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Financial Accounting Chapter Outline

IFRS 4th Edition Learning Objectives
Weygandt ● Kimmel ● Kieso 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
Chapter 4 to prepare correcting entries.
Completing the LO 4 Identify the sections of a classified statement of
financial position.
Accounting Cycle
Copyright ©2019 John Wiley & Son, Inc. 2

The Worksheet
• Multiple-column form used in preparing financial
Learning Objective 1 statements
Prepare a Worksheet • Not a permanent accounting record
• May be a computerized worksheet
• Prepared using a five step process
• Use of worksheet is optional

LO 1 Copyright ©2019 John Wiley & Sons, Inc. 3 LO 1 Copyright ©2019 John Wiley & Son, Inc. 4

Yazici Advertising A.S. Yazici Advertising A.S.

Worksheet Worksheet
For the Month Ended October 31, 2020
Step 1 Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200 Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000 Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550 Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000 Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500 Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800 Unearned Service Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000 Share Capital—Ordinary 10,000 10,000 10,000
Owner's Drawings 500 500 500 Dividends 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600 Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200 (e) 200
Salaries and Wages Expense Step 1
4,000 Step 2
(g) 1,200 Step 3
5,200 5,200 Step 4 Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900
Prepare a Enter 900
Enter 900 Extend adjusted Rent Expense 900 900 900
Totals 28,700 28,700 Totals 28,700 28,700
Supplies Expense trial balance (a)adjustment
1,500 adjusted
1,500 balances to appropriate
1,500 Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense on the (b) 50 data. balances.
50 statement columns.
50 Insurance Expense (b) 50 Trial balance
50 amounts50 come
Accumulated Depreciation worksheet. (c) 40 40 40 Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Step 5 Depreciation Expense (c) 40 directly from
40 ledger accounts.
40
Accounts Receivable (e) 200 200 Total the statement
200 Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50 columns, Include all accounts
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 compute net income 50 Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
with balances.
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 (or10,600
net loss), and 19,590
22,450 Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income complete worksheet. 2,860
2,860 Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450 Totals 10,600 10,600 22,450 22,450

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Step 2 Enter Adjustments Step 2

Yazici Advertising A.S.
Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of
The adjustments are the same as in Illustration 3.23. Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
a. Yazici debits an additional account, Supplies Expense, ₺1,500 for the cost of Cash 15,200 15,200 15,200
supplies used, and credits Supplies ₺1,500. Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Adjustments Key:
b. Yazici debits an additional account, Insurance Expense, ₺50 for the insurance Equipment 5,000 5,000 5,000

that has expired, and credits Prepaid Insurance ₺50.

Notes Payable 5,000 (a)5,000
Supplies Used 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 (b) 800Insurance Expired 800
c. The company needs two additional depreciation accounts. It debits Share Capital—Ordinary 10,000 10,000
(c) Depreciation Expensed 10,000
Depreciation Expense ₺40 for the month’s depreciation, and credits Dividends 500 500 500
Service Revenue 10,000 (d) 400 (d) Service Revenue
10,600 10,600 Recognized
Accumulated Depreciation—Equipment ₺40. (e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 (e) Service 5,200Revenue Accrued
d. Yazici debits Unearned Service Revenue ₺400 for services performed, and Rent Expense 900 900 (f) Interest 900Accrued
credits Service Revenue ₺400. Totals
Supplies Expense
28,700 28,700
(a) 1,500 1,500 (g) Salaries 1,500Accrued
Insurance Expense (b) 50 50 50
e. Yazici debits an additional account, Accounts Receivable, ₺200 for services Accumulated Depreciation (c) 40 40 40
performed but not billed, and credits Service Revenue ₺200. Depreciation Expense (c) 40 40 Enter adjustment
40 amounts, total
Accounts Receivable (e) 200 200 adjustments columns, and 200check
f. The company needs two additional accounts relating to interest. It debits Interest Expense (f) 50 50 50
for equality.
Interest Payable (f) 50 50 50
Interest Expense ₺50 for accrued interest, and credits Interest Payable ₺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
g. Yazici debits Salaries and Wages Expense ₺1,200 for accrued salaries, and Net Income 2,860 2,860
credits an additional account, Salaries and Wages Payable, ₺1,200. Totals Add additional accounts as needed. 10,600 10,600 22,450 22,450

LO 1 Copyright ©2019 John Wiley & Son, Inc. 7 LO 1 Copyright ©2019 John Wiley & Son, Inc. 8

Yazici Advertising A.S. Yazici Advertising A.S.

