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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 post-closing trial balance

Summary of Accounting Cycle Reversing entries—An optional step Correcting entries—An avoidable step

Classified Balance Sheet Current assets

Chapter 4-4

Long-term investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Owner’s equity

Using A Worksheet Worksheet A multiple-column form used in preparing financial statements. . Not a permanent accounting record. Five step process. Use of worksheet is optional. 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 Undercover Roofing for the month ended March 31. Chapter 4-7 . Depreciation for March is Roofing Supplies 1. Other data: Trial Balance Account Titles Dr.800 2.900 $ 12. 2008. Spy.500 Accounts Receivable 1.200 3. Spy.000 4.000 Accumulated Depreciation $ 1. Capital 7.000 700 200 $ 12. Prepare and complete the worksheet. Unearned revenue amounted Accounts Payable 1. is as follows.900 Instructions a. Supplies on hand total $140.400 to $130 on March 31. Accrued salaries are $350. Equipment 6. I. Cr. LO 1 Prepare a worksheet.100 $200. Unearned Revenue 300 I. Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals 600 3. Cash $ 2. 1.

000 700 200 12. Adjusted Trial Balance Dr.800 1. Income Statement Dr.400 300 7. Cr. 2.200 1. . Spy. Capital I.Steps in Preparing a Worksheet 1. Prepare a Trial Balance on the Worksheet Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue I. Cr. Cr.900 Adjustments Dr. Balance Sheet Dr. Chapter 4-8 Trial balance amounts come directly from ledger accounts. Include all accounts with balances. Cr.500 1. Cr.900 12.100 6. LO 1 Prepare a worksheet. Spy.000 600 3.000 1. Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals Trial Balance Dr.

(d) Salaries accrued. . (c) Service revenue earned. Spy. Cr. Enter adjustment amounts. Cr.680 Adjusted Trial Balance Dr. total adjustments columns. Enter the Adjustments in the Adjustments Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue I.800 1. Capital I. and check for equality.100 (a) 960 6. LO 1 Prepare a worksheet. Chapter 4-9 Add additional accounts as needed. Spy. Adjustments Key: (a) Supplies used.Steps in Preparing a Worksheet 2. Cr. Cr.000 (d) 350 700 200 12.400 300 (c) 170 7. 2.500 1. (b) Depreciation expense. Dr.680 1. Income Statement Dr.000 600 (c) 170 3.900 12.200 1.900 (a) 960 (b) 200 (d) 350 1. Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Trial Balance Adjustments Dr. Balance Sheet Dr. Cr.000 (b) 200 1.

680 1. .000 (d) 350 700 200 12. Cr.000 (b) 200 1.400 1. Spy. Complete the Adjusted Trial Balance Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue I.000 600 3.800 1.800 140 6. 2. Dr. Cr. Capital I.100 (a) 960 6.000 600 (c) 170 3. Cr. Spy.000 1.500 1. LO 1 Prepare a worksheet.500 1. Chapter 4-10 Total the adjusted trial balance columns and check for equality.400 300 (c) 170 7.900 12.680 Adjusted Trial Balance Dr.170 1.450 350 13. Cr.400 130 7.Steps in Preparing a Worksheet 3.050 200 960 200 13.900 (a) 960 (b) 200 (d) 350 1. Cr. Balance Sheet Dr. Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Trial Balance Adjustments Dr. 2.200 1.450 Income Statement Dr.

680 Adjusted Trial Balance Dr.800 1.500 1.170 1. Cr. Spy. 2. Capital I.100 (a) 960 6.450 Income Statement Dr.400 130 7.450 350 13. . Cr. Extend Amounts to Financial Statement Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue I. Spy. 3.000 1.400 300 (c) 170 7. Cr.000 (d) 350 700 200 12.500 1.Steps in Preparing a Worksheet 4.680 1. 2. Balance Sheet Dr.900 12.900 (a) 960 (b) 200 (d) 350 1. Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Trial Balance Adjustments Dr.170 1. LO 1 Prepare a worksheet. Cr. Cr.800 140 6.410 3.050 200 960 200 2.000 600 (c) 170 3.000 (b) 200 1.400 1.200 1. Dr.000 600 3.170 Chapter 4-11 Extend all revenue and expense account balances to the income statement columns.050 200 960 200 13.

