School of Commerce

Fundamentals of Accounting I (IFRS By: Tewodros

4-1 Edition) Endale 1
 Completing the
Chapter 4 Accounting Cycle
Learning Objectives
After studying this chapter, you should be able to:

1. Prepare a worksheet.

2. Explain the process of closing the books.

3. Describe the content and purpose of a post-closing trial balance.

4. State the required steps in the accounting cycle.

5. Explain the approaches to preparing correcting entries.

6. Identify the sections of a classified statement of financial position.

4-2
 Preview of Chapter 4

Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
4-3
 Using a Worksheet

Preparing a Worksheet
 Multiple-column form used in preparing financial
statements.

 Not a permanent accounting record.

 Five step process.

 Use of worksheet is optional.

4-4 LO 1 Prepare a worksheet.

 Steps in Preparing a Worksheet
Illustration 4-1

4-5 LO 1 Prepare a worksheet.

 Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet Illustration 4-2
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Share Capital-Ordinary 10,000
Dividends 500
Service Revenue 10,000

Salaries and Wages Exp. 4,000

Rent Expense 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

4-6 LO 1 Prepare a worksheet.

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

Adjusting
Journal
Entries
(Chapter 3)

4-7
LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500 (a) 1,500
Prepaid Insurance 600 (b) 50
Equipment 5,000 Adjustments Key:
Notes Payable 5,000
Accounts Payable 2,500
(a) Supplies Used.
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Share Capital-Ordinary 10,000
Dividends 500 (c) Depreciation Expensed.
Service Revenue 10,000 (d) 400 (d) Service Revenue Earned.
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 (e) Service Revenue Accrued.
Rent Expense 900 (f) Interest Accrued.
Totals 28,700 28,700
Supplies Expense (a) 1,500 (g) Salaries Accrued.
Insurance Expense (b) 50
Accumulated Depreciation (c) 40
Depreciation Expense (c) 40
Accounts Receivable (e) 200
Interest Expense (f)
50
Enter adjustment amounts, total
Interest Payable (f) 50 adjustments columns,
(g) 1,200
Salaries and Wages Payable and check for equality.
Totals 3,440 3,440

Add additional accounts as needed.

4-8 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital-Ordinary 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200
Rent Expense 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500
Insurance Expense (b) 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40
Accounts Receivable (e) 200 200
(f)
Interest Expense 50 50
Interest Payable (f) 50 50
Salaries and Wages Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190

Total the adjusted trial balance

columns and check for equality.
4-9 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital-Ordinary 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200
(f)
Interest Expense 50 50 50
Interest Payable (f) 50 50
Salaries and Wages Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600

Extend all revenue and expense account

balances to the income statement columns.
4-10 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 (d) 400 800 800
Share Capital-Ordinary 10,000 10,000 10,000
Dividends 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450
Compute Net Income or Net Loss.
4-11 LO 1 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. statement of financial position debit column only.

c. income statement credit column and statement of

financial position debit column.

d. income statement debit column and statement of

financial position credit column.

4-12 LO 1 Prepare a worksheet.

 Using a Worksheet

Preparing Statements from a Worksheet

 Income statement is prepared from the income
statement columns.

 Statement of financial position and retained earnings

statement are prepared from the statement of financial
position columns.

 Companies journalize and post adjusting entries.

4-13 LO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration 4-4

4-14 LO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration 4-4

4-15 LO 1 Prepare a worksheet.

 Preparing Statements from a Worksheet
Illustration
4-4

4-16 LO 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 LO 1 Prepare a 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.

Cash Statement of financial position (debit)

Accumulated Depreciation Statement of financial position (credit)
Accounts Payable Statement of financial position (credit)
Dividends Statement of financial position (debit)
Service Revenue Income statement (credit)
Salaries and Wages Expense Income statement (debit)

4-18 LO 1
 Closing the Books

At the end of the accounting period, the company makes

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

4-19 LO 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
 dividends

to retained earnings.

Closing entries are only made at the end of the annual

accounting period.

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

 Closing the Books

Note:
Dividends are closed directly Illustration 4-6

to retained earnings and not

to Income Summary because
Retained earnings is a
dividends are not an permanent account; all
other accounts are
expense. temporary accounts.

4-21 LO 2
 Closing the Books

Closing
Entries
Illustrated

Illustration 4-7
Closing entries
journalized

4-22
 Closing the Books

Posting
Closing
Entries

Illustration 4-8

4-23 LO 2
 The worksheet for Hancock Company shows the following in the
financial statement columns:
Dividends €15,000
Share Capital-ordinary €42,000
Net income €18,000
Prepare the closing entries at December 31 that affect equity.

Income summary 18,000

Retained earnings 18,000
Retained earnings 15,000
Dividends 15,000

4-24
LO 1
4-25
 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

4-26 LO 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

4-27 LO 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.

4-28 LO 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
4-29 LO 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
4-30 LO 5 Explain the approaches to preparing correcting entries.
4-31
 The Classified Statement of Financial Position

 Presents a snapshot at a point in time.

