CHAPTER 6 STEP 1: PREPARE A TRIAL BALANCE e.

Pioneer debits an additional

ON THE WORKSHEET account, Accounts Receivable,
Learning Objectives: $200 for services performed but
not billed, and credits Service
LO 1 Prepare a worksheet.
Revenue $200.
LO 2 Prepare closing entries and post- f. The company needs two
closing trial balance. additional accounts relating to
interest. It debits Interest
LO 3 Explain the steps in the accounting Expense $50 for accrued interest,
cycle and how to prepare correcting and credits Interest Payable $50.
entries. g. Pioneer debits Salaries and Wages
Expense $1,200 for accrued
LO 4 Identify the sections of a classified
salaries, and credits an additional
balance sheet.
account, Salaries and Wages
Payable, $1,200.
STEP 2: ENTER ADJUSTMENTS
THE WORKSHEET
The adjustments are the same as in
▪ Multiple-column form used in the Illustration 3.23
adjustment process and preparing
financial statements. a. Pioneer debits an additional
▪ Not a permanent accounting record. account, Supplies Expense,
▪ May be a computerized worksheet. $1,500 for the cost of supplies
▪ Prepared using a five-step process used, and credits Supplies
▪ Use of worksheet is optional $1,500.
b. Pioneer debits an additional
account, Insurance Expense, $50
for the insurance that has
expired, and credits Prepaid STEP 3: ENTER ADJUSTED BALANCES
Insurance $50. IN THE ADJUSTED TRIAL BALANCE
c. The company needs two COLUMNS
additional depreciation accounts.
It debits Depreciation Expense
$40 for the month’s depreciation,
and credits Accumulated
Depreciation—Equipment $40.
d. Pioneer debits Unearned Service
Revenue $400 for services
performed, and credits Service
Revenue $400.
STEP 4: EXTEND ADJUSTED TRIAL QUESTION 1:
BALANCE AMOUNTS TO
APPROPRIATE FINANCIAL Net Income is shown on a worksheet in
STATEMENT COLUMNS the:

a. income statement debit column

only
b. balance sheet debit column only
c. income statement credit column
and balance sheet debit column
d. income statement debit
column and balance sheet
credit column

PREPARING FINANCIAL STATEMENTS

FROM A WORKSHEET
STEP 5: TOTAL THE STATEMENT
COLUMNS, COMPUTE THE NET ▪ Income statement is prepared from
INCOME (OR NET LOSS), AND the income statement columns
COMPLETE THE WORKSHEET ▪ Balance sheet and owner’s equity
statement are prepared from the PREPARING ADJUSTING ENTRIES
balance sheet columns FROM A WORKSHEET
▪ Companies can prepare financial
▪ Adjusting entries are prepared from
statements before they journalize and
the adjustments columns of the
post adjusting entries
worksheet
▪ Journalizing and posting of adjusting PREPARING A POST-CLOSING TRIAL
entries follows the preparation of BALANCE
financial statements when a
worksheet is used

CLOSING THE BOOKS

At the end of the accounting period, the

company makes the accounts ready for
the next period.

THE ACCOUNTING CYCLE

PREPARING CLOSING ENTRIES

Closing Entries formally recognize in the

ledger the transfer of:

 Net income (or net loss) to

owner’s capital.
 Owner’s drawings to owner’s
capital.
1. Analyze Business Transactions
Produce a zero balance in each temporary
account.

Companies generally journalize and post

closing entries only at the end of the
annual accounting period.
2. Journalize Transactions
 8. Journalize and Post Closing
Entries

6. Prepare an Adjusted Trial Balance

3. Post to the Ledger Accounts

4. Prepare a Trial Balance

7. Prepare Financial Statements

9. Prepare a Post-Closing Trial

Balance

CORRECTING ENTRIES–An
Avoidable Step

5. Journalize and Post Adjusting ▪ Unnecessary if accounting

Entries records are free of errors
 ▪ Made whenever an error is Accounts Payable $45. The error was Intangible Assets
discovered discovered on June 3, when Mercato
▪ Must be posted before closing received monthly statement for May from
entries the creditor.

Instead of preparing a correcting

entry, it is possible to reverse the
incorrect entry and then prepare the Incorrect entry:
correct entry. Equipment 45
Case 1: On May 10, Mercato Co. Accounts Payable 45
journalized and posted a $50 cash
collection on account from a customer as Correct entry:
a debit to Cash $50 and a credit to
Service Revenue $50. The company Equipment 450
discovered the error on May 20, when
Accounts Payable 450
customer paid the remaining balance in
full. Correcting entry:

Incorrect entry: Equipment 405

Cash 50 Accounts Payable 405

Service Revenue 50

Correct entry: CLASSIFIED BALANCE SHEET

Cash 50 ▪ Presents a snapshot at a point in

time
Accounts Receivable 50
▪ To improve understanding,
Correcting entry: companies group similar assets CURRENT ASSETS
and similar liabilities together
Service Revenue 50 ▪ Assets that a company expects to
ASSETS LIABILITIES convert to cash or use up
Accounts Receivable 50 within one year or the operating
Current Assets Current Liabilities
cycle, whichever is longer
Long-term Long-term ▪ Operating cycle is the average
Case 2: On May 10, Mercato purchased Investments Liabilities time it takes to:
on account equipment costing $450. The Owner’s o purchase inventory,
Property, Plant,
transaction was journalized and posted as (Stockholder’s) o sell it on account, and
and Equipment
a debit to Equipment $45 and a credit to equity
 o collect cash from
customers

PROPERTY, PLANT, and EQUIPMENT

▪ Long useful lives

▪ Currently used in operations
▪ Includes land, buildings, QUESTION 3:
Accounts usually listed in order in which machinery and equipment,
Patents and copyrights are
they expect to convert them into cash. delivery equipment, and furniture
▪ Depreciation – allocating the a. Current assets
QUESTION 2: cost of assets to a number of b. Intangible assets
years c. Long-term investments
The correct order or presentation in a
d. Property, plant, and equipment
classified balance sheet for the following
current assets is:

a. accounts receivable, cash, CURRENT LIABILITIES

prepaid insurance
b. cash, inventory, accounts ▪ Obligations company is to pay
receivable, prepaid insurance within the coming year or its
c. cash, accounts receivable, operating cycle, whichever is
inventory, prepaid insurance longer
d. inventory, cash, accounts ▪ Usually list notes payable first,
receivable, prepaid insurance followed by accounts payable.
Other items follow in order of
magnitude
INTANGIBLE ASSETS ▪ Common examples are accounts
LONG-TERM INVESTMENTS
payable, salaries and wages
▪ Investments in stocks and bonds ▪ Long-lived assets that do not payable, notes payable, interest
of other companies have physical substance payable, income taxes payable
▪ Investments in long-term assets and current maturities of long-
such as land or building that are term obligations
not currently being used in ▪ Liquidity – ability to pay
operating activities obligations expected to be due
▪ Long-term notes receivable within the next year
 ▪ Partnership – capital account for
each partner
▪ Corporation – Common Stock and
Retained Earnings

LONG-TERM LIABILITIES

▪ Obligations a company expects to

pay after one year.

QUESTION 4:

Which of the following is not a long-term

liability?

a. Bonds payable
b. Current maturities of long-
term obligations
c. Long-term notes payable
d. Mortgages payable

OWNER’S EQUITY

▪ Proprietorship – one capital

account