Chapter 4

Accounting Principles, 7
th
Edition
Weygandt Kieso Kimmel
After studying this chapter, you should be able to:
1 prepare a work sheet
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 balance sheet
CHAPTER 4
COMPLETION OF THE
ACCOUNTING CYCLE
Work Sheet
multiple-column form used for the adjustment
process and preparing financial statements
a working tool for the accountant
not a permanent accounting record
Work Sheet
makes preparation of adjusting entries and
financial statements easier
WORK SHEET
STUDY OBJECTIVE 1
FORM AND PROCEDURE
FOR A WORK SHEET
Work sheet
is not a permanent accounting record
When used
financial statements are prepared from
the work sheet
adjustments are journalized and
posted from the work sheet after
financial statements
WORK SHEET
STEPS IN PREPARING
A WORK SHEET
1 prepare trial balance
2 enter adjustments in the adjustments columns
3 enter adjusted balances in adjusted trial balance
columns
4 extend adjusted trial balance amounts
to appropriate financial statement
columns
5 total the statement columns, compute net income
(loss), and complete the work sheet
PREPARING A WORK SHEET
1 PREPARING A TRIAL BALANCE

PIONEER ADVERTISING AGENCY

Work Sheet

For the Month Ended October 31, 200 5
Adjusted
Trial Balance Adjustments
Trial Balance


Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash

Advertising Supplies


Prepaid Insurance



Office Equipment
quipment

Notes Payable
Accounts Payable
Unearned Revenue
C.R. Byrd, Capital
C.R. Byrd, Drawing
Service Revenue

Salaries Expense
Rent Expense
Totals


.










0015,200
0002,500
0000600
0005,000
5,000
2,500
1,200
000010,000
0000500
10,000
0004,000
0000900
0028,700 28,700

PREPARING A WORK SHEET
2 ENTER THE ADJUSTMENTS

PIONEER ADVERTISING AGENCY

Work Sheet

For the Month Ended October 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawing 500
Service Revenue 10,000

Salaries Expense 4,000
Rent Expense 900
Totals 28,700 28,700
Advertising Supplies Expense
Insurance Expense
Accum. Depr Off Equip
Depreciation Expense


Accounts Receivable


Interest Expense


Interest Payable
Salaries Payable


Totals
3,440 3,440


a 1,500
b 50


d 400

d 400
e 200
g 1,200


a 1,500
b 50
c 40
c 40
e 200
f 50
f 50
g 1,200
PREPARING A WORK SHEET
3 ENTER ADJUSTED BALANCES

PIONEER ADVERTISING AGENCY

Work Sheet

For the Month Ended October 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
15,200
1,000
550
5,000




500


5,200
900

1,500
50

40
50
200





5,000
2,500
800
10,000


10,600





40



50
1,200

Advertising Supplies 2,500 a 1,500
Prepaid Insurance 600 b 50
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200 d 400
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawing 500
Service Revenue 10,000 d 400
e 200
Sa laries Expense 4,000 g 1,200
Rent Expense 900
Totals 28,700 28,700
Advertising Supplies Expense a 1,500
Insurance Expense b 50
Accum. Depr Off Equip c 40
Depre ciation Expense c 40
Interest Expense f 50
Accounts Receivable e 200
Interest Payable f 50
Salaries Payable g 1,200
Totals 3,440 3,440 30,190 30,190


PREPARING A WORK SHEET
4 EXTEND ADJUSTED BALANCES

PIONEER ADVERTISING AGENCY

Work Sheet

For the Month Ended October 31, 200 5
Adjusted Income
Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Advertising Supplies 1,000
Prepaid Insurance 5 50
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 800
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawing 500
Service Revenue 10,600
Salaries Expense 5,200
Rent Expense 90 0
Advertising Supplies Expense 1,500
Insurance Expense 50
Accum. Depr. Office Equip. 40
Depreciation Expense 40
Interest Expense 50
Accounts Receivable 200
Interest Payable 50
Salaries Payable 1,20 0
Totals 30,190 30,190 7,740 10,600
Net Income 2,860
Totals 10,600 10,600





10,600.0
5,200.0 0000000
900.00000000
1,500.000000000
50.0000000

40
5 50
PREPARING A WORK SHEET
4 EXTEND ADJUSTED BALANCES

PIONEER ADVERTISING AGENCY

Work Sheet

For the Month Ended October 31, 2005
Adjusted Income
Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Advertising Supplies 1,000
Prepaid Insurance 5 50
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 800
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawing 500
Service Revenue 10,600 10,600
Salaries Expense 5,200 5,200
Rent Expense 900 900
Advertising Supplies Expense 1,500 1,500
Insurance Expense 50 50
Accum. Depr. Office Equip. 40
Depreciation Expense 40 40
Interest Expense 50 50
Accounts Receivable 200
Interest Payable 50
Salaries Payable 1,200
Totals 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