Step 3 Worksheet
For the Month Ended October 31, 2020
Step 4 Worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200 Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000 Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550 Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000 Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000 Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500 Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800 Unearned Service Revenue 1,200 (d) 400 800 800
Share Capital—Ordinary 10,000 10,000 10,000 Share Capital—Ordinary 10,000 10,000 10,000
Dividends 500 500 500 Dividends 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600 Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200 (e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200 Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900 Rent Expense 900 900 900
Totals 28,700 28,700 Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500 Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50 Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40 Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40 Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200 Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50 Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50 Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200 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 Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860 Net Income 2,860 2,860
Totals
Check equality of adjusted trial balance columns. 10,600 10,600 22,450 22,450 Totals Extend adjusted trial balance amounts to appropriate 10,600 statement
financial 10,600 22,450 22,450
columns.
LO 1 Copyright ©2019 John Wiley & Son, Inc. 9 LO 1 Copyright ©2019 John Wiley & Son, Inc. 10

Yazici Advertising A.S.

Step 5 Worksheet
For the Month Ended October 31, 2020

Account Titles
Trial Balance
Dr. Cr.
Adjustments
Dr. Cr.
Adjusted
Trial Balance
Dr. Cr. Dr.
Income
Statement
Cr.
Statement of
Financial Position
Dr. Cr.
Steps in Preparing a Worksheet (2 of 2)
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000 Which of the following statements is incorrect concerning the
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000 worksheet?
Notes Payable 5,000 5,000 5,000
Accounts Payable
Unearned Service Revenue
2,500
1,200 (d) 400
2,500
800
2,500
800
a. The worksheet is essentially a working tool of the
Share Capital—Ordinary
Dividends 500
10,000
500
10,000
500
10,000
accountant.
Service Revenue 10,000 (d) 400 10,600 10,600

Salaries and Wages Expense 4,000 (g) 1,200

(e) 200
5,200 5,200
b. The worksheet is distributed to management and other
Rent Expense 900 900 900 interested parties.
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50 c. The worksheet cannot be used as a basis for posting to
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40 ledger accounts.
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50 d. Financial statements can be prepared directly from the
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 worksheet before journalizing and posting the adjusting
Net Income
Totals Compute net income or net loss.
2,860
10,600 10,600 22,450
2,860
22,450
entries.
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Steps in Preparing a Worksheet (1 of 2) Preparing Financial Statements from a

Which of the following statements is incorrect concerning the Worksheet
worksheet?
• Income statement is prepared from the income
a. The worksheet is essentially a working tool of the statement columns
accountant.
• Statement of financial position and retained earnings
b. The worksheet is distributed to management and other
interested parties. statement are prepared from the statement of
financial position columns
c. The worksheet cannot be used as a basis for posting to
ledger accounts. • Companies can prepare financial statements before
d. Financial statements can be prepared directly from the they journalize and post adjusting entries
worksheet before journalizing and posting the adjusting
entries.
LO 1 Copyright ©2019 John Wiley & Son, Inc. 13 LO 1 Copyright ©2019 John Wiley & Son, Inc. 14

Statements from a Worksheet (1 of 2) Statements from a Worksheet (2 of 2)

Yazici Advertising A.S. Yazici Advertising A.S.
Income Statement Retained Earnings Statement
For the Month Ended October 31, 2020 For the Month Ended October 31, 2020
Revenues Retained earnings, October 1 ₺ –0–
Service revenue ₺10,600 Add: Net income 2,860
Expenses 2,860
Salaries and wages expense ₺5,200 Less: Dividends 500
Supplies expense 1,500 Retained earnings, October 31 ₺ 2,360
Rent expense 900
Insurance expense 50
Interest expense 50
Depreciation expense 40
Total expenses 7,740
Net income ₺ 2,860

LO 1 Copyright ©2019 John Wiley & Son, Inc. 15 LO 1 Copyright ©2019 John Wiley & Son, Inc. 16

Yazici Advertising A.S.

