5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
The Complete Accounting Cycle
Let's work through a complete accounting cycle from start to finish for a Luxembourg SME.
Business Information
Company: Mode Luxembourg SARL (retail clothing store) Period: December 2024 Starting Balances (from November 30 post-closing trial balance):
- Cash: €20,000
- Inventory: €15,000
- Equipment: €25,000
- Accumulated Depreciation: €1,000
- Accounts Payable: €5,000
- Share Capital: €30,000
- Retained Earnings: €24,000
Step 1: Identify and Record Transactions
December Transactions:
Dec 1: Purchase inventory €8,000 on credit (excluding VAT), VAT 17%, recoverable Dec 5: Sell merchandise €12,000 cash (excluding VAT), VAT 17%. Cost of goods sold €7,000 Dec 10: Pay rent €1,200 Dec 15: Sell merchandise €6,000 on credit (excluding VAT), VAT 17%. Cost of goods sold €3,500 Dec 20: Pay salaries €4,000 Dec 22: Receive payment from customer €6,000 (from Dec 15 sale) Dec 25: Pay supplier €5,000 (from Dec 1 purchase) Dec 28: Purchase equipment €10,000, paying €3,000 cash and €7,000 note Dec 30: Pay utilities €300
Journal Entries:
Dec 1:
321000 Inventory €8,000
431000 VAT Recoverable 1,360
400000 Accounts Payable €9,360
Dec 5:
510000 Cash €14,040
700000 Sales Revenue €12,000
430000 VAT Payable 2,040
602000 Cost of Goods Sold €7,000
321000 Inventory €7,000
Dec 10:
612000 Rent Expense €1,200
510000 Cash €1,200
Dec 15:
410000 Accounts Receivable €7,020
700000 Sales Revenue €6,000
430000 VAT Payable 1,020
602000 Cost of Goods Sold €3,500
321000 Inventory €3,500
Dec 20:
620000 Salaries Expense €4,000
510000 Cash €4,000
Dec 22:
510000 Cash €6,000
410000 Accounts Receivable €6,000
Dec 25:
400000 Accounts Payable €5,000
510000 Cash €5,000
Dec 28:
223000 Equipment €10,000
510000 Cash €3,000
120000 Notes Payable €7,000
Dec 30:
615000 Utilities Expense €300
510000 Cash €300
Step 2: Post to Ledger Accounts
(Summary of balances after posting)
Cash (510000): €20,000 + €14,040 + €6,000 - €1,200 - €4,000 - €5,000 - €3,000 - €300 = €26,540
Inventory (321000): €15,000 + €8,000 - €7,000 - €3,500 = €12,500
Equipment (223000): €25,000 + €10,000 = €35,000
Accounts Receivable (410000): €0 + €7,020 - €6,000 = €1,020
VAT Recoverable (431000): €0 + €1,360 = €1,360
Accounts Payable (400000): €5,000 + €9,360 - €5,000 = €9,360
VAT Payable (430000): €0 + €2,040 + €1,020 = €3,060
Notes Payable (120000): €0 + €7,000 = €7,000
Sales Revenue (700000): €0 + €12,000 + €6,000 = €18,000
Cost of Goods Sold (602000): €0 + €7,000 + €3,500 = €10,500
Rent Expense (612000): €0 + €1,200 = €1,200
Salaries Expense (620000): €0 + €4,000 = €4,000
Utilities Expense (615000): €0 + €300 = €300
Step 3: Prepare Unadjusted Trial Balance
Mode Luxembourg SARL
Unadjusted Trial Balance
December 31, 2024
Account Debit Credit
─────────────────────────────────────────────────
510000 Cash €26,540
410000 Accounts Receivable 1,020
321000 Inventory 12,500
431000 VAT Recoverable 1,360
223000 Equipment 35,000
241000 Accumulated Depreciation €1,000
400000 Accounts Payable 9,360
430000 VAT Payable 3,060
120000 Notes Payable 7,000
101000 Share Capital 30,000
104000 Retained Earnings 24,000
700000 Sales Revenue 18,000
602000 Cost of Goods Sold 10,500
612000 Rent Expense 1,200
620000 Salaries Expense 4,000
615000 Utilities Expense 300
─────────────────────────────────────────────────
TOTALS €91,420 €92,420
Note: Doesn't balance - need to check. Actually, let me recalculate totals:
- Debits: €26,540 + €1,020 + €12,500 + €1,360 + €35,000 + €10,500 + €1,200 + €4,000 + €300 = €92,420
- Credits: €1,000 + €9,360 + €3,060 + €7,000 + €30,000 + €24,000 + €18,000 = €92,420 ✓
Step 4: Make Adjusting Entries
Additional Information:
- Depreciation: Equipment €35,000, 5-year life, €583/month (€35,000 ÷ 60)
- Accrued Salaries: €800 for last week of December
- Prepaid Rent: None (paid monthly)
- Supplies: None
Adjusting Entries:
Dec 31:
640000 Depreciation Expense €583
