4-1

CHAPTER4
The Recording
Process

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 PreviewofCHAPTER4

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 Using a Worksheet

Steps in Preparing a Worksheet

 A worksheet is a multiple-column form used in preparing
financial statements.
 It is not a permanent accounting record. It is neither a
journal or a part of general ledger.

 The worksheet is merely a device used in preparing

adjusting entries and the financial statements.
 Five step process. Each step is performed in sequence.
 Use of worksheet is optional.
4-4 SO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
Illustration 4-1

4-5 SO 1 Prepare a worksheet.

 Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet Illustration 4-2
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Owner's Capital 10,000
Owner's Drawing 500
Service Revenue 10,000

Salaries Expense 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 SO 1 Prepare a worksheet.

 Steps in Preparing a Worksheet
Illustration 3-23
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

4-7
SO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Office 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.
Owner's Capital 10,000
Owner's Drawing 500 (c) Depreciation Expensed.
Service Revenue 10,000 (d) 400 (d) Service Revenue Earned.
(e) 200
Salaries Expense 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,
(g) 1,200
Salaries Payable and check for equality.
Totals 3,440 3,440

Add additional accounts as needed.

4-8 SO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Office Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Owner's Capital 10,000 10,000
Owner's Drawing 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries Expense 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
(f)
Interest Expense 50 50
Interest Payable (f) 50 50
Salaries Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190

Total the adjusted trial balance

columns and check for equality.
4-9 SO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Office Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Owner's Capital 10,000 10,000
Owner's Drawing 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 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
(f)
Interest Expense 50 50 50
Interest Payable (f) 50 50
Salaries 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 SO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Office 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
Owner's Capital 10,000 10,000 10,000
Owner's Drawing 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 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
(f)
Interest Expense 50 50 50
Interest Payable (f) 50 50 50
Salaries 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 SO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet

Review Question
Net income is shown on a worksheet in the:

a. income statement debit column only.

b. balance sheet debit column only.

c. income statement credit column and balance sheet

debit column.

d. income statement debit column and balance sheet

credit column.

4-12 SO 1 Prepare a worksheet.

 Using a Worksheet

Preparing Statements from a Worksheet

 Income statement is prepared from the income
statement columns.
 Balance sheet and owner’s equity statement are
prepared from the balance sheet columns.
 Companies journalize and post adjusting entries.

4-13 SO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration 4-4

4-14 SO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration 4-4

4-15 SO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration
4-4

4-16 SO 1
 Using a Worksheet

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 SO 1 Prepare a worksheet.

 Closing the Books

At the end of the accounting period, the company makes

the accounts ready for the next period.
Illustration 4-5

4-18 SO 2 Explain the process of closing the books.

 Closing the Books

Preparing Closing Entries

Closing entries formally recognize, in the general ledger,
the transfer of
 net income (or net loss) and
 owner’s drawing

to owner’s capital.

Closing entries are only made at the end of the annual

accounting period.

4-19 SO 2 Explain the process of closing the books.

 Closing the Books

Note:
Owner’s Drawing is closed Illustration 4-6

directly to Capital and not to

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

4-20 SO 2 Explain the process of closing the books.

 Closing the Books

Closing
Entries
Illustrated

Illustration 4-7
Closing entries
journalized

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 Closing the Books

Posting
Closing
Entries

Illustration 4-8

4-22 SO 2
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 Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account

balances after journalizing and posting of closing entries.

Illustration 4-9

4-24 SO 3
 Summary of the Accounting 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 accounts
closing entries

7. Prepare financial
4. Prepare a trial balance
statements

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

4-25 SO 4 State the required steps in the accounting cycle.

 Summary of the Accounting Cycle

Correcting Entries—An Avoidable Step

 Unnecessary if the records are error-free.
 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.

4-26 SO 5 Explain the approaches to preparing correcting entries.

 Correcting Entries—An Avoidable Step
Illustration (Case 1): On May 10, Mercato Co. journalized and
posted a $50 cash collection on account from a customer as a debit
to Cash $50 and a credit to Service Revenue $50. The company
discovered the error on May 20, when the customer paid the
remaining balance in full.

Incorrect Cash 50
entry
Service revenue 50
Correct Cash 50
entry
Accounts receivable 50

Correcting Service revenue 50

entry Accounts receivable 50

4-27 SO 5 Explain the approaches to preparing correcting entries.

