CHAPTER 4

COMPLETING THE
ACCOUNTING
CYCLE
Chapter
4-1
 Study
Study Objectives
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
Completing the
the Accounting
Accounting Cycle
Cycle

Summary of
Using a Closing the Classified
Accounting
Worksheet Books Balance Sheet
Cycle

Steps in Preparing Reversing Current assets

preparation closing entries entries—An Long-term
Preparing Posting closing optional step investments
financial entries Correcting Property, plant,
statements Preparing a entries—An and equipment
Preparing post-closing trial avoidable step
Intangible assets
adjusting entries balance
Current liabilities
Long-term
liabilities
Chapter
Owner’s equity
4-3
 Using
Using A
A Worksheet
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 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 4-2

Chapter
4-5 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Example
The trial balance for Undercover Roofing for the month ended March
31, 2008, is as follows.
T ria l Ba la n ce Other data:
Acco u n t T itle s Dr. Cr.
Ca sh $ 2,500 1. Supplies on hand total $140.
Acco un ts Re ce iva b le 1,800 2. Depreciation for March is
Ro ofin g S u pplie s 1,100
Equ ip m e nt 6,000 $200.
Accu m ula te d De pre cia tio n $ 1,200 3. Unearned revenue amounted
Acco un ts P a ya b le 1,400
Un e a rn e d Re ve n ue 300 to $130 on March 31.
I. S p y, Ca p ita l 7,000
4. Accrued salaries are $350.
I. S p y, Dra w ing 600
S e rvice Re ve n ue 3,000
S a la rie s Ex p e n se 700 Instructions
M isce lla ne o us Ex p e nse
T o ta ls
200
$ 12,900 $ 12,900
a. Prepare and complete the
worksheet.

Chapter
4-6 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
1. Prepare a Trial Balance on the Worksheet
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 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
I. Spy, Capital 7,000
I. Spy, Drawing 600
Service Revenue 3,000
Salaries Expense 700
Miscellaneous Expense 200

Trial balance amounts

Totals 12,900 12,900

come directly from

Include all ledger accounts.
accounts with
balances.
Chapter
4-7 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
2. Enter the Adjustments in the Adjustments Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500
Accounts Receivable 1,800
Roofing Supplies 1,100 (a) 960
Equipment 6,000 Adjustments Key:
Accumulated Depreciation 1,200 (b) 200
Accounts Payable 1,400 (a) Supplies used.
300 (c) 170
Unearned Revenue
I. Spy, Capital 7,000
(b) Depreciation expense.
I. Spy, Drawing 600 (c) Service revenue earned.
Service Revenue 3,000 (c) 170
Salaries Expense 700 (d) 350 (d) Salaries accrued.
Miscellaneous Expense 200
Totals 12,900 12,900
Supplies Expense (a) 960
Depreciation Expense (b) 200
(d) 350
Enter adjustment
Salaries Payable
Totals 1,680 1,680

amounts, total
Add additional adjustments columns,
accounts as and check for equality.
Chapter needed.
4-8 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
3. Complete the Adjusted Trial Balance Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500
Accounts Receivable 1,800 1,800
Roofing Supplies 1,100 (a) 960 140
Equipment 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400
Accounts Payable 1,400 1,400
Unearned Revenue 300 (c) 170 130
I. Spy, Capital 7,000 7,000
I. Spy, Drawing 600 600
Service Revenue 3,000 (c) 170 3,170
Salaries Expense 700 (d) 350 1,050
Miscellaneous Expense 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960
Depreciation Expense (b) 200 200
Salaries Payable (d) 350 350
Totals 1,680 1,680 13,450 13,450

Total the adjusted

trial balance columns
Chapter and check for equality.
4-9 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500
Accounts Receivable 1,800 1,800
Roofing Supplies 1,100 (a) 960 140
Equipment 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400
Accounts Payable 1,400 1,400
Unearned Revenue 300 (c) 170 130
I. Spy, Capital 7,000 7,000
I. Spy, Drawing 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d) 350 1,050 1,050
Miscellaneous Expense 200 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960 960
Depreciation Expense (b) 200 200 200
Salaries Payable (d) 350 350
Totals 1,680 1,680 13,450 13,450 2,410 3,170

Extend all revenue and expense

account balances to the income
Chapter statement columns.
4-10 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500 2,500
Accounts Receivable 1,800 1,800 1,800
Roofing Supplies 1,100 (a) 960 140 140
Equipment 6,000 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400 1,400
Accounts Payable 1,400 1,400 1,400
Unearned Revenue 300 (c) 170 130 130
I. Spy, Capital 7,000 7,000 7,000
I. Spy, Drawing 600 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d) 350 1,050 1,050
Miscellaneous Expense 200 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960 960
Depreciation Expense (b) 200 200 200
Salaries Payable (d) 350 350 350
Totals 1,680 1,680 13,450 13,450 2,410 3,170 11,040 10,280

Extend all asset, liability, and

equity account balances to the
Chapter balance sheet columns.
4-11 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
5. Total Columns, Compute Net Income (Loss)
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500 2,500 2,500
Accounts Receivable 1,800 1,800 1,800
Roofing Supplies 1,100 (a) 960 140 140
Equipment 6,000 6,000 6,000
Accumulated Depreciation 1,200 (b) 200 1,400 1,400
Accounts Payable 1,400 1,400 1,400
Unearned Revenue 300 (c) 170 130 130
I. Spy, Capital 7,000 7,000 7,000
I. Spy, Drawing 600 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d) 350 1,050 1,050
Miscellaneous Expense 200 200 200
Totals 12,900 12,900
Supplies Expense (a) 960 960 960
Depreciation Expense (b) 200 200 200
Salaries Payable (d) 350 350 350
Totals 1,680 1,680 13,450 13,450 2,410 3,170 11,040 10,280
Net Income 760 760
Totals 3,170 3,170 11,040 11,040

Compute Net Income or Net Loss.