Statement of Financial Position
October 31, 2020
Assets
Preparing Adjusting Entries from a
Equipment
Less: Accumulated depreciation—equipment
₺5,000
40 ₺ 4,960
Worksheet
Prepaid insurance 550
Supplies 1,000 • Adjusting entries are prepared from the adjustments
Accounts receivable
Cash
200
15,200
columns of worksheet
Total assets ₺21,910
Equity and Liabilities • Journalizing and posting of adjusting entries follows
Equity the preparation of financial statements when a
Share capital—ordinary ₺10,000
Retained earnings 2,360 ₺12,360 worksheet is used
Liabilities
Notes payable 5,000
Accounts payable 2,500
Interest payable 50
Unearned service revenue 800
Salaries and wages payable 1,200 9,550
Total equity and liabilities ₺21,910

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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. Learning Objective 2
Cash Statement of financial position (debit) Prepare Closing Entries and a Post-
Owner’s Drawings Statement of financial position (debit) Closing Trial Balance
Accumulated Depreciation Statement of financial position (credit)
Service Revenue Income statement (credit)
Accounts Payable Statement of financial position (credit)
Salaries and Wages Expense Income statement (debit)

LO 1 Copyright ©2019 John Wiley & Son, Inc. 19 LO 2 Copyright ©2019 John Wiley & Sons, Inc. 20

Closing the Books (1 of 2) Closing the Books (2 of 2)

At the end of the accounting period, the company makes
the accounts ready for the next period. TEMPORARY PERMANENT
Accounts are closed Accounts are not closed

Trial Adjusting All revenue accounts All assets accounts

Analyze Journalize Post
Balance Entries
All expense accounts All liability accounts
Adjusted Post-Closing Dividends Equity
Financial Closing
Trial Trial
Balance Statements Entries
Balance

LO 2 Copyright ©2019 John Wiley & Son, Inc. 21 LO 2 Copyright ©2019 John Wiley & Son, Inc. 22

Preparing Closing Entries (1 of 2) Preparing Closing Entries (2 of 2)

Closing entries formally recognize in the ledger the (Individual) Income (Individual)
transfer of: Expenses Summary Revenues

• Net income (or net loss) to owner’s capital 2 1

• Dividends to retained earnings

Produce a zero balance in each temporary account. 3
Key:
1. Close Revenues to Income Retained
Companies generally journalize and post closing entries Summary. Dividends Earnings
2. Close Expenses to Income
only at end of the annual accounting period. Summary.
4
3. Close Income Summary to
Retained Earnings.
4. Close Dividends to Retained
Earnings.

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Closing Entries Illustrated (1 of 2)

GENERAL JOURNAL Page J3
Closing Entries Illustrated (2 of 2)
Date Account Titles and Explanations Ref. Debit Credit GENERAL JOURNAL Page J3
2020
Date Account Titles and Explanations Ref. Debit Credit
Oct. 31 Service Revenue 400 10,600
Income Summary 350 10,600 2020
(To close revenue account) Oct. 31 Income Summary 350 2,860
Retained Earnings 301 2,860
31 Income Summary 350 7,740 (To close net income)
Supplies Expense 631 1,500
Depreciation Expense 711 40 31 Retained Earnings 301 500
Insurance Expense 722 50 Dividends 306 500
Salaries and Wages Expense 726 5,200 (To close drawings)
Rent Expense 729 900
Interest Expense 729 50
(To close expense accounts)
LO 2 Copyright ©2019 John Wiley & Son, Inc. 25 LO 2 Copyright ©2019 John Wiley & Son, Inc. 26

Yazici Advertising A.S.

