74 Chapter 4 Completing the Accounting Cycle
SUGGESTED APPROACH
Rather than simply memorizing the ten steps in their proper order, it is helpful if students understand the
relationships between the steps in the accounting cycle. Students will not make the mistake of listing
“Financial statements prepared” before completing the end-of-period spreadsheet (work sheet) or adjusted
trial balance if they understand that the spreadsheet or adjusted trial balance provides the data necessary
GROUP LEARNING ACTIVITY—Accounting Cycle
Show your class TM 4-1, which lists the steps in the accounting cycle in random order. Ask students to
put the steps in the proper order. You can ask them to work individually or in small groups. TM 4-15 lists
the steps in the accounting cycle in the correct order.
WRITING EXERCISE—Accounting Cycle
Write the ten steps of the accounting cycle on the board or display TM 4-15. Ask your students to record
what information is needed as an input to each step in the accounting cycle. For example, source
documents are needed in order to analyze transactions and record them in journals (step 1). Completed
journal entries are needed to post transactions to the ledger (step 2).
After giving the students a few minutes to write, review the inputs needed for each step. Show students
that knowing what information is needed to complete each step in the accounting cycle will make it easy
to put the steps in the proper order.
Possible answers:
3. The unadjusted trial balance requires that steps 1 and 2 are completed and the account names and
balances are obtained from the general ledger.
4. Although adjustment data for the student is provided, the accountant would need to examine the
6. Step 6 requires the input from step 4 to complete. If the end–of-period spreadsheet is completed, the
7. The adjusted trial balance requires that step 6 be completed. The data is then obtained from the general
ledger once the adjusting data has been posted to update the account balances. If the optional end–of–
8. Financial statements are prepared using the data from the adjusted trial balance or the optional
spreadsheet.
10. Post-closing trial balance is completed once the closing process is finalized. The accounts and their
balances can be found in the general ledger once all closing entries are posted. All temporary accounts
should have zero balances. Only permanent (balance sheet) accounts will have a positive balance;
therefore, the post-closing trial balance will include only asset, liability, and stockholders’ equity
accounts.
Each step in the process depends on the previous step in order to obtain the necessary information to
complete the subsequent step. The optional spreadsheet can consolidate and simplify the process;
however, it does not eliminate the requirements of recording and updating the general ledger using the
journalizing and posting process.
OBJECTIVE 5
Illustrate the accounting cycle for one period.
SYNOPSIS
This objective shows the complete accounting cycle for a new business known as Kelly Consulting. A
total of thirty transactions are listed. Each transaction is analyzed and recorded in the journal. Exhibit 10
shows each journal entry. Each journal entry is posted, and then the unadjusted trial balance is prepared.
Adjustment data are analyzed, journalized, and posted. An adjusted trial balance is prepared. Financial
statements are prepared in order. Next, the closing entries are journalized and posted. The post-closing
trial balance is the last step in the accounting cycle.
Relevant Example Exercises and Exhibits
• Exhibit 9 – Chart of Accounts for Kelly Consulting
• Exhibit 10 – Journal Entries for April, Kelly Consulting
• Exhibit 11 – Unadjusted Trial Balance, Kelly Consulting
SUGGESTED APPROACH
After defining and working with the accounting cycle in Objective 3, you may wish to select PR 4-5A or
PR 4-5B and work it through using the Excel templates provided in the instructor resources. This will
76 Chapter 4 Completing the Accounting Cycle
allow the student to see the entire accounting cycle demonstrated at one time. A word of caution: This
problem is rather lengthy and could take an entire class period to complete. Nevertheless, it is a valuable
review to demonstrate to the students all the foundation materials that have been covered in Chapters 1–4.
OBJECTIVE 6
Explain what is meant by the fiscal year and the natural business year.
SYNOPSIS
The fiscal year for a business usually begins on January 1 and ends on December 31. However, a business
can choose to start its fiscal year in another month and its fiscal year-end will then be the last day of the
following twelfth month. If a business’s fiscal year follows its natural business cycle, it is called the
natural business year. The financial history of a business may be shown by a series of income statements
and balance sheets.
Keys Terms and Definitions
• Fiscal Year – The annual accounting period adopted by a business.
• Natural Business Year – A fiscal year that ends when business activities have reached the lowest
point in an annual operating cycle.
