Completing the Accounting Cycle
This chapter will explain the steps required to complete the accounting
cycle. This includes understanding the full accounting information
cycle, and what is used to create the financial statements that will be
provided to required and interested stakeholders. The accounting cycle
happens every month for most companies, and requires distinct steps and
cutoffs in order to create useful, consistent financial reports that
managers can use to make decisions that improve the performance of the
company. On a quartery and annual basis, financial statements are
created for outside stakeholders as well.
Preparing financial statements from the work sheet
When the work sheet is completed, all the necessary information to prepare the income statement, statement of retained earnings, and balance sheet is readily available. Now, you need only recast the information into the appropriate financial statement format.
The information you need to prepare the income statement in Exhibit 21 is in the work sheet's Income Statement columns in Exhibit 20.
The information you need to prepare the statement of retained earnings is taken from the Statement of Retained Earnings columns in the work sheet. Look at Exhibit 22, MicroTrain Company's statement of retained earnings for the month ended 2010 December 31. To prepare this statement, use the beginning Retained Earnings account balance (Account No. 310), add the net income (or deduct the net loss), and then subtract the Dividends (Account No. 320). Carry the ending Retained Earnings balance forward to the balance sheet. Remember that the statement of retained earnings helps to relate income statement information to balance sheet information. It does this by indicating how net income on the income statement relates to retained earnings on the balance sheet.
MICROTRAIN COMPANY
Statement of Retained Earnings
For the Month Ended 2010 December 31,
| Retained earnings, 2010 December 1 | $ -0- |
| Net income for the December | 7,290 |
| Total | $ 7,290 |
| Less: Dividends | 3,000 |
| Retained earnings, 2010 December 31 | $ 4,290 |
Exhibit 22: Statement of retained earnings
MICROTRAIN COMPANY
Balance Sheet
2010 December 31
Assets
| Cash | $ 8,250 | |
| Accounts receivable | 6,200 | |
| Supplies on hand | 900 | |
| Prepaid insurance | 2,200 | |
| Prepaid rent | 800 | |
| Interest receivable | 600 | |
| Trucks | $ 40,000 | |
| Less: Accumulated depredation 750 | 39,250 | |
| Total assets | $ 58,200 |
Liabilities and Stockholders' Equity
| Liabilities: | ||
| Accounts payable | $ 730 |
|
| Unearned service fees | 3,000 |
|
| Salaries payable | 180 |
|
| Total liabilities | $ 3,910 |
|
| Stockholders' equity: | ||
| Capital stock | $ 50,000 | |
| Retained earnings 4,290 | ||
| Total stockholders' equity |
54,290 |
|
| Total liabilities and stockholders' equity |
$ 58,200 |
Exhibit 23: Balance sheet
The information needed to prepare a balance sheet comes from the Balance Sheet columns of MicroTrain's work sheet (Exhibit 20). As stated earlier, the correct amount for the ending retained earnings appears on the statement of retained earnings. See the completed balance sheet for MicroTrain in Exhibit 23.