CHAPTER 4 Y Completing the Accounting Cycle Chapter Preview 120 countries now use the TFRSs issued by the Internationa Feature Story Accounting Standards Board (1ASB) Speaking the Same Language al capital markets underscore the im- benefit42 CHAPTER 4 Completing the Accounting Cycle gain credibility in the marketplace, which reduces financing costs, ‘The IASB’s stated objectives are as follows: To develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB: To promote the use and rigorous application of those standards; ‘© To take account of the financial reporting needs of ‘emerging economies and small- and medium-sized entities (SMEs); and + To bring about convergence of national accounting standards and IFRSs to high-quality solutions. Chapter Outline LEARNING OBJECTIVES Accounting standards may never be absolutely identical around the world. However, financial statement users have already benefitted from the increased comparability that has resulted from efforts to minimize differences in accounting standards. axe - L041 Prepare a worksheet. + Steps in preparing a worksheet DOIT! 1 Worksheet + Preparing financial statements from a worksheet + Preparing adjusting entries from a worksheet 102 Prepareclosingentries anda _ «Preparing closing entries DONT! 2 Closing Entries post-closing trial balance. «Posting closing entries + Preparing a post-closing trial balance LO3 Explain the steps in the + Summary of the accounting cycle DOIT! 3 Correcting Entries accounting cycle and how to pre- Reversing entries are correcting entries ener a LO4 Identify the sections of + Intangible assets DOIT! 4 Statement of Financial a classified statement of financial position. + Current assets + Owner's equity + Property, plant, and equipment Position Classifications + Long:term investments + Non-current liabilities + Current liabilities Series n at the end of the chapter for a review of key conc EXronie eee tcThe Worksheet 4-3 The Worksheet LEARNING OBJECTIVE 3 "Prepare a worksheet. 'Aworksheet is a multiple-column form used in the adjustment process and in preparing financial statements. As ils name suggests, the worksheet isa working fool. Itis mot a permanent account- ing record. Its nether a journal nora part ofthe general ledger. The worksheet is merely a device ‘used in preparing adjusting entries and the financial statements. Companies generally computerize "worksheets using an electronic spreadsheet program such as Microsoft Excel. Illustration 4.1 shows the basic form of a worksheet and the five steps for preparing it, Bach step is performed in sequence. The use of a worksheet is optional. When a company chooses to use one, it prepares financial statements directly from the worksheet. It enters the adjustments in the worksheet columns and then journalizes and posts the adjustments after it hhas prepared the financial statements. Thus, worksheets make it possible to provide the finan- cial statements to management and other interested parties at an earlier date Steps in Preparing a Worksheet We will use the October 31 trial balance and adjustment data of Yazici Advertising from Chapter 3 10 illustrate how to prepare a worksheet, In the following pages, we describe and then demonstrate each step of the process, Warare ae Trance _adusnens iiss ame, Bran Account Tiles De Form and procedure for a ‘worksheet44 CHAPTER 4 Completing the Accounting Cycle Ea Prepare a Trial Balance on the Worksheet ‘The first step in preparing a worksheet is to enter all edger accounts with balances in the ac: ‘count titles column and then enter debit and credit amounts from the ledger in the trial balance columns, Illustration 4.2 shows the worksheet trial balance for Yazici Advertising. This trial balance is the same one that appears in Iustration 2.31 and Illustration 3.3, Teli eabeeleedisonndnalinaedantaa deekeks i Yazid Advertsing 3 ‘vonhect ‘ For the Month Ended cabo 33,2020 = ‘ TFialBalace Adjustments raatbalance satemen _ aaa 7 Account Titles Do Dr. Gr. Doo oo OG ODO 8 Cash __ an — 1 - > Soptis 2500 11 Euipment 5.00 1a ne Pea somo 1B Account Poyable 2s00 tn Salone and Wages Expense 4000 fz x x 7 x a pe from ledger. Trial balance amounts come| directly from ledger accounts.The Worksheet 4-5 Ea Enter the Adjustments in the Adjustments Columns ‘As shown in Illustration 4.3, the second step when using a worksheet is to enter all adjust- ments in the adjustments columns. In entering the adjustments, use applicable trial balance accounts. If additional accounts are needed, insert them on the lines immediately below the trial balance totals. A different leter identifies the debit and credit for each adjusting entry. ‘The term used to describe this process is keying, Companies do not journalize the adjust- ‘ments until after they complete the worksheet and prepare the financial statements. ‘The adjustments for Yazici Advertising are the same as the adjustments in Illustration 3.23, ‘They are keyed in the adjustments columns of the worksheet as follows. a. Yazici debits an additional account, Supplies Expense, ¢1,500 for the cost of supplies used, and credits Supplies £1,500. >. Yazici debits an additional account, Insurance Expense, #50 for the insurance that has expired, and credits Prepaid Insurance #50. c. The company needs two additional depreciation accounts. It debits Depreciation Expense ®40 for the month's depreciation, and credits Accumulated Depreciation— Equipment 140. 4d. Yazici debits Uncarned Service Revenue ¢400 for services performed, and credits Service Revenue #400, ce. Yavici debits an additional account, Accounts Receivable, £200 for services performed ‘but not billed, and credits Service Revenue £200, ‘The company needs two additional accounts relating to interest. It debits Interest Expense +250 for accrued interest, and credits Interest Payable £50. ft fg. Yazici debits Salaries and Wages Expense 61,200 for acerued salaries, and credits an ad- ditional account, Salaries and Wages Payable, ¢1,200. ‘After Yarii has entered all the adjustments, the adjustments columns are totaled to prove their equality46 CHAPTER 4 Completing the Accounting Cycle PRIZE cringe aa the adjustments columns Account Tiles 15,200 2/500 ‘600 5,000 9 | supplies 10. Prepaid insurance 11 Equipment 12) Notes Payable 12| Accounts Payable 14 Unearned Service Revenue 15, Owner's Capital 16. Owner's Drawings 17” Service Revenue 8 19 Salaries and Wages Expense 4,000 20, Rent Expense 900, 21) Totale 2 23) 24, Supplies Expense 25) Insurance Expense 25) Accum. Depreciation— 127) Equipment 28, Depreciation Expense 29, Accounts Receivable 30_ Interest Expense 31 Interest Payable Salaries and Wages Payable Totals 500 = ane faveeng Trial Balance 10,000 © Sule Dol Yazici Advertising ‘Worksheet For the Month Ended October 31,20 ‘Adjusted Teal Balance Adjustments Tae Gor (2) 1.500 ©) 50 5,000 2.500 1.200 () 400 10,000 (©) 200 (@ 1200 2700 78.700 (2) 1500 ) 50 © 40 © 4 (200 © 50 so (9) 1.200, a ET 1 Ha Diba] Statement of Income “Financial statement Position Bragecresjionepacr ‘Add additional accounts as needed to complete the adjustment: () Supplies Used, (b) Insurance Expired, (€) Depreciation Expensed. (4) Service Revenue Recognized. (e) Service Revenue Accrued, (g) Salaries Accrued. Enter adjustment amounts| in appropriate columns, and use letters to cross- reference the debit and ‘credit adjustments. Total adjustments columns: and check for equality.The Worksheet 4-7 Ec Enter Adjusted Balances in the Adjusted Trial Balance Columns [As shown in Mlustration 44, Yazici Advertising next determines the adjusted balance of fn account by combining the amounts entered in the fist four columns of the worksheet for each account. For example, the Prepaid Insurance account in the trial balance columns has 1600 debit balance and a #50 credit in the adjustments columns. The resul is a 8550 debit balance seconded in the adjusted trial balance columns. For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after _journalizing and posting the adjusting entries. The balances in these columns are the same as those in the adjusted trial batance in IMustration 3.25, After Yavici has entered all account balances in the adjusted trial balance columns, the ‘columns are totaled to prove their equality. Ifthe column totals do not agree, the financial statement columns will not balance and the financial statements will be incorrect. nterng adjusted balances nthe austell oun Yaziei Advertising ‘irkshest For the Month Ended October 31,2020, statement of ‘adjustments Adlusted Income Finan. ‘Wal Balance Adjustments ia'palance statement —_ Postion ae ee 5200 oo 5.000 000 2500 1200 «) 19000 seo 1000 © © 19) solaris and Wages pense 000 (6) 1200 soo arm 28700 Supplies Expense Insurance Expense ‘Accum. Depreciation Equipment Depreciation Expense ‘Accounts Receivable | nterest Expense4-8 CHAPTER 4 Completing the Ac counting Cycle Ea Extend Adjusted Trial Balance Amounts to Appropriate Financial Statement Columns HELPFUL HINT Every adjusted trial balance amount must be extended to one of the four statement ‘columns. ‘As show in Ilustration 45, the fourth step is to extend adjusted trial balance amounts to the {income statement and statement of financial position columns of the worksheet (see Helpful Hint). Yazici Advertising enters statement of financial position accounts in the appropriate statement of financial position debit and credit columns. For instance, it enters Cash in the statement of financial position debit column, and Notes Payable in the statement of financial position eredit column, Yazici extends Accumulated Depreciation—Equipment to the state- ‘ment of financial position credit column. The reason is that accumulated depreciation is a contra asset account with a eredit balance. Because the worksheet does not have columns for the owner's equity statement, Yazici extends the balance in owner's capital to the statement of financial position credit column. In addition, it extends the balance in owner's drawings tothe statement of financial position debit column because itis an owner's equity account with a debit balance. ‘The company enters the expense and revenue accounts such as Salaries and Wages Ex- pense and Service Revenue in the appropriate income statement columns. REECE Extending the adjusted trial balance amounts to appropriate financial statement columns r alata Le alate 3 ‘Yaz Advertising ‘ fer the Mont nde Stabe 31, 2020 a (a = i520 2 supplies 2.500 1500 "000 10) Pepa surance on 0 30 21 Equipment 5.000 = 5000 12) noter Payable 000 000 13, ecouns Payable 2500 2500 14) Unerned Seve Revenue 1200 ) 400 no 45| ouners Captl 11.000 19000 19000 17 Service Revenue 10.000 @ 0 1960 9600 * © 19 Salaries and Wages Expense 4000) 1200, 520 5200 24 supplies Expense 1300 101500 Bs murancefxperse a 3% ‘° ‘ 27" eauipment o « 0 *” 2 epreitonSxpese ©» ” 28 Account Recon a 20 200 20 so ineres Expense o 9 0 so at intrest Payable 0 so 50 Snares and Wages Payable (130x200 120 ‘tie ee ese ‘ome statement columns ‘Extend al asset and Taily account balances, ax well as owner’ capital and drawings account balances, to the statement of nancial postion columasThe Worksheet 4-9 Ea Total the Statement Columns, Compute the Net Income (or Net Loss), and Complete the Worksheet As shown in Illustration 4.6, Yazici Advertising must now total each ofthe financial statement ‘columns, The net income or loss forthe period is the difference between the totals of the two ‘income statement columns. If total credits exceed total debits, the result is net income. In such ‘case, the company inserts the words “Net Income” in the account tiles space. It then enters the amount in the income statement debit column and the statement of financial position credit column. The debit amount balances the income statement columns; the credit amount bal- ances the statement of financial position columns. In addition, the credit in the statement of financial postion column indicates the increase in owner's equity resulting from net income. What if total debits in the income statement columns exceed total edits? In that case, Yazici has a net loss. Itenters the amount of the net loss in the income statement credit column ‘and the statement of financial position debit column. ‘After entering the net income or net loss, Yazici determines new column totals. The totals shown in the debit and credit income statement columns will match. So will the totals shown in the debit and credit statement of financial position columns. If either the income statement columns or the statement of financial position columns are not equal after the net income or net loss has been entered, there isan error in the worksheet. EENEEET Computing net income or net loss and completing the worksheet 2 | Yatic Advertising 3 Seep 2500 (0) 1300 "1000 ‘200 10] repairer ‘oo "Ss Ba 1s] Uneonedseric Revenue halo) ‘0 ‘0 ‘ners cpt! 10 100 some | Samer rows soo s00 s00 | sso ans wage pene 4000) 1200 sam 5200 2 teuipmert eo # « o ba) oepeition xperse © © bacon Recenle 2 2 20 b.neet xpeoe % tees Payee 0 0 so 0 Sure ond Wages oye (v0 100 120 ps Tow Fa Saw IGG TAT TOR AT 5s nein 28 2900 ps tots Ree ae er [the difference between the totals of the wo Income Haterment columns determines net income lor net loss. [Net incom 1 the credit column af the statement of financial poiion columns.410 CHAPTER 4 Completing the Accounting Cycle ness Financial statements from a worksheet Preparing Financial Statements from a Worksheet After a company has completed 1 worksheet, it has at hand all the data required for preparation of Financial statements, The income statement is prepared from the income statement columns, The ‘owner's equity statement and statement of financial position are prepared from the statement of financial position columns. Mustration 4.7 shows the financial statements prepared from Yazici Pen aa ren Ruch ete Revenues Service revenve 10,600 Expenses Salaries and wages expense Supplies expense Rent expense Insurance expense Ine Depreciation expense Total expenses 71740 Net income 22.860 Rees Crier ats aoe ee ete ‘Owner's capital, October 1 oes Add: Investments 10,000 Net income 2,860 12.860 12.860 Less: Drawings 500 Owner's capital, October 31 360 Pen eae} Seti October 31, 2020 Assets Equipment 5,000 Less: Accumulated deprecation —equipment 40 4.960 Prepaid insurance 550 Supplies 1,000 Accounts recivab Cash Total assets 200 *s Equity and Li Owners equity Owners capital #12360 Liabilities Notes payable £5,000 Accounts payable 2.500 Interest payable 50 Unearned service revenue 800 Salaries and wages payable 1.200 Total owner's equity and liabilitiesClosing the Books 4-11 Advertsing’s worksheet. At this point, the company has not journalized or posted adjusting entries, Therefore, ledger balances for some accounts are not the same asthe financial statement amounts ‘The amount shown for owner's capital on the worksheet is the account balance before considering drawings and net income (or Toss). When the owner has made no additional investments of capital during the period, this worksheet amount for owner's capital is the bal- ning of the period Using a worksheet, companies ean prepare financial statements before they journalize and post adjusting entries, However, the completed worksheet is not a substitute for formal financial statements. The format of the data inthe financial statement columns ofthe worksheet is not the same as the format of the financial statements. A worksheet is essentially a working {ool of the accountant; companies do not distribute it to management an other parties. ance atthe b Preparing Adjusting Entries from a Worksheet A worksheet is not a journal, and it cannot be used as a basis for posting to ledger accounts. To adjust the accounts, the company must journalize the adjustments and post them to the ledger. The adjusting entries are prepared from the adjustments columns of the worksheet. The reference letters inthe adjustments columns and the explanations of the adjust- | HELPFUL HINT ments atthe bottom of the worksheet help identity the adjusting entries (see Helpful Hint). The | Note that writing the expla jjournalizing and posting of adjusting entries follows the preparation of financial statements | mation to the adjustment at when a worksheet is used. The adjusting entries on October 31 for Yavici Advertising arc the | the bottom of the worksheet same as those shown in Hlustration 3.23, required DOIT!1 | Worksheet ACTION PLAN «Statement of financial ‘Susan Elbe is preparing a worksheet. Explain to Susan how she should extend the following adjusted ears (ial balance aecounts tothe financial statement columns ofthe worksheet. Cash Owner's Drawings Accumulated Depreciaion—Equipment Service Revenue Extend contra assets to ‘Accounts Payable Salaries and Wages Expense credit column, Extend ‘drawings account to debit ie ‘column, Income statement debit column—Salaries and Wages Expense eee Income statement ereditcolumn—Service Revenue ee tend rev Statement of financial position debit column—Cash; Owner's Drawings Statement of financial postion eredit column—Accumulaed Depeeciation—Equipment Accounts Payaile Related exercise mural: BEAL, BEA.2, BBA, DOT! 41, 4, E42, E43, E45, and BAS. Closing the Books LEARNING OBJECTIVE 2 Prepare closing entries and a post-closing trial balance. aaastae eet) Icyaayea © Veolia Poeest Tek) cabouaring), OUeT™ peered aes BALANCE ENTRIES gaLANcE STATEMENTS. str At the end of the accounting period, the company makes the accounts ready for the next period. This is called closing the books. In closing the books, the company distinguishes between temporary and permanent accounts,412 CHAPTER 4 Completing the Accounting Cycle ALTERNATIV TERMINOLOGY Temporary accounts are sometimes called nominal ‘accounts, and permanent accounts are sometimes called real accounts. ‘Temporary versus permanent ‘Temporary accounts relate only to a given accounting period. They include all income statement accounts and the owner's drawings account. The company closes all temporary accounts at the end of the period. In contrast, permanent accounts relate to one of more Future accounting periods, They consist of all statement of financial position accounts, including the owner's capital account Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period, Mlustration 4.8 identifies the accounts in each category (see Alternative Terminology). TEMPORARY PERMANENT. ‘These accounts are closed ‘These accounts are not closed All ibility accounts ‘Owner's capital account Preparing Closing Entries ‘Atthe end ofthe accounting period, the company transfers temporary aecount balances to the permanent owner's equity account, Owner's Capital, by means of closing entries. wf entries formally recognize inthe ledger the transfer of net income (or net loss) sto owners capital. The owner's equity statement shows the results of these entries. Closing entries also produce a zero balance in each temporary account. The temporary accounts are then ready to accumulate data inthe next accounting period separate fom the data of prior periods. Permanent accounts are not closed, Journalizing and posting closing entries is a required step in the accounting cycle (see Illustration 4.15). The company performs this step after it has prepared financial state- ‘ments. In contrast othe steps inthe cycle tht you have already studied, companies generally journalize and post closing entries only at the end of the annual accounting period. Thus, all temporary accounts will contain data for the entire accounting period In preparing closing entries, companies could close each income statement account directly to owner's capital. However, to do so would result in excessive detail inthe perma- nent Owner's Capital account. Instead, companies close the revenue and expense accounts to another temporary account, Income Summary, and then transfer the resulting net income or net loss from this account to owner's capital Companies record closing entries in the general journal. A center caption, Clos- ing Entries, inserted in the journal between the last adjusting entry and the first closing entry, identifies these entries. Then the company posts the closing entries to the ledger accounts ‘Companies generally prepare closing entries dircetly from the adjusted balances in the ledger. They could prepare separate closing entries for each nominal account, but the follow ing four entries accomplish the desired result more efficiently 1. Debit each revenue account for its balance, and credit Income Summary for cotal "explain losing entries or a parinerhip and for corporation in Chapters 12 and 13, sespectivaly2, Debit Income Summary for total expenses, and credit each expense account for its balance. 3. Debit Income Summary and credit Owner's Capital for the amount of net income. 