Chapter

4-1
 CHAPTER 4

COMPLETING THE
ACCOUNTING
CYCLE
Accounting Principles, Eighth Edition
Chapter
4-2
 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
4-3 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 4-2

Chapter
4-4 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
P4-1A The trial balance for Undercover Roofing for the month
ended March 31, 2008, is as follows.

Trial Balance Other data:

Account Titles Dr. Cr.
Cash $ 2,500 1. Supplies on hand total
Accounts Receivable 1,800 $140.
Roofing Supplies 1,100
Equipment 6,000 2. Depreciation for March is
Accumulated Depreciation $ 1,200 $200.
Accounts Payable 1,400
Unearned Revenue 300 3. Unearned revenue
I. Spy, Capital 7,000 amounted to $130 on
I. Spy, Drawing 600
Service Revenue 3,000
March 31.
Salaries Expense 700 4. Accrued salaries are $350.
Miscellaneous Expense 200
Totals $ 12,900 $ 12,900
Instructions
a. Prepare and complete the
Chapter
4-5
worksheet.
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
Totals 12,900 12,900
Trial balance
amounts come
Include all directly from ledger
accounts with accounts.
balances.
Chapter
4-6 LO 1 Prepare a
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
2. Enter the Adjustments in the Adjustments
Columns Trial Balance Adjustments
Adjusted
Trial Balance
Income
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.
Unearned Revenue 300 (c) 170
I. Spy, Capital 7,000
(b) Depreciation expense.
I. Spy, Drawing 600 (c) Service revenue
Service Revenue 3,000 (c) 170
Salaries Expense 700 (d 350 earned.
Miscellaneous Expense 200
Totals 12,900 12,900
) (d) Salaries accrued.
Supplies Expense (a) 960
Depreciation Expense (b 200
Salaries Payable ) (d 350
Totals 1,680 ) 1,680 Enter adjustment
amounts, total
Add additional adjustments
accounts as columns,
Chapter needed. and check for
4-7 LO 1 Prepare a
equality.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
3. Complete the Adjusted Trial Balance
Columns Trial Balance Adjustments
Adjusted
Trial Balance
Income
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
4-8 equality. LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement
Columns Trial Balance Adjustments
Adjusted
Trial Balance
Income
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
Chapter the income statement
4-9 LO 1 Prepare a worksheet.
columns.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement
Columns Trial Balance Adjustments
Adjusted
Trial Balance
Income
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
Chapter the balance sheet columns.
4-10 LO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
5. Total Columns, Compute Net Income
(Loss) Trial Balance Adjustments
Adjusted
Trial Balance
Income
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
4-11 LO 1 Prepare a
 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
4-12 LO 1 Prepare a
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
4-13 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
4-14 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
4-15 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
4-16 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
4-17 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
4-18 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
4-19 LO 2 Explain the process of closing the books.
 Closing
Closing the
the Books
Books

Closing entries formally recognize, in the

general ledger, the transfer of

net income (or net loss) and

owner’s drawing

to owner’s capital.

Only at the end of the annual accounting

period.

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

Note:
Owner’s Drawing is Illustration 4-6

closed directly to Capital

and not to Income
Owner’s Capital is a
Summary because permanent account;
all other accounts are
Owner’s Drawing is not temporary accounts.

an expense.

Chapter
4-21 LO 2 Explain the process of closing the books.
 Closing
Closing the
the Books
Books
d. Journalize the closing entries from the financial
statement columns of the worksheet.
Service revenue 3,170
Income summary 3,170
Income summary 2,410
Closing
Salary expense 1,050
Entries
Supplies expense 960
need
Depreciation expense 200
to be
Miscellaneous expense 200
Posted
Income summary 760
I. Spy, Capital 760

I. Spy, Capital 600

I. Spy, Drawing 600
Chapter
4-22 LO 2 Explain the process of closing the books.
 Preparing
Preparing aa Post-Closing
Post-Closing Trial
Trial
Balance
Balance
Purpose is to prove the equality of the
permanent account balances after journalizing
and posting of closing entries.
Post-Closing
All temporary Account Titles
Trial Balance
Dr. Cr.
accounts will have Cash $ 2,500
Accounts Receivable 1,800
zero balances. Roofing Supplies 140
Equipment 6,000
Accumulated Depreciation $ 1,400
Accounts Payable 1,400
Salaries payable 350
Unearned Revenue 130
I. Spy, Capital 7,160
Totals $ 10,440 $ 10,440

Chapter
4-23 LO 3 Describe the content and purpose of a post-closing trial
 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

closing entries accounts

7. Prepare financial 4. Prepare a trial

statements balance

6. Prepare an adjusted 5. Journalize and post

trial balance adjusting entries

Chapter
4-24 LO 4 State the required steps in the accounting cycle.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable
Step
Step
Correcting entries
are unnecessary if the records are error-free.

are 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.

Chapter
4-25 LO 5 Explain the approaches to preparing correcting entries.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable
Step
Step
BE4-9 At Batavia Company, the following errors were
BE4-9
discovered after the transactions had been journalized and
posted. Prepare the correcting entries.
1. A collection on account from a customer was recorded as
a debit to Cash and a credit to Service Revenue for $780.

Incorrect Cash 780

entry Service revenue
780
Correct Cash 780
entry Accounts receivable
780
Correcting Service revenue 780
entry
Accounts receivable
Chapter 780
4-26 LO 5 Explain the approaches to preparing correcting entries.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable
Step
Step
BE4-9 At Batavia Company, the following errors were
BE4-9
discovered after the transactions had been journalized and
posted. Prepare the correcting entries.
2. The purchase of supplies on account for $1,570 was
recorded as a debit to Supplies and a credit to Accounts
Payable $1,750.
Incorrect Supplies 1,750
entry Accounts payable
1,750
Correct Supplies 1,570
entry Accounts payable
1,570
Correcting Accounts payable 180
entry
Supplies
Chapter 180
4-27 LO 5 Explain the approaches to preparing correcting entries.
 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 Illustration 4-17
Classifications
Assets Liabilities and Owner’s
Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Owner’s (Stockholders’)
equity
Intangible assets
Chapter
LO 6 Identify the sections of a classified balance sheet.
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.