Chapter 4

Completing the Accounting Cycle

Chapter 4-1

Study Objectives
1. 2. 3.

Prepare a worksheet. Explain the process of closing the books. Describe the content and purpose of a post-closing trial balance.

4.
5.

State the required steps in the accounting cycle.

Explain the approaches to preparing correcting entries.

6.

Identify the sections of a classified balance sheet.

Chapter 4-2

Completing the Accounting Cycle

Using a Worksheet

Closing the Books

Summary of Accounting Cycle

Classified Balance Sheet

Steps in preparation
Preparing financial statements

Preparing closing entries

Posting closing entries Preparing a post-closing trial balance

Reversing entriesAn optional step

Correcting entriesAn avoidable step

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

Preparing adjusting entries

Chapter 4-3

Stockholders equity

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 4-4

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

Illustration 4-1

Chapter 4-5

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

Illustration The trial balance for Undercover Roofing for the month ended March 31, 2008, is as follows.
Trial Balance Account Titles 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 Common stock 1,000 Retained earnings 6,000 Dividends 600 Service Revenue 3,000 Salaries Expense 700 Miscellaneous Expense 200 Totals $ 12,900 $ 12,900
Chapter 4-6

Other data: 1. Supplies on hand total $140. 2. Depreciation for March is $200. 3. Unearned revenue amounted to $130 on March 31. 4. Accrued salaries are $350. Instructions a. Prepare and complete the worksheet.
SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

1. Prepare a Trial Balance on the Worksheet
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Trial Balance Dr. Cr. 2,500 1,800 1,100 6,000 1,200 1,400 300 1,000 6,000 600 3,000 700 200 12,900 12,900 Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr.

Include all accounts with balances.

Chapter 4-7

Trial balance amounts come directly from ledger accounts.

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

2. Enter the Adjustments in the Adjustments Columns
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 (b) 200 1,200 1,400 300 (c) 170 1,000 6,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. Income Statement Dr. Cr. Balance Sheet Dr. Cr.

Adjustments Key: (a) Supplies used. (b) Depreciation expense. (c) Service revenue earned. (d) Salaries accrued.

Chapter 4-8

Add additional accounts as needed.

Enter adjustment amounts, total adjustments columns, and check for equality.
SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

3. Complete the Adjusted Trial Balance Columns
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 (b) 200 1,200 1,400 300 (c) 170 1,000 6,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 13,450 350 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr.

Chapter 4-9

Total the adjusted trial balance columns and check for equality.

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

4. Extend Amounts to Financial Statement Columns
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 (b) 200 1,200 1,400 300 (c) 170 1,000 6,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 13,450 350 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr.

3,170 1,050 200 960 200 2,410 3,170

Chapter 4-10

Extend all revenue and expense account balances to the income statement columns.

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

4. Extend Amounts to Financial Statement Columns
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 (b) 200 1,200 1,400 300 (c) 170 1,000 6,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 13,450 350 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600

3,170 1,050 200 960 200 2,410 3,170 11,040 350 10,280

Chapter 4-11

Extend all asset, liability, and equity account balances to the balance sheet columns.

SO 1 Prepare a worksheet.

Steps in Preparing a Worksheet

5. Total Columns, Compute Net Income (Loss)
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Unearned Revenue Common stock Retained earnings Dividends Service Revenue Salaries Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries Payable Totals Net Income Totals Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 (a) 960 1,100 6,000 (b) 200 1,200 1,400 300 (c) 170 1,000 6,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 1,680 Adjusted Trial Balance Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600 3,170 1,050 200 960 200 13,450 350 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr. 2,500 1,800 140 6,000 1,400 1,400 130 1,000 6,000 600

3,170 1,050 200 960 200 2,410 760 3,170 3,170 3,170 11,040 11,040 350 10,280 760 11,040

Compute Net income or Net loss.

Chapter 4-12

SO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet

Worksheet
Income statement is prepared from the income statement columns. Balance sheet and retained earnings statement are prepared from the balance sheet columns.

Chapter 4-13

SO 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 Service revenues Expenses Salaries expense Supplies expense Depreciation expense Miscellaneous expense Total expenses Net income
Chapter 4-14

3,170

$ 1,050 960 200 200 $ 2,410 760

SO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet

b. Prepare a statement of retained earnings for the month ended March 31, 2008.

