Chapter 4-1. Chapter 4-2 Chapter 4 Completing the Accounting Cycle Financial Accounting 7th Edition...

Chapter 4-1

Chapter 4-2

Chapter 4

Completing the Accounting Cycle

Financial Accounting7th Edition

Weygandt Kimmel Kieso

Chapter 4-3

1. Explain the process of closing the books.

2. Describe the content and purpose of a post-

closing trial balance.

3. State the required steps in the accounting cycle.

4. Identify the sections of a classified balance sheet.

5. Review the worksheet – understand the theory

6. Explain the approaches to preparing correcting

entries.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 4-4

Using a Using a WorksheetWorksheet

Steps in preparation

Preparing financial statements

Preparing adjusting entries

Current assets

Long-term investments

Property, plant, and equipment

Intangible assets

Current liabilities

Long-term liabilities

Stockholders’ equity

Reversing entries—An optional step

Correcting entries—An avoidable step

Preparing closing entries

Posting closing entries

Preparing a post-closing trial balance

Closing the Closing the BooksBooks

Summary of Summary of Accounting Accounting

CycleCycle

Summary of Summary of Accounting Accounting

CycleCycle

Classified Classified Balance SheetBalance Sheet

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

Chapter 4-5

The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance

SO 7SO 7

Illustration 3-24Adjusted trial balance

Chapter 4-6

Preparing Financial Statements from a Preparing Financial Statements from a WorksheetWorksheetPreparing Financial Statements from a Preparing Financial Statements from a WorksheetWorksheet

SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

Illustration 4-4

Chapter 4-7

Illustration 4-4

Chapter 4-8

Illustration 4-4

Chapter 4-9

At the end of the accounting period, the company makes the accounts ready for the next period.

Closing the BooksClosing the BooksClosing the BooksClosing the Books

SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.

Illustration 4-5

Chapter 4-10

Closing entriesClosing entries formally recognize, in the general ledger, the transfer of

net income (or net loss) and

dividends

to Retained Earnings.

SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.

Closing entries are only at the end of the annual accounting period.

Chapter 4-11

SO 2SO 2

Illustration 4-6

Retained Earnings is a permanent account;

all other accounts are temporary accounts.

Dividends are closed directly to Retained Earnings and not to Income Summary

because Dividends are not an expense.

Chapter 4-12

Illustration 4-4

Chapter 4-13

Closing the Revenue AccountClosing the Revenue Account

Transfer ending balance in Service Revenue to Transfer ending balance in Service Revenue to Income SummaryIncome Summary

# DATE Account Titles AND Description Debit Credit1 10/31# DATE Account Titles AND Description Debit Credit1 10/31 Service Revenue 10,600

Income Summary 10,600To close revenue account

Chapter 4-14

Closing the Expense AccountsClosing the Expense Accounts

Transfer ending balance in Transfer ending balance in each each Expense Expense Account to Income SummaryAccount to Income Summary

# DATE Account Titles AND Description Debit Credit

2 10/31 Income Summary 7,740

Advertising Supplies Expense 1,500

Depreciation Expense 40

Insurance Expense 50

Salaries Expense 5,200

Rent Expense 900

Interest Expense 50

To close the Expense Accounts

# DATE Account Titles AND Description Debit Credit

2 10/31

To close the Expense Accounts

Chapter 4-15

Closing the Income Summary Closing the Income Summary AccountAccount

Transfer ending balance in Income Summary Transfer ending balance in Income Summary to Retained Earningsto Retained Earnings

# DATE Account Titles AND Description Debit Credit1 10/31# DATE Account Titles AND Description Debit Credit1 10/31 Income Summary 2,860

Retained Earnings 2,860To close Income Summary to Retained Earnings

HEY! This is profit (credit to

RE) or Loss (debit to RE

Chapter 4-16

Closing the Dividends AccountClosing the Dividends Account

Transfer ending balance in Dividends to Transfer ending balance in Dividends to Income SummaryIncome Summary

# DATE Account Titles AND Description Debit Credit1 10/31# DATE Account Titles AND Description Debit Credit1 10/31 Retained Earnings 500

Dividends 500To close Income Summary to Retained Earnings

Chapter 4-17

Closing Entries need to be

Posted

Illustration 4-7Closing entries journalized

Chapter 4-18

Posting Closing Entries

Illustration 4-8Posting of closing entries

Chapter 4-19

Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.

