Accounting
Semester 2, 2025/2026
Chapter 4
Li Wen
Chapter 4
Completing the Accounting Cycle
Chapter 4
• Learning objectives
CONCEPTUAL
C1 Explain why temporary accounts are closed each period.
C2 Identify steps in the accounting cycle.
C3 Explain and prepare a classified balance sheet.
ANALYTICAL
A1 Compute the current ratio and describe what it reveals about a company’s
financial condition.
PROCEDURAL
P1 Prepare a work sheet and explain its usefulness.
P2 Describe and prepare closing entries.
P3 Explain and prepare a post-closing trial balance.
Chapter 4
• Topic outline
qUse of a work sheet
qPreparing financial statements
qClosing the temporary accounts
qAfter-closing trial balance
qPrepare a classified balance sheet
Accounting Cycle
5
Benefits of a Work Sheet
Aids the Assists in
preparation of planning and
financial organizing an
statements. audit.
Not a Helps in
Reduces
possibility of
required preparing
report. interim financial
errors.
statements.
Shows the
Links accounts
effects of
and their
proposed
adjustments.
transactions.
FastForward
Work Sheet
For Month Ended December 31, 2024
First, enter the
unadjusted
amounts to
the worksheet.
FastForward
Work Sheet
For Month Ended December 31, 2024
Next, enter
the
adjustments.
FastForward
Work Sheet
For Month Ended December 31, 2024
Pr
adju
ba
Sort adjusted trial balance
FastForward
Work Sheet
amounts to Ended
For Month financial statements.
December 31, 2007
Total statement columns,FastForward
compute income or loss, and
Work Sheet
Forbalance columns.
Month Ended December 31, 2007
Class Exercise
The following 10-column work sheet contains the year-end unadjusted trial balance for Magic Company
as of December 31. Complete the work sheet by entering the necessary adjustments, computing the adjusted
account balances, extending the adjusted balances into the appropriate financial statement columns, and entering
the amount of net income for the period. Note: The Magic, Capital account balance was $75,000 at December 31, 2024.
Balance Sheet
Unadjusted Adjusted Income and Statement of
Trial Balance Adjustments Trial Balance Statement Owner's Equity
No. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
101 Cash 13,000
106 Accounts receivable 8,000
183 Land 85,000
201 Accounts payable 10,000
251 Long-term notes payable 33,000
301 Magic, Capital 75,000
302 Magic, Withdrawals 20,000
401 Fees earned 70,000
622 Salaries expense 54,000
650 Office supplies expense 8,000
Totals 188,000 188,000
1. Prepare and complete the work sheet, starting with the unadjusted trial balance and including adjustments
based on the following.
a. The company has earned $9,000 in fees that were not yet recorded at year-end.
b. The company incurred $2,000 in salary expense that was not yet recorded at year-end.
(Hint: For simplicity, assume it records any salary not yet paid as part of accounts payable.)
c. The long-term note payable was issued on December 31 this year. Thus, no interest has yet accrued
on this loan.
Preparing Financial Statements
Publicly owned companies – those with shares listed on
a stock exchange – have obligations to release annual
and quarterly information to their stockholders and to the
public.
The annual report includes comparative financial statements
and other information relating to the company’s financial
position, business operations, and future prospects.
The financial statements contained in the annual report must be
audited by a firm of certified public accountants (CPAs).
Preparing Financial Statements
Many companies prepare financial
statements at various points throughout
the year.
Annually
Quarterly
Interim Financial
Statements
Monthly
Jan. 1 Dec. 31
Prepare the Financial Statements
Prepare the Income
Statement.
A work sheet
does not
substitute for
financial
statements.
Prepare the Statement of
Owner’s Equity.
Prepare the
Balance Sheet.
Closing Process
Identify accounts for
closing.
Record and post closing
entries.
Prepare post-closing trial
balance.
Closing the Temporary Accounts
①Close Revenue accounts
to Income Summary. The closing process gets
the temporary accounts
②Close Expense accounts ready for the next
to Income Summary. accounting period.