15,200
1,000
5 550
5,000
5,000
2,500
800
10,000
5500



40

200
50
1,200
ADJUSTING ENTRIES
JOURNALIZED

GENERAL JOURNAL

Date Account Titles and Explanation Ref. Debit Credit
200 5 a
Oct. 31

b
31

c
31

d
31

e
31

f
31

g
31



Advertising Supplies Expense 1,500
Advertising Supplies 1,500
Insurance Expense 50
Prepaid Insurance 50
Depreciation Expense 40
Accumulated Expense 40
Unearned Fees 400
Fees Earned 400
Accounts Receivable 200
Fees Earned 200
Interest Expense 50
Interest Payable 50
Salaries Expense 1,200
Salaries Payable 1,200

PREPARATION OF FINANCIAL STATEMENTS

PIONEER ADVERTISING AGENCY

Income Statement

For the Month Ended October 31, 2005

Revenues
Service revenue

Expenses
Salaries expense
Advertising supplies expense
Rent expense
Insurance expense
Interest expense
Depreciation expense

Total expenses
Net income


The income statement is
prepared from the income
statement columns of the
work sheet.
$10,600

$5,200
1,500
900
50
50
40
7,740
$ 2,860
PREPARATION OF FINANCIAL STATEMENTS
OWNERS EQUITY STATEMENT

PIONEER ADVERTISING AGENCY

Owners Equity Statement

For the Month Ended October 31, 2005

C.R. Byrd, Capital, October 1
Add: Investments
Net income

Less: Drawings
C.R. Byrd, Capital, October 31


The owners equity
statement is prepared from
the balance sheet columns
of the work sheet.
$ -0-
$10,000
2,860 12,860
12,860
500
$12,360
PREPARATION OF FINANCIAL STATEMENTS
The balance sheet is prepared from the
balance sheet columns of the work sheet.

PIONEER ADVERTISING AGENCY

Balance Sheet

October 31, 2005

Assets Liabilities and Owners Equity

Cash Liabilities
Accounts receivable Notes payable
Advertising supplies Accounts payable
Prepaid insurance Interest payable
Office equipment Unearned revenue
Less: Accumulated Salaries payable
depreciation Total liabilities
Owners equity
C.R. Byrd, Capital
Total liabilities and owners
Total assets equity


$ 15,200
200
1,000
550
$5,000


40 4,960


$21,910
$ 5,000
2,500
50
800
1,200
9,550

12,360

$21,910
Chapter 4

A work sheet can be thought of as a(n)
a. permanent accounting record
b. optional device used by accountants
c. part of the general ledger
d. part of the journal



Chapter 4

A work sheet can be thought of as a(n)
a. permanent accounting record
b. optional device used by accountants
c. part of the general ledger
d. part of the journal


TEMPORARY VERSUS
PERMANENT ACCOUNTS
STUDY OBJECTIVE 2
TEMPORARY (NOMINAL) PERMANENT (REAL)
These accounts are closed These accounts are not closed


All revenue accounts All asset accounts

All expense accounts All liability accounts


Owners drawing Owners capital account
CLOSING ENTRIES
Closing entries
Formally transfers net income (loss) and
owners drawings to owners capital
Journalizing and posting is a required step in
the accounting cycle
Income Summary
A temporary account
Used in closing revenue and expense accounts
Minimizes the details in the permanent
owners capital account
DIAGRAM OF CLOSING PROCESS
PROPRIETORSHIP

INCOME

SUMMARY











(INDIVIDUAL)
REVENUES
1 2
1 Debit each revenue account for its balance, and credit
Income Summary for total revenues.
2 Debit Income Summary for total expenses, and credit each
expense account for its balance.
(INDIVIDUAL)
EXPENSES
DIAGRAM OF CLOSING PROCESS
3
3 Debit (credit) Income Summary and credit (debit)
owners capital for the amount of net income (loss).

INCOME

SUMMARY











OWNERS
CAPITAL
DIAGRAM OF CLOSING PROCESS
4
4 Debit owners capital for the balance in the owners drawing
account and credit owners drawing for the same amount.
OWNERS
CAPITAL

OWNERS

DRAWING









CLOSING ENTRIES
JOURNALIZED
SERVICE REVENUE No. 350
Date Explanation Debit Credit Balance
2002
Oct. 31 10,600
0
INCOME SUMMARY No. 400
Date Explanation Debit Credit Balance
2002
Oct. 31 10,600
10,600
10,600

GENERAL JOURNAL

Date Account Titles and Explanation Ref. Debit Credit
2005
Oct. 31 Service Revenue 400 10,600
Income Summary 350 10,600
(To close revenue account)



