Chapter 4
Completing the
Accounting Cycle
Financial Accounting, Sixth Edition
Chapter
4-1
Study Objectives
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.
Chapter
4-2
Completing the Accounting Cycle
Using a
Worksheet
Closing the
Books
Steps in
preparation
Preparing
closing entries
Preparing
financial
statements
Preparing
adjusting entries
Posting closing
entries
Preparing a
post-closing trial
balance
Chapter
4-3
Summary of
Accounting
Cycle
Reversing
entries—An
optional step
Correcting
entries—An
avoidable step
Classified
Balance Sheet
Current assets
Long-term
investments
Property, plant,
and equipment
Intangible assets
Current liabilities
Long-term
liabilities
Stockholders’
equity
Using A Worksheet
Worksheet
A multiple-column form used in preparing
financial statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.
Chapter
4-4
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration 4-1
Chapter
4-5
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration The trial balance for Undercover Roofing for the month
ended March 31, 2008, is as follows.
Trial Balance
Account Titles
Dr.
Cr.
Cash
$ 2,500
Accounts Receivable
1,800
Roofing Supplies
1,100
Equipment
6,000
Accumulated Depreciation
$ 1,200
Accounts Payable
1,400
Unearned Revenue
300
Common stock
1,000
Retained earnings
6,000
Dividends
600
Service Revenue
3,000
Salaries Expense
700
Miscellaneous Expense
200
Totals
$ 12,900 $ 12,900
Chapter
4-6
Other data:
1. Supplies on hand total $140.
2. Depreciation for March is
$200.
3. Unearned revenue amounted
to $130 on March 31.
4. Accrued salaries are $350.
Instructions
a. Prepare and complete the
worksheet.
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Common stock
Retained earnings
Dividends
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Chapter
4-7
Trial Balance
Dr.
Cr.
2,500
1,800
1,100
6,000
1,200
1,400
300
1,000
6,000
600
3,000
700
200
12,900
12,900
Adjustments
Dr.
Cr.
Trial balance amounts
come directly from
ledger accounts.
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
Include all
accounts with
balances.
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Common stock
Retained earnings
Dividends
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Net Income
Totals
Chapter
4-8
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
2,500
1,800
(a) 960
1,100
6,000
(b) 200
1,200
1,400
300 (c) 170
1,000
6,000
600
(c) 170
3,000
(d) 350
700
200
12,900
12,900
(a) 960
(b) 200
(d) 350
1,680
1,680
Add additional
accounts as
needed.
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
Adjustments Key:
(a) Supplies used.
(b) Depreciation expense.
(c) Service revenue earned.
(d) Salaries accrued.
Enter adjustment
amounts, total
adjustments columns,
and check for equality.
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Common stock
Retained earnings
Dividends
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Net Income
Totals
Chapter
4-9
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
2,500
1,800
(a) 960
1,100
6,000
(b) 200
1,200
1,400
300 (c) 170
1,000
6,000
600
(c) 170
3,000
(d) 350
700
200
12,900
12,900
(a) 960
(b) 200
(d) 350
1,680
1,680
Total the adjusted
trial balance columns
and check for equality.
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
1,000
6,000
600
3,170
1,050
200
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
960
200
13,450
350
13,450
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Common stock
Retained earnings
Dividends
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Net Income
Totals
Chapter
4-10
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
2,500
1,800
(a) 960
1,100
6,000
(b) 200
1,200
1,400
300 (c) 170
1,000
6,000
600
(c) 170
3,000
(d) 350
700
200
12,900
12,900
(a) 960
(b) 200
(d) 350
1,680
1,680
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
1,000
6,000
600
3,170
1,050
200
960
200
13,450
Extend all revenue and expense
account balances to the income
statement columns.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
3,170
1,050
200
960
200
350
13,450
2,410
3,170
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Common stock
Retained earnings
Dividends
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Net Income
Totals
Chapter
4-11
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
2,500
1,800
(a) 960
1,100
6,000
(b) 200
1,200
1,400
300 (c) 170
1,000
6,000
600
(c) 170
3,000
(d) 350
700
200
12,900
12,900
(a) 960
(b) 200
(d) 350
1,680
1,680
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
1,000
6,000
600
3,170
1,050
200
960
200
13,450
Extend all asset, liability, and
equity account balances to the
balance sheet columns.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
1,000
6,000
600
3,170
1,050
200
960
200
350
13,450
2,410
3,170
11,040
350
10,280
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
Common stock
Retained earnings
Dividends
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Net Income
Totals
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cr.
