CHAPTER 4

COMPLETING THE
ACCOUNTING
CYCLE
Chapter
4-1
 Using A Worksheet

Worksheet
A multiple-column form used in preparing financial
statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.

Chapter
4-2 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
Illustration 4-2

Chapter
4-3 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
P4-1A The trial balance for Undercover Roofing for the month ended March
31, 2008, is as follows.

Trial Balance Other data:

Account Titles Dr. Cr.
Cash $ 2,500 1. Supplies on hand total $140.
Accounts Receivable 1,800 2. Depreciation for March is $200.
Roofing Supplies 1,100
Equipment 6,000 3. Unearned revenue amounted to
Accumulated Depreciation $ 1,200 $130 on March 31.
Accounts Payable 1,400
Unearned Revenue 300 4. Accrued salaries are $350.
I. Spy, Capital 7,000
I. Spy, Drawing 600 Instructions
Service Revenue 3,000
a. Prepare and complete the
Salaries Expense 700
Miscellaneous Expense 200 worksheet.
Totals $ 12,900 $ 12,900

Chapter
4-4 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,500
Accounts Receivable 1,800
Roofing Supplies 1,100
Equipment 6,000
Accumulated Depreciation 1,200
Accounts Payable 1,400
Unearned Revenue 300
I. Spy, Capital 7,000
I. Spy, Drawing 600
Service Revenue 3,000
Salaries Expense 700
Miscellaneous Expense 200
Totals 12,900 12,900
Trial balance amounts
come directly from ledger
Include all accounts.
accounts with
balances.
Chapter
4-5 LO 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 2,500
Accounts Receivable 1,800
Roofing Supplies 1,100 (a 960
Equipment 6,000 ) Adjustments Key:
Accumulated Depreciation 1,200 (b 200
Accounts Payable 1,400 ) (a) Supplies used.
Unearned Revenue 300 (c) 170
I. Spy, Capital 7,000
(b) Depreciation expense.
I. Spy, Drawing 600 (c) Service revenue earned.
Service Revenue 3,000 (c) 170
Salaries Expense 700 (d 350 (d) Salaries accrued.
Miscellaneous Expense 200 )
Totals 12,900 12,900
Supplies Expense (a 960
Depreciation Expense ) 200
(b
Salaries Payable ) (d 350
Totals 1,680 ) 1,680 Enter adjustment amounts,
total adjustments columns,
Add additional and check for equality.
accounts as
Chapter needed.
4-6
LO 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 2,500 2,500
Accounts Receivable 1,800 1,800
Roofing Supplies 1,100 (a 960 140
Equipment 6,000 ) 6,000
Accumulated Depreciation 1,200 (b 200 1,400
Accounts Payable 1,400 ) 1,400
Unearned Revenue 300 (c) 170 130
I. Spy, Capital 7,000 7,000
I. Spy, Drawing 600 600
Service Revenue 3,000 (c) 170 3,170
Salaries Expense 700 (d 350 1,050
Miscellaneous Expense 200 ) 200
Totals 12,900 12,900
Supplies Expense (a 960 960
Depreciation Expense ) 200
(b 200
Salaries Payable ) (d 350 350
Totals 1,680 ) 1,680 13,450 13,450

Total the adjusted trial

balance columns and
Chapter check for equality.
4-7 LO 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 2,500 2,500
Accounts Receivable 1,800 1,800
Roofing Supplies 1,100 (a 960 140
Equipment 6,000 ) 6,000
Accumulated Depreciation 1,200 (b 200 1,400
Accounts Payable 1,400 ) 1,400
Unearned Revenue 300 (c) 170 130
I. Spy, Capital 7,000 7,000
I. Spy, Drawing 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d 350 1,050 1,050
Miscellaneous Expense 200 ) 200 200
Totals 12,900 12,900
Supplies Expense (a 960 960 960
Depreciation Expense ) 200
(b 200 200
Salaries Payable ) (d 350 350
Totals 1,680 ) 1,680 13,450 13,450 2,410 3,170

Extend all revenue and expense

account balances to the income
Chapter statement columns.
4-8 LO 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 2,500 2,500 2,500
Accounts Receivable 1,800 1,800 1,800
Roofing Supplies 1,100 (a 960 140 140
Equipment 6,000 ) 6,000 6,000
Accumulated Depreciation 1,200 (b 200 1,400 1,400
Accounts Payable 1,400 ) 1,400 1,400
Unearned Revenue 300 (c) 170 130 130
I. Spy, Capital 7,000 7,000 7,000
I. Spy, Drawing 600 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d 350 1,050 1,050
Miscellaneous Expense 200 ) 200 200
Totals 12,900 12,900
Supplies Expense (a 960 960 960
Depreciation Expense ) 200
(b 200 200
Salaries Payable ) (d 350 350 350
Totals 1,680 ) 1,680 13,450 13,450 2,410 3,170 11,040 10,280

