Chapter 4: Completion of the Accounting Cycle
T 1. Purpose of a Work Sheet
1.1 A work sheet is a multiple column form used in the adjustment process and in financial
1.2 A work sheet facilitates the preparation of financial statements because it organizes the account
balances and the statements can be prepared before the adjusting entries are journalized and
1.3 Optional and an internal working tool of the accountant.
1.4 A work sheet is not a journal, and it cannot be used as a basis for posting to ledger accounts.
Adjusting entries are recorded in the journal, and then posted to the ledger accounts.
2. Closing the Books
2.1 At the end of the accounting year, the accounts are made ready for the next year. This is called
closing the books. To close an account, its balance is reduced to zero.
2.2 Revenue, expense and drawings accounts are temporary (nominal) accounts that are closed.
Their balances will be zero, after the closing entries are recorded and posted. Temporary accounts
may then be used to accumulate data in the next accounting period separate from the data of prior
2.3 Closing entries formally recognize in the ledger the transfer of net income (or loss) and owner’s
drawings to owner’s capital as shown in the statement of owner’s equity Journalizing and
posting closing entries is a required step in the accounting cycle.
2.4 Revenue and expense accounts can be closed directly to Owner’s Capital. Alternately, a
temporary account, Income Summary, can be used in closing revenue and expense accounts to
minimize the amount of detail in the permanent owner’s capital account.
2.5 Asset, liability, and the owner’s capital account are permanent (real) accounts. They will continue
to have balances that will be carried forward to the next year.
2.6 There are three closing entries:
2.3.1 Debit each revenue account for its balance and credit Owner’s Capital for total
2.3.2 Debit Owner’s Capital for total expenses and credit each expense account for its
2.3.3 Debit Owner’s Capital for the balance in the Owner’s Drawings account and credit
Owner’s Drawings for the same amount.
STOP AND CHECK: (1) The balance in the Owner’s Capital account should equal the ending
balance in the statement of owner’s equity and balance sheet. (2) All temporary accounts
(revenue, expense, and drawings) should have zero balances.
3. Post-Closing Trial Balance
3.1 Proves the equality of the permanent account balances that are carried forward into the next
3.2 Contains only permanent balance sheet accounts since all temporary accounts will have zero
1Chapter 4: Completion of the Accounting Cycle
4. Summary of the Accounting Cycle
Step 1:Analyse business transactions.
Step 2:Journalize the transactions.
Step 3:Post to ledger accounts.
Step 4:Prepare a trial balance.
Step 5:Journalize and post adjusting entries: Prepayments, accruals, estimates.
Step 6:Prepare an adjusted trial balance.
Step 7:Prepare financial statements: Income statement, statement of owner’s equity, balance sheet.
Step 8:Journalize and post closing entries.
Step 9:Prepare a post-closing trial balance.
5. Correcting Entries
5.1 Errors should be corrected as soon as they are discovered by journalizing and posting
5.2 To determine the correcting entry, it is usefu