CLOSING ENTRIES
JOURNALIZED
INCOME SUMMARY No. 350
Date Explanation Debit Credit Balance
2002
Oct. 31 10,600 10,600
31 2,860
7,740
5,200
1,500
900
50
50
40

GENERAL JOURNAL

Date Account Titles and Explanation Ref. Debit Credit
2005
Oct. 31 Income Summary 350
Salaries Expense 726
Advertising Supplies Expense 631
Rent Expense 729
Insurance Expense 722
Interest Expense 905
Depreciation Expense 911
(To close expense
accounts)


7,740
CLOSING ENTRIES JOURNALIZED
C. R. BYRD, CAPITAL No. 301
Date Explanation Debit Credit Balance
2002
Oct. 31 10,000 10,000
31 12,860
INCOME SUMMARY No. 350
Date Explanation Debit Credit Balance
2005
Oct. 31 10,600 10,600
31 7,740 2,860
31 2,860 0




GENERAL JOURNAL

Date Account Titles and Explanation Ref. Debit Credit
2005 (3)
Oct. 31 Income Summary 350 2,860
C. R. Byrd, Capital 301 2,860
(To close net income to
capital)



2,860

CLOSING ENTRIES
JOURNALIZED
C. R. BYRD, CAPITAL No. 301
Date Explanation Debit Credit Balance
2002
Oct. 31 10,000 10,000
31 12,860
31 12,360
C. R. BYRD, DRAWING No. 350
Date Explanation Debit Credit Balance
2005
Oct. 31 500 500
31 0




500
500

GENERAL JOURNAL

Date Account Titles and Explanation Ref. Debit Credit
2005 (4)
Oct. 31 C. R. Byrd, Capital 350
C. R. Byrd, Drawing 301
(To close net income to
capital)



500
500
POSTING CLOSING
ENTRIES
Temporary accounts
All temporary accounts will have zero balances after posting
the closing entries
Temporary accounts (revenues and expenses) are totaled,
balanced and double ruled
Owners capital
Total equity of the owner at the end of the accounting period
No entries are journalized and posted to owners capital
during the year
Permanent accounts (assets, liabilities, and
owners capital) not closed
Depreciation Expense 711
40 (2) 40
Interest Expense 905
50 (2) 50
Insurance Expense 722
50 (2) 50
Rent Expense 729
900 (2) 900
Advertising Supplies
Expense
631
1,500 (2) 1,500
Salaries Expense 726
4,000 (2) 5,200
1,200
5,200 5,200
2
2
C. R. Byrd, Drawing 306
500 (4) 500
C. R. Byrd, Capital 301
(4) 500 10,000
(3) 2,860
12,360
Income Summary 350
(2) 7,740 (1) 10,600
(3) 2,860
10,600 10,600
Service Revenue 400
(1) 10,600 10,000
400
200
10,600 10,600
4
3
1
POSTING OF CLOSING ENTRIES
POST-CLOSING TRIAL
BALANCE
STUDY OBJECTIVE 3

After all closing entries have been
journalized the post-closing trial balance is
prepared from the ledger.

The purpose of this trial balance is to
prove the equality of the permanent account
balances that are carried forward into the
next accounting period.
POST-CLOSING TRIAL
BALANCE


1 Analyze business transactions
2 Journalize the transactions
3 Post to ledger accounts
4 Prepare a trial balance
5 Journalize and post adjusting
entries
STEPS IN THE ACCOUNTING
CYCLE
STUDY OBJECTIVE 4

6 Prepare an adjusted trial balance
7 Prepare financial statements:
Income Statement, Owners
Equity Statement, Balance Sheet
8 Journalize and post closing entries
9 Prepare a post-closing trial
balance
STEPS IN THE
ACCOUNTING CYCLE
Reversing entry
Made at the beginning of the next
accounting period
Purpose is to simplify the recording of a
subsequent transaction related to an
adjusting entry
Most often used to reverse two types of
adjusting entries: accrued revenues and
accrued expenses
REVERSING
ENTRIES
ILLUSTRATIVE EXAMPLE OF
REVERSING ENTRY
CORRECTING ENTRIES
STUDY OBJECTIVE 5

Correcting Entries
errors should be corrected as soon as discovered

correcting entries are unnecessary if records are free
of errors

can be journalized and posted whenever an error is
discovered

involve any combination of balance sheet and income
statement accounts
ILLUSTRATIVE EXAMPLE OF
CORRECTING ENTRY 1
Incorrect Entry
May 10
(To record collection from
customer an account)
Correct Entry
10
(To record collection from
customer an account)
Correcting Entry
20
(To correct entry of May 10)
Cash 50
Service Revenue 50



