Chapter
4
Completing the
Accounting Cycle
Financial Accounting, IRFS
Weygandt Kimmel Kieso
Slide
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 statement of
financial position.
Slide
4-2
Completing the Accounting Cycle
Using a
Worksheet
Closing the
Books
Steps in
preparation
Preparing closing
entries
Preparing
financial
statements
Posting closing
entries
Preparing
adjusting entries
Preparing a postclosing trial
balance
Summary of
Accounting
Cycle
Classified
Statement of
Financial
Position
Reversing
entries—An
optional step
Intangible assets
Correcting
entries—An
avoidable step
Long-term
investments
Property, plant,
and equipment
Current assets
Equity
Non-current
liabilities
Current liabilities
Slide
4-3
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.
Slide
4-4
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration 4-1
Slide
4-5
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration:
Slide
4-6
Illustration 4-2
Preparing a trial balance
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
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.
Slide
4-7
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Slide
4-8
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
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
Slide
4-9
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.
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance 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
Slide
4-10
Total the adjusted trial balance
columns and check for equality.
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
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement 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
Slide
4-11
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
Extend all revenue and expense account
balances to the income statement columns.
40
50
50
1,200
30,190
7,740
10,600
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement 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
Slide
4-12
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
40
40
200
50
50
1,200
30,190
Extend all asset, liability, and equity account
balances to the statement of financial position
columns.
7,740
10,600
22,450
50
1,200
19,590
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
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
(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
Net income
Totals
Slide
4-13
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
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
Compute Net Income or Net Loss.
SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Review Question
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. statement of financial position debit column only.
c. income statement credit column and statement of
financial position debit column.
d. income statement debit column and statement of
financial position credit column.
Slide
4-14
SO 1 Prepare a worksheet.
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.
Companies journalize and post adjusting entries.
Slide
4-15
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Illustration 4-4
Slide
4-16
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Illustration 4-4
Slide
4-17
SO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Illustration 4-4
Slide
4-18
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.
Slide
4-19
SO 1 Prepare a worksheet.
Preparing Adjusting Entries from a Worksheet
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Slide
4-20
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
Slide
4-21
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.
Closing entries are only at the end of the annual
accounting period.
Slide
4-22
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.
Slide
4-23
Illustration 4-6
Retained Earnings is a
permanent account; all
other accounts are
temporary accounts.
SO 2
Closing the Books
Illustration 4-7
Closing entries
journalized
Closing
entries
need to
be
posted
Slide
4-24
Closing the Books
Illustration 4-8
Posting of
closing entries
Posting
closing
entries
Slide
4-25
Preparing a Post-Closing Trial Balance
Purpose is to prove the equality of the permanent account
balances after journalizing and posting of closing entries.
Temporary
accounts
will have
zero
balances.
Illustration 4-9
Slide
4-26
SO 3
Slide
4-27
Summary of the Accounting Cycle
Illustration 4-12
1. Analyze business transactions
Slide
4-28
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.
Slide
4-29
SO 5 Explain the approaches to preparing correcting entries.
Correcting Entries—An Avoidable Step
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.
Incorrect
entry
Cash
Correct
entry
Cash
Correcting
entry
Slide
4-30
50
Service revenue
50
50
Accounts receivable
Service revenue
Accounts receivable
50
50
50
SO 5 Explain the approaches to preparing correcting entries.
Correcting Entries—An Avoidable Step
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.
Incorrect
entry
Correct
entry
Correcting
entry
Slide
4-31
Delivery equipment
45
Accounts payable
45
Office equipment
Accounts payable
450
Office equipment
Delivery equipment
Accounts payable
450
450
45
405
SO 5 Explain the approaches to preparing correcting entries.
Slide
4-32
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
Slide
4-33
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
Intangible Assets
Assets that do not have physical substance.
Slide
4-34
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
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.
Slide
4-35
SO 6 Identify the sections of a classified statement of financial position.
₩
The Classified Statement of Financial Position
Property, Plant, and Equipment
Illustration 4-20
(in billions)
Slide
4-36
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
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.
Slide
4-37
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
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.
Slide
4-38
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
Current Assets
Illustration 4-22
Slide
4-39
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
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.
Slide
4-40
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation – Share Capital and Retained Earnings.
Illustration 4-23
Slide
4-41
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
Non-current Liabilities
Obligations a company expects to pay after one year.
Slide
4-42
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Slide
4-43
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Slide
4-44
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
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.
Slide
4-45
SO 6 Identify the sections of a classified statement of financial position.
The Classified Statement of Financial Position
Current Liabilities
Slide
4-46
SO 6 Identify the sections of a classified statement of financial position.
Understanding U.S. GAAP
Completing the Accounting Cycle
Key Differences
Procedures used to prepare the worksheet are the same for
all companies under both IFRS and GAAP.
Both GAAP and IFRS are consistent regarding the type of
financial statements prepared.
IFRS requires that specific items be reported on the
statement of financial position, whereas no such general
standard exists in GAAP.
Slide
4-47
Understanding U.S. GAAP
Completing the Accounting Cycle
Similarities
Slide
4-48
o
Both require note disclosures on accounting policies and
judgments.
o
Comparative prior period information must be presented
and financial statements must be prepared annually.
o
Current/noncurrent classification for assets and liabilities is
normally required.
o
Like IFRS, a classified statement of financial position is
usually used under GAAP.
Understanding U.S. GAAP
Completing the Accounting Cycle
Key Differences
IFRS companies may report PP&E first in their statements of
financial position. This presentation is not used under
GAAP.
Under IFRS, companies, under certain conditions, can report
property, plant and equipment at cost or at fair value.
While the use of the term “reserve” is discouraged by GAAP,
it is used extensively under IFRS.
Slide
4-49
Understanding U.S. GAAP
Completing the Accounting Cycle
Looking to the Future
The IASB and FASB are working on a project to converge
their standards related to financial statement presentation.
Proposal is that each of the statements will be organized in
the same format.
The same classifications used in the statement of financial
position would also be used in the income statement and
the statement of cash flows.
Slide
4-50
APPENDIX Reversing Entries
Reversing Entries
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.
Slide
4-51
SO 7 Prepare reversing entries.
APPENDIX 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.
Slide
4-52
SO 7 Prepare reversing entries.
APPENDIX Reversing Entries
Illustration 4A-1
With Reversing Entries
(per appendix)
Oct. 26
Initial Salary Entry
Same entry
Adjusting Entry
Oct. 31
Same entry
Oct. 31
Closing Entry
Same entry
Reversing Entry
Nov. 1
Salaries payable
Salaries expense
1,200
1,200
Subsequent Salary Entry
Nov. 9
Slide
4-53
Salaries expense
Cash
4,000
4,000
SO 7 Prepare reversing entries.
APPENDIX Reversing Entries
Illustration 4A-2
Postings with
reversing
entries
Slide
4-54
SO 7 Prepare reversing entries.
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Slide
4-55