WILEY

IFRS EDITION

Prepared by
Coby Harmon
University
4-1
of California, Santa Barbara
Westmont College
 CHAPTER
Completing the
4 Accounting Cycle
LEARNING OBJECTIVES
After studying this chapter, you should be able to:

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.

4-2
 Using a Worksheet
Learning
Worksheet Objective 1
Prepare a
worksheet.
◆ Multiple-column form used in preparing
financial statements.

◆ Not a permanent accounting record.

◆ May be a computerized worksheet using an electronic

spreadsheet program such as Excel.

◆ Prepared using a five step process.

◆ Use of worksheet is optional.

4-3 LO 1
 Steps in Preparing a Worksheet Illustration 4-1
Form and procedure
for a worksheet

4-4
 Steps in Preparing a Worksheet Illustration 4-2

1. PREPARE A TRIAL BALANCE ON THE WORKSHEET

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Share Capital-Ordinary 10,000
Dividends 500
Service Revenue 10,000

Salaries and Wages Exp. 4,000

Rent Expense 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

4-5 LO 1
 Steps in Preparing a Worksheet
Illustration 3-23
General journal showing
adjusting entries

Adjusting
Journal
Entries
(Chapter 3)

4-6
 Steps in Preparing a Worksheet Illustration 4-2

2. ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500 (a) 1,500
Prepaid Insurance 600 (b) 50
Equipment 5,000
Adjustments Key:
Notes Payable 5,000 (a) Supplies Used.
Accounts Payable 2,500
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Share Capital-Ordinary 10,000
(c) Depreciation Expensed.
Dividends 500
Service Revenue 10,000 (d) 400 (d) Service Revenue Recognized.
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200
(e) Service Revenue Accrued.
Rent Expense 900 (f) Interest Accrued.
Totals 28,700 28,700
Supplies Expense (a) 1,500 (g) Salaries Accrued.
Insurance Expense (b) 50
Accumulated Depreciation (c) 40
Depreciation Expense (c) 40
Accounts Receivable (e) 200
(f)
Enter adjustment amounts, total
Interest Expense 50
Interest Payable (f) 50 adjustments columns,
Salaries and Wages Payable (g) 1,200 and check for equality.
Totals 3,440 3,440

Add additional accounts as needed.

4-7 LO 1
 Steps in Preparing a Worksheet Illustration 4-2

3. COMPLETE THE ADJUSTED TRIAL BALANCE COLUMNS

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital-Ordinary 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200
Rent Expense 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500
Insurance Expense (b) 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40
Accounts Receivable (e) 200 200
Interest Expense (f) 50 50
Interest Payable (f) 50 50
Salaries and Wages Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190

Total the adjusted trial balance

4-8 columns and check for equality. LO 1
 Steps in Preparing a Worksheet Illustration 4-2

4. EXTEND AMOUNTS TO FINANCIAL STATEMENT COLUMNS

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital-Ordinary 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50
Salaries and Wages Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600

Extend all revenue and expense account

balances to the income statement columns.
4-9 LO 1
 Steps in Preparing a Worksheet Illustration 4-2

5. TOTAL COLUMNS, COMPUTE NET INCOME (LOSS)

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
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 (d) 400 800 800
Share Capital-Ordinary 10,000 10,000 10,000
Dividends 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 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
Compute Net Income or Net Loss.
4-10 LO 1
 Preparing Financial Statements from a
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 can prepare financial statements before they

journalize and post adjusting entries.

4-11 LO 1
 Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-12 LO 1
 Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-13 LO 1
4-14 Illustration 4-3
Financial statements from a worksheet
LO 1
 Preparing Adjusting Entries from a
Worksheet

◆ 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.

4-15 LO 1
 Closing the Books
Learning
At the end of the accounting period, the Objective 2
Explain the process
company makes the accounts ready for the of closing the books.
next period.

Illustration 4-4
Temporary versus permanent accounts
4-16 LO 2
 Preparing Closing Entries

Closing entries formally recognize in the ledger the transfer of

◆ net income (or net loss) and
◆ Dividends
to Retained Earnings.