Posting Closing Entries Post-Closing Trial Balance
October 31, 2020
Debit Credit
Cash ₺15,200
Accounts Receivable 200
Supplies 1,000
Prepaid Insurance 550
Equipment 5,000
Accumulated Depreciation—Equipment ₺ 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Revenue 800
Salaries and Wages Payable 1,200
Interest Payable 50
Share Capital—Ordinary 10,000
Retained Earnings 2,360
₺21,950 ₺21,950
Copyright ©2019 John
LO 2 27 LO 2 Copyright ©2019 John Wiley & Son, Inc. 28
Wiley & Son, Inc.

DO IT! 2: Closing Entries (1 of 3) DO IT! 2: Closing Entries (2 of 3)

Hancock Company has the following balances in selected accounts Accounts Payable €27,000 Dividends €15,000
of its adjusted trial balance. Service Revenue 98,000 Share Capital—Ordinary 42,000
Accounts Payable €27,000 Dividends €15,000 Rent Expense 22,000 Accounts Receivable 38,000
Service Revenue 98,000 Share Capital—Ordinary 42,000 Salaries and Wages Supplies Expense 7,000
Rent Expense 22,000 Accounts Receivable 38,000 Expense 51,000
Salaries and Wages Supplies Expense 7,000 Prepare the closing entries at December 31.
Expense 51,000
Income Summary 80,000
Prepare the closing entries at December 31. Salaries and Wages Expense 51,000
Service Revenue 98,000 Rent Expense 22,000
Income Summary 98,000 Supplies Expense 7,000

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DO IT! 2: Closing Entries (3 of 3)

Accounts Payable €27,000 Dividends €15,000
Service Revenue 98,000 Share Capital—Ordinary 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Learning Objective 3
Salaries and Wages Supplies Expense 7,000 Explain the Steps in the Accounting
Expense 51,000
Cycle and How to Prepare Correcting
Prepare the closing entries at December 31.
Entries
Income Summary 18,000
Retained Earnings 18,000
Retained Earnings 15,000
Dividends 15,000

LO 2 Copyright ©2019 John Wiley & Son, Inc. 31 LO 3 Copyright ©2019 John Wiley & Sons, Inc. 32

The Accounting Cycle 1. Analyze Business Transactions

1. Analyze business transactions Assets Liabilities Equity
Accounts Notes Unearned Share
Date Cash + Equipment = Payable + Payable + Revenue + Capital - Dividends + Revenue - Expense
9. Prepare a post-closing trial 1 +₺10,000 +₺10,000
2. Journalize the transactions 1 +₺5,000 +₺5,000
balance
2 +1,200 +₺1,200
3 -1,200 -₺1,200
8. Journalize and post closing 4 +250 -$250
3. Post to ledger accounts
entries
Partial Schedule
7. Prepare financial
4. Prepare a trial balance
statements

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

LO 3 Copyright ©2019 John Wiley & Son, Inc. 33 LO 3 Copyright ©2019 John Wiley & Son, Inc. 34

2. Journalize the Transactions 3. Post to the Ledger Accounts

GENERAL JOURNAL J1
GENERAL JOURNAL Page J1 Date Account Titles and Explanations Ref. Debit Credit
Oct. 1 Cash 101 10,000
Date Explanation Ref. Debit Credit
Share Capital-Ordinary 311 10,000
2020 (Issued shares for cash)
Oct. 1 Cash 101 10,000
GENERAL LEDGER
Share Capital-Ordinary 311 10,000
Cash No. 101
1 Equipment 157 5,000 Date Explanations Ref. Debit Credit Balance
Notes Payable 200 5,000 Oct. 1 J1 7,000 7,000
2 Cash 101 1,200
Unearned Revenue 209 1,200
Share Capital-Ordinary No. 311
Date Explanations Ref. Debit Credit Balance
Oct. 1 J1 7,000 7,000

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4. Prepare Yazici Advertising A.S.

