Completing the Accounting Cycle

Summary :

This chapter summarizes the full accounting cycle for a service company, from preparing a work sheet through adjusting and closing entries to a post-closing trial balance. It also covers preparing a classified balance sheet and analyzing results using the current ratio, tying the cycle's mechanical steps to the statements they ultimately produce.

The work sheet

A work sheet brings together the unadjusted trial balance, the period's adjustments, and the resulting adjusted figures in one place, making it easier to prepare the income statement, statement of retained earnings, and balance sheet without error. It is a working tool rather than a formal financial statement, but it organizes the numbers that those statements are ultimately built from, step by step.

Adjusting, closing, and completing the accounting cycle

Adjusting entries update the accounts before statements are prepared, while closing entries transfer the balances of temporary accounts, revenues, expenses, and dividends, into retained earnings so the books are ready for the next period. A post-closing trial balance is then prepared to confirm that only permanent balance sheet accounts remain open and that total debits still equal total credits before the cycle begins again.

The classified balance sheet and the current ratio

A classified balance sheet groups assets and liabilities into current and long-term categories, making the statement considerably easier to analyze. The current ratio, current assets divided by current liabilities, is introduced as a way to assess a company's short-term ability to meet its obligations, drawing directly on the figures organized in this classified presentation of the balance sheet.