Accounting Principles

Fourteenth Edition
Weygandt Kimmel Mitchell

Chapter 4
Completing the Accounting Cycle

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Copyright ©2021 John Wiley & Sons, Inc.

Chapter Outline
Learning Objectives
LO 1 Prepare a worksheet.
LO 2 Prepare closing entries and a post-closing trial
balance.
LO 3 Explain the steps in the accounting cycle and how
to prepare correcting entries.
LO 4 Identify the sections of a classified balance sheet.

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The Worksheet
LEARNING OBJECTIVE 1
Prepare a Worksheet

• Multiple-column form used in preparing financial

statements
• Not a permanent accounting record
• May be a computerized worksheet
• Prepared using a five step process
• Use of worksheet is optional

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Form and Procedure for a Worksheet

ILLUSTRATION 4.1
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Step 1—Trial Balance

ILLUSTRATION 4.2
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Step 2—Adjustments
The adjustments are the same as in Illustration 3.27.
a. Pioneer debits an additional account, Supplies Expense, $1,500 for the cost of
supplies used, and credits Supplies $1,500.
b. Pioneer debits an additional account, Insurance Expense, $50 for the insurance that
has expired, and credits Prepaid Insurance $50.
c. The company needs two additional depreciation accounts. It debits Depreciation
Expense $40 for the month’s depreciation, and credits Accumulated Depreciation—
Equipment $40.
d. Pioneer debits Unearned Service Revenue $400 for services performed, and credits
Service Revenue $400.
e. Pioneer debits an additional account, Accounts Receivable, $200 for services
performed but not billed, and credits Service Revenue $200.
f. The company needs two additional accounts relating to interest. It debits Interest
Expense $50 for accrued interest, and credits Interest Payable $50.
g. Pioneer debits Salaries and Wages Expense $1,200 for accrued salaries, and credits
an additional account, Salaries and Wages Payable, $1,200.
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Step 2—Enter the Adjustments

ILLUSTRATION 4.2

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Step 3—Enter Adjusted Balances in the
Adjusted Trial Balance Columns

ILLUSTRATION 4.2

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Step 4—Extend Adj. Trial Bal. Amounts
to Appropriate Financial Statement
Columns

ILLUSTRATION 4.2

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Step 5—Total the Statement Columns,
Compute the Net Income (or Net Loss),
and Complete the Worksheet

ILLUSTRATION 4.2

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Steps in Preparing a Worksheet
Review Question
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.

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Steps in Preparing a Worksheet
Review Answer
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. Answer: income statement debit column and
balance sheet credit column.

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Preparing Financial Statements from a
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 can prepare financial statements before
they journalize and post adjusting entries by using a
worksheet

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Income Statement

ILLUSTRATION 4.3
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Owner’s Equity Statement

ILLUSTRATION 4.3

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Balance Sheet

ILLUSTRATION 4.3

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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

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DO IT! 1: Worksheet
Susan Elbe is preparing a worksheet. Explain to Susan how
she should extend the following adjusted trial balance
accounts to the financial statement columns of the
worksheet.
Cash Balance sheet (debit)
Accum. Dep.—Equipment Balance sheet (credit)
Accounts Payable Balance sheet (credit)
Owner’s Drawings Balance sheet (debit)
Service Revenue Income statement (credit)
Salaries and Wages Expense Income statement (debit)

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Closing the Books

LEARNING OBJECTIVE 2
Prepare Closing Entries and a Post-Closing Trial Balance

At the end of the accounting period, the company makes

the accounts ready for the next period.

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Temporary Versus Permanent Accounts

ILLUSTRATION 4.4

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Preparing Closing Entries

Closing entries formally recognize in the ledger the

transfer of:
• Net income (or net loss) to owner’s capital
• Owner’s drawings to owner’s capital
Produce a zero balance in each temporary account.
Companies generally journalize and post closing entries
only at end of the annual accounting period.
Permanent accounts are not closed.