Trial Balance
5. Journalize and Post AJEs
October 31, 2020
a Trial Date
GENERAL JOURNAL
Account Titles and Explanations Ref. Debit Credit
J1
Debit Credit
Balance Cash ₺15,200 Oct. 31 Supplies Expense
Supplies
631
126
1,500
1,500
Supplies 2,500 (To record supplies used)
Prepaid Insurance 600
Equipment 5,000 GENERAL LEDGER
Notes Payable ₺5,000 Supplies No. 126
Accounts Payable 2,500 Date Explanations Ref. Debit Credit Balance
Unearned Service Revenue 1,200 Oct. 1 2,500
Share Capital—Ordinary 10,000 Oct. 31 Adjusting entry J2 1,500 1,000
Retained Earnings 0
Dividends 500 Supplies Expense No. 631
Service Revenue 10,000 Date Explanations Ref. Debit Credit Balance
Oct. 31 Adjusting entry J2 1,500 1,500

LO 3 Copyright ©2019 John Wiley & Son, Inc. 37 LO 2 Copyright ©2018 John Wiley & Son, Inc. 38

Yazici Advertising A.S.

7. Prepare Financial Statements Partial
Statements
6. Prepare Adjusted Trial Balance
Yazici Advertising A.S.
October 31, 2020
an Adjusted Income Statement
For the Month Ended October 31, 2020
Debit Credit
Trial Balance Cash ₺15,200 Revenues
Accounts Receivable 200 Service revenue ₺10,600
Supplies 1,000
Yazici Advertising A.S.
Prepaid Insurance 550 Retained Earnings Statement
Equipment 5,000 For the Month Ended October 31, 2020
Accumulated Depreciation ₺ 40 Retained earnings, October 1 ₺ 0
Notes Payable 5,000
Accounts Payable 2,500 Yazici Advertising A.S.
Interest Payable 50 Statement of Financial Position
October 31, 2020
Unearned Service Revenue 800
Salaries and Wages Payable 1,200 Assets
Cash ₺15,200
Accounts receivable 200
LO 3 Copyright ©2019 John Wiley & Son, Inc. 39 LO 3 Copyright ©2019 John Wiley & Son, Inc. 40

8. Journalize and Post Closing Entries 9. Prepare a Yazici Advertising A.S.

Post-Closing Trial Balance
GENERAL JOURNAL Page J3
Post-Closing October 31, 2020

Date Account Titles and Explanations Ref. Debit Credit Trial Debit Credit
Cash ₺15,200
2020
Oct. 31 Service Revenue 400 10,600
Balance Accounts Receivable 200
Income Summary 350 10,600 Supplies 1,000
(To close revenue account) Prepaid Insurance 550
Equipment 5,000
31 Income Summary 350 7,740 Accumulated Depreciation ₺ 40
Supplies Expense 631 1,500
Notes Payable 5,000
Depreciation Expense 711 40
Accounts Payable 2,500
Partial Insurance Expense 722 50
Schedule Salaries and Wages Expense 726 5,200 Unearned Service Revenue 800
Rent Expense 729 900 Salaries and Wages Payable 1,200
Interest Expense 729 50
(To close expense accounts)

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Correcting Entries—Avoidable Step (1 of 3) Correcting Entries—Avoidable Step (2 of 3)

• Unnecessary if accounting records are free of errors Case 1: On May 10, Mercato Co. journalized and posted a NT$500
cash collection on account from a customer as a debit to Cash and a
• Made whenever an error is discovered credit to Service Revenue for NT$500. The error was discovered
• Must be posted before closing entries when the customer paid the remaining balance in full.
Incorrect Cash 500
Instead of preparing a correcting entry, it is possible to
reverse the incorrect entry and then prepare the correct entry Service Revenue 500
entry. Correct Cash 500
entry Accounts Receivable 500
Correcting Service Revenue 500
entry Accounts Receivable 500
LO 3 Copyright ©2019 John Wiley & Son, Inc. 43 LO 3 Copyright ©2019 John Wiley & Son, Inc. 44

Correcting Entries—Avoidable Step (3 of 3) DO IT! 3: Correcting Entries (1 of 3)