2,500
1,800
(a) 960
1,100
6,000
(b) 200
1,200
1,400
300 (c) 170
1,000
6,000
600
(c) 170
3,000
(d) 350
700
200
12,900
12,900
(a) 960
(b) 200
(d) 350
1,680
1,680
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
1,000
6,000
600
3,170
1,050
200
960
200
13,450
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
1,000
6,000
600
3,170
1,050
200
960
200
350
13,450
2,410
760
3,170
3,170
11,040
3,170
11,040
350
10,280
760
11,040
Compute Net income or Net loss.
Chapter
4-12
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Review Question
Net income is shown on a work sheet 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.
Chapter
4-13
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Worksheet
Income statement is prepared from the
income statement columns.
Balance sheet and retained earnings
statement are prepared from the balance
sheet columns.
Chapter
4-14
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
b. Prepare an income statement for the month ended
March 31, 2008.
Undercover Roofing
Income Statement
For the Month Ended March 31, 2008
Revenues
Service revenues
Expenses
Salaries expense
Supplies expense
Depreciation expense
Miscellaneous expense
Total expenses
Net income
Chapter
4-15
$
3,170
$
2,410
760
$ 1,050
960
200
200
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
b. Prepare a statement of retained earnings for the
month ended March 31, 2008.
Undercover Roofing
Retained Earnings Statement
For the Month Ended March 31, 2008
Retained earnings, beginning
Add: Net income
Less: Dividends
Retained earnings, ending
Chapter
4-16
$
$
6,000
760
(600)
6,160
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
b. Prepare a
balance sheet
as of March 31,
2008.
Undercover
Roofing
Balance Sheet
March 31, 2008
Chapter
4-17
Assets
Current assets
Cash
Accounts receivable
Roofing supplies
Total current assets
Property, plant, and equipment
Equipment
Less: Accumulated depreciation
Total assets
$
6,000
1,400
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Salaries payable
Unearned revenue
Total current liabilities
Stockholders' equity
Common stock
Retained earnings
Total liabilities and stockholder's equity
$
$
$
2,500
1,800
140
4,440
4,600
9,040
1,400
350
130
1,880
1,000
6,160
9,040
SO 1 Prepare a worksheet.
Preparing Adjusting Entries from a Worksheet
Adjusting Entries
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.
Chapter
4-18
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
c. Journalize the adjusting entries from the
adjustments columns of the worksheet.
Date
Mar. 31
Account Title
Supplies expense
Ref.
Debit
960
Roofing supplies
Depreciation expense
960
200
Accumulated depreciation
Unearned revenue
200
170
Service revenue
Salaries expense
Salaries payable
Chapter
4-19
Credit
170
350
350
SO 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
Chapter
4-20
SO 2 Explain the process of closing the books.
Closing the Books
Closing entries formally recognize, in the general
ledger, the transfer of
net income (or net loss) and
dividends
to retained earnings at the end of the
accounting period.
Chapter
4-21
SO 2 Explain the process of closing the books.
Closing the Books
Note:
Dividends are closed directly
to Retained Earnings and not
to Income Summary because
Dividends are not an expense.
Chapter
4-22
Illustration 4-6
Retained Earnings is a
permanent account; all
other accounts are
temporary accounts.
SO 2 Explain the process of closing the books.
Closing the Books
d. Journalize the closing entries from the financial
statement columns of the worksheet.
Closing
Entries
need
to be
Posted
Chapter
4-23
Service revenue
Income summary
3,170
Income summary
Salary expense
Supplies expense
Depreciation expense
Miscellaneous expense
2,410
Income summary
Retained earnings
760
Retained earnings
Dividends
600
3,170
1,050
960
200
200
760
600
SO 2 Explain the process of closing the books.
Preparing a Post-Closing Trial Balance
Purpose is to prove the equality of the permanent
account balances after journalizing and posting of
closing entries.
All temporary accounts
will have zero balances.