Chapter
4-12 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
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 LO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet

Worksheet
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.

Chapter
4-14 LO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
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 $ 3,170
Service revenues
Expenses
Salaries expense $ 1,050
Supplies expense 960
Depreciation expense 200
Miscellaneous expense 200
Total expenses 2,410
Net income $ 760
Chapter
4-15 LO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
b. Prepare an owner’s equity statement for the month
ended March 31, 2008.

Undercover Roofing
Statement of Owner's Equity
For the Month Ended March 31, 2008
I. Spy, Capital, March 1 $ 7,000
Add: Net income 760
Less: Drawings (600)
I. Spy, Capital, March 31 $ 7,160

Chapter
4-16 LO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
b. Prepare a balance sheet as of March 31, 2008.
Undercover Assets
Current assets
Roofing Cash $ 2,500
Accounts receivable 1,800
Balance Sheet Roofing supplies 140
Total current assets 4,440
March 31, 2008 Property, plant, and equipment
Equipment 6,000
Less: Accumulated depreciation 1,400 4,600
Total assets $ 9,040

Liabilities and Owner's Equity

Current liabilities
Accounts payable $ 1,400
Salaries payable 350
Unearned revenue 130
Total current liabilities 1,880
Owner's equity
I. Spy, Capital 7,160
Total liabilities and owner's equity $ 9,040
Chapter
4-17 LO 1 Prepare a worksheet.
Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
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 LO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
c. Journalize the adjusting entries from the
adjustments columns of the worksheet.

Date Account Title Ref. Debit Credit

Mar. 31 Supplies expense 960
Roofing supplies 960

Depreciation expense 200

Accumulated depreciation 200

Unearned revenue 170

Service revenue 170

Salaries expense 350

Salaries payable 350

Chapter
4-19 LO 1 Prepare a worksheet.
 Closing
Closing the
the Books
Books
At the end of the accounting period, the company
makes the accounts ready for the next period.
Illustration 4-5

Chapter
4-20 LO 2 Explain the process of closing the books.
 Closing the Books

Preparing Closing Entries

Closing entries formally recognize, in the general
ledger, the transfer of
 net income (or net loss) and
 owner’s drawing

to owner’s capital.
 Closing entries are done only at the end of the annual
accounting period.
 Closing entries produce zero balance in temporary accounts
and the balance of the permanent accounts are carried
Chapter forward.
4-21
 Closing the Books

Preparing Closing Entries

 Owner’s Drawing is closed directly to

Owner’s Capital
 A new account “Income Summary” is
created and all the expense and revenue
accounts are closed to it.
 Eventually Income Summary is closed to
the Owner’s Capital.

Chapter
4-22
 Example-Worksheet

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
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 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawing 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 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 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

Chapter
4-23
 Closing the Books

Closing
Entries
Examples

Chapter
4-24
 Closing the Books (Posting of closing entries)

Note:
Owner’s Drawing is closed
directly to Capital and not
to Income Summary
because Owner’s Drawing is
not an expense.

Owner’s Capital is a
permanent account; all
other accounts are
temporary accounts.

Chapter
4-25
 Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account

balances after journalizing and posting of closing entries.
Contains only permanent B/S accounts. Illustration 4-9

Chapter
4-26
 Summary
Summary of
of the
the Accounting
Accounting Cycle
Cycle
Illustration 4-12
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

Chapter
4-27 LO 4 State the required steps in the accounting cycle.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Presents a snapshot at a point in time.

To improve understanding, companies group

similar assets and similar liabilities together.

Standard Classifications Illustration 4-17

Assets Liabilities and Owner’s Equity

Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Owner’s equity
Intangible assets

Chapter
4-28 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
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
4-29 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Assets
Illustration 4-19

Companies usually list current asset accounts in the order

they expect to convert them into cash.
Chapter
4-30 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
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
4-31 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
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
4-32 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
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
4-33 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet
Property, Plant, and Equipment
Illustration 4-21

Chapter
4-34 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet
Intangible Assets
Assets that do not have physical substance.
Illustration 4-22

Chapter
4-35 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Review Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

Chapter
4-36 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
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
4-37 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet
Current Liabilities
Illustration 4-23

Chapter
4-38 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet
Long-Term Liabilities
Obligations a company expects to pay after one year.
Illustration 4-24

Chapter
4-39 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
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
4-40 LO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet
Owner’s Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.
Illustration 4-25

Chapter
4-41 LO 6 Identify the sections of a classified balance sheet.