Case 2: On May 10, 18, Mercato purchased on account equipment Sanchez Company discovered the following errors made in January
costing NT$4,500. The transaction was journalized and posted as a 2020.
debit to Equipment NT$450 and a credit to Accounts Payable 1. A payment of Salaries and Wages Expense of $600 was debited
NT$450. The error was discovered on June 3, to Supplies and credited to Cash, both for $600.
Incorrect Equipment 450 2. A collection of $3,000 from a client on account was debited to
entry Accounts Payable 450 Cash $200 and credited to Service Revenue $200.
Correct Equipment 4,500 3. The purchase of supplies on account for $860 was debited to
entry Accounts Payable 4,500 Supplies $680 and credited to Accounts Payable $680.
Correct the errors without reversing the incorrect entry.
Correcting Equipment 4,050
entry Accounts Payable 4,050
LO 3 Copyright ©2019 John Wiley & Son, Inc. 45 LO 3 Copyright ©2019 John Wiley & Son, Inc. 46

DO IT! 3: Correcting Entries (2 of 3) DO IT! 3: Correcting Entries (3 of 3)

1. A payment of Salaries and Wages Expense of $600 was debited 3. The purchase of supplies on account for $860 was debited to
to Supplies and credited to Cash, both for $600. Supplies $680 and credited to Accounts Payable $680.
Salaries and Wages Expense 600 Supplies ($860 - $680) 180
Supplies 600 Accounts Payable 180
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

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Classified Statement of Financial

Position
Learning Objective 4 • Presents a snapshot at a point in time
Identify the Sections of a Classified • To improve understanding, companies group similar
assets and similar liabilities together
Statement of Financial Position
Assets Equity and Liabilities
Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets

LO 4 Copyright ©2019 John Wiley & Sons, Inc. 49 LO 4 Copyright ©2019 John Wiley & Son, Inc. 50

Cheng Ltd. Cheng Ltd.

Statement of Financial Position Statement of Financial Position
October 31, 2020 October 31, 2020
(NT$ in thousands) (1 of 2) (NT$ in thousands) (2 of 2)
Assets Equity and Liabilities
Intangible assets Equity
Patents NT$ 3,100 Share capital—ordinary NT$20,000
Property, plant, and equipment Retained earnings 14,050 NT$34,050
Land NT$10,000 Non-current liabilities
Equipment NT$24,000
Less: Accumulated depreciation— Mortgage payable 10,000
equipment 5,000 19,000 29,000 Notes payable 1,300 11,300
Long-term investments Current liabilities
Investment in shares of Walters Corp. 5,200 Notes payable 11,000
Investment in real estate 2,000 7,200 Accounts payable 2,100
Current assets Salaries and wages payable 1,600
Prepaid insurance 400 Unearned service revenue 900
Supplies 2,100 Interest payable 450 16,050
Inventory 3,000 Total equity and liabilities NT$61,400
Notes receivable 1,000
Accounts receivable 7,000
Short-term investments 2,000
Cash 6,600 22,100
Total assets NT$61,400

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Intangible Assets Classified Statement of Financial

Long-lived assets that do not have physical substance. Position (1 of 2)
Current assets are listed:
Nokia
Statement of Financial Position (partial) a. in the reverse order of expected conversion to
(in millions) cash.
Intangible assets b. by importance.
Capitalized development costs € 244 c. by longevity.
Goodwill 6,257
Other intangible assets 3,913 d. by size.
€10,414

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Property, Plant, and Equipment (1 of 2) Property, Plant, and Equipment (2 of 2)

• Long useful lives
Laclede Group
• Currently used in operations Statement of Financial Position (partial)
(₩ in billions )
• Depreciation - allocating the cost of assets to a
Property, plant, and equipment
number of years
Land ₩ 2,604
• Accumulated depreciation - total amount of Buildings ₩ 9,487
depreciation expensed thus far in the asset’s life Structures 1,568
Machinery 36,956
• Sometimes called fixed assets or plant assets Vehicles 226
Other 10,600 58,837
Less: Accumulated depreciation 32,617
₩28,824
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Long-Term Investments Current Assets (1 of 4)

• Investments in stocks and bonds of other companies • Assets that a company expects to convert to cash or
• Investments in long-term assets such as land or use up within one year or the operating cycle,
buildings that are not currently being used in whichever is longer
operating activities • Operating cycle is the average time that it takes to
• Long-term notes receivable
▪ purchase inventory,
Alphabet Inc. ▪ sell it on account, and
Statement of Financial Position (partial)
(in thousands) ▪ collect cash from customers
Long-term investments
Non-marketable equity investments $1,469

