accounting cycle -- process by which companies produce their financial statements for a specific period
During the period
- start with the account balances at the beginning of the period
- analyze and journalize transactions as they occur
- post journal entries to the accounts
End of the period
- compute the unadjusted balance in each account at the end of the period
- enter the trial balance on the worksheet, and complete the worksheet
- using the adjusted trial balance or the full worksheet as a guide,
a. Prepare the financial statements
b. Journalize and post the adjusting entries
c. Journalize and post the closing entries - prepare the Post closing trial balance. This trial balance become step one for the next period.
Work sheet -- a columnar document designed to help move data from the trial balance to the financial statements
step by step process
- enter the account titles and their unadjusted ending balances in the trial balance columns of the worksheet, and total the amounts. Total debit equal total credits.
- Enter the adjustments in the adjustment column, and total the amounts. Total debit equal total credits.
- Compute each accounts adjusted balance by combining the trial balance and the adjustment figures. Enter the adjusted amounts in the adjusted trial balance columns. Then compute the total for each column. Total debit equal total credits.
- Extend the asset, liability, an owner's equity amounts from the adjusted trial balance to the balance sheet columns.
- Extend the revenue and expense accounts to the income statement columns.
- Total the statement columns. Here, total debit will not equal total credits.
- Compute net income or net loss as total revenues minus total expenses on the income statement. Enter net income or net loss as a balancing amount on the income statement and on the balance sheet. Then compute the final column totals. Now all pairs of debit and credit columns should be equal.
Closing the accounts -- step in the accounting cycle at the end of the period. Closing the accounts consists of journalizing and posting the closing entries to set the balances of the revenue, expense, and withdrawal accounts to zero for the next period.
Temporary accounts -- the revenue and expense accounts that relate to a particular accounting. And our closed at the end of the period. For a proprietorship, the owner withdrawal account is also temporary
permanent accounts -- accounts that are not closed at the end of the period -- the asset, liability, and capital accounts
closing entries -- entries that transfer the revenue, expense, and owner withdrawal balances to the capital account
income summary -- a temporary holding tank account into which revenues and expenses are transferred prior to their final transfer to the capital account
closing steps
- dead each revenue account for the amount of its credit balance. Credit income summary for the total of the revenues. This closing entry transfers total revenues to the credit side of income summary
- credit each expense account for the amount of its debit balance. Dead income summary for the total of the expenses. This closing entry transfers total expenses to the debit side of income summary
- the income summary account now holds the net income or net loss of the period, but only for moment. To close net income, we debit income summary for the amount of its credit balance, and credit the capital account. This closing entry transfers net income to the owner's capital account
- credit the rift drawls account for the amount of its debit balance. Dead at the owners credit account. This entry transfers the owners withdrawals to the debit side of the capital account
Postclosing trial balance -- list of the accounts and their balances at the end of the period after journalizing and posting the closing entries. This last step of the accounting cycle insurers of the ledger is in balance to start the next accounting period.
Reversing entries -- special journal entries that ease the burden of accounting for transactions in the next period
liquidity -- measure of how quickly an item can be converted to cash
current asset -- an asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business as normal operating cycle if the cycle is longer than a year
operating cycle -- time span during which caches paid for goods and services, which are then sold to customers from whom the business collects cash
long-term asset -- an asset other than a current asset
plant or fixed asset -- another name for property, plant, and equipment
current liability -- a debt due to be paid with cash or with goods and services within one year or within the entries operating cycle is the cycle is longer than a year
long-term liability -- a liability other than a current liability
current ratio -- current assets divided by current liabilities. Measures the company's ability to pay current liabilities from current assets
debt ratio -- ratio of total liabilities to total assets. Tells a proportion of the Company's assets that it has financed with debt