Preparing a Post-Closing Trial Preparing a Post-Closing Trial BalanceBalancePreparing a Post-Closing Trial Preparing a Post-Closing Trial BalanceBalance

Temporary accounts will have zero balances.

Illustration 4-9

SO 3SO 3

Chapter 4-20

Summary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting Cycle

1. Analyze business transactions

2. Journalize the transactions

6. Prepare an adjusted trial balance

7. Prepare financial statements

8. Journalize and post closing entries

9. Prepare a post-closing trial balance

4. Prepare a trial balance

3. Post to ledger accounts

5. Journalize and post adjusting entries

Illustration 4-12

SO 4 State the required steps in the accounting cycle.SO 4 State the required steps in the accounting cycle.

Chapter 4-21

The Classified Balance SheetThe Classified Balance SheetThe Classified Balance SheetThe Classified Balance Sheet

SO 6 Identify the sections of a classified balance sheet.SO 6 Identify the sections of a classified balance sheet.

Presents a snapshot at a point in time.

To improve understanding, companies group similar assets and similar liabilities together.

Assets Liabilities and Owner’s Equity

Current assets Current liabilitiesLong-term investments Long-term liabilitiesProperty, plant, and equipment Stockholders’ equityIntangible assets

Illustration 4-17Standard Classifications

Chapter 4-22

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.

Current Assets

Chapter 4-23

Companies usually list current asset accounts in the order they expect to convert them into cash.

Illustration 4-19

Current Assets

Chapter 4-24

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 4-25

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.

Long-Term Investments

Illustration 4-20

Chapter 4-26

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.

Property, Plant, and Equipment

Chapter 4-27

Illustration 4-21

Property, Plant, and Equipment

Chapter 4-28

Assets that do not have physical substance.

Intangible Assets

Illustration 4-22

Chapter 4-29

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.

Current Liabilities

Chapter 4-30

Illustration 4-23

Current Liabilities

Chapter 4-31

Obligations a company expects to pay after one year.

Long-Term Liabilities

Illustration 4-24

Chapter 4-32

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

Review Question

Chapter 4-33

Proprietorship - one capital account.

Partnership - capital account for each partner.

Corporation - Capital Stock and Retained Earnings.

Stockholders’ (Owner’s) Equity

Illustration 4-25

Chapter 4-34

A multiple-column form used in preparing financial statements.

Not a permanent accounting record.

Five step process.

Use of worksheet is optional.

Using A WorksheetUsing A WorksheetUsing A WorksheetUsing A Worksheet

Worksheet

Chapter 4-35

Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet

Illustration 4-1

Chapter 4-36

The Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial BalanceThe Adjusted Trial Balance

SO 7SO 7

Illustration 3-24Adjusted trial balance

Chapter 4-37

Illustration:

Illustration 4-2Preparing a trial balance

Chapter 4-38

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 Common stock 10,000 Dividends 500 Service Revenue 10,000

Salaries Expense 4,000 Rent 900

Totals 28,700 28,700

Balance SheetAdjusted Income

Trial Balance Adjustments Trial Balance Statement

SO 1 Prepare a SO 1 Prepare a worksheet.worksheet.

1. Prepare a Trial Balance on the Worksheet

Trial balance amounts come directly from ledger

accounts.Include all

accounts with balances.

Chapter 4-39

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.

Preparing Adjusting Entries from a Preparing Adjusting Entries from a WorksheetWorksheetPreparing Adjusting Entries from a Preparing Adjusting Entries from a WorksheetWorksheet

Adjusting Entries

Chapter 4-40

Preparing Adjusting Entries from a Preparing Adjusting Entries from a WorksheetWorksheetPreparing Adjusting Entries from a Preparing Adjusting Entries from a WorksheetWorksheet

Illustration 3-22General journal showing adjusting entries

Adjusting Journal Entries

(Chapter 3)

Chapter 4-41 SO 1 Prepare a SO 1 Prepare a

worksheet.worksheet.

Illustration 3-22General journal showing adjusting entries

Adjusting Journal Entries

(Chapter 3)

Chapter 4-42

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 1,500 Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 400 Common stock 10,000 Dividends 500 Service Revenue 10,000 400

200 Salaries Expense 4,000 1,200 Rent 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries Payable 1,200

Totals 3,440 3,440

2. Enter the Adjustments in the Adjustments Columns

(a)(b)

(e)(f)

(f)(g)

Enter adjustment amounts, total adjustments columns,

and check for equality.

