Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
CHAPTER 4: COMPLETING THE ACCOUNTING CYCLE AND CLASSIFYING
ACCOUNTS
Learning Objectives
Closing Process (LO1)
The Closing Process is an important step at end of accounting period to prepare for the next
period.
In the closing process we must:
 Identify accounts for closing.
 Record and post closing entries.
 Prepare a post-closing trial balance.
After closing, effects on accounts are as follows:
1. Revenue, expense and withdrawals accounts will be reflected in equity and will begin
the new period with a zero balance.
2. Owner’s equity account will reflect increases from profit and decreases from loss and
withdrawals.
Temporary and Permanent Accounts
3. Temporary (or nominal) accounts accumulate data related to one accounting period. (All
income statement accounts, withdrawals accounts, and the Income Summary.)
4. Permanent (or real) accounts report on activities related to one or more future
accounting periods. (All balance sheet accounts.)
The closing process applies only to temporary accounts.
Recording and Posting Closing Entries (LO2)
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Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
(Refer to Exhibit 4.2)
Use a new temporary account called Income Summary. The four closing entries are:
1. Close credit balances in revenue accounts. (By debiting the accounts and crediting Income
Summary)
2. Close debit balances in expense accounts. (By crediting the accounts and debiting Income
Summary)
3. Close the Income Summary account to owner's capital account.
4. Note: Income Summary, prior to closing, will have a credit balance equal to profit or a debit
balance equal to loss. Therefore, this entry will credit capital for the profit or debit capital for a
loss.
5. Close withdrawals account to owner’s capital. (By crediting the account and debiting the
owner’s capital account)
After all closing entries are posted, all temporary accounts have a zero balance, and the capital account
reflects the company’s period to date balance.
Preparing a Post-Closing Trial Balance (LO3)
Prepared after closing entries are journalized and posted.
Verifies that total debits equal total credits for permanent accounts, and all temporary accounts have
zero balances.
Students should note that post-closing trial balance is usually very short.
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Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
Completing the Accounting Cycle (LO4)
The sequence of accounting procedures followed each accounting period:
1.
Analyze Transactions
2.
Journalize
3.
Post
4.
Unadjusted trial balance
5.
Adjust
6.
Adjusted trial balance
7.
Prepare statements
8.
Close
9.
Post closing trial balance
Classified Balance Sheet (LO5)
The Classified Balance Sheet is commonly used classifications and contains:
A. Current assets—cash or other assets that are reasonably expected to be sold, collected, or
consumed within one year or within the normal operating cycle of the business, whichever is
longer. Examples are cash, short term investments, accounts receivable, notes receivable,
merchandise inventory, prepaid expenses- reported in order of liquidity. Prepaid expenses are
sometimes combined on a balance sheet.
B. Non-current Investments—long term assets such as stocks, bonds, promissory notes, and land
held for future expansion.
C. Property, Plant and Equipment- tangible assets that are used for more than one accounting
period to produce or sell goods and services. Examples include equipment, buildings, land.
D. Intangible assets—long term resources used to produce or sell products and services; they do
not have a physical form; their benefits are uncertain. Value comes from the privileges or rights
that are granted to or held by the owner. Examples include patents, trademarks, franchises and
copyrights.
E. Current liabilities—obligations due to be paid or liquidated within one year or the operating
cycle, whichever is longer. Examples include accounts payable, wages payable, taxes payable,
interest payable, unearned revenues, current portions of long term liabilities.
F. Non-current liabilities—obligations that are due to be paid beyond the longer of one year or the
operating cycle of the business. Examples include notes payable, bonds payable, mortgages
payable.
G. Equity—presentation of the owner’s claim on the business. Equity section for sole
proprietorship shows one owner’s capital account. Partnerships and corporations are discussed
in detail in later chapters.
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Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
Financial Statement Analysis (LO6)
Focus should be on the calculations and how these ratios are used within a company and for
measurement against industry.
Current Ratio:
The current ratio is one important measure used to evaluate a company’s ability to pay its short-term
obligations. The ability to pay day-to-day obligations (current liabilities) with existing liquid assets is
commonly referred to as liquidity.
Quick Ratio:
The quick ratio is a simple modification from the current ratio, and is a more robust measure of liquidity.
Debt to Equity Ratio:
The debt-to-equity ratio (Exhibit 4.19) is another calculation that is important for understanding
financial statements as it indicates the risk position of a company.
Work Sheet as a Tool (LO7)
Useful to organize accounting information. (Not a financial statement)
A. Some benefits include reduces errors, captures linked accounting information, helps organize an
audit, and plans interim financial statements and useful for “what if” analysis and planning
purposes.
B. Steps to prepare a work sheet: (Refer to Exhibit 4A.1 for the format and steps)
1. Enter the unadjusted trial balance in the first two columns.
2. Enter the adjustments in the third and fourth columns. Total columns to verify debit
adjustments equal credit adjustments.
3. Prepare the adjusted trial balance. Total Adjusted Trial Balance columns to verify debits
equal credits.
4. Extend the adjusted trial balance amounts to the financial statement columns.
5. Enter profit (or loss) and balance the financial statement columns. Prepare financial
statements from worksheet information.