Undercover Roofing Retained Earnings Statement For the Month Ended March 31, 2008 Retained earnings, beginning Add: Net income Less: Dividends Retained earnings, ending $ 6,000 760 (600) 6,160

Chapter 4-15

SO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet

b. Prepare a balance sheet as of March 31, 2008.
Undercover Roofing Balance Sheet March 31, 2008
Assets Current assets Cash Accounts receivable Roofing supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total assets $ 2,500 1,800 140 4,440

6,000 1,400 $

4,600 9,040

Liabilities and Stockholders' Equity Current liabilities Accounts payable Salaries payable Unearned revenue Total current liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholder's equity

1,400 350 130 1,880 1,000 6,160 9,040

Chapter 4-16

SO 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 4-17

SO 1 Prepare a worksheet.

Preparing Financial Statements from a Worksheet

c. Journalize the adjusting entries from the

adjustments columns of the worksheet.

Account Title Supplies expense Roofing supplies Depreciation expense Accumulated depreciation Unearned revenue Service revenue Salaries expense Salaries payable Ref.

Date Mar. 31

Debit 960

Credit 960

200 200 170 170 350 350

SO 1 Prepare a worksheet.

Chapter 4-18

Closing the Books

At the end of the accounting period, the company makes the accounts ready for the next period.
Illustration 4-5

Chapter 4-19

SO 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

dividends to retained earnings at the end of the accounting period.

Chapter 4-20

SO 2 Explain the process of closing the books.

Closing the Books

Note:
Dividends are closed directly to Retained Earnings and not to Income Summary because Dividends are not an expense.
Illustration 4-6

Retained Earnings is a permanent account; all other accounts are temporary accounts.

Chapter 4-21

SO 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 Income summary Closing Entries need to be Posted Income summary Salary expense Supplies expense Depreciation expense Miscellaneous expense Income summary Retained earnings 3,170 2,410 3,170 1,050 960 200 200 760 600

760

Retained earnings Dividends

Chapter 4-22

600

SO 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.

All temporary accounts will have zero balances.

Post-Closing Trial Balance Account Titles Dr. Cr. 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 Common Stock 1,000 Retained Earnings 6,160 Totals $ 10,440 $ 10,440

Chapter 4-23

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

Summary of the Accounting Cycle

1. Analyze business transactions 9. Prepare a post-closing trial balance 8. Journalize and post closing entries 7. Prepare financial statements 6. Prepare an adjusted trial balance 2. Journalize the transactions 3. Post to ledger accounts
Illustration 4-12

4. Prepare a trial balance 5. Journalize and post adjusting entries

Chapter 4-24

SO 4 State the required steps in the accounting cycle.

Correcting EntriesAn 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 4-25

SO 5 Explain the approaches to preparing correcting entries.

Correcting EntriesAn 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 entry Correct entry
Correcting entry
Chapter 4-26

Cash Service revenue Cash Accounts receivable Service revenue Accounts receivable

780 780 780 780 780 780

SO 5 Explain the approaches to preparing correcting entries.

Correcting EntriesAn 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 entry Correct entry
Correcting entry
Chapter 4-27

Supplies Accounts payable Supplies Accounts payable Accounts payable Supplies

1,750 1,750 1,570 1,570 180 180

SO 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
Assets Liabilities and Owners Equity Current assets Long-term investments Property, plant, and equipment Intangible assets
Chapter 4-28

Illustration 4-17

Current liabilities Long-term liabilities Stockholders equity

SO 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 4-29

SO 6 Identify the sections of a classified balance sheet.

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 4-30

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

Chapter 4-31

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 assets life.
Chapter 4-32

SO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

Property, Plant, and Equipment
Illustration 4-21

Chapter 4-33

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

Chapter 4-34

SO 6 Identify the sections of a classified balance sheet.

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.

Chapter 4-35

SO 6 Identify the sections of a classified balance sheet.

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 4-36

SO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

Current Liabilities
Illustration 4-23

Chapter 4-37

SO 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.
Illustration 4-24

Chapter 4-38

SO 6 Identify the sections of a classified balance sheet.

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

SO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

Stockholders (Owners) Equity
Proprietorship - one capital account.

Partnership - capital account for each partner.

Corporation - Capital Stock and Retained Earnings.
Illustration 4-25

Chapter 4-40

SO 6 Identify the sections of a classified balance sheet.