4, Debit Owner's Capital for the balance in the Owner’s Drawings account, and credit Owner's Drawings for the same amount (see Helpful Hint. lustration 4.9 presents a diagram of the closing process. Init, the boxed numbers refer to the four entries required in the closing process. TEU NEEN Diagram of closing process—proprietorship Closing the Books 4-1 HELPFUL HINT Owner's Drawings is closed directly to Owner's Capital and not to Income Summary. Owner’s Drawings is not an expense. Ker [F] Close Revenues to Income Summary. [2 Close Expenses to Income Summary [3] lose Income Summary ta Owners Capita (4) Close Owners Drawings to Owners Capa. If there were a net loss (because expenses exceeded revenues), entry 3 in Illustration 4.9 ‘would be reversed: there would be a credit to Income Summary and a debit to Owner's Capital. Closing Entries Illustrated mn practice, companies generally prepare closing entries only atthe end of the annul account- ing period. However, to illustrate the journalizing and posting of closing entries, we will assume that Yazici Advertising closes its books monthly. Illustration 4.10 shows the closing entries at October 31. (The numbers in parentheses before each entry correspond to the four entries diagrammed in Iustration 4.9,) ‘Owners Capi 2 permanenc account ‘All other accounes are emporary accountsClosing entries journalized HELPFUL HINT ‘The balance in Income Sum- mary before it is closed must equal the net income or net loss for the period, 2020 Oct. 31 Service Revenve 10,600 Tncome Summary 10,600 (To close revenue account) Q 31 | Ancome Summary Supplies Expense 1.500 Depreciation Expense 40 Insurance Expense 50 Salaries and Wages Expense 5.200 Rent Expense 900 Interest Expense 30 (To close expense accounts) 8 31 | Income Summary Owner's Capital 2.860 (To close net income to eapital) ® 31 | Owner's Capita (Owner's Drawings 500 (o close drawings to capital) are the totals of the income Note thatthe amounts for Incomte Summary in entries (1) and (2 Statement credit and debit columns, respectively, in the worksheet 21 Cour of cautions in preparing closing entries. (1) Avoid unintentionally doubling the through tenets balances rather than zeroing them. (2) Do not close Owner's Dratvings iraueh the Income Summary account. Owner's Drawings is not an expense, and it inva factor in determining net income. Posting Closing Entries {stration 411 shows the posting of the closing enties and the underlining (ruling) of the accounts, Note that ll temporary accounts have 2eo balances after posting the closing Gree: It addition, notice tha the balance in owners capital (Owner's Capital) represen ihe total equity of the owner at the end of the accounting perio. This balance slows {he statement of financial positon and! is the ending capital reported on the owner equity aly eat ts shown in lusiation 47. Yazici Advertising uses the Income Summary aceoure Pepi ite: does not jouralize and post entries to this account during the year aoe Helpful Hind) As Par of the closing process, Yazei total, balances, ad double-undertines is tempo- Tree ounts revenues, expenses, and Owner's Drawings, as shown in T-account form ia Cuustation 4.11. It does not cose its permanent accounts—assts, liabilities, and Owners Capital Instead, Yazici draws a single underline beneath the currentperiod enuies forthe Permanent accounts. The account balance is then entered below the single underline aad carried forward to the next period (for example, see Owner's Capital).Closing the Books 4-15 10606 [at 103600 Ker [1] lose Revenues to Income Summary (Close Expenses Income Summary. (Clove Income Summary ta Owner's Capt |Close Onmers Drawings co Overs Capt eT ee LU CULL oy Performing the Virtual Close ‘Technology has dramatically shortened the closing. process. Recent surveys have reported thatthe average company now takes only six to seven days to 5 close, rather than 20 days. Buta few companies do much better ‘Some companies ean perform a “virtual close"—elosing within 24 hours on any day in the ‘quarter. One company even improved its closing time by 85%. Not very long ago, i took 14 1016 days. Managers at these companies Seve ColfiSackbn ‘emphasize that this increased speed has not reduced the accuracy and completeness of the data, ‘This is not just showing off. Knowing exactly where you are financially all of the time allows the company to respond faster than competitors It also means thatthe hundreds of people who used to spend 10 0 20 days a quarter tracking transactions can now be more tsefully employed on things such as mining data for busines ite Tigence to ind new business opportunites. Source: “Reporting Practices: Few Do I AIL” Fnoneal Executive (November 2005), p. 1 Who else benefits from a shorter closing process? (Go to the book's companion website for this answer and additional questions.)4.16 CHAPTER 4 Completing the Accounting Cycle e Preparing a Post-Closing Trial Balance ‘After Yaziei Advertising has journalized and posted all closing entries, it prepares another trial balance, called a post-closing trial balance, from the ledger. The post-closing trial balance lists permanent accounts and their balances after the journalizing and posting of closing en- tries. The purpose of the post-closing trial balance is to prove the equality of the permanent account balances carried forward into the next accounting period. Since all temporary ac- counts will have zero balances, the post-closing trial balance will contain only per statement of financial position—accounts. Illustration 4.12 shows the post-closing trial balance for Yazici Advertising. it CTT Post-closing tral bal Poet October 31, 2020 ash 15,200 ‘Accounts Receivable Supplies Pr Equipment Accumulated Depreciation—Equipment Notes Payable Accounts Payable UUnearned Service Revenue Salaries and Wages Payable 1.200 Interest Payable 50 (Owner's Capital 12,360 Yazici prepares the post-closing trial balance from the permanent accounts in the led lustration 4.13 shows the permanent accounts in Yazici's eneral ledgerClosing the Books 4-17 PEED vert eer, permanent accounts (Permanent Accounts Only) fea Cash No. 101 Accounts Payable No. 201 Date [Explanation [Ret | Debit [ Credit [ Balance Date [Explanation | Ref. | Debit | Credit | Balance 200 2020 Oa 1 41 | 10,000 10000 Oa. 5 a 2,500 | 2,800 2 mi | 1,200 11.200 c F a ‘900 | 10:300 ‘Unearned Service Revenue No. 209 4 m1 00 | 9.700 Explanation [Ref | Debit | Credit | Balance » a 00 | 9.200 6 uw 4.000 | 5.200 n 1,200 | 1,200 31 a | 10,000 15,200 Adj-ewy 1 | 400 800 Accounts Receivable Nouiz Salaries and Wages Payable No. 212 Date [Explanation [Ref | Debit [ Credit [ Balance Date [Explanation | Ref. | Debit | Credit | Balance 2000 220) Oe. 31 | Adjenuy | 12 | 200 200 Oc. 31 Adiemry | 32 1200 | 1,200 Supplies No. 126 Interest Payable No.230 Date [Explanation [ Ref. | Debit | Credit | Balance Date [Explanation | Ret. Credit | Balance 2020 2020 x. 5 ai | 2,500 2500 Oe. 31} Adj.enry | 12 sol s0 atl Adjenty — | 32 1,500 | 1,000 Owner's Capital No. 301 Prep Insurance, No.130° “Date_[Explanation [Ref | Debit | Credit [ Balance Date_[Explanation, | Ref. | Debit | Credit [ Balance 999 2000 Ox 1 a1 10.000 | 10,000 Oct. 4 n | 600 600 31 Closing entry | J3 2,860 | 12,860 sil adjenry | 32 so | 550 31 Cosingentry | 33 | 500 12360 Equipment No. 157 Date [Explanation [ Ret. | Debit | Credit | Balance [oer The permancin account or Yarci Advertsing ae shown here. oa Mlustaton 4.14 shows the temporary accounts. Both penne nd temporary accounts rep ofthe general lige. They ae sere ec. JT tha ONY $000 | hereto ai nearing __Accumulated Depreciation—Equipment __No. 158 Date [Explanation [Ref | Debit | Credit [ Balance 20 | Ot. 31] Adjentry — | a2 ao! 40 Notes Payable No. 200 Date [Explanation [ Ret. | Debit | Credit | Balance 2000 Oct 1 uw | 5,000 | 5,000 A post-closing trial balance provides evidence that the company has properly journalized ‘and posted the closing entries. It also shows that the accounting equation is in balance at the end of the accounting period. However, lke the trial balance, it does not prove that Yazici has recorded all transactions or that the ledger is correct. For example, the post-closing trial bal- ance still will balance even if transaction is not journalized and posted ot if transaction is journalized and posted twice, ‘The remaining accounts in the general ledger are temporary accounts, shown in Thus 4.14, After Yazici correctly posts the closing entries, each temporary account has a zero balance. These accounts are double-underlined to finalize the closing process,418 CHAPTER 4 Completing the Accounting Cycle Gener ee, temporary scouts (Temporary Accounts Only) Gee Owner's Drawings No. 306 Insurance Expense No. 722 aie [Explanation [Ref] Debit | Credit [ Balance Date [Explanation | Ret.| Debit | Credit | Balance 2020 2020) ct. 20 a] 500 500 Oct, 31 Adj entry bas eo 50 31 |Closingentry | 33 | soo] 0 tl closingentey | 33 50 Income Summary No. 380 Salaries and Wages Expense No. 726 aie [Explanation [Ref] Debit | Credit | Balance Date [Explanation | Ref.| Debit | Credit | Balance 20201 Oct. 31 B 10,600] 10,600 Oct. 26 a | 4.000 4.000 31| Closingentry | 33 | 7,740 2,860 31 | Adj. entry 2} 1200 5.200 31! Closingentry | 3 | 2.860 fs 31 | Closing entry | 3 5200) 0 Service Revenue No. 400 Rent Expense No. 729 Date [Explanation | Ref. Debit | Credit | Balance Date [Explanation | Ret.| Debit | Credit | Balance 2020 2020 Oct. 31 n 10,000] 10.000 Oc. 3 st | 900 900 31 | Adj. entry 2 400) 10.400 31! Closingentry | 13 900] 31 | Adj. entry 2 200} 10,600 " Sl ase iii een wd Interest Expense No. 905 ——= “dae [Explanation —_[Ret.] Debit [ Credit | Balance Supplies Expense No.6 5559 Date [Explanation [Ref.] Debit [ Creat [ Balance Oc, 31 | Adj. enmry aa eeieal “a 2020 31 Closing entey | 33 si eeees Oct. 31 | Adj. entry 2 | 1,500 1,500 311 Closing entry | 3 1300/ Depreciation Expense No.7H1 Date _[ Explanation Debit_[ Credit [ Balance | Nae: The empoary accounts or Yael Advertsing re shown ere aT istration 4.13 hms the pene accounts, Bash permanent nd Gest tape eas 4o_ | Srey cms apt he eal ea Tey ae 31 Closing entey | 33 ol a DO IT!2 | Closing Entries ACTION PLAN + Close revenue and expense ‘Hancock Heating has the following balances in selected accounts of its adjusted tral balance. Seecetape cing ‘Accounts Payable 27,000 ‘Owner's Drawings €15,000 Summary. Service Revenue 98,000 (Owner's Capital 42.000 ee Rent Expense 22,000 ‘Accounts Receivable 38.000 Owner's Capita Salaries and Wages Expense 51,000 Supplies Expense 7,000 + Close Owner's Drawings to Prepare the closing entries at December 31 onsen Coat Solution Dec, 31 | Service Reveme J} 9800 Tome Sura 98,000 (To close revenue secount to Income Summary) 31] tncome Summary 80.000 Slris and Wages Expense s1.000 Supplies Expense 7000 (cose expense accounts to Icom Summary)The Accounting Cycle and Correcting Entries. 