Chapter 6
The Accounting Cycle: Statements and Closing Entries
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In Summary
Prepare financial statements using the adjusted trial balance
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The adjusted trial balance provides the updated balances that are used to create the financial
statements.The income statement shows the net income or loss for the period.The statement
of owner’s equity shows the change in equity for the period. The balance sheet shows the
financial standing of the business at the period end date.
Prepare closing journal entries and post to the general ledger
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Closing journal entries zero out the income statement accounts and the owner’s drawing
account.The entries are then posted to the general ledger. After closing these accounts, a new
income statement can be started for the next accounting period.
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There are two ways to close the income statement accounts: close directly to owner’s capital
or close to an intermediary income summary account.
Prepare the post-closing trial balance to complete the accounting cycle
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A post-closing trial balance is created after the books are closed. It will only show accounts
with a balance, which are assets, liabilities and owner’s capital.
Distinguish between current and long-term assets and liabilities
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Current assets are assets that will be converted to cash or used up within one year. Long-term
assets are typically used to run the business and will not be used up within one year.
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Current liabilities are liabilities that are due within one year. Long-term liabilities are due
beyond one year.
Prepare the classified balance sheet
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The classified balance sheet presents assets and liabilities separated into current and long-
term items.
Calculate working capital, the current ratio and the quick ratio
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Working capital is the difference between current assets and current liabilities.
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The current ratio is calculated as current assets divided by current liabilities.
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The quick ratio is calculated as liquid assets (cash and accounts receivable) divided by current
liabilities.
Describe some benefits of a computerized accounting system over a manual system
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A computerized system automates many of the steps of the accounting cycle, such as posting
to the general ledger and preparing reports. It also allows for easy retrieval of the data.
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