CHAPTER 2 (PART 3)

4-1
 PREVIEW OF THE CHAPTER

4-2
 Completing the
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.

4-3
 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.

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

4-5
 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.

4-6 LO 1
 Steps in Preparing a Worksheet
Illustration 3-23
General journal showing
adjusting entries

Adjusting
Journal
Entries
(Chapter 3)

4-7
 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
Accounts Payable 2,500
(a) Supplies Used.
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Share Capital-Ordinary 10,000
Dividends 500
(c) Depreciation Expensed.
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
Interest Expense (f) 50
Enter adjustment amounts, total
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.

4-8 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

4-9 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.
4-10 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.
4-11 LO 1
 Steps in Preparing a Worksheet

Question
Which of the following statements is incorrect concerning the
worksheet?
a. The worksheet is essentially a working tool of the
accountant.
b. The worksheet is distributed to management and other
interested parties.
c. The worksheet cannot be used as a basis for posting to
ledger accounts.
d. Financial statements can be prepared directly from the
worksheet before journalizing and posting the adjusting
entries.
4-12 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.

4-13 LO 1
 Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-14 LO 1
 Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-15 LO 1
4-16 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.

4-17 LO 1
 > DO IT!

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 Statement of financial position

(debit column)
Accumulated
Depreciation
Statement of financial position
Accounts Payable (credit column)

Dividends Income statement

Service Revenue (debit column)

Salaries and Income statement

Wages Expense (credit column)

4-18 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
4-19 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.

4-20 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. All
dividends are not an other accounts are
temporary accounts.
expense.

4-21 LO 2
 Illustration 4-6
4-22
Closing entries journalized LO 2
 Posting
Closing
Entries

Illustration 4-7
Posting of closing entries

4-23 LO 2
 > DO IT!

The worksheet for Hancock Company shows the following in

the financial statement columns:
Dividends €15,000
Common stock €42,000
Net income €18,000
Prepare the closing entries at December 31 that affect equity.

Income Summary 18,000

Retained Earnings 18,000
Retained Earnings 15,000
Dividends 15,000

4-24 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.

4-25 LO 3
 Illustration 4-8

Illustration 4-8
4-26 Post-closing trial balance LO 3
 Learning Objective 4
The Accounting Cycle State the required steps in
the accounting cycle.

1.
1. Analyze
Analyze business
business transactions
transactions

9.
9. Prepare
Prepare aa post-closing
post-closing 2.
2. Journalize
Journalize the
the
trial
trial balance
balance transactions
transactions

8.
8. Journalize
Journalize and
and post
post 3.
3. Post
Post to
to ledger
ledger accounts
accounts
closing
closing entries
entries

7.
7. Prepare
Prepare financial
financial 4.
4. Prepare
Prepare aa trial
trial balance
balance
statements
statements

6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial 5.
5. Journalize
Journalize and
and post
post
balance
balance adjusting
adjusting entries
entries

Illustration 4-11
4-27
Steps in the accounting cycle
LO 4
 Correcting Entries—An Avoidable Step
Learning
Objective 5
 Unnecessary if accounting records are Explain the
approaches to
free of errors. 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.

4-28 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
4-29 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
4-30 LO 5
 > DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

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.

4-31 LO 5
 > DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

1. A payment of Salaries and Wages Expense of $600 was

debited to Supplies and credited to Cash, both for $600.

Correct the error without reversing the incorrect entry.

Salaries and Wages Expense 600

Supplies 600

4-32 LO 5
 > DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

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

to Cash $200 and credited to Service Revenue $200.

Correct the error without reversing the incorrect entry.

Service Revenue 200

Cash 2,800
Accounts Receivable 3,000

4-33 LO 5
 > DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

3. The purchase of supplies on account for $860 was debited

to Supplies $680 and credited to Accounts Payable $680.

Correct the error without reversing the incorrect entry.

Supplies ($860 - $680) 180

Accounts Payable 180

4-34 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
4-35 LO 6
 Illustration 4-17
Classified statement
of financial position

4-36 LO 6
 Illustration 4-17
Classified statement
of financial position

4-37 LO 6
 Intangible Assets

 Assets that do not have physical substance.

Illustration 4-18
Intangible assets section

4-38 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.

4-39 LO 6
 Property, Plant, and Equipment

Illustration 4-19
Property, plant, and equipment section

4-40 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
4-41 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.

4-42 LO 6
 Current Assets

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

4-43 LO 6
 Equity

 Proprietorship - one capital account.

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

Illustration 4-22
4-44 Equity section LO 6
 Non-Current Liabilities

 Obligations a company expects to pay after one year.