Cash 50
Accounts Receivable 50



Service Revenue 50
Accounts Receivable 50
ILLUSTRATIVE EXAMPLE OF
CORRECTING ENTRY 2
Incorrect Entry
May 18
(To record purchase of
equipment on account)
Correct Entry
18
(To record purchase of
equipment on account)
Correcting Entry
June 3
(To correct entry of May 18)
Delivery Equipment 45
Accounts Payable 45



Office Equipment 450
Accounts Payable 450



Office Equipment 450
Delivery Equipment 45
Accounts Payable 405
Chapter 4

The closing entry process consists of
closing
a. all asset and liability accounts
b. out the owner's capital account
c. all permanent accounts
d. all temporary accounts



Chapter 4

The closing entry process consists of
closing
a. all asset and liability accounts
b. out the owner's capital account
c. all permanent accounts
d. all temporary accounts



STANDARD BALANCE
SHEET CLASSIFICATIONS
STUDY OBJECTIVE 6
Assets Liabilities and Owners Equity
Financial statements become more useful when
the elements are classified into significant
subgroups.
A classified balance sheet generally has the
following standard classifications:


Current Assets Current Liabilities
Long-Term Investments Long-Term Liabilities
Property, Plant and Owners (Stockholders) Equity
Equipment
Intangible Assets
Current assets
Cash and other resources that are reasonably expected to
be realized in cash or sold or consumed in the business
within one year of the balance sheet date or the companys
operating cycle, whichever is longer
Current assets are listed in the order of their liquidity
Operating cycle of a company
This is the average time required to go from cash to cash in
producing revenues
Examples
Inventory, accounts receivable and cash
CURRENT ASSETS
Long-term investments
Resources which can be realized in cash
Their conversion into cash is not expected within
one year or the operating cycle, whichever is
longer
Examples
Investments in bonds of another company or
investment in land held for resale
XYZ stock
LONG-TERM
INVESTMENTS
Property, plant, and equipment
Tangible resources, relatively permanent
nature, used in the business, and not intended
for sale
Examples
Land, buildings, and machinery
PROPERTY, PLANT,
AND EQUIPMENT
Intangible assets
Non-current resources that do not have
physical substance
Examples
Includes patents, copyrights, trademarks, or
trade names, gives the holder exclusive right
of use for a specified period of time
INTANGIBLE ASSETS
Current liabilities
Obligations reasonably expected to be paid
from existing current assets or through the
creation of other current liabilities within
one year or the operating cycle, whichever
is longer
Examples
Accounts payable, wages payable, interest
payable and current maturities of long-
term debt
CURRENT LIABILITIES
CURRENT LIABILITIES
Liquidity is the ability of a company to pay obligations
that are expected to become due within the next year or
operating cycle.
Long-term liabilities
Obligations expected to be
paid after one year
Examples
Long-term notes payable, bonds
payable, mortgages payable,
and lease liabilities
LONG-TERM LIABILITIES
The content of the owners equity section
Varies with the form of business organization
Proprietorship
A single owners equity account called
(Owners Name), Capital
Partnership
Separate capital accounts for each partner
Corporation
Called stockholders equity, and it consists of two
accounts: Capital Stock and Retained Earnings
OWNERS EQUITY
CLASSIFIED BALANCE
SHEET IN ACCOUNT FORM
A classified balance sheet
1 availability of assets to meet debts
2 claims of short- and long-term creditors on total assets

PIONEER ADVERTISING AGENCY


Balance Sheet


October 31, 2005


Assets
Current assets
Cash
Accounts receivable
Advertising supplies
Prepaid insurance
Total current assets
Property, plant, and equipment
Office equipment
Less: Accumulated depreciation
Total assets


$ 15,200
200
1,000
550
16,950
$5,000
40 4,960
$21,910
CLASSIFIED BALANCE
SHEET IN REPORT FORM
The balance sheet is most often presented in the report form,
with the assets above liabilities and owners equity.
$ 1,000
2,500
50
800
1,200
5,550
4,000
9,550
12,360
$21,910
Liabilities and Owners Equity
Current liabilities
Notes payable
Accounts payable
Interest payable
Unearned revenue
Salaries payable
Total current liabilities
Long-term liabilities
Notes payable
Total liabilities
Owners equity
C. R. Byrd, Capital
Total liabilities and owners equity
Chapter 4

A current asset is
a. the last asset purchased by a business
b. an asset which is currently being used to produce a
product or service
c. usually found as a separate classification in the
income statement
d. expected to be realized in cash, sold or consumed
within one year of the balance sheet or the
company's operating cycle, whichever is longer

Chapter 4

A current asset is
a. the last asset purchased by a business
b. an asset which is currently being used to produce a
product or service
c. usually found as a separate classification in the
income statement
d. expected to be realized in cash, sold or consumed
within one year of the balance sheet or the
company's operating cycle, whichever is longer