Chapter 4

Completing the
Accounting Cycle

Financial Accounting, IRFS

Weygandt Kimmel Kieso
Slide
4-1
 Study
Study Objectives
Objectives

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.

Slide
4-2
 Completing
Completing the
the Accounting
Accounting Cycle
Cycle

Classified
Summary of
Using a Closing the Statement of
Accounting
Worksheet Books Financial
Cycle
Position

Steps in Preparing closing Reversing entries Intangible assets

preparation entries —An optional Property, plant,
Preparing Posting closing step and equipment
financial entries Correcting Long-term
statements Preparing a post- entries—An investments
Preparing closing trial avoidable step
Current assets
adjusting entries balance
Equity
Non-current
liabilities
Current liabilities

Slide
4-3
 Using
Using A
A Worksheet
Worksheet

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

Slide
4-4 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 4-1

Slide
4-5
SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 4-2
Illustration: Preparing a trial balance

Slide
4-6 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
1. Prepare a Trial Balance on the Worksheet
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
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Share Capital 10,000
Dividends 500
Service Revenue 10,000

Salaries Expense 4,000

Rent 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

Slide
4-7 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

Slide
4-8 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
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
Advertising 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.
Share Capital 10,000 )
Dividends 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 900 ) (f) Interest Accrued.
Totals 28,700 28,700
Advertising 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
Salaries Payable
)
1,200 and check for equality.
Totals 3,440 3,440

Add additional accounts as needed.

Slide
4-9 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
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
Advertising 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
Share Capital 10,000 ) 10,000
Dividends 500 500
Service Revenue 10,000 (d 400 10,600
)
(e 200
Salaries Expense 4,000 (g 1,200 ) 5,200
Rent 900 ) 900
Totals 28,700 28,700
Advertising 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

Slide columns and check for equality.
4-10 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
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
Advertising 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
Share Capital 10,000 ) 10,000
Dividends 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 900 ) 900 900
Totals 28,700 28,700
Advertising 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

Slide balances to the income statement columns.
4-11 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement
Columns Trial Balance Adjustments
Adjusted
Trial Balance
Income
Statement
Statement of
Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Advertising 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
Share Capital 10,000 ) 10,000 10,000
Dividends 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 900 ) 900 900
Totals 28,700 28,700
Advertising 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

Extend all asset, liability, and equity

Slide account balances to the statement of
SO 1 Prepare a
4-12 financial position columns.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
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
Advertising 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
Share Capital 10,000 ) 10,000 10,000
Dividends 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 900 ) 900 900
Totals 28,700 28,700
Advertising 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 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

Slide Compute Net Income or Net Loss.

4-13 SO 1 Prepare a worksheet.
 Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet

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.

Slide
4-14 SO 1 Prepare a worksheet.
 Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Slide
4-15
SO 1 Prepare a worksheet.
 Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet

Illustration 4-4

Slide
4-16
SO 1 Prepare a worksheet.
 Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Slide
4-17
 Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
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.

Slide
4-18 SO 1 Prepare a worksheet.
 Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

Slide
4-19 SO 1 Prepare a worksheet.
 Closing
Closing the
the Books
Books

At the end of the accounting period, the company makes

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

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

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 at the end of the annual

accounting period.

Slide
4-21 SO 2 Explain the process of closing the books.
 Closing
Closing the
the Books
Books

Note:
Dividends are closed directly Illustration 4-6

to Retained Earnings and

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

Slide
4-22 SO 2
 Closing
Closing the
the Books
Books
Illustration 4-7
Closing entries
journalized

Closing
entries
need to
be
posted

Slide
4-23
 Closing
Closing the
the Books
Books
Illustration 4-8
Posting of
closing entries

Posting
closing
entries

Slide
4-24
 Preparing
Preparing aa Post-Closing
Post-Closing Trial
Trial Balance
Balance
Purpose is to prove the equality of the permanent account
balances after journalizing and posting of closing entries.

Temporary
accounts
will have
zero
balances.

Illustration 4-9

Slide
4-25
SO 3
 Summary
Summary of
of the
the Accounting
Accounting Cycle
Cycle
Illustration 4-12
1.
1. Analyze
Analyze business
business transactions
transactions

9.
9. Prepare
Prepare aa post-closing
post-closing trial
trial 2.
2. Journalize
Journalize the
the transactions
transactions
balance
balance

8.
8. Journalize
Journalize and
and post
post closing
closing 3.
3. Post
Post to
to ledger
ledger accounts
accounts
entries
entries

7.
7. Prepare
Prepare financial
financial 4.
4. Prepare
Prepare aa trial
trial balance
balance
statements
statements

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

Slide
4-26 SO 4 State the required steps in the accounting cycle.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable Step
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.

Slide
4-27 SO 5 Explain the approaches to preparing correcting entries.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable Step
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
Slide
50
4-28 SO 5 Explain the approaches to preparing correcting entries.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable Step
Step
Illustration (Case 2): On May 18, Mercato purchased on account
office equipment costing $450. The transaction was journalized
and posted as a debit to Delivery Equipment $45 and a credit to
Accounts Payable $45. The error was discovered on June 3.

Incorrect Delivery equipment 45

entry Accounts payable
45
Office equipment 450
Correct
entry Accounts payable
450
Office equipment 450
Correcting
Delivery equipment
entry
Accounts payable 45
Slide 405
4-29 SO 5 Explain the approaches to preparing correcting entries.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
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

Assets Equity and Liabilities

Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets

Slide
4-30 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Intangible Assets
Assets that do not have physical substance.

Slide
4-31 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
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.

Slide
4-32 SO 6 Identify the sections of a classified statement of financial position.
 ₩

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Property, Plant, and Equipment

Illustration 4-20

(in billions)

Slide
4-33 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

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.

Slide
4-34 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
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.

Slide
4-35 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Current Assets
Illustration 4-22

Slide
4-36 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation – Share Capital and Retained Earnings.
Illustration 4-23

Slide
4-37 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Non-current Liabilities
Obligations a company expects to pay after one year.

Slide
4-38 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

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.

Slide
4-39 SO 6 Identify the sections of a classified statement of financial position.
 The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Current Liabilities

Slide
4-40 SO 6 Identify the sections of a classified statement of financial position.
 APPENDIX
APPENDIX Reversing
Reversing Entries
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.

Slide
4-41 SO 7 Prepare reversing entries.
 APPENDIX
APPENDIX Reversing
Reversing Entries
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 payable and
$2,800 was earned between November 1 and November 9.

Slide
4-42 SO 7 Prepare reversing entries.
 APPENDIX
APPENDIX Reversing
Reversing Entries
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 expense 1,200

Subsequent Salary Entry

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

Slide
4-43 SO 7 Prepare reversing entries.
 APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Illustration 4A-2
Postings with
reversing
entries

Slide
4-44 SO 7 Prepare reversing entries.
 Copyright
Copyright

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Slide
4-45