Chapter
4-24
Post-Closing
Trial Balance
Account Titles
Dr.
Cr.
Cash
$ 2,500
Accounts Receivable
1,800
Roofing Supplies
140
Equipment
6,000
Accumulated Depreciation
$ 1,400
Accounts Payable
1,400
Salaries payable
350
Unearned Revenue
130
Common Stock
1,000
Retained Earnings
6,160
Totals
$ 10,440 $ 10,440
SO 3 Describe the content and purpose of a post-closing trial balance.
Summary of the Accounting Cycle
1. Analyze business transactions
Chapter
4-25
Illustration 4-12
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
SO 4 State the required steps in the accounting cycle.
Correcting Entries—An Avoidable Step
Correcting 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.
Chapter
4-26
SO 5 Explain the approaches to preparing correcting entries.
Correcting Entries—An Avoidable Step
BE4-9 At Batavia Company, the following errors were
discovered after the transactions had been journalized and
posted. Prepare the correcting entries.
1. A collection on account from a customer was recorded as a
debit to Cash and a credit to Service Revenue for $780.
Incorrect
entry
Cash
Correct
entry
Cash
Correcting
entry
Chapter
4-27
780
Service revenue
780
780
Accounts receivable
Service revenue
Accounts receivable
780
780
780
SO 5 Explain the approaches to preparing correcting entries.
Correcting Entries—An Avoidable Step
BE4-9 At Batavia Company, the following errors were
discovered after the transactions had been journalized and
posted. Prepare the correcting entries.
2. The purchase of supplies on account for $1,570 was recorded
as a debit to Supplies and a credit to Accounts Payable $1,750.
Incorrect
entry
Supplies
Correct
entry
Supplies
Correcting
entry
Chapter
4-28
1,750
Accounts payable
1,750
1,570
Accounts payable
Accounts payable
Supplies
1,570
180
180
SO 5 Explain the approaches to preparing correcting entries.
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
Assets
Liabilities and Owner’s Equity
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Chapter
4-29
Illustration 4-17
Current liabilities
Long-term liabilities
Stockholders’ equity
SO 6 Identify the sections of a classified balance sheet.
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.
Chapter
4-30
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Current Assets
Illustration 4-19
Companies usually list current asset accounts in the order
they expect to convert them into cash.
Chapter
4-31
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Review 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.
Chapter
4-32
SO 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
Chapter
4-33
SO 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 asset’s
life.
Chapter
4-34
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Property, Plant, and Equipment
Illustration 4-21
Chapter
4-35
SO 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
Chapter
4-36
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Review Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
Chapter
4-37
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Current Liabilities
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.
Chapter
4-38
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Current Liabilities
Illustration 4-23
Chapter
4-39
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Long-Term Liabilities
Obligations a company expects to pay after one year.
Illustration 4-24
Chapter
4-40
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Review 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
Chapter
4-41
SO 6 Identify the sections of a classified balance sheet.
The Classified Balance Sheet
Stockholders’ (Owners’) Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.
Illustration 4-25
Chapter
4-42
SO 6 Identify the sections of a classified balance sheet.
All About You
Your Personal Balance Sheet
What are your personal assets?
What are your personal liabilities?
=
Net
Worth
Some Facts:
48% of Americans think they know how much wealth
they have.
2005 was the first year since the Depression when
Americans spent more money than they made.
Chapter
4-43
All About You
Your Personal Balance Sheet
Some Facts:
The total net worth of U.S. households hit a record
$51.09 trillion during 2005.
Economists note that a rise in house prices actually
results in a fall in individual savings.
When asked about very important wealth-building
strategies for all Americans, 16% said “win the
lottery.”
Chapter
4-44
All About You
In a recent study, individuals were asked whether
they could save 20% of their household income.
Inconsistent
thinking?
Should you
prepare a
personal
balance
sheet?
Chapter
4-45
All About You
What Do You Think?
Should you prepare a personal balance sheet?
YES: In order to attain your desired financial
objectives, you need to set goals early.
NO: Your financial situation right now bears very
little resemblance to what it will look like after you
graduate. At that point, you will have a better job,
and you won’t have to pay tuition. Right now, you’re
just “bleeding cash.”
Chapter
4-46
Copyright
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responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.”
Chapter
4-47