Relevant Example Exercises and Exhibits
• Exhibit 19 – Financial History of a Business
SUGGESTED APPROACH
LECTURE AID—Fiscal Year
To begin this exercise, explain the definitions of fiscal year and natural business year. Then ask students
who work either full- or part-time to raise their hands. Call on one of these students and ask where he or
she works.
Chapter 4 Completing the Accounting Cycle 77
Use the following examples to help students understand why the fiscal business year may vary from the
calendar year. First, ask students if they would like to be taking inventory and working through the
accounting cycle financial statements closing process the week of Christmas. For retail stores, this is
typically a high volume sales time with after-Christmas sales, returns, and exchanges. Explain that a retail
store will typically choose the slowest time of the year, when inventory levels are low and sales are slow,
to complete this process.
A second example for demonstration purposes is a ski resort. Ski resorts’ busy season is in the winter,
when there is snow. A secondary busy season might be summer for hiking and fishing. Ski resorts’ slow
time is typically in the spring, when snow is melting and the slopes are a muddy mess. This is the time a
ski resort would choose to complete the accounting cycle.
OBJECTIVE 7
Describe and illustrate the use of working capital and the current ratio in evaluating a
company’s financial condition.
SYNOPSIS
Financial statements can also be used to analyze a business in another way. Using numbers obtained from
the financial statements, a business’s liquidity and solvency can be determined. Working capital is
defined as follows: Working Capital = Current Assets – Current Liabilities. Current assets are usually
Keys Terms and Definitions
• Current Ratio – A financial ratio that is computed by dividing current assets by current
liabilities.
• Liquidity – The ability to convert assets into cash.
• Solvency – The ability of a firm to pay its debts as they come due.
• Working Capital – The excess of the current assets of a business over its current liabilities.
Relevant Example Exercises and Exhibits
• Example Exercise 4-6 Working Capital and Current Ratio
78 Chapter 4 Completing the Accounting Cycle
SUGGESTED APPROACH
To help students understand these terms, make it personal.
For example, for liquidity, ask them to imagine being offered the “deal of a lifetime” but the opportunity
is available only for the next hour. What is the first item they possess that comes to mind that would be
easiest to use to pay for “the deal”? For those who have cash in the bank, a quick trip to the ATM would
seal the deal or selling something very popular among their peers could work. Which items would take
APPENDIX—End-of-Period Spreadsheet
(Work Sheet)
If you elect to include the end-of-period spreadsheet (work sheet) in the curriculum, you may want to
include this discussion early in the chapter material.
GROUP LEARNING ACTIVITY—Preparing an End-of-Period Spreadsheet
(Work Sheet)
TM 4-2 presents information that can be used in explaining the purpose of the end-of-period spreadsheet
(work sheet). After reviewing this material, use TM 4-3 to explain how to complete the columns of the
spreadsheet. You may want to instruct your students to turn to the end-of-period spreadsheet illustrated in
the text while you review this information. Point out that it is not necessary to prepare a separate trial
balance if an end-of-period spreadsheet is used. You may also want to emphasize that the Adjusted Trial
Chapter 4 Completing the Accounting Cycle 79
At this point, display TM 4-5, which shows the first three columns of the completed spreadsheet. After
your students have checked their work, instruct them to complete the Income Statement and Balance
Check your students’ understanding of using the end-of-period spreadsheet to compute net income by
asking the following questions:
1. If the totals of the Income Statement columns of a spreadsheet are Debit, $2,800 and Credit, $2,500,
what is the net income or net loss? Answer: Net loss, $300.
2. If the totals of the Balance Sheet columns of a spreadsheet are Debit, $1,250 and Credit, $1,110, what
is the net income or net loss? Answer: Net income, $140.
Handout 4-1
A
B
C
D
E
F
G
H
I
J
K
1
Dixie Machinery, Inc.
2
End-of-Period Spreadsheet (Work Sheet)
3
For the Year Ended December 31, 20—
4
Unadjusted
Adjusted
Income
Balance
5
Trial Balance
Adjustments
Trial Balance
Statement
Sheet
6
Account Title
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
7
Cash
825
8
Accounts Receivable
300
9
Prepaid Insurance
500
10
Office Equipment
5,050
11
Acc. Depr.—Office Equip.