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Diagram of Closing Process—
Proprietorship

ILLUSTRATION 4.5

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Closing Entries Journalized

ILLUSTRATION 4.6
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Posting Closing Entries

ILLUSTRATION 4.7
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Post-Closing Trial Balance

ILLUSTRATION 4.8
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General Ledger Permanent Accounts

ILLUSTRATION 4.9

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General Ledger Temporary Accounts

ILLUSTRATION 4.10

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DO IT! 2: Closing Entries
Entry to Close Revenue to Income Summary
Hancock Company has the following balances in selected accounts
of its adjusted trial balance.
Accounts Payable $27,000 Owner’s Drawings $15,000
Service Revenue 98,000 Owner’s Capital 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages 51,000 Supplies Expense 7,000
Expense

Prepare the closing entries at December 31.

Service Revenue 98,000
Income Summary 98,000

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DO IT! 2: Closing Entries
Entry to Close Expenses to Income Summary
Accounts Payable $27,000 Owner’s Drawings $15,000
Service Revenue 98,000 Owner’s Capital 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages 51,000 Supplies Expense 7,000
Expense

Prepare the closing entries at December 31.

Income Summary 80,000
Salaries and Wages Expense 51,000
Rent Expense 22,000
Supplies Expense 7,000

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DO IT! 2: Closing Entries
Entries to Close Net Income and Owner’s Drawing
to Owner’s Capital
Accounts Payable $27,000 Owner’s Drawings $15,000
Service Revenue 98,000 Owner’s Capital 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages 51,000 Supplies Expense 7,000
Expense

Prepare the closing entries at December 31.

Income Summary 18,000
Owner’s Capital 18,000
Owner’s Capital 15,000
Owner’s Drawings 15,000

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The Accounting Cycle and Correcting Entries
LEARNING OBJECTIVE 3
Explain the steps in the accounting cycle and how to prepare
correcting entries.

ILLUSTRATION 4.11

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1. Analyze Business Transactions

ILLUSTRATION 4.11

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2. Journalize the Transactions

ILLUSTRATION 4.11

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3. Post to the Ledger Accounts

ILLUSTRATION 4.11

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4. Prepare a Trial Balance

ILLUSTRATION 4.11

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5. Journalize and Post Adjusting Entries:
Deferrals/Accruals

ILLUSTRATION 4.11

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6. Prepare an Adjusted Trial Balance

ILLUSTRATION 4.11

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7. Prepare Financial Statements

ILLUSTRATION 4.11

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8. Journalize and Post Closing Entries

ILLUSTRATION 4.11

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9. Prepare a Post-Closing Trial Balance

ILLUSTRATION 4.11

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Correcting Entries—An Avoidable Step

• Unnecessary if accounting records are free of errors

• 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.

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Correcting Entries—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 Cash 50
entry Service Revenue 50

Correct Cash 50
entry Accounts Receivable 50

Correcting Service Revenue 50

entry Accounts Receivable 50

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Correcting Entries—Case 2
On May 18, Mercato purchased on account equipment costing $450.
The transaction was journalized and posted as a debit to Equipment
$45 and a credit to Accounts Payable $45. The error was discovered
on June 3, when Mercato received the monthly statement for May
from the creditor.
Incorrect Equipment 45
entry Accounts Payable 45

Correct Equipment 450

entry Accounts Payable 450

Correcting Equipment 405

entry Accounts Payable 405

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DO IT! 3: Correcting Entries
Sanchez Company discovered the following errors made in January
2022.
1. A payment of Salaries and Wages Expense of $600 was debited
to Supplies and credited to Cash, both for $600.
2. A collection of $3,000 from a client on account was debited to
Cash $200 and credited to Service Revenue $200.
3. The purchase of supplies on account for $860 was debited to
Supplies $680 and credited to Accounts Payable $680.
Correct the errors without reversing the incorrect entry.

