2. Objective
Learn how to prepare a worksheet
Prepare closing entries and a post-closing trial balance
Explain the steps in the accounting cycle and how to prepare
correcting entries
Identify the sections of a classified balance sheet
3. Worksheet
A work sheet is a multiple-column form that may be used in the
adjustment process and in preparing financial statements.
It is a working tool or a supplementary device for the accountant
and not a permanent accounting record.
4. Worksheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Balance SheetTrial Balance Adjustments Adjusted Trial Balance Income Statement
1. Prepare trial
balance on the
worksheet.
2. Enter
adjustment
data.
3. Enter
adjusted
balances
4. Extend adjusted balance
to appropriate columns.
5. Calculate income/loss
and complete the
worksheet.
5. Temporary Vs Permanent Accounts
TEMPORARY (NOMINAL) PERMANENT (REAL)
These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawings Owner’s capital account
(Balance Sheet Accounts)(Income Statement / Drawings
Accounts)
6. Closing Process
Updates the owner’s capital account in the ledger by transferring net income
(loss) and owner’s drawings to owner’s capital.
Transfer the balance in each temporary revenue and expense account to the
Net Income (loss) account
Income statement prepared after adjusting and correcting entries are made
Reduces the balance in each income statement account to zero
• Debit the revenue accounts and credit Net Income (loss) account for the
amounts in the revenue accounts
• Credit the expense accounts and debit Net Income (loss) account for the
amounts in the expense accounts
8. Closing Process
3
OWNER’S
DRAWINGS
Normal Dr.
Balance
Cr. to close
- 0 -
OWNER’S
CAPITAL
Net Loss
Net Income
Opening Balance
Drawings
Ending Balance
INCOME SUMMARY
Expenses
Cr. to close (if
net loss)
Revenue
Dr. to close (if
net income)
4
4
10. Steps in Accounting Cycle
1. Analyze
transactions 2. Journalize the
transactions
3. Post to ledger
accounts
4. Prepare a trial
balance
5. Journalize
and post
adjusting
entries
6. Prepare
adjusted trial
balance
7. Prepare
financial
statements
8. Journalize
and post closing
entries
9. Prepare post-
closing trial
balance
11. Steps in Accounting Cycle
Reversing Entries (Optional Step)
• A reversing entry is made at the beginning of the next accounting period.
• A reversing entry reverses certain adjusting entries made in the previous period.
Opening balances can then be ignored when preparing year-end adjusting entries
Correcting Entries (Avoidable step)
• Errors that occur in recording transactions should be corrected as soon as they are
discovered by preparing correcting entries.
• Correcting entries are unnecessary if the records are free of errors; they can be
journalized and posted whenever an error is discovered.
12. Sections of a classified Balance Sheet
Assets
• Current Assets : Convert to cash within the operating cycle
• Long term investments: investments in stock and bonds held for many years,
land/building company not currently using, long term notes receivable
• Property Plant and Equipment: assets with long useful lives that the company
is currently using
• Intangible Asset: valuable assets with no physical substance
13. Sections of a classified Balance Sheet
Liabilities and Owner’s Equity
• Current Liabilities: obligation that needs to be paid within the operating cycle
• Long term Liabilities: obligation that can be paid after one year
• Owner’s Equity: what the owner owns
14. Sections of a classified Balance Sheet
Current Assets
Cash 15,200$
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Total Current Assets 16,950
Capital Assets
Office Equipment 5,000$
Less: Accumulated Amortization 83 4,917
Total Assets 21,867$
Current Liabilities
Notes Payable 1,000$
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
Interest Payable 25
Total Current Liabilities 5,525
Long-term Liabilties
Notes Payable 4,000
Total Liabilities 9,525
Owner's Equity
C.R. Byrd, Capital 12,342
Total Liabilities and Owner's Equity 21,867$
Pioneer Advertising Agency
Balance Sheet
Liabilities and Owner's Equity
October 31, 2002
Assets