4-19 3) Income Summary (€98,000 ~ €80,000) 18000 | omerscenit 1.000 (To clone net income 0 own’ capital) ‘Owner's Drawings 3 | Owners Cail 500 (close owners drawings wo owner's epital) Related esevse mister: BEA, BEAS, BEA6, BEAT, DO ITI 42, Fld, E47, E48, and BALL. The Accounting Cycle and Correcting Entries LEARNING OBJECTIVE 3 Explain the steps in the accounting cycle and how to prepare correcting entries. Summary of the Accounting Cycle Illustration 4.18 summarizes the steps in the accounting cycle. You can see that the cycle begins with the analysis of business transactions and ends with the preparation of a post- closing trial balance. Companies perform the steps in the cycle in sequence and repeat them in each accounting period, Steps 1-3 may occur daily during the accounting period. Companies perform Steps 4-7 a periodic basis, such as monthly, quarterly, or annually. Steps 8 and 9—closing entries and a post-closing trial balance—usually take place only at the end of a company's annual accounting period, ‘There are also two optional steps in the accounting cycle. As you have seen, companies may use a worksheet in preparing adjusting entries and financial statements, In addition, they may use reversing entries, as explained below. Reversing Entries—An Optional Step ‘Some accountants prefer to reverse certain adjusting entries by making a reversing entry at the beginning of the next accounting period. A reversing entry is the exact opposite of the adjusting entry made in the previous period. Use of reversing entries is an optional book- ‘keeping procedure; itis not a required step in the accounting cycle. Accordingly, we have chosen to cover this topic in an appendix at the end of the chapter. Correcting Entries—An Avoidable Step Unfortunately, errors may occur in the recording process, Companies should correct errors, as soon as they discover them, by journalizing and posting correcting entries. I the account- ing records are free of errors, no correcting entries are needed, You should recognize several differences between correcting entries and adjusting entries First, adjusting entries are an integral part of the accounting cycle. Correcting entries, on the | PTHICS NOTE other hand, are unnecessary ifthe records are error-free. Second, companies journalize and post} When companies find errors ‘adjustments only at the end of an accounting period. In contrast, companies make correcting | in previously released entries whenever they discover an error (see Ethics Note). Finally adjusting entries always | stafements, they rest affect at least one statement of financial position account and one income statement account. In| UmbEFS.4-20 CHAPTER 4 Completing the Accounting Cycle THE ACCOUNTING CYCLE eequired steps in the accounting cycle Penn 2, JOURNALIZE THE TRANSACTIONS ec eaeen en)The Accounting Cycle and Correcting Entries 4-21, ‘contrast, correcting entries may involve any combination of accounts in need of correction. Correcting entries must be posted before closing entries. To determine the correcting entry, its useful to compare the incorrect entry with the cor rect entty, Doing so helps identify the accounts and amounts that should—and should not—be corrected. After comparison, the accountant makes an entry to correct the accounts. The fol- Towing two cases for Mercato Co. illustrate this approach, Case 1 (On May 10, Mercato Co, journalized and posted a NT$500 cash collection on account from a customer as a debit to Cash NTS500 and a eredit to Service Revenue NT$500. The company discovered the error on May 20, when the customer paid the remaining balance in full (see Mlustration 4.16), Incorrect Entry (May 10) Correct Entry (May 10) Ca | >| Cash | Service Revenue 500 | Accounts Receivable 500 Comparison of the incorrect entry with the correct entry reveals that the debit 10 Cash NTS500 is correct. However, the NTSS00 credit to Service Revenue should have been credited to Accounts Receivable. As a result, both Service Revenue and Accounts Receivable are over- stated in the ledger. Mercato makes the correcting entry shown in Illustration 4.17, Correcting Entry May 20. | Service Revenue 500 "Accounts Receivable 500 (To correct entry of May 10) Case 2 (On May 18, Mercato purchased on account equipment costing NTS4,S00. The transaction was journalized and posted as a debit to Equipment NTS450 and a credit to Accounts Payable NTS450. The error was discovered on June 3, when Mercato received the monthly statement for May from the creditor (see Mustration 4.18). Incorrect Entry (May 18) Correct Entry (May 18) Equipment | Equipment | = ‘Accounts Payable 450 | Accounts Payable 4,500 ‘Comparison of the two entries shows that two accounts are incorrect. Equipment is un- derstated NTS4,050, and Accounts Payable is understated NTS4,050. Mercato makes the cor- recting entry shown in Ilustration 4.19 Correcting Bn June 3 Equipment ‘Accounts Payable (To correct entry of May 18) 4.050 4,050 | ‘Comparison of entries 500 cash Flows octet ‘Comparison of entries Correcting entry = - a 050) +405 ‘cash Flows noetfoc422 CHAPTER 4 Completing the Accounting Cycle Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry. This approach will result in more entries and postings than ‘correcting entry, but it will accomplish the desired result Investor Insight _ Nigerian Stock Exchange How Can Accounting many opportunites oimestors and companies. But the acount “African Growth? races of any Affican compare Ig behing those of eompan aid fn in other parts of the world. In order to attract more outside investment ‘The sceraey of compo: anf theefre lve the cost of facing projec, many Af com ny una rcs ery panies ave aged IFRS, One Hani avons ht wie ey important t invexon, But fngto ep one African company, ke ound cont that were om ‘other issves ae also of con- mingled and ase that had not been recorded because they had been ccem, Recently, the Nigerian purchased with cash. She emphasized, however, that “just because Stock Exchange adopied a they don't have the best accounting records doesn't mean they don't company-governance system have a good business to assess the 190 companies that are listed on the exchange “The rating system requires the ‘companies to answer questions about business ethies, alt procedures, internal controls, Aisclosure practices, and other What benefit is African companies improve ‘alters. Africa's economy’ is their accounting practices and adopt IFRS? (Go to the book's (© Danie M ErmShasesiock ‘growing rapidly, 50 it offers companion website for this answer and additional questions.) Source: KimbertyS Johnson, “Africa Makes Strid in Corporate Accounting, Governance,” Wall iret Journal Online (November 17,2014. cy to res DOIT!3 | Correcting Entries ACTION PLAN + Compare the incorrect entry with correct entry. 1A payment of Salaries and Wages Expense of INR60O was debited to Supplies and credited 1© | After comparison, make Cash, oth for INR6OO. fan entry to correct the 2. A collection of INR3,000 from a client on account was debited to Cash INR200 and eredited 10 Service Revenue INR200. ‘3. The purchase of supplies on aecount for INR86O vsas debited to Supplies INRGSO and credited to Accounts Payable INR68O. ‘Sanchez Company discovered the following erors made in January 2020 (amounts in thousands). Correct the errors without reversing the incorrect etry Solution 1. Salaries and Wages Expense co Supplies oo 2. Service Revere 200 Cash 2800 ‘Accounts Receivable 3.000 3. Suppties (INRB ~ INR6SO) 180 Accounts Payable 180 Related exercise material: BESS, BES., BO TI, F410, F412, and E13.Classified Statement of Financial Position 4-23 Classified Statement of Financial Position LEARNING OBJECTIVE 4 Identify the sections of a classified statement of financial position, ‘The statement of financial position presents a snapshot of a company’s financial position at a point in time, To improve users’ understanding of a company’s financial position, companies often use a classified statement of financial position. A classified statement of financial position groups together similar assets and similar liabilities, using a number of standard clas- sifications and sections. This is useful because items within a group have similar econom characteristics. A classified statement of financial position generally contains the standard classifications listed in Mlustration 4.20, Assets ites Intangible assets Property, plant, and equipment Long-term investments (Current assets Eguity and Li Equity NNon-curren bilities ‘Current labiiies ‘These groupings help financial statement readers determine such things as (1) whether the company has enough assets to pay its debts as they come due, and (2) the claims of short- and Ton, ors on the company's total assets. Many of these groupings can be seen in the statement of financial position of Cheng Ltd. shown in Tustration 4.21 (see Helpful Hint) Inthe sections that follow, we explain each of these groupings, aes Pee en ry October 31,2020 (NTS in thousands) Intangible assets Patents Property, plant, and equipment Land NTS10,000 Equipment NTS24,000 Less: Accumulated depreciation — equipment NTS 3,100 5.000 19,000 29,000 Long-ter Investment in shares of Walters Corp investments 5.200 2.000 Current assets Prepaid insurance 400 Supplies 2.100 Inventory 3.000 Notes receivable 1,000 Accounts receivable 7,000 Short-term investments 2,000 Cash 6.600 ‘Total current assets Total assets ea ‘Standard statement of financial HELPFU HINT Recall that the basie ‘counting equation is Assets Classified statement of financial po424 CHAPTER 4 Completing the Accounting Cycle (continued) Owner's Equity Owner's capital Non-current liabilities Mortgage payable Notes payable Current liabilities Notes payable Accounts payable Salaries and wages payable Unearned service revenue Interest