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.


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


Balance Sheet

2010 December 31


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

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
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.