WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW . ATKINS
PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION
Chapter 4
Completion of the Accounting Cycle
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
1
Chapter 4: Completion of the
Accounting Cycle
Study Objectives
1. Prepare closing entries and a postclosing trial balance.
2. Explain the steps in the accounting cycle
including optional steps.
3. Prepare correcting entries.
4. Prepare a classified balance sheet.
5. Illustrate measures used to evaluate
liquidity.
6. Prepare a work sheet (Appendix 4A).
7. Prepare reversing entries (Appendix 4B).
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2
Closing the Books
• Done at the end of the accounting period
– Accounts are made ready for the next period
• Temporary accounts:
– Only collect data for a single period; closed at
the end of the period
– Revenue, expense and owner’s drawings
accounts
• Permanent accounts:
– Not closed
– Balances are carried forward into next period
– All balance sheet accounts
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Closing Entries
• Transfer temporary account balances to the
owner’s capital account
– Updates the owner’s capital account balance
– Reduces balances in all temporary accounts to
zero, so they are ready for the next period
• Journalizing and posting closing entries are
a required step in the accounting cycle
• Revenue and expense accounts are closed
to Income Summary (a temporary account)
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The Closing Process
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The Closing Process
1.
Close revenue accounts
–
–
2.
Close expense accounts
–
–
3.
Debit Income Summary for total expenses
Credit each individual expense account to ‘zero’
their balances
Close Income Summary
–
–
4.
Debit each individual revenue account for the
same amount as its balance to ‘zero’ it
Credit Income Summary for total revenues
Debit Income Summary for balance (credit if loss)
Credit owner’s capital account (debit if loss)
Close drawings
–
–
–
Debit owner’s capital account
Credit owner’s drawings account for the balance
This will reduce the balance drawings to zero
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Post-Closing Trial Balance
• Prepared after all closing entries
have been journalized and posted
• Provides a list of all permanent
accounts and their balances
– These balances are carried forward into
the next period
– Since all temporary accounts have zero
balances, only permanent accounts
remain
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7
Post-Closing Trial Balance
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Chapter 4: Completion of the
Accounting Cycle
Study Objectives
1. Prepare closing entries and a post-closing
trial balance.
2. Explain the steps in the accounting cycle
including optional steps.
3. Prepare correcting entries.
4. Prepare a classified balance sheet.
5. Illustrate measures used to evaluate
liquidity.
6. Prepare a work sheet (Appendix 4A).
7. Prepare reversing entries (Appendix 4B).
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9
Accounting Cycle Summarized
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10
Worksheets-An Optional Step
• Multiple-column form to help
prepare adjusting entries and
financial statements
• A working tool - not a permanent
accounting record
• Useful for the preparation of interim
financial information or for internal
use
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11
Reversing EntriesAn Optional Step
• Reversing entries reverse certain
adjusting entries made in the
previous period
– Made at the beginning of the next
accounting period
– To simplify recording of transactions in
future accounting periods
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12
Chapter 4: Completion of the
Accounting Cycle
Study Objectives
1. Prepare closing entries and a post-closing
trial balance.
2. Explain the steps in the accounting cycle
including optional steps.
3. Prepare correcting entries.
4. Prepare a classified balance sheet.
5. Illustrate measures used to evaluate
liquidity.
6. Prepare a work sheet (Appendix 4A).
7. Prepare reversing entries (Appendix 4B).
Copyright John Wiley & Sons Canada, Ltd.
13
Correcting EntriesAn Avoidable Step
• Correcting entries correct errors that
have occurred in the recording
process
– Unnecessary if the records are free of
errors
– Can be journalized and posted
whenever an error is discovered
– Must be done before closing entries are
prepared and posted
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14
Chapter 4: Completion of the
Accounting Cycle
Study Objectives
1. Prepare closing entries and a post-closing
trial balance.
2. Explain the steps in the accounting cycle
including optional steps.
3. Prepare correcting entries.
4. Prepare a classified balance sheet.
5. Illustrate measures used to evaluate
liquidity.
6. Prepare a work sheet (Appendix 4A).
7. Prepare reversing entries (Appendix 4B).
Copyright John Wiley & Sons Canada, Ltd.