payable “Tox curvent Fabilites Total equity and liabilities Intangible Assets NTS34,050 NTS10,000 1,300 11300 11,000 2.100 1.600 900 450 16,080 NTS61,400, ‘Many companies have long-lived assets that do not have physical substance yet often are very valuable, We call these assets intangible assets. One si HELPFUL HINT Sometimes are reported heading called “Other assets. Others include patents, copy intangible assets der a broader ees tangible assets sect Wor Intangible assets Goodwill Other ita clusive right of use for a specified period of time. In Ilustration 4.21, Chei intangible assets of NTS3,100, Illustration 4.22 shows the intan in a recent year (see Helpful Hint), Sree Cero) Capitalized development costs ible assets wail. s, and trademarks or trade names that give the company ex= Ad. reported ible assets of Nokia (FIN) Tey Ear People, Planet, and Profit Insight Nestlé SA Creating Value Appendix Bat the end of this textbook contains the financial statements of Nestlé SA. (CHE). ‘Those financial statements report fn the company's profitability and financial position. In addition to these financial statements, Nestlé Tike many other companies today aso reports its acl jevements with rt other, non-financial goals In Neste eas, i calls these goals ‘Creating Shared Value.” Nestlé has set objectives to help society in areas most directly related to its particular expertise: nutrition, water and environmental sustainabil ity, and rural development. The company evaluates its progress in cach area using objective measures, Examples of measures used are provided below Nutrition: Products meeting or exceeding Nutritional Foundation profiling criteria (as percentage of total sles) and products with Water and Environmental Sustanabil hard (average mg CODA) and packaging we Quay oF water dis ht reduction tonnes) Raral Development: Farmers tine ough capsity:-buing pro rams and supplies suited fr food safety, guaity, and processing. To learn more about Nesil's efforts to create shared value, go to p:thwww neste comfess ‘What are some implications of Nes results using objective measures and th 's decision to meas publicly report these results? (Go to the book's companion website for this answer and additional questions.)Classified Statement of Financial Position 4-25 Property, Plant, and Equipment Property; plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business. This category includes land, buildings, machinery nd equipment, delivery equipment, and furniture (see Alternative Terminology). In Tllustra- tion 4.21, Cheng Ltd. reported property, plant, and equipment of NTS29,000. Depreciation is the practice of allocating the cost of assets to a number of years. Com= panies do this by systematically assigning a portion of an asset's cost as an expense each year (rather than expensing the full purchase price inthe year of purchase). The assets thatthe com- pany depreciates are reported on the statement of financial position at cost less accumulated dopreciation. The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far inthe asset's life. In Ilustration 4.21, Cheng Ltd. re- ported accumulated depreciation of NT$5,000. Illustration 4.23 presents the property, plant, and equipment of Laclede Group (KOR). Real emer teen eee ee ees (cies Property, plant, and equipme Land Buildings 9487 Structures 1568 Machinery 36956 Vehicles 26 Other 10,600 Less: Accumulated depreciation 32617 W824 say Long-Term Investments Long-term investments are generally (1) investments in shares and bonds of other compa- nies that are normally held for many years, (2) non-current assets such as land or buildings that a company is not currently using in its operating activities, and (3) long-term notes receivable (see Alternative Terminology). In Illustration 4.21, Cheng Ltd. reported total long-term investments of NTS7,200 on its statement of financial position. Alphabet Ine. (USA) reported long-term investments in its statement of financial position, as shown in Mlustration 4.24. Reena Peet eee cea) reer Current Assets Current assets are assets that a company expects fo convert to eash or use up within one year or its operating eycle, whichever is longer. In Illustration 4.21, Cheng Ltd had current assets of NTS22,100. For most businesses, the cutoff for classification as current assets is one year from the statement of financial position date. For example, accounts receivable are current assets ALTERNATIVE TERMINOLOGY Property, plant, and equi ment is\ sometimes. called fixed assets or plant assets nee) Property, plant, section ALTERNATIVE TERMINOLOGY Long-term investments are often referred to simply as Long-term investments section26 CHAPTER 4 Completing the Accounting Cycle because the company will collect them and convert them to cash within one year. Supplies is ‘current asset because the company expects to use the supplies in operations within one yea. Some companies use a period longer than one year to classify assets and liabilities as ccurrent because they have an operating cycle longer than one year. The operating e company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. For most businesses, this cycle takes less than a year so they use ‘2 one-year cutoff. But for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or non-current. ‘Common types of currentassets are (1) cash, (2) investments (such as short-term govern: ‘ment securities), (3) receivables (notes receivable, accounts receivable, and interest r able) (4) inventories, and (5) prepaid expenses (supplies and insurance). On the statement of financial position, companies usually list these items in the reverse order in which they expect to convert them into cash, Ilustration 4.25 presents the current assets of Tesco (GBR). dle of a eS Current assets Inventories £2,430 ‘Trade and other receivables 13 Derivative financial instruments 7 Current tax assets 6 Short-term investments 360 ‘Cash and cash equivalents 788 oval curent assets ism AAs we explain later in the chapter, a company's current assets are important in assessing its short-term debt-paying ability Owner’s Equity ‘The content of the owner's equity section varies with the form of business organization, In 1 proprietorship, there is one capital account. In a partnership, there is a capital account for ceach partner. Corporations often divide equity into two accounts—Share Capital and Retained Earnings. Corporations record shareholders’ investments in the company by debiting an asset account and crediting the Share Capital account. They record in the Retained Earnings ac count income retained for use in the business, Corporations combine the Share Capital and Retained Earnings accounts and report them on the statement of financial position as equity. (We discuss these corporation accounts in later chapters.) Halie Capital Ltd. reported its ‘equity section as shown in Mlustration 4.26. Halie Capital Ltd. Egquity section Statement of Financial Position (partial) {inthousands) Equity ‘Shate capital £ 685.964 Retained earn 1,406,747 eval equity P.002.681Classified Statement of Financial Position 427 Non-Current Liab Non-eurrent 1 5 are obligations that a company expects to pay after one year, Liabilities in this category include bonds payable, mortgages payable, long-term notes pay- able, lease liabilities, and pension liabilities. Many companies report long-term debt matur- ing after one year as a single amount in the statement of financial position and show the details of the debt in notes that accompany the financial statements. Others list the various types of non-current liabilities. In Tlustration 4.21, Cheng Ld. reported non-current libili- ties of NTS11,300, Mustration 4.27 shows the non-current liabilities that Siemens (DEU) reported in its statement of financial position in a recent year Real World] Non-current liabilities Long-term debt Pension plans and similar commitments Provisions Seed Statement of Financial Position (partial (in milo 14.260 Deferred tax liabilities Other non-current liabilities Current Liabilities In the owner's equity and liabilities section of the statement of financial position, the last ies are obligations that the company is to pay year or its operating cye is longer (see Ethies Note). Com- ‘mon examples are accounts payable, salaries and wages payable, notes payable, interest pay able, and income taxes payable. Also included as curtent liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations, In llustration 4.21, Cheng Ltd. reported five different types of current liabilities, for a total of NT$16,050, IMustration 4.28 shows the current liabilities section adapted from the sta ‘ment of financial position of Siemens (DEU). Sy een eee) (in millions) Current liabilities “Trade payables Current provisions € 8.860 Other current financial Hiabiiies 2, Income taxes payable 70 CCurreat maturities for long-term debt 1819 22210 42451 Other current liabilities Users of financial statements look closely at the relationship between current assets and current liabilities. This relationship is important in evaluating a company’s liquidity—its abil- ity to pay obligations expected to be due within the next year, When current assets exceed current liabilities, the likelihood for paying the liabilities is favorable, When the reverse is true, short-term creditors may not be paid, and the company may ultimately be forced into bankruptcy. (tenes ‘Non-current liabilities section ETHICS NOTE, A company that has more feurrent assets than current bilities ean increase the ratio of eurrent assets to cur- rent liabilities by using cash to pay off some current lia es. This gives the appear rmiore liquid. Do moves ethical? ILLUSTRATION 4.28 Current liabilities section4.28 CHAPTER 4 Completing the Accounting Cycle eer Ue eer cuca / Cana Company Be Too Liquid? ‘There actually i a point where a company can he t00 liguid—that js, it ean have too much working capital (current assets les cutrent liabilities), While itis important to be liquid enough to be able 10 pay short-term bills as they come due, a company does not want t0 ‘ie up its cash in extra inventory oF receivables tha are not earning the ‘company money. By one estimate fom the ‘OdngeSusedoiSickphoio REL Consultancy Group, about REL Consultancy Group 1,000 large companies have on their books cumulative excess work- ing capital of $764 billion, Based on this