Illustration 4-23
Non-current liabilities section

4-45 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.

4-46 LO 6
 Current Liabilities

Illustration 4-24
Current liabilities section

4-47 LO 6
 Statement of Financial Position

Question
The correct order of presentation in a classified statement of
financial position for the following current assets is:

a. accounts receivable, cash, prepaid insurance, inventories.

b. cash, inventories, accounts receivable, prepaid insurance.

c. prepaid insurance, inventories, accounts receivable, cash.

d. inventories, cash, accounts receivable, prepaid insurance.

4-48 LO 6
 Statement of Financial Position

Question
In a classified statement of financial position, assets are usually
classified using the following sequence of categories:
a. current assets; non-current assets; property, plant, and
equipment; intangible assets.
b. tangible assets; property, plant, and equipment; long-term
investments; current assets.
c. current assets; long-term investments; tangible assets;
intangible assets.
d. intangible assets; property, plant, and equipment; long-
term investments; current assets.
4-49 LO 6
 APPENDIX 4A Reversing Entries
Learning
Objective 7
 It is often helpful to reverse some of the Prepare reversing
entries.
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.

4-50 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.

4-51 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
4-52 LO 7
 Reversing Entries Example
Illustration 4A-2
Postings with
reversing
entries

4-53 LO 7
 A Look at U.S. GAAP Learning
Objective 8
Compare the
procedures for the
Key Points closing process under
IFRS and U.S. GAAP.
Similarities
 Both IFRS and GAAP require disclosures about
(1) accounting policies followed, (2) judgments that management has made
in the process of applying the entity’s accounting policies, and (3) the key
assumptions and estimation uncertainty that could result in a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year.
 Comparative prior-period information must be presented and financial
statements must be prepared annually.

4-54 LO 8
 A Look at U.S. GAAP
Key Points
Differences
 IFRS officially uses the term statement of financial position in its literature,
while in the United States it is often referred to as the balance sheet.
 IFRS requires that specific items be reported on the statement of financial
position, whereas no such general standard exists in GAAP. However, under
GAAP, public companies must follow U.S. Securities and Exchange
Commission (SEC) regulations, which require specific line items as well. In
addition, specific GAAP standards mandate certain forms of reporting
statement of financial position information. The SEC guidelines are more
detailed than IFRS.
 While IFRS companies often report non-current assets before current assets
in their statements of financial position, this is never seen under GAAP. Also,
some IFRS companies report the subtotal “net assets,” which equals total
assets minus total liabilities. This practice is also not seen under GAAP.
4-55 LO 8
 A Look at U.S. GAAP
Key Points
Differences
 A key difference in valuation is that under IFRS, companies, under certain
conditions, can report property, plant, and equipment at cost or at fair value,
whereas under GAAP this practice is not allowed.
 GAAP has many differences in terminology from what are shown in your
textbook. For example, in the investment category shares are called stock.
Also note that Share Capital—Ordinary is referred to as Common Stock. In
addition, the format used for statement of financial position presentation is
often different between GAAP and IFRS.

4-56 LO 8
 A Look at U.S. GAAP
Looking to the Future
The IASB and the FASB are working on a project to converge their standards
related to financial statement presentation. A key feature of the proposed
framework is that each of the statements will be organized in the same format,
to separate an entity’s financing activities from its operating and investing
activities and, further, to separate financing activities into transactions with
owners and creditors. Thus, the same classifications used in the statement of
financial position would also be used in the income statement and the
statement of cash flows.

4-57 LO 8
 A Look at U.S. GAAP
A Look at IFRS
IFRS Self-Test Questions
Which of the following statements is false?

a) Assets equals liabilities plus stockholders’ equity.

b) Under IFRS, companies sometimes net liabilities against

assets to report “net assets.”

c) The FASB and IASB are working on a joint conceptual

framework project.

d) Under GAAP, the statement of financial position is usually

referred to as the statement of assets and equity.

4-58 LO 8
 A Look at U.S. GAAP
A Look at IFRS
IFRS Self-Test Questions
Current assets under GAAP are listed generally:

a) by importance.

b) in the reverse order of their expected conversion to cash.

c) by order of liquidity.

d) alphabetically.

4-59 LO 8
 A Look at U.S. GAAP
A Look at IFRS
IFRS Self-Test Questions
Companies that use GAAP:
a) may report all their assets on their balance sheets at fair
value.
b) often offset assets against liabilities and show net assets
and net liabilities on their balance sheets, rather than the
underlying detailed line items.
c) generally report current assets before non-current assets
on their balance sheets.
d) do not have any guidelines as to what should be reported
on their balance sheets.
4-60 LO 8