Chapter 4
Completing the
Accounting Cycle
高立翰
Study Objectives
1. Prepare a worksheet.
2. Explain the process of closing the books.
3. Describe the content and purpose of a postclosing 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 statement of
financial position.
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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 postclosing trial
balance
Summary of
Accounting
Cycle
Reversing
entries—An
optional step
Correcting
entries—An
avoidable step
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Classified
Statement of
Financial
Position
Intangible assets
Property, plant,
and equipment
Long-term
investments
Current assets
Equity
Non-current
liabilities
Current
liabilities
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Using A Worksheet (1/2)
 Worksheet (工作底稿)
A multiple-column form used in preparing financial
statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.
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Using A Worksheet (2/2)
 Illustration: pp. 149-151
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Illustration 4-1
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Steps in Preparing a Worksheet (1/5)
1. Prepare a Trial Balance on the Worksheet
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Revenue
Share Capital
Dividends
Service Revenue
Trial Balance
Dr.
Cr.
15,200
2,500
600
5,000
5,000
2,500
1,200
10,000
500
10,000
Salaries Expense
Rent
Totals
4,000
900
28,700
Account Titles
Adjustments
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Statement of
Financial Position
Dr.
Cr.
28,700
Trial balance amounts come
directly from ledger accounts.
Include all accounts
with balances.
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Steps in Preparing a Worksheet (2/5)
2. Enter the Adjustments in the Adjustments Columns
Trial Balance
Adjustments
Account Titles
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
Share Capital
10,000
Dividends
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a) 1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e)
Accounts Receivable
200
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Statement of
Financial Position
Dr.
Cr.
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.
Enter adjustment amounts, total
adjustments columns,
and check for equality.
Add additional accounts as needed.
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Steps in Preparing a Worksheet (3/5)
3. Complete the Adjusted Trial Balance Columns
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
Share Capital
10,000
Dividends
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a) 1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e) 200
Accounts Receivable
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Account Titles
Adjusted
Trial Balance
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
Income
Statement
Dr.
Cr.
Statement of
Financial Position
Dr.
Cr.
5,200
900
1,500
50
40
40
200
50
30,190
50
1,200
30,190
Total the adjusted trial balance
columns and check for equality.
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Steps in Preparing a Worksheet (4/5)
4. Extend Amounts to Financial Statement Columns
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
Share Capital
10,000
Dividends
500
(d) 400
Service Revenue
10,000
(e) 200
(g)
Salaries Expense
4,000
1,200
Rent
900
Totals
28,700
28,700
(a) 1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e) 200
Accounts Receivable
(f)
Interest Expense
50
(f)
Interest Payable
50
(g)
Salaries Payable
1,200
Totals
3,440
3,440
Account Titles
Adjusted
Trial Balance
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
Income
Statement
Dr.
Cr.
Statement of
Financial Position
Dr.
Cr.
10,600
5,200
900
5,200
900
1,500
50
1,500
50
40
40
200
50
30,190
40
50
50
1,200
30,190
Extend all revenue and expense account
balances to the income statement
columns.
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7,740
10,600
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Steps in Preparing a Worksheet (5/5)
5. Total Columns, Compute Net Income (Loss)
Trial Balance
Adjustments
Account Titles
Dr.
Cr.
Dr.
Cr.
Cash
15,200
(a) 1,500
Advertising Supplies
2,500
(b)
Prepaid Insurance
600
50
Office Equipment
5,000
Notes Payable
5,000
Accounts Payable
2,500
Unearned Revenue
1,200 (d) 400
Share Capital
10,000
Dividends
500
(d) 400
Service Revenue
10,000
200
(e)
(g) 1,200
Salaries Expense
4,000
Rent
900
Totals
28,700
28,700
(a) 1,500
Advertising Supplies Expense
(b)
Insurance Expense
50
(c)
Accumulated Depreciation
40
(c)
Depreciation Expense
40
(e) 200
Accounts Receivable
(f)
Interest Expense
50
(f)
Interest Payable
50
(g) 1,200
Salaries Payable
Totals
3,440
3,440
Net income
Totals
Adjusted
Trial Balance
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
Income
Statement
Dr.