③Close Income Summary
account to Owner’s Capital.
④Close Withdrawals to
Owner’s Capital.
Temporary and
Permanent Accounts
Revenues Assets
Withdrawals
Liabilities
Expenses
Owner’s
Capital
Temporary Permanent
Accounts Accounts
Income
Summary
20
Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.
① Close Revenue
accounts to
Income Summary.
Close Revenue Accounts to
Income Summary
Now, let’s look at the ledger accounts after
posting this closing entry.
Close Revenue Accounts to
Income Summary
Consulting Revenue
7,850 7,850
Rental Revenue
300 300
-
Close Expense
accounts to
Income Summary.
Close Expense Accounts to
Income Summary
Now, let’s look at the ledger accounts after
posting this closing entry.
Close Expense Accounts to
Income Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-
Salaries Expense Supplies Expense
1,610 1,610 1,050 1,050
- -
Insurance Expense Utilities Expense Net Income
100 100 230 230
- -
Close Income
Summary to
Owner’s Capital.
Close Income Summary to
Owner’s Capital
Now, let’s look at the ledger accounts after
posting this closing entry.
Close Income Summary to
Owner’s Capital
Close
Withdrawals to
Owner’s Capital.
Close Withdrawals to
Owner’s Capital
Now, let’s look at the ledger accounts after
posting this closing entry.
Close Withdrawals to
Owner’s Capital
Post-Closing Trial Balance
• List of permanent
accounts and their Let’s look at
balances after FastForward’s post-
posting closing closing trial balance.
entries.
• Total debits and
credits must be equal.
Post-Closing Trial Balance
Let’s discuss
the
components
of a classified
balance
sheet.
Classified Balance Sheet
Current items are expected to come due (collected and owed)
within the longer of one year or the company’s normal operating
cycle.
Most operating cycles are less than one year, so most
companies use a one year period in deciding what assets and
liabilities are current.
37
Current assets are expected to be sold,
collected, or used within one year or the
company’s operating cycle.
Long-term investments are expected to
be held for more than one year or the
operating cycle.
Plant assets are tangible long-lived
assets used to produce or sell
products and services.
Intangible assets are long-term
resources used to produce or sell
products and services and that lack
physical form.
Current liabilities are obligations due
within the longer of one year or the
company’s operating cycle.
Long-term liabilities are obligations not
due within the longer of one year or the
company’s operating cycle.
Equity is the owner’s claim on the assets.
Class Exercise
The following unadjusted trial balance contains the accounts and balances of Dylan Delivery Company as of December 31, 2024, its first year of
operations.
(1) Use the following information about the company’s adjustments to complete a 10-column work sheet.
a. Unrecorded depreciation on the trucks at the end of the year is $40,000.
b. The total amount of accrued interest expense at year-end is $6,000.
c. The cost of unused office supplies still available at the year-end is $2,000.
(2) Prepare the year-end closing entries for this company, and determine the capital amount to be reported on its year-end balance sheet.
Dylan Delivery Company Work Sheet
Balance Sheet &
Unadjusted Trial
Adjustments Adjusted Trial Balance Income Statement Statement of Owner's
Balance
Equity
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash $ 16,000
Accounts receivable 34,000
Office supplies 5,000
Trucks 350,000
Accumulated depreciation - Trucks $ 80,000
Land 160,000
Accounts payable 24,000
Interest payable 5,000
Long-term notes payable 100,000
S. Dylan, Capital 307,000
S. Dylan, Withdrawals 34,000
Delivery fees earned 263,000
Depreciation expense - Trucks 40,000
Salaries expense 110,000
Office supplies expense 15,000
Interest expense 5,000
Repairs expense - Trucks 10,000
Totals $ 779,000 $ 779,000
Compute the current ratio and
describe what it reveals about a
company’s financial condition.
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Current Ratio
Helps assess the company’s ability to pay
its debts in the near future
Current assets
Current ratio =
Current liabilities
Limited Brands, Inc.
End of Chapter 4