Chapter 4-1 Completing the Accounting Cycle Accounting Principles, Ninth Edition

Chapter 4-1

Completing the Accounting Cycle

Accounting Principles, Ninth Edition

Chapter 4-2

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.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 4-3

Using a Using a WorksheetWorksheet

Steps in Steps in preparationpreparation

Preparing financial Preparing financial statementsstatements

Preparing Preparing adjusting entriesadjusting entries

Current assetsCurrent assets

Long-term Long-term investmentsinvestments

Property, plant, and Property, plant, and equipmentequipment

Intangible assetsIntangible assets

Current liabilitiesCurrent liabilities

Long-term liabilitiesLong-term liabilities

Owner’s equityOwner’s equity

Reversing entriesReversing entries—An optional step—An optional step

Correcting entriesCorrecting entries—An avoidable —An avoidable stepstep

Preparing closing Preparing closing entriesentries

Posting closing Posting closing entriesentries

Preparing a post-Preparing a post-closing trial closing trial balancebalance

Closing the Closing the BooksBooks

Summary of Summary of Accounting Accounting

CycleCycle

Summary of Summary of Accounting Accounting

CycleCycle

Classified Classified Balance SheetBalance Sheet

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

Chapter 4-4

A multiple-column form used in preparing financial statements.

Not a permanent accounting record.

Five step process.

Use of worksheet is optional.

Using A WorksheetUsing A WorksheetUsing A WorksheetUsing A Worksheet

SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

WorksheetWorksheet

Chapter 4-5

Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet

Illustration 4-1

Chapter 4-6

Illustration:

Illustration 4-2Preparing a trial balance

Chapter 4-7

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 C. R. Byrd, Capital 10,000 C. R. Byrd, Drawing 500 Service Revenue 10,000

Salaries Expense 4,000 Rent 900

Totals 28,700 28,700

Balance SheetAdjusted Income

Trial Balance Adjustments Trial Balance Statement

SO 1 Prepare a SO 1 Prepare a worksheet.worksheet.

1. Prepare a Trial Balance on the Worksheet1. Prepare a Trial Balance on the Worksheet

Trial balance amounts come directly from ledger

accounts.Include all

accounts with balances.

Chapter 4-8 SO 1 Prepare a SO 1 Prepare a

worksheet.worksheet.

Illustration 3-22General journal showing adjusting entries

Adjusting Journal Entries

(Chapter 3)

Chapter 4-9

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 1,500 Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 400 C. R. Byrd, Capital 10,000 C. R. Byrd, Drawing 500 Service Revenue 10,000 400

200 Salaries Expense 4,000 1,200 Rent 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries Payable 1,200

Totals 3,440 3,440

2. Enter the Adjustments in the Adjustments 2. Enter the Adjustments in the Adjustments ColumnsColumns

(a)(b)

(e)(f)

(f)(g)

Enter adjustment amounts, total adjustments columns,

and check for equality.

Add additional accounts as needed.

Adjustments Key:(a) Supplies Used.(b) Insurance Expired.(c) Depreciation Expensed.(d) Service Revenue Earned.(e) Service Revenue Accrued.(f) Interest Accrued.(g) Salaries Accrued.

Chapter 4-10

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 C. R. Byrd, Capital 10,000 10,000 C. R. Byrd, Drawing 500 500 Service Revenue 10,000 400 10,600

200 Salaries Expense 4,000 1,200 5,200 Rent 900 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190

3. Complete the Adjusted Trial Balance Columns3. Complete the Adjusted Trial Balance Columns

(a)(b)

(e)(f)

(f)(g)

Total the adjusted trial balance columns and check for equality.

Chapter 4-11

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 C. R. Byrd, Capital 10,000 10,000 C. R. Byrd, Drawing 500 500 Service Revenue 10,000 400 10,600 10,600

200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 Interest Expense 50 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600

4. Extend Amounts to Financial Statement 4. Extend Amounts to Financial Statement ColumnsColumns

(a)(b)

(e)(f)

(f)(g)

Extend all revenue and expense account balances to the income statement

columns.

Chapter 4-12

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 C. R. Byrd, Capital 10,000 10,000 10,000 C. R. Byrd, Drawing 500 500 500 Service Revenue 10,000 400 10,600 10,600

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

4. Extend Amounts to Financial Statement 4. Extend Amounts to Financial Statement ColumnsColumns

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

columns.

(a)(b)

(e)(f)

(f)(g)

Chapter 4-13

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 C. R. Byrd, Capital 10,000 10,000 10,000 C. R. Byrd, Drawing 500 500 500 Service Revenue 10,000 400 10,600 10,600

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

Net income 2,860 2,860 Totals 10,600 10,600 22,450 22,450

5. Total Columns, Compute Net Income (Loss)5. Total Columns, Compute Net Income (Loss)

(a)(b)

(e)(f)

(f)(g)

Compute Net Income or Net Loss.

Chapter 4-14

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.

Review QuestionReview Question

Chapter 4-15

Income statement is prepared from the income statement columns.

Balance sheet and owner’s equity statement are prepared from the balance sheet columns.

Companies journalize and post adjusting entries.

Preparing Financial Statements from a Preparing Financial Statements from a WorksheetWorksheetPreparing Financial Statements from a Preparing Financial Statements from a WorksheetWorksheet

WorksheetWorksheet

Chapter 4-16

Illustration 4-4

Chapter 4-17

Illustration 4-4

Chapter 4-18

Illustration 4-4

Chapter 4-19

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.

