Completing the Accounting Cycle

Chapter 4

Wild and Shaw

Fundamental Accounting Principles
25th Edition

Copyright ©2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter 4 Learning Objectives
CONCEPTUAL
C1 Explain and prepare a classified balance sheet.

ANALYTICAL
A1 Compute and analyze the current ratio.

PROCEDURAL
P1 Prepare a work sheet and explain its usefulness.
P2 Prepare closing entries and a post-closing trial balance.
P3 Appendix 4A – Prepare reversing entries and explain their purpose.

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 Learning Objective P1

Prepare a work sheet and

explain its usefulness.

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 Benefits of a Work Sheet
Helps in
Reduces risk of preparing
errors. financial
statements.
Not a
required
report. Shows the
Links accounts
and adjustments effects of
to financial proposed
statements. transactions.

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Learning Objective P1: Prepare a work sheet and explain its usefulness.
 Use of a Work Sheet
Five steps:
Step 1: Enter Unadjusted Trial Balance
Step 2: Enter Adjustments
Step 3: Prepare Adjusted Trial Balance
Step 4: Sort Adjusted Trial Balance Amounts
to Financial Statements
Step 5: Total Statement Columns, Compute
Income or Loss, and Balance Columns

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Learning Objective P1: Prepare a work sheet and explain its usefulness.
 Work Sheet Example
Exhibit
4.1

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Learning Objective P1: Prepare a work sheet and explain its usefulness.
 Learning Objective P2

Prepare closing entries and a

post-closing trial balance.

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 4-8

Closing Process
1. Resets revenue,
expense, and
Identify accounts
withdrawal account
for closing.
balances to zero at the
end of the period.
Record and post
2. Updates the balance in
closing entries.
the owner’s capital
account to match the
amount reported on
the statement of Prepare post-closing
owner’s equity and the trial balance.
balance sheet.
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
 4-9

Temporary and
Permanent Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The closing process
applies only to
temporary accounts.
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
 4 - 10

Recording Closing Entries

1. Close Credit Balances in Revenue Accounts to
Income Summary.
2. Close Debit Balances in Expense accounts to
Income Summary.
3. Close Income Summary account to Owner’s
Capital.
4. Close Withdrawals to Owner’s Capital.

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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
 4 - 11

Recording Closing Entries Example

Exhibit
4.3

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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
 Post-Closing Trial Balance
 List of permanent accounts and their
balances after posting closing entries.
 Total debits and credits must be equal.
 All temporary accounts have a zero
balance.

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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
 Post-Closing Trial Balance Example
Exhibit
4.6

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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
 4 - 14

Accounting Cycle
Exhibit
4.7

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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
 Learning Objective C1

Explain and prepare a

classified balance sheet.

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 4 - 16

Classified Balance Sheet

Exhibit
4.8

Current items are expected to come due (collected and

owed) within the longer of one year or the company’s
normal operating cycle.
Most operating cycles are less than one year, so most
companies use a one year period in deciding what assets
and liabilities are current.
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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 17

Classified Balance Sheet Example

Exhibit
4.9

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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 18

Current Assets
Current assets are expected to be sold,
collected, or used within one year or the
company’s operating cycle, whichever is
longer.
Examples: cash, short-term investments,
accounts receivable, short-term notes
receivable, merchandise inventory, and
prepaid expenses.
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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 19

Long-Term Investments

Long-term investments are expected to be held for

more than one year or the operating cycle.
Examples: notes receivable and investments in stocks
and bonds expected to be held for more than the
longer of one year or the operating cycle.

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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 20

Plant Assets

Plant assets are tangible long-lived assets used to

produce or sell products and services.
Examples: equipment, machinery, buildings, and
land that are used to sell products and services.
Also called property, plant, and equipment (PP&E)
or fixed assets.

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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 21

Intangible Assets

Intangible assets are long-term assets that benefit

business operations but lack physical form.
Examples: patents, trademarks, copyrights,
franchises, and goodwill.

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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 22

Current Liabilities

Current liabilities are liabilities due within the longer of

one year or the company’s operating cycle.
Examples: accounts payable, wages payable, taxes
payable, interest payable, and unearned revenues.

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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 23

Long-Term Liabilities

Long-term liabilities are liabilities not due within the

longer of one year or the company’s operating cycle.
Examples: notes payable, mortgages payable, bonds
payable, and lease obligations.

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Learning Objective C1: Explain and prepare a classified balance sheet.
 4 - 24

Equity

Equity is the owner’s claim on the assets.

For a proprietorship, reported in owner’s capital
account.
Equity is not separated into current and noncurrent
categories.

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Learning Objective C1: Explain and prepare a classified balance sheet.
 Learning Objective A1

Compute and analyze the

current ratio.

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 4 - 26

Current Ratio
Helps assess the company’s ability to pay its
debts in the near future

Exhibit
Current assets
Current ratio = Current liabilities 4.10

Exhibit
4.11

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Learning Objective A1: Compute and analyze the current ratio.
 4 - 27

Exercises

4-27
 4 - 28

Exercise

4-28
 4 - 29

4-29
 4 - 30

4-30