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DO IT! 3: Correcting Entries Solution
1. A payment of Salaries and Wages Expense of $600 was debited to Supplies
and credited to Cash, both for $600.
Salaries and Wages Expense 600
Supplies 600

2. A collection of $3,000 from a client on account was debited to Cash $200

and credited to Service Revenue $200.
Service Revenue 200
Cash 2,800
Accounts Receivable 3,000
3. The purchase of supplies on account for $860 was debited to Supplies $680
and credited to Accounts Payable $680.
Supplies ($860 - $680) 180
Accounts Payable 180

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Classified Balance Sheet

LEARNING OBJECTIVE 4
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 Owners Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Owner’s equity
Intangible assets

ILLUSTRATION 4.16

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Classified Balance Sheet
Assets

ILLUSTRATION 4.17
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Classified Balance Sheet
Liabilities and Owner’s Equity

ILLUSTRATION 4.17
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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 that it takes to
o purchase inventory,
o sell it on account, and
o collect cash from customers

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Current Assets Section

ILLUSTRATION 4.18

Accounts are usually listed in order of liquidity.

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Current Assets
Review Question
The correct order of presentation in a classified balance
sheet for the following current assets is:
a. accounts receivable, cash, prepaid insurance,
inventory.
b. cash, inventory, accounts receivable, prepaid
insurance.
c. cash, accounts receivable, inventory, prepaid
insurance.
d. inventory, cash, accounts receivable, prepaid
insurance.
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Current Assets
Review Answer
The correct order of presentation in a classified balance
sheet for the following current assets is:
a. accounts receivable, cash, prepaid insurance,
inventory.
b. cash, inventory, accounts receivable, prepaid
insurance.
c. Answer: cash, accounts receivable, inventory,
prepaid insurance.
d. inventory, cash, accounts receivable, prepaid
insurance.
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Long-Term Investments Section
• Investments in stocks and bonds of other companies
• Investments in long-term assets such as land or
buildings that are not currently being used in
operating activities
• Long-term notes receivable

ILLUSTRATION 4.19

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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
• Sometimes called fixed assets or plant assets

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Property, Plant, and Equipment Section

ILLUSTRATION 4.20

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Intangible Assets Section
• Long-lived assets that do not have physical substance

ILLUSTRATION 4.21

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

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Classified Balance Sheet
Review Answer
Patents and copyrights are
a. Current assets
b. Answer: Intangible assets
c. Long-term investments
d. Property, plant, and equipment

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Current Liabilities
• Obligations company is to pay within 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
• Common examples are accounts payable, salaries and
wages payable, notes payable, interest payable,
income taxes payable current maturities of long-term
obligations
• Liquidity - ability to pay obligations expected to be
due within the next year
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Current Liabilities Section

ILLUSTRATION 4.22

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Long-Term Liabilities Section
• Obligations a company expects to pay after one year.

ILLUSTRATION 4.23

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Long-Term Liabilities
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

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Long-Term Liabilities
Review Answer
Which of the following is not a long-term liability?
a. Bonds payable
b. Answer: Current maturities of long-term
obligations
c. Long-term notes payable
d. Mortgages payable

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Owner’s Equity Section
• Proprietorship - one capital account
• Partnership - capital account for each partner
• Corporation - Common Stock and Retained Earnings

ILLUSTRATION 4.24

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DO IT! 4: Balance Sheet Classifications
Match each of the following to its proper balance sheet classification, shown
below. If the item would not appear on a balance sheet, use “NA.”
CL Salaries and wages payable
___ LTI Stock investments (long-term)
___
NA Service revenue
___ P___
PE Equipment
CL Interest payable
___ P___
PE Accumulated depreciation
IA Goodwill
___ NA Depreciation expense
___
CA Debt investments (short-term)
___ OE Owner’s capital
___
LTL Mortgage payable (due in 3 years)
___ CL Unearned service revenue
___

Current assets (CA) Current liabilities (CL)

Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Owner’s equity (OE)
Intangible assets (IA)

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