Chapter 4-1

CHAPTER 4

COMPLETING THE ACCOUNTING CYCLE
Accounting Principles, Eighth Edition
Chapter 4-2

Study Objectives
1. Prepare a worksheet.

2. Explain the process of closing the books. 3. Describe the content and purpose of a post-closing trial balance. 4. State the required steps in the accounting cycle. 5. Explain the approaches to preparing correcting entries. 6. Identify the sections of a classified balance sheet.

Chapter 4-3

Completing the Accounting Cycle

Using a Worksheet Steps in preparation Preparing financial statements Preparing adjusting entries

Closing the Books Preparing closing entries Posting closing entries Preparing a postpost-closing trial balance

Summary of Accounting Cycle Reversing entries² entries²An optional step Correcting entries² entries²An avoidable step

Classified Balance Sheet Current assets LongLong-term investments Property, plant, and equipment Intangible assets Current liabilities LongLong-term liabilities Owner¶s equity

Chapter 4-4

Using A Worksheet

Worksheet
A m lti l - l m rm s i i l st t m ts. N t Fiv st Us rm r rks t ss. t is ti l. ti i r r r . ri

Chapter 4-5

LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet
Illustration 4-2

Chapter 4-6

LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet
Example The trial balance for ndercover Roofing for the onth ended March 31, 2008, is as follows. Other data: Trial Balance Account Titles Dr. Cr. 1. Supplies on hand total $140. Cash $ 2,500 Accounts Receivable 1,800 2. Depreciation for March is Roofing Supplies 1,100 $200. Equipment 6,000 Accumulated Depreciation $ 1,200 3. nearned revenue a ounted Accounts Payable 1,400 to $130 on March 31. Unearned Revenue 300 I. Spy, Capital 7,000 4. Accrued salaries are $350.
I. Spy, Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals 600 3,000 700 200 $ 12,900

$ 12,900

Instructions a. Prepare and co plete the worksheet.
LO 1 Prepare a worksheet.

Chapter 4-7

Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet
j t Ca h t Re e vab e R pp e q p e t ate Depre at t a ab e ear e Reve e . p , Cap ta . p , Draw erv e Reve e a ar e xpe e ea e xpe e ta te r a aa e Dr. Cr. , 00 ,800 , 00 ,000 , 00 ,400 00 ,000 00 ,000 00 00 ,900 ,900 j Dr. t e t Cr. ra Dr. te aa e Cr. e tate e t Dr. Cr. aa Dr. e heet Cr.

Include all accounts with balances.
Chapter 4-8

Trial balance a ounts co e directly fro ledger accounts.

LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
j t Ca h t e e a e pp e te ra r. , , , , aa e Cr. j r. t e t Cr. ra r. te aa e Cr. e tate e t r. Cr. aa r. e heet Cr.

(a)

p e t ate epre at t a a e ear e e e e . p , Cap ta . p , ra er e e e e a ar e pe e ea e pe e ta pp e pe e epre at pe e a ar e a a e ta

, ,4
(c)

(b)

, ,
(d) (c)

Adjustments Key: (a) Supplies used. (b) Depreciation expense. (c) Service revenue earned. (d) Salaries accrued.

,

,
(a) (b) (d)

,

,

Chapter 4-

Add additional accounts as needed.

Enter adjust ent a ounts, total adjust ents colu ns, and check for equality.
LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
j t Ca h t e e a e pp e te ra r. , 1, 1,1 , aa e Cr. j r. t e t Cr. ra r. , 1, 14 , te aa e Cr. e tate e t r. Cr. aa r. e heet Cr.

(a)

p e t ate epre at t a a e ear e e e e . p , Cap ta . p , ra er e e e e a ar e pe e ea e pe e ta pp e pe e epre at pe e a ar e a a e ta

1, 1,4
(c) 1

(b)

, ,
(d) (c)

1,4 1,4 1 , 1 1, ,1

1 ,

1 ,
(a) (b) (d)

1,

1,

1 ,4

1 ,4

Chapter 4-1

Total the adjusted trial balance colu ns and check for equality.

LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
j t Ca h t e e a e pp e te ra r. , 1, 1,1 , aa e Cr. j r. t e t Cr. ra r. , 1, 14 , te aa e Cr. e tate e t r. Cr. aa r. e heet Cr.

(a)

p e t ate epre at t a a e ear e e e e . p , Cap ta . p , ra er e e e e a ar e pe e ea e pe e ta pp e pe e epre at pe e a ar e a a e ta

1, 1,4
(c) 1

(b)

, ,
(d) (c)

1,4 1,4 1 , 1 1, ,1 1, ,1

1 ,

1 ,
(a) (b) (d)

1,

1,

1 ,4

1 ,4

,41

,1

Chapter 4-11

Extend all revenue and expense account balances to the inco e state ent colu ns.

LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
j t Ca h t e e a e pp e te ra r. 2, 1, 1,1 , aa e Cr. j r. t e t Cr. ra r. 2, 1, 14 , te aa e Cr. e tate e t r. Cr. aa r. 2, 1, 14 , e heet Cr.

(a)

p e t ate epre at t a a e ear e e e e . p , Cap ta . p , ra er e e e e a ar e pe e ea e pe e ta pp e pe e epre at pe e a ar e a a e ta

1,2 1,4
(c) 1

(b)

2

, ,
(d) (c)

1,4 1,4 1 , ,1 1, 2 1, 2 ,1

1,4 1,4 1 ,

1

2 12, 12,
(a) (b) 2 (d)

2 1, 1 ,4 1 ,4

2 2,41 ,1 11, 4 1 ,2

1,

Chapter 4-12

Extend all asset, liability, and equity account balances to the balance sheet colu ns.

LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
ra t Ca h t e e a e pp e 1 11 1 14 3 1
(a) (b) (c) 1

aa

te

r

e Cr

r

t e t Cr

ra r

te aa e Cr

e tate e t r Cr

aa r 1

e heet Cr

14 14 14 13

14 14 14 13

p e t ate epre at t a a e ear e e e e p Cap ta p ra er e e e e a ar e pe e ea e pe e ta pp e pe e epre at pe e a ar e a a e ta et e ta

3
(d) 3

(c)

1 1

31 1

31

1

1
(a) (b) (d)

3 1 13 4

1

3 13 4

3 41 31 31 31 11 4 11 4 1 11 4

Co pute
Chapter 4-13

et Inco e or

et Loss.
LO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

Review Question
Net inco e is shown on a work sheet in the: a. inco e state ent debit colu n only. b. balance sheet debit colu n only. c. inco e state ent credit colu n and balance sheet debit colu n. d. inco e state ent debit colu n and balance sheet credit colu n.

Chapter 4-14

LO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet

Worksheet
Inco e state ent is prepared fro inco e state ent colu ns. the

Balance sheet and owner·s equity state ent are prepared fro the balance sheet colu ns. Co panies journalize and post adjusting entries.

Chapter 4-15

LO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet
b. Prepare an inco e state ent for the March 31, 2008.
er e tate e t th e ar h 1 $ e re e e $ 1 6 1 er

onth ended

F r the e e er pe e

e a ar e e pe e pp e e pe e epre at e pe e e a e e pe e ta e pe e et e
Chapter 4-16

$

41 6

LO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet
b. Prepare an owner·s equity state ent for the ended March 31, 2008. onth

i ' I : : I i i i l ( ) i l i

Chapter 4-17

LO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet
b. Prepare a balance sheet as of March 31, 2008.
Undercover Roofing Balance Sheet March 31, 2008
Assets Current assets Cash Accounts receivable Roofing supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total assets Liabilities and Owner's Equity Current liabilities Accounts payable Salaries payable Unearned revenue Total current liabilities Owner's equity I. Spy, Capital Total liabilities and owner's equity
Chapter 4-18

$

2,500 1,800 140 4,440

6,000 1,400 $

4,600 9,040

$

1,400 350 130 1,880 7,160 9,040

$

LO 1 Prepare a worksheet.