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Current Assets (2 of 4) Current Assets (3 of 4)

The correct order of presentation in a classified
Tesco
statement of financial position for the following current
Statement of Financial Position (partial)
(£ in millions )
assets is:
Current assets a. accounts receivable, cash, prepaid insurance,
Inventories £2,430 inventory.
Trade and other receivables 1,311 b. prepaid insurance, inventory, accounts
Derivative financial instruments 97 receivable, cash.
Current tax assets 6
Short-term investments 360 c. cash, accounts receivable, inventory, prepaid
Cash and cash equivalents 1,788 insurance.
Total current assets £5,992 d. inventory, cash, accounts receivable, prepaid
insurance.
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Equity Non-Current Liabilities

• Proprietorship - one capital account Obligations a company expects to pay after one year.
• Partnership - capital account for each partner
Siemens
• Corporation – Share Capital—Ordinary and Retained Statement of Financial Position (partial)
Earnings (in millions)

Halie Capital Ltd. Non-current liabilities

Statement of Financial Position (partial) Long-term debt €14,260
(in thousands) Pension plans and similar commitments 4,361
Equity Provisions 2,533
Share capital—ordinary £ 685,934 Deferred tax liabilities 726
Retained earnings 1,406,747 Other non-current liabilities 2,752
Total equity £2,092,681 €24,632
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Current Liabilities (1 of 2) Current Liabilities (2 of 2)

• Obligations company has to pay within coming year
Siemens
or its operating cycle, whichever is longer Statement of Financial Position (partial)
• Common examples are accounts payable, salaries and (in millions)
wages payable, notes payable, interest payable, Current liabilities
income taxes payable, and current maturities of long- Trade payables € 8,860
term obligations Current provisions 5,165
Other current financial liabilities 2,427
• Liquidity - ability to pay obligations expected to be Income taxes payable 1,970
due within the next year Current maturities for long-term debt 1,819
Other current liabilities 22,210
€42,451

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Statement of Financial Position (1 of 2) DO IT! 4: Statement of Financial Position

Current assets are listed: Classifications
Match each of the following to its proper statement of financial position
a. in the reverse order of expected conversion to cash. classification, shown below. If the item would not appear on a statement of
financial position, use “NA.”
b. by importance.
CL Salaries and wages payable LTI Stock investments (long-term)
c. by longevity. NA Service revenue PPE Equipment
CL Interest payable PPE Accumulated depreciation
d. by size. IA Goodwill NA Depreciation expense
CA Debt investments (short-term) E Share capital—ordinary
NCL Mortgage payable (due in 3 years) CL Unearned service revenue
Intangible assets (IA) Equity (E)
Property, plant, and equipment (PPE) Non-current liabilities (NCL)
Long-term investments (LTI) Current liabilities (CL)
Current assets (CA)
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Appendix 4A Reversing Entries

• It is often helpful to reverse some adjusting entries
Learning Objective 5 before recording regular transactions of the next
period
Prepare Reversing Entries
• Companies make a reversing entry at beginning of
next accounting period
• Each reversing entry is exact opposite of adjusting
entry made in previous period
• Use of reversing entries does not change amounts
reported in the financial statements

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Reversing Entries Example (1 of 3) Reversing Entries Example (2 of 3)

