Chapter 3: Completing the
accounting cycle
Learning Objectives
[Link] an accounting worksheet
[Link] the worksheet to prepare financial
statements
[Link] the revenue, expense, and
drawing accounts
[Link] the post-closing trial balance
[Link] assets and liabilities as
current or long-term
[Link] the effect of various
transactions on the current ratio and
the debt ratio
Chapter’s content
3.1 The Worksheet
3.2 Completing the Accounting
Cycle
3.3 Closing the Accounts
3.4 Post-Closing Trial Balance
3.5 Classifying Assets and
Liabilities
3.6 Accounting Ratios
3.1 The Worksheet
• a document with several columns
• to summarize data for the financial
statements.
3.1 The Worksheet
3.1 The Worksheet
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
1. Prepare 4. Extend adjusted
2. Enter 3. Enter
trial balance balance to appropriate
adjustment adjusted
on the columns.
data. balances
worksheet. 5. Calculate income/loss
and complete the
worksheet.
3.1 The Worksheet
A step-by-step description of the worksheet
follows:
1. Enter the account titles and their
unadjusted balances in the Trial Balance
columns of the worksheet, and total the
amounts.
2. Enter the adjusting entries in the
Adjustments columns, and total the
amounts.
3. Compute 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
3.1 The Worksheet
A step-by-step description of the worksheet
follows:
4. Draw an imaginary line above the first
revenue account (in this case, Service revenue).
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.
3.1 The Worksheet
A step-by-step description of the worksheet
follows:
5. On the income statement, compute net
income or net loss as total revenues minus total
expenses. Enter net income (loss) as the
balancing amount on the income statement. Also
enter net income (loss) as the balancing amount
on the balance sheet. Then total the financial
statement columns.
3.1 The Worksheet
A step-by-step description of the worksheet
follows:
5. On the income statement, compute net
income or net loss as total revenues minus total
expenses. Enter net income (loss) as the
balancing amount on the income statement. Also
enter net income (loss) as the balancing amount
on the balance sheet. Then total the financial
statement columns.
3.2 Completing the Accounting Cycle
• Preparing the Financial Statements from a
Worksheet
• Recording the Adjusting Entries from a
Worksheet
3.3 Closing the Accounts
3.3 Closing the Accounts
3.3 Closing the Accounts
3.3 Closing the Accounts
3.3 Closing the Accounts
3.4 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—revenues,
expenses, or drawing—are
included because they have been
closed (their balances are zero).
3.4 Post-Closing Trial Balance
3.5 Classifying Assets and Liabilities
• classified as either current or long-
term to show their relative
liquidity.
• Liquidity measures how quickly
and easily an account can be
converted to cash.
3.5 Classifying Assets and Liabilities
• Current assets will be converted
to cash, sold, or used up during the
next 12 months, or within the
business’s operating cycle if the
cycle is longer than a year.
• Long-term assets are all the
assets that will not be converted
to cash within the business’s
operating cycle.
3.5 Classifying Assets and Liabilities
• Current liabilities must be paid
either with cash or with goods and
services within one year, or within
the entity’s operating cycle if the
cycle is longer than a year
• Long-term liabilities do not need
to be paid within the entity’s
operating cycle.
3.5 Classifying Assets and Liabilities
3.6 Accounting Ratios
• The current ratio measures a
company’s ability to pay its
current liabilities with its current
assets. Current ratio = Total
current assets/ Total current
liabilities
• The debt ratio measures an
organization’s overall ability to
pay its total liabilities.(debt).
Debt ratio = total liabilities / Total
assets
Thank for your attention!