Preparing Adjusting Entries from a Worksheet

Adjusting Entries
The adjusting entries are prepared fro the adjust ents colu ns of the worksheet. Journalizing and posting of adjusting entries follows the preparation of financial state ents when a worksheet is used.

Chapter 4-1

LO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet
c. Journalize the adjusting entries fro

the adjust ents colu ns of the worksheet.
Account Title Supplies expense oofing supplies Depreciation expense Accumulated depreciation Unearned revenue Service revenue Salaries expense Salaries payable 350 350
LO 1 Prepare a worksheet.

Date Mar. 31

ef.

Debit 960

Credit 960

200 200 170 170

Chapter 4-2

Preparing Financial Statements from a Worksheet

Discussion Question
Q4-2. Explain the purpose of the worksheet.

See notes page for discussion
Chapter 4-21

LO 1 Prepare a worksheet.

Closing the Books
At the end of the accounting period, the co pany akes the accounts ready for the next period.
Illustration 4-5

Chapter 4-22

LO 2 Explain the process of closing the books.

Closing the Books
Closing entries for ally recognize, in the general ledger, the transfer of net inco e (or net loss) and owner·s drawing to owner·s capital. Closing entries are only at the end of the annual accounting period.

Chapter 4-23

LO 2 Explain the process of closing the books.

Closing the Books

Note: Owner·s Drawing is closed directly to Capital and not to Inco e Su ary because Owner·s Drawing is not an expense.
Illustration 4-6

Owner·s Capital is a per anent account; all other accounts are te porary accounts.

Chapter 4-24

LO 2 Explain the process of closing the books.

 

 

Closing the Books
d. Journalize the closing entries fro the financial state ent colu ns of the worksheet.
Service revenue Inco e su Closing Entries need to be Posted 3,170 ary 2,410 1,050 960 200 200 760 760 600 600
LO 2 Explain the process of closing the books.

3,170

Inco e su ary Salary expense Supplies expense Depreciation expense Miscellaneous expense Inco e su ary I. Spy, Capital I. Spy, Capital I. Spy, Drawing

Chapter 4-25

Preparing a Post-Closing Trial Balance PostPurpose is to prove the equality of the per anent account balances after journalizing and posting of closing entries. All te porary accounts will have zero balances.
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Salaries payable Unearned Revenue I. Spy, Capital Totals Post-Closing Trial Balance Dr. Cr. $ 2,500 1,800 140 6,000 $ 1,400 1,400 350 130 7,160 $ 10,440 $ 10,440

Chapter 4-26

LO 3 Describe the content and purpose of a post-closing trial balance. post-

Summary of the Accounting Cycle
Illustration 4-12

1. Analyze business transactions 9. Prepare a post-closing trial balance 8. Journalize and post closing entries 7. Prepare financial statements 6. Prepare an adjusted trial balance 2. Journalize the transactions 3. Post to ledger accounts

4. Prepare a trial balance 5. Journalize and post adjusting entries

Chapter 4-27

LO 4 State the required steps in the accounting cycle.

Correcting Entries³An Avoidable Step Entries³
Correcting entries
are unnecessary if the records are error-free. are ade whenever an error is discovered.

ust be posted before closing entries. Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry.

Chapter 4-28

LO 5 Explain the approaches to preparing correcting entries.

Correcting Entries³An Avoidable Step Entries³
BE4BE4-9 At Batavia Co pany, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries. 1. A collection on account fro a custo er was recorded as a debit to Cash and a credit to Service Revenue for $780. Incorrect entry Correct entry
Correcting entry
Chapter 4-2

Cash Service revenue Cash Accounts receivable Service revenue Accounts receivable

780 780 780 780 780 780

LO 5 Explain the approaches to preparing correcting entries.

Correcting Entries³An Avoidable Step Entries³
BE4BE4-9 At Batavia Co pany, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries. 2. The purchase of supplies on account for $1,570 was recorded as a debit to Store Supplies and a credit to Accounts Payable for $1,750. Incorrect entry Correct entry
Correcting entry
Chapter 4-3

Store Supplies Accounts payable Store Supplies Accounts payable Accounts payable Store Supplies

1,750 1,750 1,570 1,570 180 180

LO 5 Explain the approaches to preparing correcting entries.