180
12
Accounts Payable
250
13
Salaries Payable
14
Common Stock
15
Retained Earnings
370
16
Dividends
1,100
17
Repair Revenue
18
Salaries Expense
8,025
19
Rent Expense
1,500
20
Utilities Expense
640
21
Insurance Expense
22
Depr. Exp.—Office Equip.
23
24
25
26
27
28
29
Handout 4-2
CLOSING ENTRIES
Part A—Make entries that will bring the revenue, expense, and dividends accounts to a
zero balance. Do this by moving the balance of each account to the retained earnings
account. After you have completed your entries, compute the balance of the retained
earnings account.
Service Revenue
3,500
1,200
10,000
Salaries Expense
1,400
Rent Expense
600
Part B—Prepare closing entries in the format used by accountants. To do this, close the
revenue, expense, and dividends accounts in the following order:
(a) Close the revenue account to Income Summary.
(b) Close the expense accounts to Income Summary.
(c) Make sure that the balance in Income Summary equals net income. If it doesn’t,
Service Revenue
3,500
1,200
10,000
Salaries Expense
1,400
Rent Expense
600
PR 5A Complete accounting cycle 4,5 Challenging 3 hours Analytic FN – Measurement Recording Transactions Application x x 0
PR 1B Financial statements and closing entries 1,2,3 Moderate 1 hour Analytic FN – Measurement Financial Statements Application x x x X
PR 2B Financial statements and closing entries 2,3 Moderate 1 hour Analytic FN – Measurement Financial Statements Application 0
PR 3B T accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet 2,3 Moderate 2.5 hours Analytic FN – Measurement Recording Transactions Application x x 0
PR 4B Ledger accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet 2,3 Challenging 2.5 hours Analytic FN – Measurement Recording Transactions Application x x x 0
PR 5B Complete accounting cycle 4,5 Challenging 3 hours Analytic FN – Measurement Recording Transactions Application x x 0
Type Item Description LO(s) Difficulty Time Est BUSPROG AICPA ACBSP – APC Bloom’s EE Excel GL SMH FAI Service Real World Writing Ethics Internet Group
DQ 1 1 Easy 5 min. Analytic FN – Measurement Recording Transactions Knowledge 0
DQ 2 2 Easy 5 min. Analytic FN – Measurement Current Assets Knowledge 0
DQ 3 2 Easy 5 min. Analytic FN – Measurement Current Liabilities Knowledge 0
DQ 4 3 Easy 5 min. Analytic FN – Measurement Recording Transactions Knowledge 0
DQ 5 3 Easy 5 min. Analytic FN – Measurement Closing Entries Knowledge 0
DQ 6 3 Easy 5 min. Analytic FN – Measurement Adjusting Entries Knowledge 0
DQ 7 4 Easy 5 min. Analytic FN – Measurement Recording Transactions Knowledge 0
DQ 8 4 Easy 5 min. Analytic FN – Measurement Recording Transactions Knowledge 0
DQ 9 6 Easy 5 min. Analytic FN – Measurement GAAP Knowledge 0
DQ 10 6 Easy 5 min. Analytic FN – Measurement GAAP Knowledge 0 x
PE 1A Flow of accounts into financial statements 1 Easy 5 min. Analytic FN – Measurement Adjusting Entries Knowledge x 0
PE 1B Flow of accounts into financial statements 1 Easy 5 min. Analytic FN – Measurement Adjusting Entries Knowledge x 0
PE 2A Retained earnings statement 2 Easy 5 min. Analytic FN – Measurement Financial Statements Application x 0
PE 2B Retained earnings statement 2 Easy 5 min. Analytic FN – Measurement Financial Statements Application x 0
PE 3A Classified balance sheet 2 Easy 5 min. Analytic FN – Measurement Financial Statements Application x 0
PE 3B Classified balance sheet 2 Easy 5 min. Analytic FN – Measurement Financial Statements Application x 0
PE 4A Closing entries 3 Easy 5 min. Analytic FN – Measurement Closing Entries Application x 0
PE 4B Closing entries 3 Easy 5 min. Analytic FN – Measurement Closing Entries Application x 0
PE 5A Accounting cycle 4 Easy 5 min. Analytic FN – Measurement Recording Transactions Application x 0
PE 5B Accounting cycle 4 Easy 5 min. Analytic FN – Measurement Recording Transactions Application x 0
PE 6B Working capital and current ratio 7 Easy 5 min. Analytic FN – Measurement Financial Statement Analysis Application x 0 x x