Preparing Adjusting Entries from a Preparing Adjusting Entries from a WorksheetWorksheetPreparing Adjusting Entries from a Preparing Adjusting Entries from a WorksheetWorksheet

Adjusting EntriesAdjusting Entries

Chapter 4-20

Illustration 3-22General journal showing adjusting entries

Adjusting Journal Entries

(Chapter 3)

Chapter 4-21

Q4-2. Explain the purpose of the worksheet.

Discussion QuestionDiscussion Question

See notes page for discussion

Chapter 4-22

At the end of the accounting period, the company makes the accounts ready for the next period.

Closing the BooksClosing the BooksClosing the BooksClosing the Books

SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.

Illustration 4-5

Chapter 4-23

Closing entriesClosing entries formally recognize, in the general ledger, 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.

Chapter 4-24

Illustration 4-6

Owner’s Capital is a permanent account;

all other accounts are temporary accounts.

Owner’s Drawing is closed directly to Capital

and not to Income Summary because

Owner’s Drawing is not an expense.

Chapter 4-25

Closing Entries need to be

Posted

Illustration 4-7Closing entries journalized

Chapter 4-26

Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.

Preparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial Balance

Temporary accounts will have zero balances.

Illustration 4-9

Chapter 4-27

Chapter 4-28

Summary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting Cycle

1. Analyze business transactions

2. Journalize the transactions

6. Prepare an adjusted trial balance

7. Prepare financial statements

8. Journalize and post closing entries

9. Prepare a post-closing trial balance

4. Prepare a trial balance

3. Post to ledger accounts

5. Journalize and post adjusting entries

Illustration 4-12

SO 4 State the required steps in the accounting cycle.SO 4 State the required steps in the accounting cycle.

Chapter 4-29

Correcting entriesCorrecting entries

are unnecessary if the records are error-free.

are 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.

Correcting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable Step

SO 5 Explain the approaches to preparing correcting entries.SO 5 Explain the approaches to preparing correcting entries.

Chapter 4-30

Illustration (Case 1):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.

Cash 50Incorrect entry Service revenue

50Cash 50Correct

entry Accounts receivable 50Service revenue 50Correcting Correcting

entryentry Accounts receivable 50

Chapter 4-31

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

Delivery equipment 45Incorrect entry Accounts payable

45Office equipment 450Correct

entry Accounts payable 450

Office equipment 450Correcting Correcting entryentry Delivery equipment

45Accounts receivable 405

Chapter 4-32

Chapter 4-33

The Classified Balance SheetThe Classified Balance SheetThe Classified Balance SheetThe Classified Balance Sheet

SO 6 Identify the sections of a classified balance sheet.SO 6 Identify the sections of a classified balance sheet.

Presents a snapshot at a point in time.

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

Assets Liabilities and Owner’s Equity

Current assets Current liabilitiesLong-term investments Long-term liabilitiesProperty, plant, and equipment Owner’s (Stockholders’) equityIntangible assets

Illustration 4-17Standard Standard ClassificationsClassifications

Chapter 4-34

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.

Current AssetsCurrent Assets

Chapter 4-35

Companies usually list current asset accounts in the order they expect to convert them into cash.

Illustration 4-19

Current AssetsCurrent Assets

Chapter 4-36

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.

Chapter 4-37

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.

Long-Term InvestmentsLong-Term Investments

Illustration 4-20

Chapter 4-38

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 asset’s life.

Property, Plant, and Property, Plant, and EquipmentEquipment

Chapter 4-39

Illustration 4-21

Property, Plant, and Property, Plant, and EquipmentEquipment

Chapter 4-40

Assets that do not have physical substance.

Intangible AssetsIntangible Assets

Illustration 4-22

Chapter 4-41

Patents and copyrights are

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

Chapter 4-42

Obligations the company is to pay within the coming year.

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.

Current LiabilitiesCurrent Liabilities

Chapter 4-43

Illustration 4-23

Current LiabilitiesCurrent Liabilities

Chapter 4-44

Obligations a company expects to pay after one year.

Long-Term LiabilitiesLong-Term Liabilities

Illustration 4-24

Chapter 4-45

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

Chapter 4-46

Proprietorship - one capital account.

Partnership - capital account for each partner.

Corporation - Capital Stock and Retained Earnings.

Owner’s EquityOwner’s Equity

Illustration 4-25

Chapter 4-47

Q4-18: (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.

Discussion QuestionDiscussion Question

See notes page for discussion

Chapter 4-48

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.

SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Reversing EntriesReversing Entries

Reversing EntriesReversing EntriesReversing EntriesReversing Entries

Appendix

Chapter 4-49 SO 7 Prepare reversing entries.SO 7 Prepare 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.

Chapter 4-50

With Reversing Entries (per appendix)

SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Initial Salary Entry

Oct. 26 Same entry

Adjusting Entry

Closing Entry

Reversing Entry

Salaries payable 1,200Salaries expense

1,200Subsequent Salary Entry

Oct. 31 Same entry

Nov. 1

Salaries expense 4,000Cash

Nov. 9

Illustration 4A-1

Chapter 4-51 SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Illustration 4A-2 Postings with reversingentries

Chapter 4-1 Completing the Accounting Cycle Accounting Principles, Ninth Edition

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