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

Standard Classifications
Illustration 4-17

4-32 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Illustration
4-18

4-33 LO 6
 The Classified Statement of Financial Position

Illustration
4-18

4-34 LO 6
 The Classified Statement of Financial Position

Intangible Assets
 Assets that do not have physical substance.
Illustration 4-19

4-35 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Question
Patents and copyrights are

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

4-36 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

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 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Property, Plant, and Equipment

Illustration 4-20

4-38 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Long-Term Investments
 Investments in ordinary shares and bonds of other
companies.
 Investments in non-current assets such as land or buildings
that a company is not using in its operating activities.
Illustration 4-21

4-39 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

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.

4-40 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Assets Illustration 4-22

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

4-41 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Question
Assets that a company expects to convert to cash or use up
within one year or its operating cycle, whichever is longer
are called:

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

4-42 LO 6 Identify the sections of a classified statement of financial position.

4-43
 Baxter Hoffman recently received the following information related to Hoffman
Company’s December 31, 2014, statement of financial position.
Prepaid insurance $ 2,300 Inventory $3,400
Cash 800 Accumulated depreciation—
Equipment 2,700 Equipment 10,700
Accounts receivable 1,100
Prepare the asset section of Hoffman Company’s statement of financial position.

4-44
LO 6
 The Classified Statement of Financial Position

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

Illustration 4-23

4-45 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

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

4-46 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

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.

4-47 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Liabilities
Illustration 4-25

4-48 LO 6 Identify the sections of a classified statement of financial position.

4-49
 The following accounts were taken from the financial statements of Callahan
Company.

Match each of the following accounts to its proper statement of financial

position classification, shown below. If the item would not appear on a
statement of financial position, use “NA.”
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Non-current liabilities (NCL)
Property, plant, and equipment (PPE) Equity (E)
Intangible assets (IA)

4-50 LO 6
 APPENDIX 4A REVERSING ENTRIES

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.

4-51 LO 7 Prepare reversing entries.

 APPENDIX 4A REVERSING ENTRIES

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 and
2,800 was earned between November 1 and November 9.

4-52 LO 7 Prepare reversing entries.

 APPENDIX 4A REVERSING ENTRIES

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 and Wages expense

Subsequent Salary Entry

1,200
Nov. 9 Salaries and Wages expense 4,000
Cash

4,000
4-53 LO 7 Prepare reversing entries.
 APPENDIX 4A REVERSING ENTRIES

Illustration 4A-2
Postings with
reversing
entries

4-54 LO 7 Prepare reversing entries.

 Another Perspective

Key Points
 IFRS officially uses the term statement of financial position in its
literature, while in the United States it is often referred to as the balance
sheet.
 IFRS requires that specific items be reported on the statement of
financial position, whereas no such general standard exists in GAAP.
However, under GAAP, public companies must follow U.S. Securities
and Exchange Commission (SEC) regulations, which require specific line
items as well. In addition, specific GAAP standards mandate certain
forms of reporting statement of financial position information. The SEC
guidelines are more detailed than IFRS.

4-55
 Another Perspective

Key Points
 While IFRS companies often report non-current assets before current
assets in their statements of financial position, this is never seen under
GAAP. Also, some IFRS companies report the subtotal “net assets,”
which equals total assets minus total liabilities. This practice is also not
seen under GAAP.
 In general, GAAP follows the similar guidelines as this textbook for
presenting items in the current asset section, except that under GAAP
items are listed in order of liquidity, while under IFRS they are often
listed in reverse order of liquidity. For example, under GAAP cash is
listed first, but under IFRS it is listed last.
 A key difference in valuation is that under IFRS, companies, under
certain conditions, can report property, plant, and equipment at cost or at
fair value, whereas under GAAP this practice is not allowed.
4-56
 Another Perspective

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.
 GAAP has many differences in terminology from what are shown in your
textbook. For example, in the sample balance sheet (statement of
financial position) illustrated below, notice in the investment category that
shares are called stock. Also note that Share Capital—Ordinary is referred
to as Common Stock. In addition, the format used for statement of
financial position presentation is often different between GAAP and IFRS.
4-57
 Another Perspective

Key Points
 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 cases intangible assets

4-58
 Another Perspective

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.

4-59
 Another Perspective

GAAP Self-Test Questions

Which of the following statements is false?

a) Assets equals liabilities plus stockholders’ equity.

b) Under IFRS, companies sometimes net liabilities against

assets to report “net assets.”

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

framework project.

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

referred to as the statement of assets and equity.

4-60
 Another Perspective

GAAP Self-Test Questions

Current assets under GAAP are listed generally:

a) by importance.

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

c) by order of liquidity.

d) alphabetically.

4-61
 Another Perspective

GAAP Self-Test Questions

Companies that use GAAP:

a) may report all their assets on their balance sheets at fair

value.

b) often offset assets against liabilities and show net assets and
net liabilities on their balance sheets, rather than the
underlying detailed line items.

c) generally report current assets before non-current assets on

their balance sheets.

d) do not have any guidelines as to what should be reported on

4-62 their balance sheets.
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