15
Classified Balance Sheet
• Financial statements are more useful when
similar assets and liabilities are grouped
together
• A classified balance sheet generally has the
following standard classifications:
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16
Current Assets
• Cash and other resources that will be
converted to cash, sold or used up in
one year from the balance sheet
date
• Can be longer period if operating
cycle is greater than one year
• Listed in order of liquidity
• Examples:
– Cash, short-term investments, accounts
receivable, inventory, prepaid expenses
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Operating Cycle
• The length of it takes from starting with cash
to ending with cash in producing revenues
• Usually less than one year, but for some
companies it may be longer than one year
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Long-term Investments
• Investments in debt or equity that
are expected to be held for many
years
• Not readily marketable or expected
to be converted into cash within one
year
• Examples:
– Investments in shares or bonds of
another company, investment in land
held for resale
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Property, Plant and
Equipment
• Long-lived tangible assets that are
used in the business and not intended
for sale
• Examples:
– Land, buildings, equipment
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Intangible Assets
• Long-lived assets that do not have
physical substance
• Examples:
– Patents, copyrights, trademarks, trade
names, licences
• Goodwill is a type of intangible asset
– Arises when a company is acquired at a
price greater than the fair value of the
assets
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21
Current Liabilities
• Obligations expected to be settled within
one year from the balance sheet date or in
the normal operating cycle
• Listed first in the liabilities and equity
section of the balance sheet
• Listed in order of liquidity
• Examples:
– Accounts payable, interest payable, salaries
payable, unearned revenue, current
maturities of long-term debt
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22
Non-Current Liabilities
• Obligations expected to be paid after
one year or longer
• Examples:
– Long-term notes payable, bonds
payable, mortgages payable, lease
liabilities, deferred income taxes (or
future income taxes)
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23
Equity
• Content of the equity section varies
with the form of business organization:
– Proprietorship: one capital account under
the heading “Owner’s Equity”
– Partnership: Capital account for each
partner under the heading “Partners’
Equity”
– Corporation: shareholders’ equity consists
of two sections: “Share Capital” and
“Retained Earnings”
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IFRS Versus ASPE
• Statement Name
– IFRS: Statement of Financial Position
– ASPE: Balance Sheet
– But both allow either name
• Order of Items
– IFRS: May present assets, liabilities,
equity in reverse order of liquidity
– ASPE: typically uses order of liquidity
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IFRS Versus ASPE 2
• Classification of Assets
– Long-term investments, property, plant
and equipment, intangible assets
– IFRS: May use sub-heading “NonCurrent Assets”
– ASPE: does not use this sub-heading,
uses the separate classifications
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Chapter 4: Completion of the
Accounting Cycle
Study Objectives
1. Prepare closing entries and a post-closing
trial balance.
2. Explain the steps in the accounting cycle
including optional steps.
3. Prepare correcting entries.
4. Prepare a classified balance sheet.
5. Illustrate measures used to evaluate
liquidity.
6. Prepare a work sheet (Appendix 4A).
7. Prepare reversing entries (Appendix 4B).
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27
Using Information in the
Financial Statements
• Liquidity: the ability to pay
obligations as they come due within
the next year
• Working capital: an important
measure of liquidity
= Current assets - Current liabilities
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Using Information in the
Financial Statements
• Current ratio: a measure of shortterm debt-paying ability
= Current assets ÷ Current liabilities
• Acid-test ratio: measures immediate
short-term liquidity
={Cash + Short-term investments +
Receivables} ÷ Current liabilities
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29
Chapter 4: Completion of the
Accounting Cycle
Study Objectives
1. Prepare closing entries and a post-closing
trial balance.
2. Explain the steps in the accounting cycle
including optional steps.
3. Prepare correcting entries.
4. Prepare a classified balance sheet.
5. Illustrate measures used to evaluate
liquidity.
6. Prepare a work sheet (Appendix 4A).
7. Prepare reversing entries (Appendix 4B).
Copyright John Wiley & Sons Canada, Ltd.
30
Appendix 4A: Work Sheets
• A multiple-column form used in preparing
financial statements
• Steps in preparing a work sheet:
1. Prepare a trial balance on the work sheet
2. Enter adjustments in the adjustment
columns
3. Enter adjusted balances in the adjusted
trial balance columns
4. Enter adjusted trial balance amounts in the
correct financial statement columns
5. Total columns, calculate profit (loss) and
complete the work sheet
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31
Chapter 4: Completion of the
Accounting Cycle
Study Objectives
1. Prepare closing entries and a post-closing
trial balance.
2. Explain the steps in the accounting cycle
including optional steps.
3. Prepare correcting entries.
4. Prepare a classified balance sheet.
5. Illustrate measures used to evaluate
liquidity.
6. Prepare a work sheet (Appendix 4A).
7. Prepare reversing entries (Appendix 4B).
Copyright John Wiley & Sons Canada, Ltd.
32
Appendix 4B: Reversing
Entries
• Entries that reverse the adjusting entries
at the beginning of the next period
– Used to reverse accrued revenues and
expenses
• Simplifies the recording of future
transactions related to an adjusting entry
– When transaction is recorded, no need to
refer back to adjusting entries to determine
how much relates to prior period
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33
Copyright
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by the use of these programs or from the use of the
information contained herein.
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