Extend all asset, liability, and equity

account balances to the balance sheet
Chapter columns.
4-9 LO 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 2,500 2,500 2,500
Accounts Receivable 1,800 1,800 1,800
Roofing Supplies 1,100 (a 960 140 140
Equipment 6,000 ) 6,000 6,000
Accumulated Depreciation 1,200 (b 200 1,400 1,400
Accounts Payable 1,400 ) 1,400 1,400
Unearned Revenue 300 (c) 170 130 130
I. Spy, Capital 7,000 7,000 7,000
I. Spy, Drawing 600 600 600
Service Revenue 3,000 (c) 170 3,170 3,170
Salaries Expense 700 (d 350 1,050 1,050
Miscellaneous Expense 200 ) 200 200
Totals 12,900 12,900
Supplies Expense (a 960 960 960
Depreciation Expense ) 200
(b 200 200
Salaries Payable ) (d 350 350 350
Totals 1,680 ) 1,680 13,450 13,450 2,410 3,170 11,040 10,280
Net Income 760 760
Totals 3,170 3,170 11,040 11,040

Compute Net income or Net loss.

Chapter
4-10 LO 1 Prepare a worksheet.
 Steps in Preparing a Worksheet

Review Question
Net income is shown on a work sheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance sheet
debit column.
d. income statement debit column and balance sheet
credit column.

Chapter
4-11 LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet

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

Chapter
4-12 LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet

b. Prepare an income statement for the month ended March 31,

2008.
Undercover Roofing
Income Statement
For the Month Ended March 31, 2008
Revenues $ 3,170
Service revenues
Expenses
Salaries expense $ 1,050
Supplies expense 960
Depreciation expense 200
Miscellaneous expense 200
Total expenses 2,410
Net income $ 760
Chapter
4-13 LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet

b. Prepare an owner’s equity statement for the month ended March

31, 2008.

Undercover Roofing
Statement of Owner's Equity
For the Month Ended March 31, 2008
I. Spy, Capital, March 1 $ 7,000
Add: Net income 760
Less: Drawings (600)
I. Spy, Capital, March 31 $ 7,160

LO 1 Prepare a worksheet.
Chapter
4-14
Preparing Financial Statements from a Worksheet

b. Prepare a balance sheet as of March 31, 2008.

Undercover Assets
Current assets
Roofing Cash $ 2,500
Accounts receivable 1,800
Balance Sheet Roofing supplies 140
Total current assets 4,440
March 31, 2008 Property, plant, and equipment
Equipment 6,000
Less: Accumulated depreciation 1,400 4,600
Total assets $ 9,040

Liabilities and Owner's Equity

Current liabilities
Accounts payable $ 1,400
Salaries payable 350
Unearned revenue 130
Total current liabilities 1,880
Owner's equity
I. Spy, Capital 7,160
Total liabilities and owner's equity $ 9,040
Chapter
4-15 LO 1 Prepare a worksheet.
Preparing Adjusting Entries from a Worksheet

Adjusting Entries
The adjusting entries are prepared from the
adjustments columns of the worksheet.
Journalizing and posting of adjusting entries follows
the preparation of financial statements when a
worksheet is used.

Chapter
4-16 LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet

c. Journalize the adjusting entries from the adjustments

columns of the worksheet.
Date Account Title Ref. Debit Credit
Mar. 31 Supplies expense 960
Roofing supplies 960

Depreciation expense 200

Accumulated depreciation 200

Unearned revenue 170

Service revenue 170

Salaries expense 350

Salaries payable 350

Chapter
4-17 LO 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

Chapter
4-18 LO 2 Explain the process of closing the books.
 Closing the Books

Closing entries formally recognize, in the general ledger,

the transfer of
net income (or net loss) and
owner’s drawing
to owner’s capital.

Only at the end of the annual accounting period.

Chapter
4-19 LO 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.

Chapter
4-20 LO 2 Explain the process of closing the books.
 Closing the Books
d. Journalize the closing entries from the financial statement
columns of the worksheet.
Service revenue 3,170
Income summary 3,170
Income summary 2,410
Closing
Salary expense 1,050
Entries
Supplies expense 960
need to
Depreciation expense 200
be
Miscellaneous expense 200
Posted
Income summary 760
I. Spy, Capital 760

I. Spy, Capital 600

I. Spy, Drawing 600
Chapter
4-21 LO 2 Explain the process of closing the books.
 Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account

balances after journalizing and posting of closing entries.