000 (b) 200 1.500 1. and equity account balances to the balance sheet columns.900 (a) 960 (b) 200 (d) 350 1. 2. Spy.500 1.170 1. Cr.410 3.000 1.280 Chapter 4-12 Extend all asset.000 600 3.100 (a) 960 6.800 140 6.050 200 960 200 2. liability.170 1. 2.400 1. 2.500 1.040 350 10.800 1.800 140 6.000 600 (c) 170 3.680 Adjusted Trial Balance Dr. Spy.Steps in Preparing a Worksheet 4.170 11.400 130 7.450 Income Statement Dr. Cr. LO 1 Prepare a worksheet. Cr. Dr. Balance Sheet Dr.680 1. Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Trial Balance Adjustments Dr.000 600 3.400 300 (c) 170 7.400 1.000 1.050 200 960 200 13. Capital I.450 350 13.400 130 7. . Extend Amounts to Financial Statement Columns Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue I.000 (d) 350 700 200 12.900 12. Cr. Cr.200 1.

Steps in Preparing a Worksheet 5. 2.680 1. Cr.000 (b) 200 1.900 (a) 960 (b) 200 (d) 350 1.680 Adjusted Trial Balance Dr.040 350 10.000 600 (c) 170 3.000 600 3.000 1.170 1.040 Compute Net Income or Net Loss.170 3.900 12.400 130 7.450 Income Statement Dr.200 1. Drawing Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Compute Net Income (Loss) Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue I.800 1.000 600 3.400 1. Spy.500 1.400 130 7. Total Columns.400 1.500 1. Cr.050 200 960 200 13.040 11.170 3. Spy. Cr.280 760 11.800 140 6. Cr. Dr.800 140 6. 2.000 (d) 350 700 200 12.500 1.170 1.000 1. Capital I.400 300 (c) 170 7.170 11.410 760 3. . Balance Sheet Dr.450 350 13. Chapter 4-13 LO 1 Prepare a worksheet. Cr.050 200 960 200 2. 2.100 (a) 960 6.

income statement credit column and balance sheet debit column. income statement debit column only. income statement debit column and balance sheet credit column.Steps in Preparing a Worksheet Review Question Net income is shown on a work sheet in the: a. balance sheet debit column only. c. Chapter 4-14 LO 1 Prepare a worksheet. . b. d.

Balance sheet and owner’s equity statement are prepared from the balance sheet columns.Preparing Financial Statements from a Worksheet Worksheet Income statement is prepared from the income statement columns. Companies journalize and post adjusting entries. . Chapter 4-15 LO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet b. 2008. Prepare an income statement for the month ended March 31. . 2008 Revenues Service revenues Expenses Salaries expense Supplies expense Depreciation expense Miscellaneous expense Total expenses Net income Chapter 4-16 $ 3.170 $ 1. Undercover Roofing Income Statement For the Month Ended March 31.410 760 LO 1 Prepare a worksheet.050 960 200 200 $ 2.

Capital. Undercover Roofing Statement of Owner's Equity For the Month Ended March 31. . 2008 I.Preparing Financial Statements from a Worksheet b. 2008. Spy.000 760 (600) 7.160 $ Chapter 4-17 LO 1 Prepare a worksheet. March 1 Add: Net income Less: Drawings I. Spy. Capital. Prepare an owner’s equity statement for the month ended March 31. March 31 $ 7.

