Completing the Accounting Cycle

Chapter 4

Wild, Kwok, Venkatesh and Shaw

Fundamental Accounting Principles
3rd Edition

Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.
 Chapter 4 Learning Objectives
CONCEPTUAL
C1 Explain why temporary accounts are closed each period.
C2 Identify steps in the accounting cycle.
C3 Explain and prepare a classified balance sheet.

ANALYTICAL
A1 Compute the current ratio and describe what it reveals about a company’s financial condition.

PROCEDURAL
P1 Prepare a work sheet and explain its usefulness.
P2 Describe and prepare closing entries.
P3 Explain and prepare a post-closing trial balance.
P4 Appendix 4A – Prepare reversing entries and explain their purpose.

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 Learning Objective P1

Prepare a work sheet and

explain its usefulness.

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 Benefits of a Work Sheet
Helps in
Reduces risk of preparing
errors. financial
statements.

Shows the
Links accounts effects of
and their proposed
adjustments. transactions.

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Learning Objective P1: Prepare a work sheet and explain its usefulness.
 Use of a Work Sheet
Five steps:
Step 1: Enter Unadjusted Trial Balance
Step 2: Enter Adjustments
Step 3: Prepare Adjusted Trial Balance
Step 4: Sort Adjusted Trial Balance Amounts
to Financial Statements
Step 5: Total Statement Columns, Compute
Profit or Loss, and Balance Columns

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Learning Objective P1: Prepare a work sheet and explain its usefulness.
 Use of a Work Sheet (continued)
Exhibit
4.1

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Learning Objective P1: Prepare a work sheet and explain its usefulness.
 Learning Objective C1

Explain why temporary

accounts are closed each
period.

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 4-8

Temporary and
Permanent Accounts

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Learning Objective C1: Explain why temporary accounts are closed each period.
 Learning Objective P2

Describe and prepare closing

entries.

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Recording Closing Entries

Exhibit
4.3

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Learning Objective P2: Describe and prepare closing entries.
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Preparing Closing Entries Exhibit

4.3

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Learning Objective P2: Describe and prepare closing entries.
 Learning Objective P3

Explain and prepare a post-

closing trial balance.

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 Post-Closing Trial Balance
 Total debits equal total
credits for permanent
accounts.

 All temporary accounts

have zero balances.

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Learning Objective P3: Explain and prepare a post-closing trial balance.
 Post-Closing Trial Balance (continued)
Exhibit
4.6

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Learning Objective P3: Explain and prepare a post-closing trial balance.
 Learning Objective C2

Identify steps in the accounting

cycle.

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Accounting Cycle Exhibit

4.7

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Learning Objective C2: Identify steps in the accounting cycle.
 Learning Objective C3

Explain and prepare a

classified balance sheet.

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Classified Balance Sheet

Exhibit
4.8

Current items are expected to come due (collected or owed)

within the longer of one year or the company’s normal
operating cycle.
Most operating cycles are less than one year, so most
companies use a one-year period in deciding what assets
and liabilities are current.
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Learning Objective C3: Explain and prepare a classified balance sheet.
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Classified Balance Sheet Example

Exhibit
4.9

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Learning Objective C3: Explain and prepare a classified balance sheet.
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Current Assets
Current assets are cash and other resources
that are expected to be sold, collected, or
used within one year or the company’s
operating cycle, whichever is longer.

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Learning Objective C3: Explain and prepare a classified balance sheet.
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Long-Term Investments

Long-term investments are expected to be held for

more than the longer of one year or the operating
cycle.

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Learning Objective C3: Explain and prepare a classified balance sheet.
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Property, plant and equipment

Property, plant and equipment are tangible long-

term assets used to produce or sell products and
services.

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Learning Objective C3: Explain and prepare a classified balance sheet.
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Intangible Assets

Intangible assets are long-term assets that benefit

business operations but lack physical form.

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Learning Objective C3: Explain and prepare a classified balance sheet.
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Current Liabilities

Current liabilities are liabilities due to be paid or settled

within one year or the operating cycle, whichever is
longer.

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Learning Objective C3: Explain and prepare a classified balance sheet.
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Long-Term Liabilities

Long-term liabilities are liabilities not due within one

year or the operating cycle, whichever is longer.

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Learning Objective C3: Explain and prepare a classified balance sheet.
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Equity

Equity is the owner’s claim on the assets.

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Learning Objective C3: Explain and prepare a classified balance sheet.
 Learning Objective A1

Compute the current ratio and

describe what it reveals about
a company’s financial
condition.

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Current Ratio
Helps assess the company’s ability to pay its
debts in the near future

Current assets Exhibit

Current ratio = 4.10
Current liabilities

Exhibit
Nestlé’s Current Ratio 4.11

Learning Objective A1: Compute the current ratio and describe what it reveals about a © McGraw Hill 28
company’s financial condition.
 Learning Objective P4

Prepare reversing entries and

explain their purpose.

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Appendix 4A – Reversing Entries

Reversing entries are optional. They are recorded in
response to accrued assets and accrued liabilities that
were created by adjusting entries at the end of a
reporting period. Reversing entries simplify
recordkeeping.

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Learning Objective P4: Prepare reversing entries and explain their purpose.
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Reversing Entries
Exhibit
4A.1

next slide next slide

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Learning Objective P4: Prepare reversing entries and explain their purpose.
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Reversing Entries (continued) Exhibit

4A.1
Without Reversing Entries With Reversing Entries

Learning Objective P4: Prepare reversing entries and explain their purpose.
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End of Chapter 4

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