figure, companies could have reduced debt by 36% or inereased net income by 9%. Given that managers throughout a company’ are interested in improving profitability, it is clear that they should have an eye toward manag ing working capital. They need to aim fr & “Goldilocks solution" — ‘nt too much, not too Title, but jus ight Source: K. Richardson, “Compencs Fall Behind in Cash Managemen, Wat Seer Journal ue 19, 2007 ‘What can various company managers do to ensure that work: ‘capital is managed efficiently to maximize net income? (Go to the book's companion website for this answer and additional questions.) DOIT!4 | Statement of Financial Position Cla: Related exercise mers: BES.10, BEALL, DO ssifications ACTION PLAN ‘+ Analyze whether each er ee fee ery Ree er ra Analyze wheter cc eee ee ee ae see Eine Senn ae a pear Soe ee Goodwill ‘equipment iobdlteg Meanes tere amit Beery Rees anit tens recurrent Ie tL (Se ty DC Uneared service evenve “Match each ofthe following tits proper statement of financial postion classification, shown below. Ifthe item would not appear on a statement of financial postion, use “NA.” Intangible assets (1A) Owner's equity (OP) Property, plant, and equipment (PPE) Non-current bilities (NCL) “Long-term investments (LTD) Curreat liabilities (CL) Current assets (CA) Solution CL Salaries and wages payable LT Share investments (long-term) TNA Service revenue PPE Equipment CL Imerest payable PPE Accumulated depreciation— TIA— Goodwill equipment TCA Debt investments (short-term) __NA___ Depreciation expense NCL Mortgage payable (duc in OF Owner's capital 3 years) (CL Unearned service revenue 4, B41, BAIS, BA.16, ad B17Appendix 4a: Reversing Entries 4.29 appendix 44 | Reversing Entries LEARNING OBJECTIVE *5 Prepare reversing entries, “After preparing the financial statements and closing the books, its often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period. Such entries ‘are reversing entries, Companies make a reversing entry at the beginning of the next ac- ‘counting period, Each reversing entry is the exact opposite ofthe adjusting entry made in the previous period. The recording of reversing entries is an optional step in the accounting cycle. “The purpose of reversing entries isto simplify the recording of a subsequent transaction re- lated to an adjusting entry. For example, in Chapter 3, the payment of salaries ater an adjusting cniry resulted in wo debits: one o Salaries and Wages Payable and the other to Salaries and Wages Expense. With reversing entries, the company can debit the entre subsequent payment to Salaries sand Wages Expense. The use of reversing entries does not change the amounts reported in the financial statements. What it does is simplify the recording of subsequent transactions. Reversing Entries Example ‘Companies most often use reversing entries to reverse two types of adjusting entries: acerued revenues and accrued expenses. To illustrate the optional use of reversing entries for accrued expenses, we will use the salaries expense transactions for Yazici Advertising as illustrated in ‘Chapters 2, 3, and 4, The transaction and adjustment data areas follows. 1. October 26 (initial salary entry): Yazici pays £4,000 of salaries and wages earned between ‘October 15 and October 26. 2. October 31 (adjusting entry): Salaries and wages earned between October are ¢1,200. The company will pay these in the November 9 payroll 3. November 9 (subsequent salary entry): Salaries and wages paid are 4,000. OF this amount, £1,200 applied to accrued salaries and wages payable and 2,800 was earned ‘between November I and November 9 29 and October 31 Illustration 44.1 shows the entries with and without reversing entries. EEEEY comparative entries—without and with reversing ‘Without Reversing Entries (per chapter) Initial Salary Entry Initial Salary Entry ‘Oct, 26 | Salaries and Wages Expense i (Get. 26 | (Same entry) Cash 4,000 Adjusting Entry Aas ‘Oct. 31 | Salaries and Wages Expense | 120 | ‘Oc. 31 | (Same entry) Salaries and Wages Payable 1.200 Closing Entry Closing Entry ct. 31 | Income Summary ad Oct. 31 | (Same entey) Salaries and Wages Expense 5.200 Reversing Entry Reversing Entry Nov 11 No reversing enry is made, Now 1 Salaries and Wages Payable jem | Salaries and Wages Expense 1,200 Suipsoquent Salary Entey ‘Subsequent Salary Entry Nov. 9 | Salaries and Wages Payable 1.200 Now. 9| Salaries and Wages Expense | 4,000 | Salaries and Wages Expense 2,800 Cash 4,000 Cash 4.000430 CHAPTER 4 Completing the Accounting Cycle “The first three entries are the same whether or not Yazici uses reversing entries. The last ‘ovo entries are different. The November I reversing entry eliminates the ¢1,200 balance in Salaries and Wages Payable created by the October 31 adjusting entry. The reversing entry also creates a £1,200 credit balance in the Salaries and Wages Expense account. As you know, it is unusual for an expense account to have a eredit balance. The balance is correct in this instance, though, because it anticipates that the entire amount of the first salaries and wages payment in the new accounting period will be debited to Salaries and Wages Expense. This debit will eliminate the credit balance. The resulting debit balance in the expense account will equal the salaries and wages expense incurred in the new accounting period (22,800 in th example), If Yazici makes reversing entees, it can debit all cash payments of expenses to the expense account. This means that on November 9 (and every payday) Yazici can debit Salaries and ‘Waxes Expense for the amount paid, without regard to any accrued salaries and wages payable. Being able to make the same entry each time simplifies the recording process. The company ccan record subsequent transactions as ifthe related adjusting entry had never been made, Mlustration 44.2 shows the posting of the entries with reversing entries. stg wh reversing ees Salaries and Wages Expense Salaries and Wages Payable 1026 Paid 4,000 TA Reversing 1,200 | 10051 Adjusting 1.200 31 Adjusting 1.200 10031 Clos LIL Reversing A company can also use reversing entries for accrued revenue adjusting entries. For the adjusting entry was Accounts Receivable (Dr.) £200 and Service Revenue (Cr.) £200. Thus, the reversing entry on November 1 is: | 200 it debits Cash and credits Service Nowe 1 | Service Revenue 200 Accounts Receivable (To reverse October 31 adjusting entry) cash Flows ntact, When Yazici collects the accrued service revenue, Revenue. ‘aw and Practice “es Review 2 Prepare closing entries and a post-closing tral balance, coms, (a) Prepare a coments the adjustments the adjusted rial balanee ance amounts t appropriate 1 the statement _mplete the worksheet, Closing the books occurs atthe end of an accounting period, The process i to journalize and post closing entries and then underline And balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Sum- ‘mary, Income Summary to Owner's Capital, and Owner's Draw ings to Owner's Capital. Only temporary accounts are closed[A post-elosing trial balance contains the balances in permanent fccounts that are carried forward to the next accounting period ‘he purpose ofthis tral halanee is to prove the equality of these balances, 3 Explain the steps in the accounting cycle and how to prepare correcting entries. ‘The required steps in the accounting eyele are (1) analyze busi ress tansictions, (2) journalize the wansactions, (3) post to ledger accounts, (4 prepare atrial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted tial balance, (7) prepare financial Statements, (8) journalize and post closing entries, and (9) prepare a post-losing trial balance. (One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company ‘makes a correcting entry to correct the accounts. An alternative co ‘cortecting entry is to reverse the incorrect entry and then prepare the ‘correct entry. Practice Multiple-Choice Questions 4-31, 4 Identify the sections of a classified statement of finan- cial posi [A classified statement of financial postion categorizes assets as intangibles; property plant, and equipment; long-term: investments and current assets. Liabilities ae classitied as either non-current or current. There is also an owner's (owner) equity section, whieh var- Jes with the form of business organization 5 Prepare reversing entries. Reversing entries are the opposite ofthe adjusting entries made inthe preceding period. Some companies choose to make reversing entries, at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries, In mast cases, ‘only acerued adjusting entries are reversed Glossary Review (Classified statement of financial position A statement of financial position that contains standard casificatios or sections p. 4-23). CClosingentres Enies made at the end ofan accounting perio to rans fer the balances of temporary’ accounts to permanent owner's equity account, Owner's Capt (P. 412}. Correcting entries Entries correct errors made in recording wansac- tions. (p. 4-19) ‘Current assets Assets that a company expects to convert eash of use ‘up within one year ois operating cycle, whichever is longer. (P. 425). Current bilities Obligations that a company expects to pay witin the coming year or its operating eyele, whichever i longer. (p. 427) Equity The ownership claim of shareholders on total assets, It i 10 8 compotion what owners equity ist a proprietorship. (p. 426) Income Summary A temporary account used in closing revenue and ‘expense accounts. (p, 4-12), Intangible assets Lon, (42. assets tha donot have physical substance, Liquidity ‘The abitiy ofa company to pay obligations expected to he due within the next year (p. 427), Long-term investments Generally, (1) investments in. shares and ‘bonds of other companies that compsinies normally hold for many year (2) non-current assets, such as land and buildings, aot currently being sed in operating atvities: and (3) long-term noes receivable (p. 425) [Non-current lish ‘one yea. (p. 4-27) ies Obligations that a company expects to pay after Operating cycle The average time that it takes to purchase inventor, sell ton account, and then collect cash from customers. (p. 4-26) Permanent (real) accounts. Aecouns thi relate to one o more futire sccounting periods, Consstof ll statement of nancial position accounts, Balances are carrie! forward to the next accounting perio. (p. 4-12), Post-closing