CH 04

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- entriesAn investments
Preparing closing trial avoidable step
Current assets
adjusting entries balance
Equity
Non-current
liabilities
Current liabilities
Slide
4-3
Using
Using A
AWorksheet
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
Worksheet
Illustration 4-2
Illustration: Preparing a trial balance
Slide
Steps
Steps in
in Preparing
Worksheet
1. Prepare a Trial Balance on the Worksheet
Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.
Slide
Steps
Steps in
in Preparing
Worksheet
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Slide
Steps
Steps in
in Preparing
Worksheet
2. Enter the Adjustments in the Adjustments Columns
(a)
(b)
Adjustments Key:
(a) Supplies Used.
(d) (b) Insurance Expired.
(c) Depreciation Expensed.
(d) (d) Service Revenue Earned.
(e)
(g) (e) Service Revenue Accrued.
(f) Interest Accrued.
(a) (g) Salaries Accrued.
(b)
(c)
(c)
(e)
(f) Enter adjustment amounts, total
(f) adjustments columns,
(g)
and check for equality.
Add additional accounts as needed.

Slide
Steps
Steps in
in Preparing
Worksheet
3. Complete the Adjusted Trial Balance Columns
(a)
(b)
(d)
(d)
(e)
(g)
(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)
Total the adjusted trial balance

Slide columns and check for equality.
Steps
Steps in
in Preparing
Worksheet
4. Extend Amounts to Financial Statement Columns
(a)
(b)
(d)
(d)
(e)
(g)
(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)
Extend all revenue and expense account

Slide balances to the income statement columns.
Steps
Steps in
in Preparing
Worksheet
4. Extend Amounts to Financial Statement Columns
(a)
(b)
(d)
(d)
(e)
(g)
(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)
Extend all asset, liability, and equity account

Slide balances to the statement of financial position
4-12 columns.
Steps
Steps in
in Preparing
Worksheet
5. Total Columns, Compute Net Income (Loss)
(a)
(b)
(d)
(d)
(e)
(g)
(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)
Slide Compute Net Income or Net Loss.

Steps
Steps in
in Preparing
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.
Slide
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
Preparing
Preparing Financial
Statements from
from aa Worksheet
Worksheet
Illustration 4-4
Slide
4-16
Preparing
Preparing Financial
Statements from
from aa Worksheet
Worksheet
Illustration 4-4
Slide
4-17
Preparing
Preparing Financial
Statements from
from aa Worksheet
Worksheet
Illustration 4-4
Slide
4-18
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
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
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
4-21 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
4-22 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
because Dividends are not permanent account; all
other accounts are
an expense. temporary accounts.
Slide
4-23 SO 2
Closing
Closing the
the Books
Books
Illustration 4-7
Closing entries
journalized
Closing
entries
need to
be
posted
Slide
4-24
Closing
Closing the
the Books
Books
Illustration 4-8
Posting of
closing entries
Posting
closing
entries
Slide
4-25
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
4-26
SO 3
Slide
4-27
Summary
Summary of
of the
the Accounting
Accounting Cycle
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
4. Prepare a trial balance
statements
6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries
Slide
4-28 SO 4 State the required steps in the accounting cycle.
Correcting
Correcting EntriesAn
EntriesAn 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
4-29 SO 5 Explain the approaches to preparing correcting entries.
Correcting
EntriesAn 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 50
Slide
Correcting
EntriesAn 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
Correcting Office equipment 450

Delivery equipment 45
entry
Accounts payable 405
Slide
Slide
4-32
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
4-33 SO 6 Identify the sections of a classified statement of financial position.
The
The Classified
Statement of
of Financial
Financial Position
Position
Intangible Assets
Assets that do not have physical substance.
Slide
The
The Classified
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 assets life.
Slide

The
The Classified
Statement of
of Financial
Financial Position
Position
Property, Plant, and Equipment

