Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . Clip’em Cliff’s ledger represented by T-accounts is presented in Figure 5.16. His consulting practice will be recognized as service revenue and will provide additional revenue while he develops his barbering practice. Cliff then prepares the balance sheet for Clip’em Cliff as shown in Figure 5.25.

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The adjusted trial balance shows a debit and credit balance of $94,150. Once the adjusted trial balance is prepared, Cliff can prepare his financial statements (step 7 in the cycle). We only prepare the income statement, statement of retained earnings, and the balance sheet. The statement of cash flows is discussed in detail in Statement of Cash Flows.

Reversing Entries

To find the balance, take the difference between the income summary amount in the first and second entries (10,650 – 10,625). To close income summary, Cliff would debit Income Summary and credit Retained Earnings. To close expenses, Cliff will credit expense accounts and debit income summary. The beginning retained earnings balance is zero because Cliff just began operations and does not have a balance to carry over to a future period. It might make sense for Cliff to not pay dividends until he increases his net income.

Using Liquidity Ratios to Evaluate Financial Performance

Once all journal entries have been created, the next step in the accounting cycle is to post journal information to the ledger. Cliff will go through each transaction and transfer the account information into the debit or credit side of that ledger account. Any account that has more than one transaction needs to have a final balance calculated. This happens by taking the difference between the debits and credits in an account. Cliff will only close temporary accounts, which include revenues, expenses, income summary, and dividends. To close revenues, Cliff will debit revenue accounts and credit income summary.

4 Appendix: Complete a Comprehensive Accounting Cycle for a Business

Clip’em Cliff’s post-closing trial balance is presented in Figure 5.27. The unadjusted trial balance shows a debit and credit balance of $87,900. Remember, the unadjusted trial balance is prepared before any period-end adjustments are made. You own a landscaping business that has just begun operations. You made several expensive equipment purchases in your first month to get your business started.

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• Remember, the unadjusted trial balance is prepared before any period-end adjustments are made.
• Once the adjusted trial balance is prepared, Cliff can prepare his financial statements (step 7 in the cycle).
• Let’s go through the complete accounting cycle for another company here.
• Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .
• Cliff will go through each transaction and transfer the account information into the debit or credit side of that ledger account.
• One step in the accounting cycle that we did not cover is reversing entries.

Now that all of the adjusting entries are journalized, they must be posted to the ledger. Posting adjusting entries is the same process as posting the general journal entries. Each journalized account figure will transfer to the corresponding ledger account on either the debit or credit side as illustrated in Figure 5.20. It can be difficult to keep track of accruals from prior periods, as support documentation may not be readily available in current or future periods. This requires an accountant to remember when these accruals came from. By reversing these accruals, there is a reduced risk for counting revenues and expenses twice.

These purchases very much reduced your cash-on-hand, and in turn your liquidity suffered in the following months with a low working capital and current ratio. Once all of the closing entries are journalized, Cliff will post this information to the ledger. The closed accounts with their final balances, as well as Retained Earnings, are presented in Figure 5.26.

The support documentation received in the current or future period for an accrual will be easier to match to prior revenues and expenses with the reversal. One step in the accounting cycle that we did not cover freelancers tv series is reversing entries. Reversing entries can be made at the beginning of a new period to certain accruals. The company will reverse adjusting entries made in the prior period to the revenue and expense accruals.

Once all of the account balances are transferred to the correct columns, each column is totaled. The total in the debit column must match the total in the credit column to remain balanced. The unadjusted trial balance for Clip’em Cliff appears in Figure 5.18. The last step for the month of August is step 9, preparing the post-closing trial balance. The post-closing trial balance should only contain permanent account information.