Companies generally journalize and post closing entries only

at the end of the annual accounting period.
Closing entries produce a zero balance in each temporary
account.

4-17 LO 2
 Illustration 4-5
Diagram of closing
• HELPFUL HINT process—corporation

The Dividends account is

closed directly to Retained
Earnings and not to Retained earnings is a
Income Summary because permanent account.
dividends are not an All other accounts are
temporary accounts.
expense.

4-18 LO 2
 Illustration 4-6
4-19
Closing entries journalized LO 2
 Posting
Closing
Entries

Illustration 4-7
Posting of closing entries

4-20 LO 2
 ACCOUNTING ACROSS THE ORGANIZATION
Performing the Virtual Close
Technology has dramatically shortened the closing process. Recent
surveys have reported that the average company now takes only six to
seven days to close, rather than 20 days. But a few companies do much
better. Some companies can perform a “virtual close”—closing within 24
hours on any day in the quarter. One company even improved its closing
time by 85%. Not very long ago, it took 14 to 16 days. Managers at these
companies emphasize that this increased speed has not reduced the
accuracy and completeness of the data. This is not just showing off.
Knowing exactly where you are financially all of the time allows the
company to respond faster than competitors. It also means that the
hundreds of people who used to spend 10 to 20 days a quarter tracking
transactions can now be more usefully employed on things such as mining
data for business intelligence to find new business opportunities.
Source: “Reporting Practices: Few Do It All,” Financial Executive (November 2003),
p. 11.

4-21 LO 2
 Preparing a Post-Closing Trial Balance
Learning
Post-closing trial balance Objective 3
Describe the content
and purpose of a
◆ Lists permanent accounts and their post-closing trial
balance.
balances after the journalizing and
posting of closing entries.
◆ Purpose is to prove the equality of the permanent account
balances carried forward into the next accounting period.
◆ Only contains balances for permanent—statement of
financial position—accounts.
◆ All temporary accounts will have zero balances.

4-22 LO 3
 Illustration 4-8

Illustration 4-8
4-23 Post-closing trial balance LO 3
 Learning Objective 4
The Accounting Cycle State the required steps in
the accounting cycle.

1. Analyze business transactions

9. Prepare a post-closing 2. Journalize the

trial balance transactions

8. Journalize and post

3. Post to ledger accounts
closing entries

7. Prepare financial
4. Prepare a trial balance
statements

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

Illustration 4-11
4-24
Steps in the accounting cycle
LO 4
 Correcting Entries—An Avoidable Step
Learning
◆ Unnecessary if accounting records are Objective 5
Explain the
free of errors. approaches to
preparing correcting
entries.
◆ 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.

4-25 LO 5
 Correcting Entries—An Avoidable Step

CASE 1: On May 10, Bai Co. journalized and posted a NT$500 cash
collection on account from a customer as a debit to Cash NT$500 and
a credit to Service Revenue NT$500. The company discovered the
error on May 20, when the customer paid the remaining balance in full.

Incorrect Cash 500

entry
Service Revenue 500
Correct Cash 500
entry
Accounts Receivable 500

Correcting Service Revenue 500

entry Accounts Receivable 500

4-26 LO 5
 Correcting Entries—An Avoidable Step

CASE 2: On May 18, Mercato purchased on account equipment

costing NT$4,500. The transaction was journalized and posted as a
debit to Equipment NT$450 and a credit to Accounts Payable NT$450.
The error was discovered on June 3.