Post-Closing
All temporary accounts will Account Titles
Trial Balance
Dr. Cr.
have zero balances. Cash $ 2,500
Accounts Receivable 1,800
Roofing Supplies 140
Equipment 6,000
Accumulated Depreciation $ 1,400
Accounts Payable 1,400
Salaries payable 350
Unearned Revenue 130
I. Spy, Capital 7,160
Totals $ 10,440 $ 10,440

Chapter
4-22 LO 3 Describe the content and purpose of a post-closing trial balance.
 Summary of the Accounting Cycle
Illustration 4-12
1. Analyze business transactions

9. Prepare a post-closing trial

2. Journalize the transactions
balance

8. Journalize and post closing

3. Post to ledger accounts
entries

7. Prepare financial statements 4. Prepare a trial balance

6. Prepare an adjusted trial 5. Journalize and post adjusting

balance entries

Chapter
4-23 LO 4 State the required steps in the accounting cycle.
 Correcting Entries—An Avoidable Step

Correcting entries
are unnecessary if the records are error-free.
are made whenever an error is discovered.
must be posted before closing entries.
Instead of preparing a correcting entry, it is possible to reverse
the incorrect entry and then prepare the correct entry.

Chapter
4-24 LO 5 Explain the approaches to preparing correcting entries.
 Correcting Entries—An Avoidable Step
BE4-9 At Batavia Company, the following errors were discovered after
the transactions had been journalized and posted. Prepare the correcting
entries.
1. A collection on account from a customer was recorded as a debit to Cash
and a credit to Service Revenue for $780.

Incorrect Cash 780

entry Service revenue 780
Correct entry Cash 780
Accounts receivable 780
Correcting Service revenue 780
entry
Accounts receivable 780
Chapter
4-25 LO 5 Explain the approaches to preparing correcting entries.
 Correcting Entries—An Avoidable Step
BE4-9 At Batavia Company, the following errors were discovered after
the transactions had been journalized and posted. Prepare the correcting
entries.
2. The purchase of supplies on account for $1,570 was recorded as a debit
to Supplies and a credit to Accounts Payable $1,750.

Incorrect Supplies 1,750

entry Accounts payable 1,750
Correct entry Supplies 1,570
Accounts payable 1,570
Correcting Accounts payable 180
entry
Supplies 180
Chapter
4-26 LO 5 Explain the approaches to preparing correcting entries.
 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

Chapter
4-27 LO 6 Identify the sections of a classified balance sheet.
 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.

Chapter
4-28
 The Classified Balance Sheet

Current Assets
Illustration 4-19

Companies usually list current asset accounts in the order they expect
to convert them into cash.
Chapter
4-29
 The Classified Balance Sheet

Review Question
Cash, and other resources that are reasonably expected to
be realized in cash or sold or consumed in the business
within one year or the operating cycle, are called:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

Chapter LO 6 Identify the sections of a classified balance sheet.

4-30
 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.

Chapter
4-31 LO 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.

LO 6 Identify the sections of a classified balance sheet.

Chapter
4-32
 The Classified Balance Sheet
Property, Plant, and Equipment

Chapter LO 6 Identify the sections of a classified balance sheet.

4-33
 The Classified Balance Sheet

Intangible Assets
Assets that do not have physical substance.

Chapter LO 6 Identify the sections of a classified balance sheet.

4-34
 The Classified Balance Sheet

Review Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

LO 6 Identify the sections of a classified balance sheet.

Chapter
4-35
 The Classified Balance Sheet

Current Liabilities
Obligations the company is to pay within the coming
year.
Usually list notes payable first, followed by accounts
payable. Other items follow in order of magnitude.
Liquidity - ability to pay obligations expected to be
due within the next year.

Chapter LO 6 Identify the sections of a classified balance sheet.

4-36
 The Classified Balance Sheet

Current Liabilities

Chapter
4-37 LO 6 Identify the sections of a classified balance sheet.
 The Classified Balance Sheet
Long-Term Liabilities
Obligations a company expects to pay after one year.

LO 6 Identify the sections of a classified balance sheet.

Chapter
4-38
 The Classified Balance Sheet

Review Question
Which of the following is not a long-term liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable

Chapter
4-39
 The Classified Balance Sheet

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

Chapter
4-40