trial balance A is of permanent aecounts snd their ba ances fe company has jouralized and posted closing ents. (p. 4-16) Property, plant, and equipment Asses with celatvely long useful lives and currently being used in operations. (p. 4-25). Reversing entry. An entry, made athe beginning ofthe nex accounting ped that isthe exact opposite ofthe adjusting entry made in the previ ‘ous period. (419), ‘Temporary (nominal) accounts Accounts that relate only 10 given accounting period. Consist of all income statement accounts and ‘owner's drawings aecount. ll temporary accounts are closed at end of the accounting period. (p. 4-12), Worksheet A multiple-column form that may be used in making jst rents and in preparing financial statements (p43) Practice Multiple-Choice Questions 1, (L041) Which of the folowing statements is incorrect concerning the worksheet? a. The worksheet is essentially a working tool of the accountant 1. The worksheet is distributed to management and other imer- ested partes. «. The worksheet cannot he used as a bass for posting to ledger 4. Financial statements can be prepared directly feom the work- sheet before journalizing and posting the adjusting entries, 2 (LO2) Ina worksheet, net income is entered ‘columas: 1. income statement (Dr) and statement of financial position (Dr). income statement (Ci) and statement of financial position (Dr). incom statement (Dr) and statement of financial position (Ci. 4. income statement (Ci) and statement of Financial position (CA). the following 3. (L032) Inthe unadjusted ral balance ofits worksheet forthe year fended December 31, 2020, Kim Company reported Equipment of 1NTS120.000. The year-end adjusting entries require an adjustment432 CHAPTER 4 Completing the Accounting Cycle ‘of NTS15,000 for depreciation expense for the equipment, Aer the adjusted tril balance is completed, what amount should be shove in ‘the financial statement columns? 1. A debit of NTSSL05,000 for Equipment in the statement of financial position column. , A credit of NTS1S,000 for Depreciation Expense in the in- ‘come statement column. A debit of NT$120,000 for financial position column. 4. A debit of NTS15,000 for Accumulated Depreciation— Equipment inthe statement of financial position columa, Equipment in the statement of 4. (LO 2) An account that will have a zero balance after closing centres have been journalized and posted is a, Service Revenue, Db. Supplies. . Prepaid Insurance 4. Accumulated Depreciation Equipment ‘5. (LO2) When net loss has occurred, Income a, debited and Owner's Capital is credited bs, croited and Owner's Capital is debited debited and Owner's Drawings is credit 4. credited and Owner's Drawings is debited. wmmary is 6. (LO 2) The closing process involves separate entries to close 1) expenses, 2) drawings, (3) revenues, and (4) income summary The correct sequencing of the entries is a. (2,3), 2, (0. b.(.2.8., © 8.0.4.2. 4.8), 2,0, 7. {LO 2) Which types of accounts will appear in the postclosing tral balance? a, Permanent (real) accounts. be. Temporary (nominal) acount, ‘6. Accounts shown in the income statement columns of a work- sheet 44. None ofthese answer choices is correct. 8, (LO 2) All of the following are required steps in the accounting cyele except: a. journalizing and posting closing enres ». preparing financial statements. «. journalizing the transactions. 4. preparing a worksheet. 9. {LO 3) The proper order of the following steps in the accounting cycle is 8. prepare unadjusted trial balance, journalize transactions, Post to ledger accounts, journalize and post adjusting b, journalize wansactions, prepare unadjusted trial balance Post 10 ledger accounts, journalize and post adjusting «6, journalize transaetions, post to ledger accounts, prepare unadjusted trial balance, journalize and post adjusting 4. prepare unadjusted trial balance, journalize and post Adjusting entries, journalize transactions, post to ledger accounts 10, (LO 3) When Lopez Company purchased supplies worth $600, it incorrectly recorded a credit to Supplies for $6,000 and a debit 10 Cash for $6,000. Before correcting this error: 1 Cash is overstated and Supplies is overstated. bi, Cash is understated and Supplies is understated, ‘ash i understated and Supplies is overstated 4. Cashis overstated and Supplies is understated, 11, (LO 3) Cash of €100 received atthe time the service was per formed was journalized and posted as « debit o Cash €100 and a credit to Accounts Receivable €100, Assuming the incorrect entry is not reversed, the correcting entry is 1. debit Service Revenue €100 and credit Accounts Receivable €100. ', debit Accounts Receivable €100 and credit Service Revenue €100. . debit Cash €100 and credit Service Revenue €100, 4, debit Accounts Receivable €100 and credit Cash €100. 12, (L04) The correct order of presentation ina classified statement of financial position fr the following current assets is a, accounts receivable, cash, prepaid insuran ’, prepaid insurance, inventory, accounts receivable, cash. «. cash, aecounts receivable, inventory, prepaid insurance. 4, inventory, cash, accounts receivable, prepaid insurance 13. (LO4) A company has purchased a tract of land. Tt expects to build produetion plan onthe land in approximately 5 years. During the 5 years before construction, the land will be idle. The land should be reported as ‘4. property, plant, and equipment be land expense. «6 a long-term investment 4. an intangible asset 14, (LO4) Ina classified statement of financial postion, assets and Tibilities are usually shown in the following order: 8, current assets, current liabilities, non-current liabilities, and ',non-cuerent liabilities, current liabilities, current asses, and . mon-cutrent liabilities, non-current assets, current ities, and non-curtent assets. 4, non-current assets, current assets, nan-curren bilities, and ‘current lables. 15, (LOA) Current assets are listed 1a, in the reverse order of expected conversion to cash b. by importance. «. by longevity. 4. by size 16, (LOS) On December 31, Kohl Company correctly made an adjust ing entry to recognize $2,000 of avrued salaries payable, On January 8 ofthe next year, total salaries of $3,800 were paid. Assuming the‘correct reversing entry was made on January 1. the entry on Fanuary 8 ‘vill esl in a credit to Cash $3,800 andthe following debit(s) ‘a Salaries and Wages Payable $1,800 and Salaries and Wages Expense $2,000. Solutions 1. b. The worksheet is a working tool of the accountant; it isnot istributed to management and other interested parties. The other choices are all rue statements 2, e, Net income is entered in the Dr colums othe income sate- ‘ment and the Cr column of the statement of financial postion. The other choices are incorrect because net income is entered inthe (a) Ce (niot Dr column of the statement of financial position, ¢b) Dr (not Cx) column of the income statement and in the Cr (not Dr) coluran ofthe statement of financial position, and (d) Dr (not Cr) column of the income statement. 3. cA debit of NTS120,000 for Equipment would appear in the statement of financial position column. The other choices are incorrect because (a) Equipment, less accumulated depreciation of NTS15,000, would total NT$105.000 under asses on the statement ‘of financial positon, not on the worksheet (b) a debit, not credit for Depreciation Expense would appear in the income statement column and (@) a credit, not debit, of NTS15,000 for Accumulated Depreci ation—Equipment would appear in the statement of financial pos- ition colums, 4a. The Service Revenue account will have a zero balance after closing entries have been journalized and posted because it isa tem- porary account. The other choices are incorrect because (b) Supplies, (6) Prepaid Insurance, and (q) Accumulated Depreciation—Equip- ‘ment are all permanent accounts and therefore not closed in the clos- ing process. 5. b._ The effect of a net Joss is credit to Income Summary and 8 debit to Owners Capital. The other choices are incorrect because (a) Income Summary is credited, not debited, and Owner's Capital is debited, not credited; (c) Income Summary is edited, not debited, and Owner’s Drawings is not affected; and (@) Owner's Capital, not ‘Owner's Drawing, is debited. 6. ¢. The correct onder is (3) revenues, (1) expenses, (4) income ‘summary, and (2) drawings. Therefore, choices (a), (b), and (@) are incorrect. 7. a, Permanent accounts appear in the post-closing tral balance, ‘The other choices are incorrect because (b) temporary accounts and (6) income statement accounts are closed to & zero balance and are ‘therefore not included in the pos-closing tral balance. Choice (A) is wrong as there isa coreet answer fr this question 8. d. Preparing a worksheet is nota required step in the accounting cycle. The other choices are all required steps in the accounting eye, Practice Brief Exercises 4-33, Db. Salaries and Wages Payable $2,000 and Salaries and Wages Expense $1,800. , Salaries and Wages Expense $3,800. 4, Salaries and Wages Payable $3,800, 9c. The proper onder of the steps in the accounting eyele is (1) journatize transactions, (2) pos to ledger aceounts, (3) prepare ‘unadjusted ral balance, and (4) journalize and post adjusting entries, “Therefore, choices (a), (b) and (d) are incorrect. 10. 4. This entry causes Cash to be overstated and Supplies to be ‘understated, Supplies should have been debited (inereasing supplies) and Cash should have been credited (decreasing cash). The other choices are incorrect because (a) Supplies is understated, not over. stated: (b) Cash is overstated, not understated; and (c) Cash is overs stated, not understated, and Supplies is understated, not overstated, 11, b, The correcting entry isto debit Accounts Receivable €100 and credit Service Revenue €100, The other choices are incor rect because (a) Service Revenue should be credited, not debited tnd Accounts Receivable should be debited, not credited; () Ser vice Revenue should be eredited for €100, and Cash should not be included in the correcting entry as it sas recorded properly and (d) Accounts Receivable should be debited for €100 and Cash should not be included in the correcting entry as it was recorded properly 12, b, Companies list current assets in the following onder: prepaid insurane, inventory, aecounts receivable, and cash, Therefore choice (@), (€) and (a) are incorrect. 