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. 2008.880 7.040 $ 1.440 6.160 9.800 140 4.Preparing Financial Statements from a Worksheet b. Prepare a balance sheet as of March 31. 2008 Assets Current assets Cash Accounts receivable Roofing supplies Total current assets Property. Spy. Capital Total liabilities and owner's equity Chapter 4-18 $ 2.400 $ 4.000 1.500 1. plant.400 350 130 1.040 $ LO 1 Prepare a worksheet. . Undercover Roofing Balance Sheet March 31.600 9.

.Preparing Adjusting Entries from a Worksheet Adjusting Entries The adjusting entries are prepared from the adjustments columns of the worksheet. Journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used. Chapter 4-19 LO 1 Prepare a worksheet.

Date Mar.Preparing Financial Statements from a Worksheet c. Chapter 4-20 . 31 Debit 960 Credit 960 200 200 170 170 350 350 LO 1 Prepare a worksheet. Journalize the adjusting entries from the adjustments columns of the worksheet. Account Title Supplies expense Roofing supplies Depreciation expense Accumulated depreciation Unearned revenue Service revenue Salaries expense Salaries payable Ref.

Explain the purpose of the worksheet. See notes page for discussion Chapter 4-21 LO 1 Prepare a worksheet.Preparing Financial Statements from a Worksheet Discussion Question Q4-2. .

Closing the Books At the end of the accounting period. the company makes the accounts ready for the next period. Illustration 4-5 Chapter 4-22 LO 2 Explain the process of closing the books. .

Chapter 4-23 LO 2 Explain the process of closing the books. . in the general ledger.Closing the Books Closing entries formally recognize. the transfer of net income (or net loss) and owner’s drawing to owner’s capital. Closing entries are only at the end of the annual accounting period.

all other accounts are temporary accounts. . Chapter 4-24 LO 2 Explain the process of closing the books. Illustration 4-6 Owner’s Capital is a permanent account.Closing the Books Note: Owner’s Drawing is closed directly to Capital and not to Income Summary because Owner’s Drawing is not an expense.

Closing the Books d.170 2. . Service revenue Income summary Closing Entries need to be Posted Income summary Salary expense Supplies expense Depreciation expense Miscellaneous expense Income summary I.170 1. Spy. Journalize the closing entries from the financial statement columns of the worksheet.410 3. Capital I. Drawing Chapter 4-25 3.050 960 200 200 760 600 760 600 LO 2 Explain the process of closing the books. Capital I. Spy. Spy.

. $ 2. All temporary accounts will have zero balances. Spy.000 $ 1. Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Salaries payable Unearned Revenue I.800 140 6. Capital Totals Post-Closing Trial Balance Dr.440 $ 10. Cr.400 1.440 Chapter 4-26 LO 3 Describe the content and purpose of a post-closing trial balance.500 1.400 350 130 7.160 $ 10.Preparing a Post-Closing Trial Balance Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.

Journalize the transactions 3. . Prepare an adjusted trial balance 2. Prepare financial statements 6.Summary of the Accounting Cycle 1. Post to ledger accounts Illustration 4-12 4. Journalize and post closing entries 7. Journalize and post adjusting entries Chapter 4-27 LO 4 State the required steps in the accounting cycle. Prepare a trial balance 5. Prepare a post-closing trial balance 8. Analyze business transactions 9.

Chapter 4-28 LO 5 Explain the approaches to preparing correcting entries.Correcting Entries—An Avoidable Step Correcting entries are unnecessary if the records are error-free. . Instead of preparing a correcting entry. it is possible to reverse the incorrect entry and then prepare the correct entry. must be posted before closing entries. are made whenever an error is discovered.

Prepare the correcting entries. Incorrect entry Correct entry Correcting entry Chapter 4-29 Cash Service revenue Cash 780 780 780 Accounts receivable Service revenue Accounts receivable 780 780 780 LO 5 Explain the approaches to preparing correcting entries. A collection on account from a customer was recorded as a debit to Cash and a credit to Service Revenue for $780.Correcting Entries—An Avoidable Step BE4-9 At Batavia Company. . 1. the following errors were discovered after the transactions had been journalized and posted.

