Prepared by

Coby Harmon
University of California, Santa Barbara
Westmont College

4-1
 4 Completing the
Accounting Cycle
Learning Objectives
After studying this chapter, you should be able to:
[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.

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 Preview of Chapter 4

Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
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 Using a Worksheet

Steps in Preparing a Worksheet

Multiple-column form used in preparing financial
statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.

4-4 LO 1 Prepare a worksheet.

 Steps in Preparing a Worksheet
Illustration 4-1

4-5 LO 1 Prepare a worksheet.

 Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet Illustration 4-2

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

4-6 LO 1 Prepare a worksheet.

 Steps in Preparing a Worksheet
Illustration 3-23
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

4-7
LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns

(a)
(b)
Adjustments Key:
(a) Supplies Used.
(d) (b) Insurance Expired.
(c) Depreciation Expensed.
(d) (d) Service Revenue Earned.
(e)
(g) (e) Service Revenue Accrued.
(f) Interest Accrued.
(a) (g) Salaries Accrued.
(b)
(c)
(c)
(e)
(f) Enter adjustment amounts, total
(f) adjustments columns,
(g)
and check for equality.

Add additional accounts as needed.

4-8 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns

(a)
(b)

(d)

(d)
(e)
(g)

(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)

Total the adjusted trial balance

columns and check for equality.
4-9 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns

(a)
(b)

(d)

(d)
(e)
(g)

(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)

Extend all revenue and expense account

balances to the income statement columns.
4-10 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)

(a)
(b)

(d)

(d)
(e)
(g)

(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)

Compute Net Income or Net Loss.

4-11 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet

Review Question
Net income is shown on a worksheet in 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.

4-12 LO 1 Prepare a worksheet.

 Using a Worksheet

Preparing Statements from a Worksheet

Income statement is prepared from the income
statement columns.
Balance sheet and owners equity statement are
prepared from the balance sheet columns.
Companies journalize and post adjusting entries.

4-13 LO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration 4-4

4-14 LO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration 4-4

4-15 LO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration 4-4

4-16 LO 1
 Using a Worksheet

Preparing Adjusting Entries from a Worksheet

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.

4-17 LO 1 Prepare a worksheet.

 > DO IT!
Susan Elbe is preparing a worksheet. Explain to Susan how she
should extend the following adjusted trial balance accounts to the
financial statement columns of the worksheet.

Cash Balance sheet (debit column)

Accumulated Depreciation Balance Sheet (credit column)
Accounts Payable Balance Sheet (credit column)
Owners Drawings Balance sheet (debit column)
Service Revenue Income statement (credit column)
Salaries and Wages Expense Income statement (debit column)

4-18 LO 1 Prepare a worksheet.

 Closing the Books

At the end of the accounting period, the company makes

the accounts ready for the next period.
Illustration 4-5

4-19 LO 2 Explain the process of closing the books.

 Closing the Books

Preparing Closing Entries

Closing entries formally recognize, in the general ledger, the
transfer of
net income (or net loss) and
owners drawing

to owners capital.

Closing entries are only made at the end of the annual

accounting period.

4-20 LO 2 Explain the process of closing the books.

 Closing the Books

Note:
Owners Drawing is closed Illustration 4-6

directly to Capital and not to

Income Summary because
Owners Capital is a
Owners Drawing is not an permanent account; all
expense. other accounts are
temporary accounts.

4-21 LO 2 Explain the process of closing the books.

 Closing the Books

Closing
Entries
Illustrated

Illustration 4-7
Closing entries
journalized

4-22
 Closing the Books

Posting
Closing
Entries

Illustration 4-8

4-23 LO 2
4-24
 Preparing a Post-Closing Trial Balance
Purpose is to prove the equality of the permanent account
balances after journalizing and posting of closing entries.

Illustration 4-9

4-25 LO 3
 Summary of the Accounting Cycle
Illustration 4-12
1. Analyze business transactions

9. Prepare a post-closing 2. Journalize the

trial balance transactions

8. Journalize and post

3. Post to ledger accounts
closing entries

7. Prepare financial
4. Prepare a trial balance
statements

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

4-26 LO 4 State the required steps in the accounting cycle.

