FDNACCT 08 · Completing the Cycle

An optional working paper that gathers period-end data; it is not a formal accounting record.

The worksheet gathers ledger balances and adjustments in one place to help prepare statements. It is optional because the same statements can be prepared from adjusted ledger balances directly; it does not replace journals, ledgers or formal statements.

Trial Balance; Adjustments; Adjusted Trial Balance; Statement of Profit or Loss; Statement of Financial Position.

The five pairs carry unadjusted balances, adjustment debits and credits, their adjusted results, and the two statement sections. Each pair has a debit and credit column, so 5 × 2 = 10 columns. Journals, ledgers, cash flows and budgets serve different purposes and are not substitutes for these five worksheet sections.

Adjusted Trial Balance.

An eight-column worksheet has four debit/credit pairs rather than five. It omits the separate Adjusted Trial Balance pair while retaining unadjusted balances, adjustments and the two statement sections; the need to account for adjustments is still present.

No. Journalize and post the adjustments, and prepare formal statements.

A worksheet organizes calculations but does not itself enter them in the formal journal or ledger. Journalizing and posting gives each adjustment a permanent accounting record and updates the accounts used for formal statements. Leaving it only on the worksheet would leave the ledger balances incomplete.

Same-side adjustments add; opposite-side adjustments subtract.

A debit adjustment adds to a debit balance, while a credit adjustment offsets it; the reverse applies to a credit balance. This follows the algebra of debit and credit sides, rather than a rule that every adjustment always increases the account. If the offset exceeds the starting balance, the balance changes sides.

In the smaller column, to make debits and credits equal.

The statement-column difference represents the period’s profit or loss, and adding it to the smaller side balances that section. For profit, it is added to the Profit or Loss debit column and Financial Position credit column; a loss uses the opposite columns. It is the same result linking performance to equity, not two different profits.

Debit Income Summary; credit Merchandise Inventory.

The opening inventory asset balance must be removed and included in this period’s cost of goods available under the periodic procedure. Debit Income Summary for its cost and credit Merchandise Inventory to remove that opening balance. A separate ending-inventory entry restores the goods still unsold; neither step creates a cash movement.

Debit Merchandise Inventory; credit Income Summary.

Unsold goods remain an asset and must be excluded from the cost of goods sold. In the course’s periodic procedure, debit Merchandise inventory and credit Income summary for the physical ending inventory. The credit reduces the costs accumulated in Income summary; crediting Cash would incorrectly invent a new payment.

Natural form groups expense types (e.g. rent); functional form groups purposes (e.g. selling or administration).

Nature answers what kind of cost occurred, such as salaries or rent; function answers why it occurred, such as selling goods or running the office. The same salary type can serve different functions depending on the employee’s work. Neither presentation distinction concerns cash versus credit or the account/report form of financial position.

Net sales = sales less sales returns/allowances and discounts; gross profit = net sales less cost of sales.

Returns and discounts reduce the sales amount retained from customers, so subtract them to obtain net sales. Then subtract only the cost of goods actually sold to obtain gross profit; other operating and financing expenses are deducted later when finding net profit.

Selling: advertising and delivery fees. General/administrative: office supplies and legal/accounting fees.

Advertising creates demand and delivery brings goods to customers, so both serve selling. Office supplies and legal/accounting work support general administration rather than distribution. Classify by the activity served, not merely the expense account’s name.

Net profit/loss flows into the equity statement; ending capital flows into financial position.

Profit increases the owner’s claim and a loss reduces it, so performance enters the changes-in-equity calculation. After contributions and drawings are included, ending capital is the equity balance shown with assets and liabilities on financial position. Drawings reduce capital directly instead of reducing profit.

Cash receipts and payments from operating activities directly, rather than reconciling from net profit.

The direct method shows actual operating receipts and payments, such as cash collected from customers and cash paid to suppliers. It therefore removes unpaid or uncollected parts from accrual amounts rather than assuming net profit equals cash; the indirect method instead starts with profit and reconciles it.

Operating: principal revenue-producing activities. Investing: long-term assets and investments. Financing: contributed equity and borrowings.

Operating relates to ordinary revenue-producing business activity, investing changes long-term assets or non-trade investments, and financing changes owner funding and borrowings. For example, customer collection is operating, equipment purchase is investing and receiving a bank loan is financing. A cash transaction’s purpose determines its category.

Received: investing. Paid: financing (dividends paid apply to corporations).

The source’s interest/dividend rule places investment returns received in investing and returns or borrowing costs paid in financing. Use received versus paid to select the specified category, while keeping any principal cash flows classified separately. Dividends paid concern corporations in these notes.

No. Recognized sales and cash collected are different amounts.

A credit sale creates revenue and a receivable, but cash has not moved until the customer pays. The cash-flow statement reports cash movement, so exclude the uncollected amount from current cash receipts even though accrual profit includes the sale.

Transfer net income/loss to capital and zero temporary accounts, including drawings.

Revenue and expense accounts measure only the current period and must begin the next period at zero. Closing transfers their net result to capital through Income Summary, and drawings close directly to capital. Permanent assets and liabilities continue into the next period instead of being reset.

Permanent accounts: assets, liabilities and owner’s capital; temporary accounts have been closed.

Assets, liabilities and capital carry balances forward because they represent resources and claims existing after period-end. Revenues, expenses, drawings and Income Summary have been transferred and zeroed by closing. Contra-assets also remain because they are permanent valuation accounts linked to assets.

At the start of the next period to simplify later receipts/payments involving selected prior adjustments.

Reversals are recorded on the first day of the next period because they prepare for later ordinary cash entries. Reversing an accrual avoids recognizing the same prior-period expense or revenue again when cash is paid or collected. The previous period’s finalized recognition remains intact.

Reverse accruals, expense-method prepayments and revenue-method unearned revenue. Do not reverse asset-method prepayments, liability-method unearned revenue, depreciation, doubtful accounts or closing inventory.

Accruals and the specified expense/revenue-method deferrals are reversed so later payments or receipts can use ordinary expense/revenue entries. Asset-method prepayments, liability-method unearned amounts, depreciation, doubtful accounts and ending inventory retain their adjusted balances because the course does not use that reversal procedure for them.