13, e. Long-term investments include non-current asets such as land that a company is not currently using in is operating activites, ‘The aaher choices are incorrect because (a land would be reported as, property, plant, and equipment only if ts being curently used in the ‘business: (b) land isan asset, not an expense; and (a) land as physi cal substance and thus isa tangible propery. 14. d. Usually in classified statement of financial position, non current assets are shown first followeuby current assets, noa-curten is bilities and current Fails. The othe choices are therefore incorrect 15, a, Current assets ae listed in the reverse order of expected com version to cash (liquidity), not (6) by importance, (c) by longevity, or (d) by size «. Tho use of reversing enties simplifies the recording of the first payroll following the end of the year by eliminating the need to make an entry to the Salaries and Wages Payable account, The other choices are incorrect hecause (a) Salaries and Wages Payable is not part of the payroll entry on January 8, and the debit to Salaries and Wages Expease should be for $3,800, not $2,000: and (b) and (4) the Salaries and Wages Expense acount, not the Salaries and ‘Wages Payable account, should be debited, Practice Brief Exercises 4, (LO2) The ledger of Xi Travel contains the following balances (amounts in thousands): Owner's Capital ¥40,000, Owner's Drawings ¥3,000, Service Revenue ¥65,000, Salaries and Wages Expense ‘Prepare closing entries from ledger balances 39,000, and Maintenance and Repairs Expense ¥9,000, Prepare the closing entries at December 31.Solution Salaries and Wages Expense | 39.000 Joumalized and posted. Prepare the correcting enien Accent 108 casomer for €780 was recorded as debit 1 Cath €780 anda cri vo Accounts Receivable €780, > Tfurcase of equipment on account for €1.730 was recorded a a debit to Equipment £€1,370 and a credit to Accounts Payable €1.370, Solution ae Accounts Reeable } m0] Serve Revenue 70 D———exuipmen(€.730—€1,370) j) Accounts Payable 1 se0 Face paces satan efa 3. (L0-4) The teen of rnc potion debit column of he worksheet for Soon Cosmetics “emen of fran psion Insure 7060 ecu toms in hos Acros Reccable HS 00) Pea Insurance $47,000, Cash ¥8,000, Supplies 1,000, and Inventory Metaoen Prepare the current SNG® ection of he statement of nancial poston, ising the acount in proper revecnee Solution 3 erty Re cue rT eee Current assets Prepaid insurance 7.000 Supplies 1000 Inventory 14,000 ‘Accounts receivable 25,000 Cash 8.000 Total curent assets 00 Practice Exercises errs and past long err, 1, (L032) Hercules Company Sed its cal year on August 31, 2020, The company's adjusted Wad and prepare a postcaxng iad balance as ofthe end ofits fiscal year is shown as follows atone.No. 01 12 157 167 201 301 306 29 7 70 732 Instructions Hercules Company Adjusted Trial Balance August 31, 2020 ‘Account Tiles Det Cash 10,900 ‘Accounts Receivable 6200 Equipment 10,600 Accumulated Depr—Equip, ‘Accounts Payable Unearned Rent Revenue ‘Owner's Capital ‘Owner's Prawings 12,000 Service Revenue Rent Revenve Depreciation Expense 2,700 Salaries and Wages Expense 37,100, Usiities Expense 10,100 £59,600 1, Prepare the closing entries using page J1S in a general journal € 5400 2.800 1.200 31.700 42,400 6.100) £89,600 ’, Post to Owner's Capital and No. 380 Income Summary accounts. (Use the three-column form.) €e Prepare a post-closing tral balance at August 31, 2020. Practice Exercises 435 Solution ka GENERAL JOURNAL as Date ‘Recount Ties Bek] Debit [Cre ‘Aug. 31 [Service Revenue ‘04 | 42400 Rent Revense 29 | 6,100 Income Summary 350 4800 ‘(To close revenve accounts) 31 | reome Summary 330 | 49,900 Salaries and Wages Expense 20 37.100 Unites Expense m2 ro.in0 Depreciation Expense 7 2.300 (To lose expense aecouns) 31 | Owner's Capital (€49.900 ~ €48.500) sor | 1400 Tncome Summary 380 1400 (To close net loss to capital) si | owner's Capita 301 | 12.000 ‘Owner's Drawings 306, 12000 (To close drawings o capital) b. Owner's Capit No. 308 Income Summary No. 380 Dawe [Explanation [Ret] Debit | Credit | Balance Date | Explanation | Ref. | Debit | Credit | Balance ‘Aug. 31 | Balance 31,700 Aug. 31 | lose revere | 15 “48500 | 48500 31] Closenetioss | ats | 1400 30300 31 | Closeexpenses | 313 | 29.000 1.200) 31] Ctosedawings | 15 | 12000 18.300 31 | Closenetioss | 315, 1.400 °436 CHAPTER 4 Completing the Accounting Cycle ene eres pemee ona August 31,2020 cash 10.900 Accounts Receivable 6.200 Equipment 10,600 Accumulated Depreciation Equipment € 5.400 Accounts Payable 2.800 Unearned Rent Revenue 1200 Owner's Capital _ 18300 e300 Prepare franca setones 2. (L04) The adjusted tial balance for Hercules Company is presente in Practice Exercise 1 Instructions 1. Prepare an income statement and an owner's equity statement for the year ended August 31 2020, Hercules did not make any capital investments during the yea, b, Prepare a classified statement of financial position at August 31, 2020 Solution Peron Income Statement For the Year Ended August 31, 2020 Revenues Service revenue 42,400 Rent revenue 6.100 Total revenues Expenses Salaries and wages expense 37.100 ilies expense 10,100 Depreciation expense 700 Total expenses 49.900 Net loss 1.400) Perrin Cremer re rans ern e eed ‘Owner's capital, September 1, 2019 € 31,700 Less: Net loss € 1,400 (Owner's drawings 12,000 13,400 ‘Owner's capital, August 31,2020 &18.300eesti prestrain peered Assets Property. plant and equipment ‘Equipment €10,600 ‘Less: Accumulated depreciation equipment 5.400 Current assets Accounts receivable a Cash om ‘Toca current assets | Owner's Equity a Owners equity | ‘Owners capital | CCrrent liabilities Accounts payable € 2.300 ‘Unearned rent revenue 1.200 Total current liabilities oval owner's equity and liabilities Practice Problem 437 17,100 £18,300 Practice Problem (001,2,4) Atihe adjusted trial balance. Pee asad ieemrerietr coc Debit cash Nis 500 Accounts Receivable 2800 Supplies 15300 Prepaid Insurance 200 Equipment 0.00 Notes Payable Aecounts Payable Owner's Capital Owner's Drawing Service Revenue Salaries and Wages Expense 3.200 Uilies Expense #00 1,000 Advertising Expense 400 NTS77.300 Other data 1, Insurance expires atthe rate of NTS200 per month, 2. NTSI.000 of supplies are om hand at August 3 3. Monthly depreciation on the equipment is NTSOO 4. Interes of NTS500 on the notes payable has aeerued daring August ‘ofits first month of operations, Pumpered Pet Service has the following un-Propereworkshet and classed statement of fancal postion, and NTS40,000 2.400 30,000 4900 NTS77300438 CHAPTER 4 Completing the Accounting Cycle Instructions fa, Prepare a worksheet ', Prepare a classified statement of financial postion assuming NTS35,000 ofthe notes payable are long-term, «. Journaize the closing enes Solution a. Pampered Pet Service Worksheet forthe Month Ended August 31,2020 Trial Adjusted Trial Income _——_Statement of alance __Adjustments_—_Balance itement_ Financkal Posi De Gh Dn Ch DGD CD Ca 3.400 5.400 5.400 Accounts Receivable 2,800 2.800) 2.300 Supplies 1.300 (300 1,000 1,000 Prepaid Insurance 2-400 (200 2.200, 2.200 Equipment 60.000 «60,000 60,000 Notes Payable 40,000 440,000 40,000 Accounts Payable 2.400 2.400) 2.400 Owner's Capital 30,000 30,000 30.00 Owner's Drawings 1,000 1,000 1,000 Service Revenue 4.9000 4900 4,900 Salaries and Wages Expense 3.200 3.200 3.200 Utilities Expense ‘800 ‘00 ‘300 Advertsing Expense 400 400 400 Torals 100 77.300 Insurance Expense (200 200 200 Supplies Expense «) 300 300 300 Depreciation Expense «©90 900 ‘00 ‘Accumulated Depreciation — Equipment (900 900 900 Interest Expense (a s00 500 500 Intorest Payable «a soo 500 500 Totals [900 1,900 78.700 78,700 6300 3900 72400 73,800 Net Loss 1.400 _1.400 Totals 300 6500 73.800 75,800 Explanation: (a) insurance expire, (b) supplies used, () deprecation expensed, and (d) interest accrued. b. Peeeedass acs peered ‘August 31, 2020 ide) Assets Property, plant, and equipment Equipment NTS60,000 Less: Accumulated depreciation—equipment ‘900 NTS59,100 Curzent assets Prepaid insurance 2,200 Supplies 1,000 Accounts receivable 2.800 Cash 5.400 Total current assetsOwner's Equity and Liabilities owner's equity ‘Owner's capital [Non-current liabilities ‘Notes payable CCursent liabilities ‘Notes payable ‘Accounts payable Inerest payable ‘Total current liabilities ‘Total owner's equity and Tabiities Questions 439 NTS27,600" 35,000 Owner's apt of NTS3O00 les loss of NTS1A00 an es drawings of NTS 000 ‘Aug. 31 | Service Revenue Income Summary (Te elose revenue account) Si | Income Summary ‘Silris and Wages Expense Depreciation Expense ilies Expense Inveres Expense Advertsing Expense Supplies Expense Insurance Expense (close expense aecounts) 31 | owner's Capital (NPS6,300--NTS4.900) come Summary (Tele net loss to capital) at | owner's Capital ‘Owners Dravings close drawings wespital) 4900 4900 630 3200 00 00 300 200 1.400 1400 1.000 ‘Note: All asterisked Questions, Exerises, and Problems relate to material in the appendix to the chapter Questions 1. *A worksheet is a permanent accounting record and required inthe accounting cycle.” Do you agree? Explain, 2. Explain the purpose of the worksheet. 3. What isthe relationship, if any, between the amount shown in the ‘adjusted tral balance column foran account ad that account's ledger balance? 4. IF 2 company’s revenues are ¥125,000 and its expenses are ¥113,000, in which financial statement columns ofthe worksheet will the net income of ¥12,000 appear? When expenses excved revenues, in which columns will che difference appear? 5. Why is it necessary to prepare formal financial statements if all of ‘the data are in the statement columns of the worksheet? 6. Identify the acvount(s) debited and eredited in each of the four closing entries, assuming the company has net income for the year 7. Describe the nature ofthe Income Summary account and identity the types of summary data that may be poste to this account. 8, What are the content and purpose of post-closing trial balance? 9. Which of the following aecounts would not appear in the post closing tral balance? Interest Payable, Equipment, Depreciation Expense, Owner's Drawings, Unearned Service Revenue, Accum lated Depreciation—Equipment, and Service Revenue 10, Distinguish between a reversing entry and an adjusting entry. Are reversing entries required?