Cr.
Statement of
Financial Position
Dr.
Cr.
15,200
1,000
550
5,000
5,000
2,500
800
10,000
500
10,600
5,200
900
5,200
900
1,500
50
1,500
50
40
40
200
50
30,190
Compute Net Income or Net Loss.
40
40
200
50
50
1,200
30,190
7,740
2,860
10,600
10,600
22,450
10,600
22,450
50
1,200
19,590
2,860
22,450
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Preparing Financial Statements from a
Worksheet
 Worksheet
Income statement is prepared from the income
statement columns.
Statement of financial position and retained earnings
statement are prepared from the statement of
financial position columns.
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Income Statement from a Worksheet
Illustration 4-4
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Retained Earnings Statement from a Worksheet
Illustration 4-4
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Statement of Financial Position from a
Worksheet
Illustration 4-4
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Preparing Adjusting Entries from a Worksheet
 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
Illustration 3-22
General journal
showing adjusting
entries
Adjusting Journal Entries
(Chapter 3)
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Closing the Books (1/4)
 At the end of the accounting period, the company
makes the accounts ready for the next period.
 Temporary (暫時性) and Permanent (永久性) accounts
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Closing the Books (2/4)
 Closing Entries (結帳分錄) formally recognize, in the general
ledger, the transfer of
Net Income (or Net Loss), and
Dividends to Retained Earnings.
 Closing entries are only at the end of the annual accounting
period
Note:
Dividends are closed
directly to Retained
Earnings and not to
Income Summary because
Dividends are not an
expense.
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Closing the Books (3/4)
 Closing entries need to be posted
Illustration 4-7
Closing entries
journalized
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Closing the Books (4/4)
 Posting closing entries
Illustration 4-8
Posting of
closing entries
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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
Temporary
accounts will have
zero balances.
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Summary of the Accounting Cycle
Illustration 4-12
1. Analyze business transactions
9. Prepare a post-closing trial
balance
2. Journalize the transactions
8. Journalize and post closing
entries
3. Post to ledger accounts
7. Prepare financial statements
4. Prepare a trial balance
6. Prepare an adjusted trial
balance
5. Journalize and post
adjusting entries
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Correcting Entries – An Avoidable Step
 Correcting Entries (更正分錄)
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
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Closing Entries – Illustration (1/2)
 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
entry
Cash
Correct
entry
Cash
Correcting
entry
50
Service revenue
50
50
Accounts receivable
Service revenue
50
50
Accounts receivable
50
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Closing Entries – Illustration (2/2)
 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.
Incorrect
entry
Correct
entry
Correcting
entry
Delivery equipment
45
Accounts payable
Office equipment
45
450
Accounts payable
Office equipment
Delivery equipment
Accounts payable
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450
450
45
405
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The Classified Statement of Financial Position
 Presents a snapshot at a point in time
 To improve understanding, companies group
similar assets and similar liabilities together
Standard Classifications
Assets
Illustration 4-17
Equity and Liabilities
Intangible assets
Equity
Property, plant, and equipment
Non-current liabilities
Long-term investments
Current liabilities
Current assets
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Classified Statement of Financial Position (1/
 Intangible Assets (無形資產)
Assets that do not have physical substance.
– Goodwill (商譽)
– Franchises (特許權)
– Trademark (商標)
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Classified Statement of Financial Position (2/
 Property, Plant, and Equipment (固定資產，PP&E)
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
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Classified Statement of Financial Position (3/
 Long-term investments (長期投資)
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
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Classified Statement of Financial Position (4/
 Current Assets (流動資產)
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
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Classified Statement of Financial Position (5/
 Equity (權益)
Proprietorship - one capital account (Owner’s Equity)
Partnership - capital account for each partner
Corporation – Share Capital and Retained Earnings
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Classified Statement of Financial Position (6/)
 Non-current Liabilities (非流動負債)
Obligations a company expects to pay after one year.
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Classified Statement of Financial Position (7/)
 Current Liabilities (流動負債)
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 (流動性)
– ability to pay obligations expected to be due within the next year
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Appendix: Reversing Entries
 Reversing Entries (迴轉分錄)
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
 Illustrations: pp.176
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