Page 150 - Accounting Principles (A Business Perspective)

4. Completing the accounting cycle

working closely with businesses and consulting firms. A dual major in accounting and MIS is one of the most
desirable undergraduate degree combinations in the workforce.
This chapter explains two new steps in the accounting cycle—the preparation of the work sheet and closing

entries. In addition, we briefly discuss the evolution of accounting systems and present a classified balance sheet.
This balance sheet format more closely resembles actual company balance sheets. After completing this chapter,
you will understand how accounting begins with source documents that are evidence of a business entity's
transactions and ends with financial statements that show the solvency and profitability of the entity.

The accounting cycle summarized
In Chapter 1, you learned that when an event is a measurable business transaction, you need adequate proof of
this transaction. Then, you analyze the transaction's effects on the accounting equation, Assets = Liabilities +
Stockholders' equity. In Chapters 2 and 3, you performed other steps in the accounting cycle. Chapter 2 presented
the eight steps in the accounting cycle as a preview of the content of Chapters 2 through 4. As a review, study the
diagram of the eight steps in the accounting cycle in Exhibit 19. Remember that the first three steps occur during

the accounting period and the last five occur at the end. The next section explains how to use the work sheet to
facilitate the completion of the accounting cycle.
The work sheet

The work sheet is a columnar sheet of paper or a computer spreadsheet on which accountants summarize
information needed to make the adjusting and closing entries and to prepare the financial statements. Usually, they
save these work sheets to document the end-of-period entries. A work sheet is only an accounting tool and not part
of the formal accounting records. Therefore, work sheets may vary in format; some are prepared in pencil so that
errors can be corrected easily. Other work sheets are prepared on personal computers with spreadsheet software.
Accountants prepare work sheets each time financial statements are needed—monthly, quarterly, or at the end of
the accounting year.
This chapter illustrates a 12-column work sheet that includes sets of columns for an unadjusted trial balance,

adjustments, adjusted trial balance, income statement, statement of retained earnings, and balance sheet. Each set
has a debit and a credit column. (See Exhibit 20.)
Accountants use these initial steps in preparing the work sheet. The following sections describe the detailed
steps for completing the work sheet.
• Enter the titles and balances of ledger accounts in the Trial Balance columns.
• Enter adjustments in the Adjustments columns.

• Enter adjusted account balances in the Adjusted Trial Balance columns.
• Extend adjusted balances of revenue and expense accounts from the Adjusted Trial Balance columns to the
Income Statement columns.
• Extend any balances in the Retained Earnings and Dividends accounts to the Statement of Retained
Earnings columns.
• Extend adjusted balances of asset, liability, and capital stock accounts from the Adjusted Trial Balance
columns to the Balance Sheet columns.
Instead of preparing a separate trial balance as we did in Chapter 2, accountants use the Trial Balance columns
on a work sheet. Look at Exhibit 20 and note that the numbers and titles of the ledger accounts of MicroTrain

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