241000 Accumulated Depreciation €583
Dec 31:
620000 Salaries Expense €800
440000 Salaries Payable €800
Step 5: Prepare Adjusted Trial Balance
Mode Luxembourg SARL
Adjusted Trial Balance
December 31, 2024
Account Debit Credit
─────────────────────────────────────────────────
510000 Cash €26,540
410000 Accounts Receivable 1,020
321000 Inventory 12,500
431000 VAT Recoverable 1,360
223000 Equipment 35,000
241000 Accumulated Depreciation €1,583
400000 Accounts Payable 9,360
430000 VAT Payable 3,060
440000 Salaries Payable 800
120000 Notes Payable 7,000
101000 Share Capital 30,000
104000 Retained Earnings 24,000
700000 Sales Revenue 18,000
602000 Cost of Goods Sold 10,500
612000 Rent Expense 1,200
620000 Salaries Expense 4,800
615000 Utilities Expense 300
640000 Depreciation Expense 583
─────────────────────────────────────────────────
TOTALS €92,803 €92,803
Step 6: Prepare Financial Statements
Income Statement:
Mode Luxembourg SARL
Income Statement
For the Month Ended December 31, 2024
REVENUE
Sales Revenue (700000) €18,000
COST OF GOODS SOLD
Cost of Goods Sold (602000) (10,500)
Gross Profit €7,500
OPERATING EXPENSES
Salaries Expense (620000) €4,800
Rent Expense (612000) 1,200
Utilities Expense (615000) 300
Depreciation Expense (640000) 583
Total Operating Expenses (6,883)
NET INCOME €617
Statement of Owner's Equity:
Mode Luxembourg SARL
Statement of Owner's Equity
For the Month Ended December 31, 2024
Beginning Equity, December 1, 2024
Share Capital (101000) €30,000
Retained Earnings (104000) 24,000
Total Beginning Equity €54,000
Add: Net Income (from Income Statement) 617
Less: Distributions 0
Ending Equity, December 31, 2024 €54,617
Balance Sheet:
Mode Luxembourg SARL
Balance Sheet
As of December 31, 2024
ASSETS
Current Assets:
Cash (510000) €26,540
Accounts Receivable (410000) 1,020
Inventory (321000) 12,500
VAT Recoverable (431000) 1,360
Total Current Assets €41,420
Noncurrent Assets:
Equipment (223000) €35,000
Less: Accumulated Depreciation (241000) (1,583)
Net Equipment 33,417
Total Noncurrent Assets 33,417
TOTAL ASSETS €74,837
LIABILITIES
Current Liabilities:
Accounts Payable (400000) €9,360
VAT Payable (430000) 3,060
Salaries Payable (440000) 800
Total Current Liabilities €13,220
Noncurrent Liabilities:
Notes Payable (120000) 7,000
Total Noncurrent Liabilities 7,000
TOTAL LIABILITIES €20,220
EQUITY
Share Capital (101000) €30,000
Retained Earnings (104000) 24,617
Total Equity 54,617
TOTAL LIABILITIES AND EQUITY €74,837
Verification: Assets (€74,837) = Liabilities (€20,220) + Equity (€54,617) ✓
Step 7: Prepare Closing Entries
Close Revenues:
700000 Sales Revenue €18,000
350000 Income Summary €18,000
Close Expenses:
350000 Income Summary €17,383
602000 Cost of Goods Sold €10,500
620000 Salaries Expense 4,800
612000 Rent Expense 1,200
615000 Utilities Expense 300
640000 Depreciation Expense 583
Close Income Summary:
350000 Income Summary €617
104000 Retained Earnings €617
Step 8: Prepare Post-Closing Trial Balance
Mode Luxembourg SARL
Post-Closing Trial Balance
December 31, 2024
Account Debit Credit
─────────────────────────────────────────────────
510000 Cash €26,540
410000 Accounts Receivable 1,020
321000 Inventory 12,500
431000 VAT Recoverable 1,360
223000 Equipment 35,000
241000 Accumulated Depreciation €1,583
400000 Accounts Payable 9,360
430000 VAT Payable 3,060
440000 Salaries Payable 800
120000 Notes Payable 7,000
101000 Share Capital 30,000
104000 Retained Earnings 24,617
─────────────────────────────────────────────────
TOTALS €76,420 €76,420
Verification: All temporary accounts are zero, only permanent accounts remain.
Summary of Accounting Cycle
- ✅ Identify and record transactions
- ✅ Post to ledger accounts
- ✅ Prepare unadjusted trial balance
- ✅ Make adjusting entries
- ✅ Prepare adjusted trial balance
- ✅ Prepare financial statements
- ✅ Prepare closing entries
- ✅ Prepare post-closing trial balance
Cycle Complete! Ready for next period.