 Summary of the Accounting Cycle

Correcting EntriesAn Avoidable Step

Unnecessary if the records are error-free.
Made whenever an error is discovered.
Must 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.

4-27 LO 5 Explain the approaches to preparing correcting entries.

 Correcting EntriesAn Avoidable Step
Illustration (Case 1): On May 10, Mercato Co. journalized and posted
a $50 cash collection on account from a customer as a debit to Cash
$50 and a credit to Service Revenue $50. The company discovered the
error on May 20, when the customer paid the remaining balance in full.

Incorrect Cash 50
entry
Service Revenue 50
Correct Cash 50
entry
Accounts Receivable 50
Correcting Service Revenue 50
entry Accounts Receivable 50

4-28 LO 5 Explain the approaches to preparing correcting entries.

 Correcting EntriesAn Avoidable Step
Illustration (Case 2): On May 18, Mercato purchased on account
equipment costing $450. The transaction was journalized and posted
as a debit to Equipment $45 and a credit to Accounts Payable $45. The
error was discovered on June 3,

Incorrect Equipment 45
entry
Accounts Payable 45
Correct Equipment 450
entry
Accounts Payable 450
Correcting Equipment 405
entry Accounts Payable 405

4-29 LO 5 Explain the approaches to preparing correcting entries.

4-30
 The Classified Balance Sheet

Presents a snapshot at a point in time.

To improve understanding, companies group similar
assets and similar liabilities together.

Standard Classifications Illustration 4-17

Assets Liabilities and Owners Equity

Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Owners (Stockholders) equity
Intangible assets

4-31 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet
Illustration 4-18

4-32 LO 6
 The Classified Balance Sheet
Illustration 4-18

4-33 LO 6
 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.
Operating cycle is the average time it takes from the
purchase of inventory to the collection of cash from
customers.

4-34 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Current Assets Illustration 4-19

Usually listed in the order they expect to convert them into cash.

4-35 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Question
Cash, 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, are called:

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

4-36 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Long-Term Investments
Investments in stocks and bonds of other companies.
Investments in long-term assets such as land or buildings
that a company is not currently using in its operating
activities.
Illustration 4-20

4-37 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 number
of years.
Accumulated depreciation - total amount of
depreciation expensed thus far in the assets life.

4-38 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Property, Plant, and Equipment

Illustration 4-21

4-39 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

4-40 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Question
Patents and copyrights are

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

4-41 LO 6 Identify the sections of a classified balance sheet.

4-42
 > DO IT!
Baxter Hoffman recently received the following information related to Hoffman
Companys December 31, 2014, balance sheet.
Prepaid insurance $ 2,300 Inventory $3,400
Cash 800 Accumulated depreciation
Equipment 2,700 Equipment 10,700
Accounts receivable 1,100
Prepare the asset section of Hoffman Companys balance sheet.

4-43
LO 6
 The Classified Balance Sheet

Current Liabilities
Obligations company is to pay within the coming year or
its operating cycle, whichever is longer.
Usually list notes payable first, followed by accounts
payable. Other items follow in order of magnitude.
Liquidity - ability to pay obligations expected to be due
within the next year.

4-44 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Current Liabilities
Illustration 4-23

4-45 LO 6 Identify the sections of a classified balance sheet.

4-46
 The Classified Balance Sheet

Long-Term Liabilities
Obligations a company expects to pay after one year.
Illustration 4-24

4-47 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Question
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

4-48 LO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Owners Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.

Illustration 4-25

4-49 LO 6 Identify the sections of a classified balance sheet.

 APPENDIX 4A Reversing Entries

Reversing Entries
It is often helpful to reverse some of the adjusting entries
before recording the regular transactions of the next period.
Companies make 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.

4-50 LO 7 Prepare reversing entries.

 APPENDIX 4A Reversing Entries

Illustration: To illustrate the optional use of reversing entries for

accrued expenses, we will use the salaries expense transactions for
Pioneer Advertising Agency.

1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries

earned between October 15 and October 26.

2. October 31 (adjusting entry): Salaries earned between October

29 and October 31 are $1,200. The company will pay these in the
November 9 payroll.

3. November 9 (subsequent salary entry): Salaries paid are $4,000.

Of this amount, $1,200 applied to accrued wages payable and
$2,800 was earned between November 1 and November 9.