Incorrect entry Correct entry Correcting entry Chapter 4-30 Store Supplies Accounts payable Store Supplies 1. the following errors were discovered after the transactions had been journalized and posted. The purchase of supplies on account for $1. .750 1.570 was recorded as a debit to Store Supplies and a credit to Accounts Payable for $1.750. 2.Correcting Entries—An Avoidable Step BE4-9 At Batavia Company.570 Accounts payable Accounts payable Store Supplies 180 1. Prepare the correcting entries.750 1.570 180 LO 5 Explain the approaches to preparing correcting entries.

plant.The Classified Balance Sheet Presents a snapshot at a point in time. . companies group similar assets and similar liabilities together. and equipment Intangible assets Chapter 4-31 Illustration 4-17 Liabilities and Owner’s Equity Current liabilities Long-term liabilities Owner’s equity LO 6 Identify the sections of a classified balance sheet. Standard Classifications Assets Current assets Long-term investments Property. To improve understanding.

Chapter 4-32 LO 6 Identify the sections of a classified balance sheet. Operating cycle is the average time it takes from the purchase of inventory to the collection of cash from customers.The Classified Balance Sheet Current Assets Assets that a company expects to convert to cash or use up within one year or the operating cycle. whichever is longer. .

Chapter 4-33 LO 6 Identify the sections of a classified balance sheet.The Classified Balance Sheet Current Assets Illustration 4-19 Companies usually list current asset accounts in the order they expect to convert them into cash. .

Long-term investments. are called: a. c. plant. Property. Current assets. and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle. and equipment. b.The Classified Balance Sheet Review Question Cash. Chapter 4-34 LO 6 Identify the sections of a classified balance sheet. . d. Intangible assets.

Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities. .The Classified Balance Sheet Long-Term Investments Investments in stocks and bonds of other companies. Illustration 4-20 Chapter 4-35 LO 6 Identify the sections of a classified balance sheet.

and Equipment Long useful lives. Currently used in operations.total amount of depreciation expensed thus far in the asset’s life.The Classified Balance Sheet Property. Plant. .allocating the cost of assets to a number of years. Depreciation . Chapter 4-36 LO 6 Identify the sections of a classified balance sheet. Accumulated depreciation .

and Equipment Illustration 4-21 Chapter 4-37 LO 6 Identify the sections of a classified balance sheet.The Classified Balance Sheet Property. . Plant.

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. .

Long-term investments. b. plant. Current assets. Property. . Intangible assets. and equipment. c.The Classified Balance Sheet Review Question Patents and copyrights are a. d. Chapter 4-39 LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet Current Liabilities Obligations the company is to pay within the coming year. Usually list notes payable first. Chapter 4-40 LO 6 Identify the sections of a classified balance sheet. Liquidity .ability to pay obligations expected to be due within the next year. followed by accounts payable. Other items follow in order of magnitude. .

.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 Long-Term Liabilities Obligations a company 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-term liability? a. Long-term notes payable d. Bonds payable b. Mortgages payable Chapter 4-43 LO 6 Identify the sections of a classified balance sheet. Current maturities of long-term obligations c.

The Classified Balance Sheet Owner’s Equity Proprietorship .one capital account. .capital account for each partner. Illustration 4-25 Chapter 4-44 LO 6 Identify the sections of a classified balance sheet. Corporation . Partnership .Capital Stock and Retained Earnings.

. (a) What is the term 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.Recording Process Discussion Question Q4-18.

Each reversing entry is the exact opposite of the adjusting entry made in the previous period.Reversing Entries Reversing Entries It is often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period. . Chapter 4-46 LO 7 Prepare reversing entries. The use of reversing entries does not change the amounts reported in the financial statements. Companies make a reversing entry at the beginning of the next accounting period.

.Reversing Entries Example Illustration 4A-1 Chapter 4-47 LO 7 Prepare reversing entries.

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