Illustration 4-20
(in billions)
Slide
The
The Classified
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
The
The Classified
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
The
The Classified
Statement of
of Financial
Financial Position
Position
Current Assets
Illustration 4-22
Slide
The
The Classified
Statement of
of Financial
Financial Position
Position
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.
Slide
The
The Classified
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
The
The Classified
Statement of
of Financial
Financial Position
Position
Non-current Liabilities
Obligations a company expects to pay after one year.
Slide
The
The Classified
Statement of
of Financial
Financial Position
Position
Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Slide
The
The Classified
Statement of
of Financial
Financial Position
Position
Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Slide
The
The Classified
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
The
The Classified
Statement of
of Financial
Financial Position
Position
Current Liabilities
Slide
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle

Key Differences
Procedures used to prepare the worksheet are the same for
all companies under both IFRS and GAAP.
Both GAAP and IFRS are consistent regarding the type of
financial statements prepared.
IFRS requires that specific items be reported on the
statement of financial position, whereas no such general
standard exists in GAAP.
Slide
4-47
Understanding
Understanding U.S.
U.S. GAAP
GAAP

Similarities
o Both require note disclosures on accounting policies and
judgments.
o Comparative prior period information must be presented
and financial statements must be prepared annually.
o Current/noncurrent classification for assets and liabilities is
normally required.
o Like IFRS, a classified statement of financial position is
usually used under GAAP.
Slide
4-48
Understanding
Understanding U.S.
U.S. GAAP
GAAP

Key Differences
IFRS companies may report PP&E first in their statements of
financial position. This presentation is not used under
GAAP.
Under IFRS, companies, under certain conditions, can
report property, plant and equipment at cost or at fair value.
While the use of the term reserve is discouraged by GAAP,
it is used extensively under IFRS.
Slide
4-49
Understanding
Understanding U.S.
U.S. GAAP
GAAP

Looking to the Future
The IASB and FASB are working on a project to converge
their standards related to financial statement presentation.
Proposal is that each of the statements will be organized in
the same format.
The same classifications used in the statement of financial
position would also be used in the income statement and
the statement of cash flows.
Slide
4-50
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
4-51 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
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
APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Illustration 4A-2
Postings with
reversing
entries
Slide
Copyright
Copyright
Copyright 2010 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
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errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Slide
4-55

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Chapter 4

Financial Accounting, IRFS

2. Explain the process of closing the books.

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

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

Steps in Preparing closing Reversing entries Intangible assets

Not a permanent accounting record.

Five step process.

Use of worksheet is optional.

Trial balance amounts come

Add additional accounts as needed.

Total the adjusted trial balance

Extend all revenue and expense account

Extend all asset, liability, and equity account

Slide Compute Net Income or Net Loss.

Statement of financial position and retained earnings

Companies journalize and post adjusting entries.

Journalizing and posting of adjusting entries follows

At the end of the accounting period, the company makes

Closing entries formally recognize, in the general

net income (or net loss) and

Closing entries are only at the end of the annual

9. Prepare a post-closing trial

8. Journalize and post closing

6. Prepare an adjusted trial 5. Journalize and post

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

Incorrect Delivery equipment 45

Correcting Office equipment 450

Presents a snapshot at a point in time.

To improve understanding, companies group similar

Standard Classifications Illustration 4-17

Assets Equity and Liabilities

Property, Plant, and Equipment

Currently used in operations.

Depreciation - allocating the cost of assets to a number of

Accumulated depreciation - total amount of depreciation

Property, Plant, and Equipment

Investments in long-term assets such as land or buildings that

Operating cycle is the average time it takes from the

Usually list notes payable first, followed by accounts

Liquidity - ability to pay obligations expected to be

Completing the Accounting Cycle

Completing the Accounting Cycle

Completing the Accounting Cycle

Completing the Accounting Cycle

Companies make a reversing entry at the beginning of

Each reversing entry is the exact opposite of the

The use of reversing entries does not change the

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

2. October 31 (adjusting entry): Salaries earned between October

3. November 9 (subsequent salary entry): Salaries paid are $4,000.

Initial Salary Entry

Subsequent Salary Entry

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