EX 1 Flow of accounts into financial statements 1,2 Easy 5 min. Analytic FN – Measurement Financial Statements Application 0
EX 2 Classifying accounts 1,2 Easy 5 min. Analytic FN – Measurement Financial Statements Application 0
EX 3 Financial statements from the end-of-period spreadsheet 1,2 Moderate 15 min. Analytic FN – Measurement Financial Statements Application X
EX 4 Financial statements from the end-of-period spreadsheet 1,2 Moderate 15 min. Analytic FN – Measurement Financial Statements Application X
EX 5 Income statement 2 Easy 10 min. Analytic FN – Measurement Financial Statements Application X
EX 6 Income statement; net loss 2 Easy 10 min. Analytic FN – Measurement Financial Statements Application X
EX 7 Income statement 2 Easy 10 min. Analytic FN – Measurement Financial Statements Application 0 x x x
EX 9 Retained earnings statement; net loss 2 Moderate 10 min. Analytic FN – Measurement Financial Statements Application 0
EX 10 Classifying assets 2 Easy 5 min. Analytic FN – Measurement Long-term Asset Reporting Knowledge 0
EX 11 Balance sheet classification 2 Easy 5 min. Analytic FN – Measurement Financial Statements Application 0 x
EX 12 Balance sheet 2 Moderate 10 min. Analytic FN – Measurement Financial Statements Application X
EX 13 Balance sheet 2 Moderate 15 min. Analytic FN – Measurement Financial Statements Application 0
EX 14 Identifying accounts to be closed 3 Easy 5 min. Analytic FN – Measurement Closing Entries Application 0
EX 15 Closing entries 3 Easy 5 min. Analytic FN – Measurement Closing Entries Application 0 x
EX 16 Closing entries with net income 3 Moderate 10 min. Analytic FN – Measurement Closing Entries Application X
EX 17 Closing entries with net loss 3 Easy 10 min. Analytic FN – Measurement Closing Entries Application X
EX 18 Identifying permanent accounts 3 Easy 5 min. Analytic FN – Measurement GAAP Knowledge 0
EX 19 Post-closing trial balance 3 Moderate 10 min. Analytic FN – Measurement Financial Statements Knowledge X
EX 20 Steps in the accounting cycle 4 Moderate 10 min. Analytic FN – Measurement Recording Transactions Knowledge 0
EX 21 Working capital and current ratio 7 Moderate 10 min. Analytic FN – Measurement Financial Statement Analysis Application X x x x
EX 22 Working capital and current ratio 7 Moderate 10 min. Analytic FN – Measurement Financial Statement Analysis Application 0 x x x
EX 23 Completing an end-of-period spreadsheet Appendix Moderate 10 min. Analytic FN – Measurement Recording Transactions Knowledge 0
EX 24 Adjustment data on an end-of-period spreadsheet Appendix Moderate 15 min. Analytic FN – Measurement Adjusting Entries Application x x 0
EX 25 Completing an end-of-period spreadsheet Appendix Moderate 15 min. Analytic FN – Measurement Adjusting Entries Application x x 0
EX 26 Financial statements from an end-of-period spreadsheet Appendix Moderate 15 min. Analytic FN – Measurement Financial Statements Application x x 0
EX 27 Adjusting entries from an end-of-period spreadsheet Appendix Easy 15 min. Analytic FN – Measurement Adjusting Entries Application 0
EX 28 Closing entries from an end-of-period spreadsheet Appendix Moderate 10 min. Analytic FN – Measurement Closing Entries Application 0
PR 1A Financial statements and closing entries 1,2,3 Moderate 1 hour Analytic FN – Measurement Financial Statements Application x x x X
PR 2A Financial statements and closing entries 2,3 Moderate 1 hour Analytic FN – Measurement Financial Statements Application 0
PR 3A T accounts, adjusting entries, financial statements, and closing entries; optional end-of-period spreadsheet 2,3 Moderate 2.5 hours Analytic FN – Measurement Recording Transactions Application x x 0
PR 4A Ledger accounts, adjusting entries, financial statements, and closing entries; optional spreadsheet 2,3 Challenging 2.5 hours Analytic FN – Measurement Recording Transactions Application x x x 0
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