Completing the Accounting Cycle

As the Feature Story below highlights, at Rhino Foods, Inc., financial statements help employees understand what is happening in the business. In Chapter 3 (Adjusting the Accounts), we prepared financial statements directly from the adjusted trial balance. However, with so many details involved in the end-of-period accounting procedures, it is easy to make errors. One way to minimize errors in the records and to simplify the end-of-period procedures is to use a worksheet. 

In this chapter, we will explain the role of the worksheet in accounting. We also will study the remaining steps in the accounting cycle, especially the closing process, again using Pioneer Advertising as an example. Then, we will consider correcting entries and classified balance sheets.

Feature Story: Everyone Likes to Win

When Ted Castle was a hockey coach at the University of Vermont, his players were self-motivated by their desire to win. Hockey was a game you usually either won or lost. But at Rhino Foods, Inc., a bakery-foods company he founded in Burlington, Vermont, he discovered that manufacturing-line workers were not so self-motivated. Ted thought, what if he turned the food-making business into a game, with rules, strategies, and trophies?

In a game, knowing the score is all-important. Ted felt that only if the employees know the score-know exactly how the business is doing daily, weekly, monthly-could he turn food-making into a game. But Rhino is a closely held, family-owned business, and its financial statements and profits were confidential. Ted wondered, should he open Rhino’s books to the employees?

A consultant put Ted’s concerns in perspective when he said, “Imagine you’re playing touch football. You play for an hour or two, and the whole time I’m sitting there with a book, keeping score. All of a sudden I blow the whistle, and I say, ‘OK, that’s it. Everybody go home.’ I close my book and walk away. How would you feel?” Ted opened his books and revealed the financial statements to his employees.

The next step was to teach employees the rules and strategies of how to “win” at making food. The first lesson: “Your opponent at Rhino is expenses. You must cut and control expenses.” Ted and his staff distilled those lessons into daily scorecards-production reports and income statements-that keep Rhino’s employees up-to-date on the game. At noon each day, Ted posts the previous day’s results at the entrance to the production room. Everyone checks whether they made or lost money on what they produced the day before. And it’s not just an academic exercise: There’s a bonus check for each employee at the end of every four-week “game” that meets profitability guidelines.

Rhino has flourished since the first game. Employment has increased from 20 to 130 people, while both revenues and profits have grown dramatically.