Accounting Principles I – Completion of the Accounting Cycle - Quick Guides

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Study GuideAccounting Principles I–Completion of the AccountingCycle1. The Work SheetWhat is a work sheet, and why do accountants use it?Awork sheetis a helpful tool many accountants use to organize their work before creating financialstatements. It helps them:•prepare theunadjusted trial balance•record the effects ofadjusting entries•create theadjusted trial balance•preparepreliminary financial statementsA work sheet isoptionalin the accounting cycle. That means a businesscanuse it, but it doesn’thave to.Also, a work sheet isnot an official financial statement. It’s aninformal document, but it givesmanagement useful information about how the business performed during the period.Most work sheets includefive sets of debit and credit columns, and they are filled outfrom left toright, one section at a time. (The Greener Landscape Group example shows how this works forApril.)Step 1: Trial Balance Columns (First Set)The first set of columns is used to prepare thetrial balance.Here’s what you do:1.List all open (active) accounts on the left side of the work sheet.2.Put each account’s balance in either thedebitorcreditcolumn.This section looks just like a normal trial balance—you’re simply copying the current balances.

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Study GuideStep 2: Adjustments Columns (Second Set)The second set of columns shows howadjusting entriesaffect the accounts.While filling this part in:•You may need toadd new accountsto the list on the left (for example, depreciation expenseor interest payable).•Each adjusting entry gets aletter label(like(a), (b), (c)).This makes it easier later when youjournalize and postthe adjustments.Some extra tips:•You can write a shortexplanationof each adjustment at the bottom of the work sheet.•If one account needsmore than one adjustment, show each one separately (using multiplelines if needed).•After you enter all adjustments,total the debit and credit adjustment columnsto makesure they are equal.Step 3: Adjusted Trial Balance Columns (Third Set)The third set of columns is theadjusted trial balance.Toget the adjusted balance for each account, you combine:Trial Balance amountplus/minusAdjustments amountQuick examples (from the Greener Landscape Group work sheet)•Cash:No adjustments → the cash balance stays the same and carries straight across.•Accounts Receivable:Starts with$150 debitand has a$50 debit adjustment→ Adjusted balance becomes$200 debit•Supplies:Starts with$50 debitand has a$25 creditadjustment→ Adjusted balance becomes$25 debit

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Study GuideImportant warning (students often miss this!)Even though each account is adjusted by combining its own trial balance and adjustments, youcannot simply add the column totalsat the bottom.For example, adding$26,070 + $614doesnotautomatically give the final adjusted trial balance totalsin a simple way.So the right process is:•adjust each accountline-by-line•then total the adjusted trial balance debit and credit columns•and confirmdebits = creditsStep 4: Income Statement Columns vs Balance Sheet Columns (Fourth and Fifth Sets)Once the adjusted trial balance is complete, each account gets moved into one of the last twosections:Income Statement ColumnsPutrevenues and expenseshere.Examples include:•revenue accounts•expense accounts (wages expense, gas expense, depreciation expense, etc.)Balance Sheet ColumnsPut everything else here:•assets•liabilities•owner’s capital•owner’s drawingOnce you move all accounts:•total theincome statement debit and credit columns•total thebalance sheet debit and credit columns

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Study GuideStep 5: Find Net Income or Net LossMost of the time, the income statement columns won’t balance right away—and that’s normal.If credits > debits in the income statement columns:That means the business earned anet income.You do two things:1.Add the difference to theincome statement debit column2.Add the same difference to thebalance sheet credit column○becausenet income increasesowner’s equity○and increases in owner’s equity are recorded ascreditsWrite this on a line labeledNet Income.If debits > credits in the income statement columns:That means the business had anet loss.You do two things:1.Add the difference to theincome statement credit column2.Add the same difference to thebalance sheet debit columnWrite this on a line labeledNet Loss.Once net income or net loss is added correctly:each set of debit/credit columns will balanceand the work sheet is complete.Step 6: Prepare the Financial Statements (Using the Work Sheet)Once the work sheet is finished, you can prepare the financial statements in order.

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Study Guide1) Income Statement (prepared first)Everything in theincome statement columnstransfers directly into the income statement.2) Statement of Owner’s Equity (prepared second)Use thebalance sheet columnsto find:•owner’s capital•owner’s drawing

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Study Guide•net income or net lossThen calculate the ending capital amount.3) Balance Sheet (prepared last)The balance sheet also comes from thebalance sheet columns—but there’s one key detail:Don’t use the capital account balance from the work sheet directly.That balance shows thebeginning capitalfor the period.Instead, use theending capitalfrom thestatement of owner’s equity, because that number alreadyincludes:•net income or net loss•withdrawals (drawing)2.Closing EntriesWhy do we make closing entries?At the end of afiscal year(and sometimes at the end of anaccounting period, like each month),accountants makeclosing entries. These entries update theowner’s capital accountand “reset”certain accounts so the next period starts fresh.Closing entries are used fortemporary accounts, which include:•Revenues•Expenses•Drawing (withdrawals)These are calledtemporary (or nominal) accountsbecause their balances are only meant to trackactivityduring one period. After closing, their balances go back tozero.Temporary vs. Permanent Accounts (important difference!)Permanent (real) accountskeep their balances from one period to the next.These include:•Assets

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Study Guide•Liabilities•Owner’s CapitalTheir ending balance in one period becomes the beginning balance in the next period.Temporary accounts start over each period, which makes it easier to:•track income and expenses clearly•compare results from year to year (or month to month)•measure performance for one specific periodWhat happens when an account is “closed”?When an accountantclosesan account, it means the balance is transferred out so the accountreturns to$0.To do this, accountants usefour closing entries. These transfer all temporary account balances intotheowner’s capital account(orretained earningsin a corporation).The Four Closing Entries (in order)Closing Entry 1: Close Revenues to Income SummaryFirst, close allincome statement accounts with credit balances, which are usuallyrevenueaccounts, into a temporary account calledIncome Summary.•Debit the revenue account(s)(to bring them to zero)•Credit Income SummaryFor Greener Landscape Group:Mr. Green has only one revenue account:Lawn Cutting Revenue.So the entry is:•DebitLawn Cutting Revenuefor its balance•CreditIncome Summaryfor the same amount

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Study GuideClosing Entry 2: Close Expenses to Income SummaryNext, close allincomestatement accounts with debit balances, which are usuallyexpenseaccounts, intoIncome Summary.Here’s the rule:•Debit Income Summaryfor the total expenses•Credit each expense accountfor its own balance (to bring each to zero)For Mr. Green:He haseight expense accounts(all with debit balances).So all eight get closed in one compound entry by:•DebitingIncome Summaryfor the combined total•Crediting each expense account for its individual amount

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