Add additional accounts as needed.

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.

Chapter 4-43

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Common stock 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600

200 Salaries Expense 4,000 1,200 5,200 Rent 900 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190

3. Complete the Adjusted Trial Balance Columns

(a)(b)

(e)(f)

(f)(g)

Total the adjusted trial balance columns and check for equality.

Chapter 4-44

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Common stock 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600 10,600

200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 Interest Expense 50 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600

4. Extend Amounts to Financial Statement Columns

(a)(b)

(e)(f)

(f)(g)

Extend all revenue and expense account balances to the income statement

columns.

Chapter 4-45

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Common stock 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

4. Extend Amounts to Financial Statement Columns

Extend all asset, liability, and equity account balances to the balance sheet

columns.

(a)(b)

(e)(f)

(f)(g)

Chapter 4-46

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office Equipment 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000 Accounts Payable 2,500 2,500 2,500 Unearned Revenue 1,200 400 800 800 Common stock 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

Net income 2,860 2,860 Totals 10,600 10,600 22,450 22,450

5. Total Columns, Compute Net Income (Loss)

(a)(b)

(e)(f)

(f)(g)

Compute Net Income or Net Loss.

Chapter 4-47

Income statement is prepared from the

income statement columns.

Balance sheet and owner’s equity statement

are prepared from the balance sheet columns.

Companies journalize and post adjusting entries.

Worksheet

Chapter 4-48

Let’s review: Accrual Basis Let’s review: Accrual Basis AccountingAccounting

•Revenue recorded only when earned not when cash is received

•Expense recorded only when incurred not when cash paid—in the period in which the company benefited from it

Chapter 4-49

Still confused?Still confused?

Do we need another way to learn this Do we need another way to learn this concept?concept?

Chapter 4-50

Revenue Recognition – a Revenue Recognition – a raprap

If you wanna be If you wanna be accrualaccrual Here’s what you gotta do,Here’s what you gotta do, When the When the service is performedservice is performed You book the You book the RevenueRevenue!!

Chapter 4-51

End of Chapter 4End of Chapter 4

Good Bye and Good Luck.Good Bye and Good Luck.

Chapter 4-52

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.

SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Reversing Entries

Reversing EntriesReversing EntriesReversing EntriesReversing Entries APPENDIX

Chapter 4-53 SO 7 Prepare reversing entries.SO 7 Prepare 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.

Reversing EntriesReversing EntriesReversing EntriesReversing Entries APPENDIX

Chapter 4-54

With Reversing Entries (per appendix)

SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Reversing EntriesReversing EntriesReversing EntriesReversing Entries

Initial Salary Entry

Oct. 26 Same entry

Adjusting Entry

Closing Entry

Reversing Entry

Salaries payable 1,200Salaries expense

1,200Subsequent Salary Entry

Oct. 31 Same entry

Nov. 1

Salaries expense 4,000Cash

Nov. 9

Illustration 4A-1

APPENDIX

Chapter 4-55 SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Reversing EntriesReversing EntriesReversing EntriesReversing Entries

Illustration 4A-2 Postings with reversingentries

APPENDIX

Chapter 4-56

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CopyrightCopyrightCopyrightCopyright

Chapter 4-57

Net income is shown on a worksheet 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.

Review Question

Chapter 4-58

Chapter 4-59

Chapter 4-60

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 4-61

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.

Correcting Entries—An Avoidable Correcting Entries—An Avoidable StepStepCorrecting Entries—An Avoidable Correcting Entries—An Avoidable StepStep

SO 5 Explain the approaches to preparing correcting entries.SO 5 Explain the approaches to preparing correcting entries.

Chapter 4-62

Illustration (Case 1):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.

Cash 50Incorrect entry Service revenue

50Cash 50Correct

entry Accounts receivable 50Service revenue 50Correcting Correcting

entryentry Accounts receivable 50

Chapter 4-63

Illustration (Case 2):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.

Delivery equipment 45Incorrect entry Accounts payable

45Office equipment 450Correct

entry Accounts payable 450

Office equipment 450Correcting Correcting entryentry Delivery equipment

45Accounts payable 405

Chapter 4-1. Chapter 4-2 Chapter 4 Completing the Accounting Cycle Financial Accounting 7th Edition...

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