Completing the Accounting Cycle Flashcards
the complete accounting cycle (diagram)
the accounting cycle is usually completed once a year
steps 1 to 3 are carried out continuously during the year as transactions occur
steps 4 to 13 are carried out only at the end of the accounting period
closing temporary accounts
the accounting cycle is referred to as the closing process, and journal entries made to close the temporary accounts are called closing entries
income and expense accounts then begin the next accounting period with a zero balance
the profit or loss summary account is established to summarise the balances in the income and expense accounts and to calculate profit
the closing process
the balance sheet items, assets, liabilities and equity, do not get closed off
close each income and expense account to the profit or loss summary account
- the balance of this account, profit or loss, is then closed off to the capital account
any drawings made by the owner during the year are reflected in the drawings account
- also closed off to the capital account
the closing of all temporary accounts is done by making compound general journal entries, and then posting to the relevant accounts
closing entries are not shown on a worksheet but the information necessary to make the general journal entries is available from the worksheet
closing the income, including revenue, accounts (format)
we close it of by debiting the account but credit the profit and loss summary
an income account normally contains a credit balance
hence, to close the account, it must be debited for an amount equal to its credit balance
the offsetting credit is made to the profit or loss summary account
closing the expense accounts (format)
we close it off by crediting the account but debit the profit and loss summary
expense accounts normally have debit balances
in order to close the expense accounts, each account is therefore credited for an amount equal to its balance, and the profit or loss summary account is debited for the sum of the individual balances
anything that reduces profit has to be closed off
closing the profit or loss summary account (format)
after the first two closing entries are posted, the balances formerly reported in the individual income and expense accounts are summarised in the profit or loss summary account
the balance is transferred to the capital account
if it is a loss, the figures are recorded on opposite sides = debit is recorded as a credit and vice versa
closing the drawings account (format)
the debit balance reflects the decrease in the owner’s interest from the withdrawal of cash and/or other assets for personal use
the drawings account is not closed to the profit or loss summary account because the withdrawal of assets by the owner is not an expense of doing business
the balance in the account is transferred directly to the capital account by the following entry
account balances after the closing process
all income accounts have nil balances
all expense accounts have nil balances
the drawings account has a nil balance
the capital account has either been
- increased by the profit
- decreased by the loss
- decreased by the drawings
the capital balance is now updated
the post-closing trial balance
prepared to verify the equality of debits and credits
confirm that the ledger is ‘in balance’
these balances are also the starting point for the next accounting period
only has assets, liabilities and equity items in it
looks similar to a balance sheet
must balance = may not balance due to accidently including income or expenses
accrual entries in subsequent periods
adjusting entries must be made to recognise expenses that have been incurred but not yet paid for or recorded, and also revenues for services performed but not yet collected or recorded
cash received or paid in subsequent periods for accruals must be analysed to correctly apportion the amount between the two periods
for example, payment for salaries
- salaries payable relates to this period
- salaries expense relates to the next period
reversal of accrual entries
an accounting technique used to simplify the recording of regular transactions in the next period
they are optional in an accounting system, however very useful
dated the first day of the subsequent accounting period
exactly reverse certain adjusting entries
reversal of deferral entries
adjusting entries are made for prepaid expenses and unearned or pre-collected revenue
some entities, on initial purchase of an asset, make a debit entry to an expense account
the pre-collected revenue is recorded in a liability account
accounting for a partnership
separate capital and drawings accounts for each partner
profit/loss at the end of the period is allocated to each partner in accordance with the partnership agreement
each drawings account is closed off to the partner’s capital account
accounting for a company
the equity section of a company balance sheet is separated into two main account categories
- share capital, which represents the amount of assets invested in the company by the shareholders
- retained earnings, which reflect the accumulated profits or losses earned by the company and retained in the business
profits are distributed as dividends