WITHOUT Reversing Entries WITH Reversing Entries
We use the salaries expense transactions for Yazici Advertising as (per appendix) (per appendix)
illustrated in Chapters 2, 3, and 4.
Initial Salary Entry Initial Salary Entry
1. October 26 (initial salary entry): Yazici pays ₺4,000 of salaries Oct. 26 Salaries and Wages Expense 4,000 Oct. 26 (Same entry)
Cash 4,000
and wages earned between October 15 and October 26. Adjusting Entry Adjusting Entry
Oct. 31 Salaries and Wages Expense 1,200 Oct. 31 (Same entry)
2. October 31 (adjusting entry): Salaries and wages earned Salaries and Wages Payable 1,200
between October 29 and October 31 are ₺1,200. The company Closing Entry Closing Entry
Oct. 31 Income Summary 5,200 Oct. 31 (Same entry)
will pay these in the November 9 payroll. Salaries and Wages Expense 5,200
Reversing Entry Reversing Entry
3. November 9 (subsequent salary entry): Salaries and wages paid Nov. 1 No reversing entry is made. Nov. 1 Salaries and Wages Payable 1,200
are ₺4,000. Of this amount, ₺1,200 applied to accrued salaries Salaries and Wages Expense 1,200
Subsequent Salary Entry Subsequent Salary Entry
and wages payable and ₺2,800 was earned between November Nov. 9 Salaries and Wages Payable 1,200 Nov. 9 Salaries and Wages Expense 4,000
1 and November 9. Salaries and Wages Expense 2,800 Cash 4,000
Cash 4,000

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Reversing Entries Example (3 of 3)

Salaries and Wages Expense
10/26 Paid 4,000 Blank Blank
Learning Objective 6
10/31 Adjusting 1,200 Blank Blank Compare the Procedures for the
5,200 10/31 Closing 5,200
Blank
Accounting Cycle Under I F R S and U.S.
11/9 Paid 4,000 11/1 Reversing 1,200
GAAP
Salaries and Wages Payable
11/1 Reversing 1,200 10/31 1,200

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A Look at IFRS A Look at IFRS (1 of 5)

Key Points Key Points
• In general, G A A P follows the similar guidelines as this text for Similarities
presenting items in the current asset section, except that • Both I F R S and G A A P require disclosures about (1)
under G A A P items are listed in order of liquidity, while under accounting policies followed, (2) judgments that management
I F R S they are often listed in reverse order of liquidity. For has made in the process of applying the entity’s accounting
example, under G A A P cash is listed first, but under I F R S it is policies, and (3) the key assumptions and estimation
listed last. uncertainty that could result in a material adjustment to the
• Both G A A P and I F R S are increasing the use of fair value to carrying amounts of assets and liabilities within the next
report assets. However, at this point I F R S has adopted it financial year.
more broadly. As examples, under I F R S companies can apply • Comparative prior-period information must be presented and
fair value to property, plant, and equipment; natural financial statements must be prepared annually.
resources; and in some cases intangible assets.

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A Look at IFRS (2 of 5) A Look at IFRS (3 of 5)

Key Points Key Points
Differences Differences
• I F R S officially uses the term statement of financial position in • While I F R S companies often report non-current assets before
its literature, while in the United States it is often referred to current assets in their statements of financial position, this is
as the balance sheet. never seen under G A A P. Also, some I F R S companies report
• I F R S requires that specific items be reported on the the subtotal “net assets,” which equals total assets minus
statement of financial position, whereas no such general total liabilities. This practice is also not seen under G A A P.
standard exists in G A A P. However, under G A A P, public • A key difference in valuation is that under I F R S , companies,
companies must follow U.S. Securities and Exchange under certain conditions, can report property, plant, and
Commission (S E C) regulations, which require specific line equipment at cost or at fair value, whereas under G A A P this
items as well. In addition, specific G A A P standards mandate practice is not allowed.
certain forms of reporting statement of financial position
information. The S E C guidelines are more detailed than I F R S
.
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A Look at IFRS (4 of 5) A Look at IFRS (5 of 5)

Key Points Looking to the Future
Differences The IASB and the FASB are working on a project to converge their
• G A A P has many differences in terminology from what are standards related to financial statement presentation. A key feature
shown in your textbook. For example, in the investment of the proposed framework is that each of the statements will be
category shares are called stock. Also note that Share Capital— organized in the same format, to separate an entity’s financing
Ordinary is referred to as Common Stock. In addition, the activities from its operating and investing activities and, further, to
format used for statement of financial position presentation is separate financing activities into transactions with owners and
often different between G A A P and I F R S . 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.

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Copyright
Copyright © 2019 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Act without the express written permission of the
copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up
copies for his/her own use only and not for distribution or resale. The Publisher assumes
no responsibility for errors, omissions, or damages, caused by the use of these programs
or from the use of the information contained herein.

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