 Correcting Entries—An Avoidable Step
Illustration (Case 2): On May 18, Mercato purchased on account
equipment costing $450. The transaction was journalized and
posted as a debit to Equipment $45 and a credit to Accounts
Payable $45. The error was discovered on June 3,

Incorrect Equipment 45
entry
Accounts payable 45
Correct Equipment 450
entry
Accounts payable 450

Correcting Equipment 405

entry Accounts payable 405

4-28 SO 5 Explain the approaches to preparing correcting entries.

4-29
 The Classified Balance Sheet

 Presents a snapshot at a point in time.

 To improve understanding, companies group similar
assets and similar liabilities together.

Standard Classifications Illustration 4-17

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

4-30 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet
Illustration 4-18

4-31 SO 6
 The Classified Balance Sheet
Illustration 4-18

4-32 SO 6
 The Classified Balance 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.

4-33 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Current Assets
Illustration 4-19

Usually listed in the order they expect to convert them into cash.

4-34 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

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.

4-35 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance 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

4-36 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance 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.

4-37 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Property, Plant, and Equipment

Illustration 4-21

4-38 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Intangible Assets
 Assets that do not have physical substance.
Illustration 4-22

4-39 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Question
Patents and copyrights are

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

4-40 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

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.

4-41 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Current Liabilities
Illustration 4-23

4-42 SO 6 Identify the sections of a classified balance sheet.

4-43
 The Classified Balance Sheet

Long-Term Liabilities
 Obligations a company expects to pay after one year.
Illustration 4-24

4-44 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

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

4-45 SO 6 Identify the sections of a classified balance sheet.

 The Classified Balance Sheet

Owner’s Equity
 Proprietorship - one capital account.
 Partnership - capital account for each partner.
 Corporation - Capital Stock and Retained Earnings.
Illustration 4-25

4-46 SO 6 Identify the sections of a classified balance sheet.

 APPENDIX4A
Reversing Entries
 It is often helpful to reverse some of the 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.

4-47 SO 7 Prepare reversing entries.

 Reversing Entries Example

Illustration: To illustrate the optional use of reversing entries for

accrued expenses, we will use the salaries expense transactions for
Pioneer Advertising Agency.

1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries

earned between October 15 and October 26.

2. October 31 (adjusting entry): Salaries 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 paid are $4,000.

Of this amount, $1,200 applied to accrued wages payable and
$2,800 was earned between November 1 and November 9.

4-48 SO 7 Prepare reversing entries.

 Reversing Entries Example
Illustration 4A-1

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 payable 1,200
Salaries expense 1,200

Subsequent Salary Entry

Nov. 9 Salaries expense 4,000
Cash 4,000

4-49 SO 7 Prepare reversing entries.

 Reversing Entries Example

Illustration 4A-2
Postings with
reversing
entries

4-50 SO 7 Prepare reversing entries.

 Key Points
 The procedures of the closing process are applicable to all
companies, whether they are using IFRS or GAAP.
 IFRS recommends but does not require the use of the title
“statement of financial position” rather than balance sheet.
 The format of statement of financial position information is often
presented differently under IFRS. Although no specific format is
required, most companies that follow IFRS present statement of
financial position information in this order:
► Noncurrent assets ► Noncurrent liabilities

► Current assets ► Current liabilities

► Equity
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 Key Points
 IFRS requires a classified statement of financial position except in
very limited situations. IFRS follows the same guidelines as this
textbook for distinguishing between current and noncurrent assets
and liabilities.
 Under IFRS, current assets are usually listed in the reverse order
of liquidity. For example, under GAAP cash is listed first, but
under IFRS it is listed last.
 Some companies report the subtotal net assets, which equals
total assets minus total liabilities.
 IFRS has many differences in terminology that you will notice in
this textbook.

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 Key Points
 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.
 Both GAAP and IFRS are increasing the use of fair value to report
assets. However, at this point IFRS has adopted it more broadly.
As examples, under IFRS companies can apply fair value to
property, plant, and equipment; natural resources; and in some
4-53 cases intangible assets.
 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. The
project has three phases. You can follow the joint financial presentation
project at the following link:

http://www.fasb.org/project/financial_statement_presentation.shtml.

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 IFRS Self-Test Questions
Which of the following statements is false?

a) Assets equals liabilities plus 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 IFRS, the statement of financial position is usually

referred to as the statement of assets and equity.

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 IFRS Self-Test Questions
A company has purchased a tract of land and expects to build a
production plant on the land in approximately 5 years. During the 5
years before construction, the land will be idle. Under IFRS, the
land should be reported as:

a) land expense.

b) property, plant, and equipment.

c) an intangible asset.

d) a long-term investment.

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 IFRS Self-Test Questions
Current assets under IFRS are listed generally:

a) by importance.

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

c) by longevity.

d) alphabetically.

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 Copyright

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