The Classified Balance Sheet
Presents a snapshot at a point in ti e. To i prove understanding, co panies group si ilar assets and si ilar liabilities together.

Standard Classifications
Assets Current assets Long-ter invest ents Property, plant, and equip ent Intangible assets
Chapter 4-31

Illustration 4-17

Liabilities and Owner·s Equity Current liabilities Long-ter liabilities Owner·s equity

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Current Assets
Assets that a co pany expects to convert to cash or use up within one year or the operating cycle, whichever is longer. Operating cycle is the average ti e it takes fro the purchase of inventory to the collection of cash fro custo ers.

Chapter 4-32

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Current Assets
Illustration 4-19

Co panies usually list current asset accounts in the order they expect to convert the into cash.
Chapter 4-33

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

Review Question
Cash, and other resources that are reasonably expected to be realized in cash or sold or consu ed in the business within one year or the operating cycle, are called: a. Current assets. b. Intangible assets. c. Long-ter invest ents. d. Property, plant, and equip ent.
Chapter 4-34

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet LongLong-Term Investments
Invest ents in stocks and bonds of other co panies. Invest ents in long-ter assets such as land or buildings that a co pany is not currently using in its operating activities.

Illustration 4-20

Chapter 4-35

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Property, Plant, and Equipment
Long useful lives. Currently used in operations. Depreciation - allocating the cost of assets to a nu ber of years. Accumulated depreciation - total a ount of depreciation expensed thus far in the asset·s life.
Chapter 4-36

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Property, Plant, and Equipment
Illustration 4-21

Chapter 4-37

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Intangible Assets
Assets that do not have physical substance.
Illustration 4-22

Chapter 4-38

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

Review Question
Patents and copyrights are a. Current assets. b. Intangible assets. c. Long-ter invest ents. d. Property, plant, and equip ent.

Chapter 4-3

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Current Liabilities
Obligations the co pany is to pay within the co ing year. sually list notes payable first, followed by accounts payable. Other ite s follow in order of agnitude. Liquidity - ability to pay obligations expected to be due within the next year.
Chapter 4-4

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Current Liabilities
Illustration 4-23

Chapter 4-41

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet LongLong-Term Liabilities
Obligations a co pany expects to pay after one year.
Illustration 4-24

Chapter 4-42

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

Review Question
Which of the following is not a long-ter liability? a. Bonds payable b. Current c. Long-ter aturities of long-ter notes payable obligations

d. Mortgages payable

Chapter 4-43

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Owner·s Equity
Proprietorship - one capital account. Partnership - capital account for each partner. Corporation - Capital Stock and Retained Earnings.
Illustration 4-25

Chapter 4-44

LO 6 Identify the sections of a classified balance sheet.

Recording Process

Discussion Question
Q4-18. (a) What is the ter used to describe the owner·s equity section of a corporation? (b) Identify the two owner·s equity accounts in a corporation and indicate the purpose of each.

See notes page for discussion
Chapter 4-45

LO 6 Identify the sections of a classified balance sheet.

Reversing Entries

Reversing Entries
It is often helpful to reverse so e of the adjusting entries before recording the regular transactions of the next period. Co panies ake a reversing entry at the beginning of the next accounting period. Each reversing entry is the exact opposite of the adjusting entry made in the previous period. The use of reversing entries does not change the amounts reported in the financial statements.
Chapter 4-46

LO 7 Prepare reversing entries.

Reversing Entries Example
Illustration 4A-1

Chapter 4-47

LO 7 Prepare reversing entries.

Copyright
´Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that per itted in Section 117 of the 1976 nited States Copyright Act without the express written per ission of the copyright owner is unlawful. Request for further infor ation should be addressed to the Per issions Depart ent, John Wiley & Sons, Inc. The purchaser ay ake back-up copies for his/her own use only and not for distribution or resale. The Publisher assu es no responsibility for errors, o issions, or da ages, caused by the use of these progra s or fro the use of the infor ation contained herein.µ

Chapter 4-48

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