary Income summary Exp 8 000 Rev 10 000 Balance 2 000 Close income summary Close the amount of net income to retained earnings Date Dec 31 Account Income summary Retained earnings PR Debit Credit 2000 2000 Close dividends Date Dec 31 Account Retained earnings Dividends PR Debit Credit 4000 4000 Balance in Retained earnings Retained Earnings Dividends 4 000 12 000 Beg Balance 2 000 Net income 10 000 Ending balance Example 1 Date Dec 31 Account Fees earned P R Debit 20 000 Income Summary Dec 31 Income summary Credit 20 000 24 000 Rent expense 6000 Wages exp 8000 Misc exp 10000 Example 1 Date Account Dec 31 Retained earnings PR Debit 4000 Income summary Dec 31 Income Summary Dividends Credit 4 000 3000 3000 Closing entries After closing entries are posted Post Closing trial balance is prepared Accounting Year Calendar year ends on December 31st Fiscal year ends other than December 31st