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Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
It is helpful to know what to are look for in completing the final 4 columns. You should only be “filling
in” the 2 inside columns for a loss and the 2 outside columns for a profit.
Reversing Entries (LO8)
Reversing entries are optional entries used to simplify recordkeeping. They are prepared on the first day
of the new accounting period. Reversing entries are prepared for those adjusting entries that created
accrued assets and liabilities (such as interest receivable and salaries payable).
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Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
Summary of
THE ACCOUNTING CYCLE
STEPS
1. Journalizing
2. Posting
3. Work sheet
4. Preparing the
statements
5. Journalizing and
posting of adjusting
entries
6. Journalizing and
posting of closing entries
7. Post-closing trial
balance
Assuming a worksheet is used
PURPOSE
To record the daily transactions
TIMING
During the period
To transfer the amounts from journal entries
to the individual accounts affected by the
recorded transaction
To summarize the balances of ledger accounts
and test the accuracy of journalizing and
posting and the computation of account
balances (unadjusted trial balance columns)
To plan the adjusting entries and the income
statement and balance sheet numbers
To prove the mathematical accuracy of profit
To provide information for closing entries
To report financial information
During the period
To bring the ledger accounts to adjusted
balances
End of period
To bring all temporary accounts to zero and
the capital account up-to-date
To prove the accuracy of the
adjusting and closing procedures
End of period
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End of period
End of period
End of period
Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
Additional Example of Classified Balance Sheet
(Very comprehensive, uses all classifications)
MUSIC WORLD
BALANCE SHEET
DECEMBER 31, 2022
Assets
Current Assets
Cash
Short-Term Investments
Accounts Receivable
Merchandise Inventory
Prepaid Insurance
Supplies
Total Current Assets
Non-current Investments
Land Held for Future Use
$30,360
2,000
43,000
60,700
6,600
1,696
$144,356
13,950
Property, Plant and Equipment:
Land
Building
Less Accumulated Depreciation
Office Equipment
Less Accumulated Depreciation
Total Plant and Equipment
Intangible Assets
Trademark
Total Assets
$ 4,500
$20,650
8,640
$ 8,600
5,000
12,010
3,600
20,110
500
$178,916
Liabilities
Current Liabilities
Accounts Payable
Salaries Payable
Current portion of long-term liabilities
Total Current Liabilities
Non-current Liabilities
Mortgage Payable (less current portion)
Total Liabilities
25,683
17,000
10,200
$52,883
27,600
$ 80,483
Equity
Joy Melody, Capital
Total Liabilities and Equity
98,433
$178,916
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Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
Chapter 4 Alternate Demo Problem
The trial balance of Large Company, Inc. at the end of its annual accounting period is as
follows:
LARGE COMPANY, INC.
Trial Balance
December 31, 2021
Cash ..............................................................................
Prepaid Insurance .........................................................
Supplies .......................................................................
Equipment ...................................................................
Accumulated Depreciation—Equipment ........................
C. Large, Capital ............................................................
C. Large, Withdrawals ...................................................
Revenue ........................................................................
Salaries Expense ............................................................
Rent Expense ................................................................
Totals ............................................................................
Additional information:
1. Expired insurance, $600.
2. Unused supplies, per inventory, $800.
3. Estimated depreciation, $1,000.
4. Earned but unpaid salaries, $700
Required
1. Prepare adjusting entries.
2. Prepare closing entries.
3. Prepare a post-closing trial balance.
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$ 4,000
1,600
2,100
20,000
$ 2,000
19,000
2,000
33,000
18,300
6,000
$54,000
______
$54,000
Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
Chapter 4 Solution: Alternate Demo Problem
1.
Insurance Expense .................................................
600
Prepaid Insurance ...........................................
Supplies Expense ...................................................
600
1,300
Supplies ..........................................................
Depreciation Expense Equip. ..................................
1,300
1,000
Accumulated Depreciation Equip. ....................
Salaries Expense ....................................................
1,000
700
Salaries Payable ..............................................
2.
Revenue ................................................................
700
33,000
Income Summary ............................................
Income Summary ...................................................
33,000
27,900
Salaries Expense ..............................................
19,000
Rent Expense ..................................................
6,000
Insurance Expense ...........................................
600
Supplies Expense .............................................
1,300
Depreciation Expense ......................................
1,000
Income Summary ...................................................
5,100
C. Large, Capital...............................................
C. Large, Capital .....................................................
C. Large, Withdrawal .......................................
Solution continued next page
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5,100
2,000
2,000
Instructor’s Manual for Larson/Dieckmann/Harris Fundamental Accounting Principles 17ce
3.
LARGE COMPANY, INC.
Post-Closing Trial Balance
December 31, 2021
Dr.
Cash.......................................................................
$4,000
Prepaid Insurance ..................................................
1,000
Supplies .................................................................
800
Equipment .............................................................
20,000
Cr.
Accumulated Depreciation, Equipment ..................
$ 3,000
Salaries Payable .....................................................
700
C. Large, Capital .....................................................
______
22,100
Totals.....................................................................
$25,800
$25,800
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