Chapter 4

Completion of

the Accounting
Cycle

Prepared by:
Debbie Musil
Kwantlen University College
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Closing Entries
• Transfer temporary account balances to the
owner’s capital account
• Updates the owner’s capital account balance
• Reduces balances in all temporary accounts
to zero, so they are ready for the next period
• Journalizing and posting closing entries are a
required step in the accounting cycle
• Revenue and expense accounts are closed to
Income Summary (a temporary account)
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 The Closing Process
(Individual) Owner’s Capital is a permanent (Individual)
Expenses account. All other accounts shown Revenues
here are temporary accounts.
Dr. Cr. Dr. Cr.
(normal to close to close (normal
balance) balance)
Income
0 2 Summary 1 0

2 Close expenses to income summary Dr. Cr. 1 Close revenues to income summary
Expenses Revenue
3
Dr. Cr. balance
to close = Net Income
Owner’s Owner’s
Drawings 0 Capital

Dr. Cr. 3 Close income summary to Owner’s Capital Drawings Net

(normal to close 4 Income
balance) Cr.
4 Close Owner’s Drawings to Owner’s Capital
(normal
0 balance)

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Post-Closing Trial Balance
PPIONE
IONEEERRADVE
ADVERRTTISISING
INGAGE
AGENCY
NCY
PPost-Closing T rial Balance
ost-Closing T rial Balance
October
October31,
31,2008
2008

Debit
Debit Credit
Credit
Cash
Cash $$ 15,200
15,200
Accounts
Accountsreceivable
receivable 200
200
Advertising
Advertisingsupplies
supplies 1,000
1,000
PPrepaid insurance
repaid insurance 550
550
Office
Officeequipment
equipment 5,000
5,000
Accumulated
Accumulatedamortization
amortization $$ 83
83
Notes payable
Notes payable 5,000
5,000
Accounts
Accountspayable
payable 2,500
2,500
Unearned
Unearnedrevenue
revenue 800
800
SSalaries payable
alaries payable 2,000
2,000
Interest
Interestpayable
payable 25
25
[Link], capital
[Link], capital 11,542
11,542
$$ 21,950
21,950 $$ 21,950
21,950

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Accounting Cycle Summarized
1 Analyze business transactions

9 Prepare post adjusting trial 2 Journalize the transactions

balance

8 Journalize & post closing entries 3 Post to ledger accounts

7 Prepare financial statements 4 Prepare a trial balance

6 Prepare adjusted trial balance 5 Journalize & post adjusting entries

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Work Sheets
• A working tool for the accountant; not a
permanent accounting record
• An aid in the preparation of adjusting
entries and financial statements
• Useful for the preparation of interim
financial information or for internal use

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Reversing Entries – An Optional
Step
• Reversing entries reverse certain adjusting
entries made in the previous period
• Made at the beginning of the next accounting
period
• To simplify recording of transactions in future
accounting periods

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Classified Balance Sheet
• Financial statements are more useful
when the accounts are classified into
significant subgroups
• A classified balance sheet generally has
the following standard classifications:
Assets
Assets Liabilities
Liabilitiesand
andOwner’s
Owner’sEquity
Equity
Current
Currentassets
assets Current
Currentliabilities
liabilities
Long-term
Long-terminvestments
investments Long-term
Long-termliabilities
liabilities
Property,
Property, plantand
plant andequipment
equipment Owner’s equity
Owner’s equity
Intangible assets
Intangible assets

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Current Assets
• Cash and other resources that will be
realized within one year of the balance
sheet date
• Realized in cash or sold or consumed in the
business
• Listed in the order of liquidity
• Examples:
• Cash, short-term investments, accounts
receivable, inventory, prepaids
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Long-Term Investments
• Investments that are expected to be held
for many years
• Not readily marketable or expected to be
converted into cash within one year
• Examples:
• Investments in shares or bonds of another
company, investment in land held for resale

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Property, Plant and Equipment
• Long-lived tangible assets that are used in
the business and not intended for sale
• Examples: land, buildings, machinery
Intangible Assets
• Long-lived assets that do not have
physical substance
• Examples: goodwill, patents, copyrights,
trademarks, trade names, licences
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Current Liabilities
• Obligations that are expected to be paid in
the coming year from existing current
assets or by creating other current liabilities
• Listed first in the liabilities and equity
section of the balance sheet
• Examples:
• accounts payable, interest payable, salaries
payable, unearned revenue, current maturities
of long-term debt

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Long-Term Liabilities
• Obligations expected to be paid after one
year or longer
• Examples:
• Future income taxes, long-term notes
payable, bonds payable, mortgages payable,
lease liabilities

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Equity
• Content of the equity section varies with
the form of business organization:
• Proprietorship: one capital account under the
heading “Owner’s Equity”
• Partnership: Capital account for each partner
under the heading “Partners’ Equity”
• Corporation: shareholders’ equity consists of
two sections: “Share Capital” and “Retained
Earnings”
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Classified Balance Sheet Illustrated
P IONE E R ADVE R T IS ING AGE NCY
P IONE E R ADVE R T IS ING AGE NCY
Balance S heet
Balance S heet
October 31, 2008
October 31, 2008
Assets
Assets
Current assets
Current assets
Cash
Cash
Accounts receivable
$ 15,200
$ 15,200
200
• Usually presented in
Accounts receivable 200
Advertising supplies
Advertising supplies
P repaid insurance
1,000
1,000
550
report form, with assets
P repaid insurance 550
T otal current assets
T otal current assets
P roperty, plant and equipment
16,950
16,950 shown above liabilities
P roperty, plant and equipment
Office equipment
Office equipment
Less: Accumulated amortization
$
$
5,000
5,000
83 4,917
and owner’s equity
Less: Accumulated amortization 83 4,917
T otal assets $ 21,867
T otal assets $ 21,867 • Can also be presented
Current liabilities
Current liabilities
Liabilities and Owner's E quity
Liabilities and Owner's E quity in account form, with
Accounts payable $ 2,500
Accounts payable
Unearned revenue
Unearned revenue
$ 2,500
800
800
assets placed on the
S alaries payable 2,000
S alaries payable
Interest payable
Interest payable
2,000
25
25
left and liabilities and
Current portion of notes payable 1,000
Current portion of notes payable
T otal current liabilities
T otal current liabilities
1,000
6,325
6,325
owner’s equity placed
Long-term liabilties
Long-term liabilties
Notes payable
Notes payable
4,000
4,000
on the right
T otal liabilities 10,325
T otal liabilities 10,325
Owner's equity
Owner's equity
[Link], capital 11,542
[Link], capital 11,542
T otal liabilities and owner's equity $ 21,867
T otal liabilities and owner's equity $ 21,867

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 Using Information in the
Financial Statements
• Liquidity: the ability to pay obligations as
they come due within the next year
• Working capital: an important measure of
liquidity
= Current assets - Current liabilities
• Current ratio: a second, more useful
measure of short-term debt-paying ability
= Current assets ÷ Current liabilities
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
 COPYRIGHT

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Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.