4-51 LO 7 Prepare reversing entries.

 APPENDIX 4A Reversing Entries

Illustration 4A-1
With Reversing Entries
(per appendix)

Initial Salary Entry

Oct. 26 Same entry

Adjusting Entry
Oct. 31 Same entry

Closing Entry
Oct. 31 Same entry

Reversing Entry
Nov. 1 Salaries and Wages Payable 1,200
Salaries and Wages Expense 1,200

Subsequent Salary Entry

Nov. 9 Salaries and Wages Expense 4,000
Cash 4,000

4-52 LO 7 Prepare reversing entries.

 APPENDIX 4A Reversing Entries

Illustration 4A-2
Postings with
reversing
entries

4-53 LO 7 Prepare reversing entries.

 A Look at IFRS

Key Points
The procedures of the closing process are applicable to all
companies, whether they are using IFRS or GAAP.
IFRS recommends but does not require the use of the title statement
of financial position rather than balance sheet.
The format of statement of financial position information is often
presented differently under IFRS. Although no specific format is
required, most companies that follow IFRS present statement of
financial position information in this order:
Noncurrent assets Equity

Current assets Noncurrent liabilities

Current liabilities

4-54 LO 8
 A Look at IFRS

Key Points
IFRS requires a classified statement of financial position except in
very limited situations. IFRS follows the same guidelines as this
textbook for distinguishing between current and noncurrent assets
and liabilities.
Under IFRS, current assets are usually listed in the reverse order of
liquidity. For example, under GAAP cash is listed first, but under IFRS
it is listed last.
Some companies report the subtotal net assets, which equals total
assets minus total liabilities.
IFRS has many differences in terminology that you will notice in this
textbook.

4-55 LO 8 Compare the procedures for the closing process under GAAP and IFRS.
 A Look at IFRS

Key Points
Both IFRS and GAAP require disclosures about (1) accounting
policies followed, (2) judgments that management has made in the
process of applying the entitys accounting policies, and (3) the key
assumptions and estimation uncertainty that could result in a material
adjustment to the carrying amounts of assets and liabilities within the
next financial year.
Comparative prior-period information must be presented and financial
statements must be prepared annually.
Both GAAP and IFRS are increasing the use of fair value to report
assets. However, at this point IFRS has adopted it more broadly. As
examples, under IFRS companies can apply fair value to property,
plant, and equipment; natural resources; and in some cases
intangible assets.
4-56 LO 8
 A Look at IFRS

Looking to the Future

The IASB and the FASB are working on a project to converge their
standards related to financial statement presentation. A key feature of the
proposed framework is that each of the statements will be organized in the
same format, to separate an entitys financing activities from its operating
and investing activities and, further, to separate financing activities into
transactions with owners and creditors. Thus, the same classifications used
in the statement of financial position would also be used in the income
statement and the statement of cash flows. The project has three phases.
You can follow the joint financial presentation project at the following link:

http://www.fasb.org/project/financial_statement_presentation.shtml.

4-57 LO 8 Compare the procedures for the closing process under GAAP and IFRS.
 A Look at IFRS

IFRS Self-Test Questions

Which of the following statements is false?

a) Assets equals liabilities plus equity.

b) Under IFRS, companies sometimes net liabilities against assets

to report net assets.

c) The FASB and IASB are working on a joint conceptual framework

project.

d) Under IFRS, the statement of financial position is usually referred

to as the statement of assets and equity.

4-58 LO 8 Compare the procedures for the closing process under GAAP and IFRS.
 A Look at IFRS

IFRS Self-Test Questions

A company has purchased a tract of land and expects to build a
production plant on the land in approximately 5 years. During the 5
years before construction, the land will be idle. Under IFRS, the land
should be reported as:

a) land expense.

b) property, plant, and equipment.

c) an intangible asset.

d) a long-term investment.

4-59 LO 8 Compare the procedures for the closing process under GAAP and IFRS.
 A Look at IFRS

IFRS Self-Test Questions

Current assets under IFRS are listed generally:

a) by importance.

b) in the reverse order of their expected conversion to cash.

c) by longevity.

d) alphabetically.

4-60 LO 8 Compare the procedures for the closing process under GAAP and IFRS.
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