Incorrect Equipment 450

entry
Accounts Payable 450
Correct Equipment 4,500
entry
Accounts Payable 4,500

Correcting Equipment 4,050

entry Accounts Payable 4,050

4-27 LO 5
 INVESTOR INSIGHT Why Accuracy Matters
How Can Accounting Aid African Growth?
The accuracy of a company’s financial records is very important to investors, but
other issues are also of concern. Recently, the Nigerian Stock Exchange adopted a
corporate-governance system to assess the 190 companies that are listed on the
exchange. The rating system requires the companies to answer questions about
business ethics, audit procedures, internal controls, disclosure practices, and other
matters. Africa’s economy is growing rapidly, so it offers many opportunities to
investors and companies. But the accounting practices of many African companies
lag behind those of companies in other parts of the world. In order to attract more
outside investment and therefore lower the cost of financing projects, many African
companies have adopted IFRS. One financial advisor said that while trying to help
one African company, she found accounts that were commingled and assets that
had not been recorded because they had been purchased with cash. She
emphasized, however, that “just because they don’t have the best accounting
records doesn’t mean they don’t have a good business.”
Source: Kimberly S. Johnson, “Africa Makes Strides in Corporate Accounting,
Governance,” Wall Street Journal Online (November 17, 2014).

4-28
LO 5
 Statement of Financial Position
Learning
◆ Presents a snapshot at a point in time. Objective 6
Identify the sections
of a classified
◆ To improve understanding, companies statement of financial
position.
group similar assets and similar liabilities
together.

Standard Classifications

Assets Equity and Liabilities

Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets
Illustration 4-16
Standard statement of financial position classifications
4-29 LO 6
 Illustration 4-17
Classified statement
of financial position

4-30 LO 6
 Illustration 4-17
Classified statement
of financial position

4-31 LO 6
 Intangible Assets

◆ Assets that do not have physical substance.

Illustration 4-18
Intangible assets section

4-32 LO 6
 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.

4-33 LO 6
 Property, Plant, and Equipment

Illustration 4-19
Property, plant, and equipment section

4-34 LO 6
 Long-Term Investments

◆ Investments in ordinary shares and bonds of other

companies.
◆ Investments in non-current assets such as land or buildings
that a company is not using in its operating activities.

Illustration 4-20
Long-term investments section
4-35 LO 6
 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.

4-36 LO 6
 Current Assets

Illustration 4-21
Current assets section Accounts usually listed in the reverse order they
expect to convert them into cash.

4-37 LO 6
 Equity

◆ Proprietorship - one capital account.

◆ Partnership - capital account for each partner.
◆ Corporation – Share Capital and Retained Earnings.

Illustration 4-22
4-38 Equity section LO 6
 Non-Current Liabilities

◆ Obligations a company expects to pay after one year.

Illustration 4-23
Non-current liabilities section

4-39 LO 6
 Current Liabilities

◆ Obligations company is to pay within the coming year or

its operating cycle, whichever is longer.

◆ 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.

4-40 LO 6
 Current Liabilities

Illustration 4-24
Current liabilities section

4-41 LO 6
 APPENDIX 4A Reversing Entries
Learning
◆ It is often helpful to reverse some of the Objective 7
Prepare reversing
adjusting entries before recording the regular entries.

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.

4-42 LO 7
 Reversing Entries Example

Illustration: To illustrate the optional use of reversing entries for

accrued expenses, we will use the salaries expense transactions for
Yazici Advertising A.S.

1. October 26 (initial salary entry): Pioneer pays ₺4,000 of salaries and

wages earned between October 15 and October 26.

2. October 31 (adjusting entry): Salaries and wages 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 and wages paid are

₺4,000. Of this amount, ₺1,200 applied to accrued salaries and
wages payable and ₺2,800 was earned between November 1 and
November 9.

4-43 LO 7
 Reversing Entries Example
With Reversing Entries
(per appendix)

Initial Salary Entry

Oct. 26 Same entry

Adjusting Entry
Oct. 31 Same entry

Closing Entry
Oct. 31 Same entry

Reversing Entry
Nov. 1 Salaries and Wages Payable 1,200
Salaries and Wages Expense 1,200

Subsequent Salary Entry

Nov. 9 Salaries and Wages Expense 4,000
Cash 4,000

Illustration 4A-1
Comparative entries—not reversing vs. reversing
4-44 LO 7
 Reversing Entries Example
Illustration 4A-2
Postings with
reversing
entries

4-45 LO 7