1. John Wiley & Sons, Inc.
Financial Accounting, 4e
Weygandt, Kieso, & Kimmel
Prepared by
Gregory K. Lowry
Mercer University
Marianne Bradford
The University of Tennessee
2. After studying this chapter, you should be able to:
1 Prepare a work sheet.
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 balance sheet.
CHAPTER 4
COMPLETION OF THE ACCOUNTING CYCLE
3. COMPLETION OF THE
ACCOUNTING CYCLE
Using a Work Sheet
Steps in
preparation
Preparing financial
statements
Preparing
adjusting entries
Closing the Books
Preparing closing
entries
Posting closing
entries
Preparing a post-
closing trial
balance
Summary of
Accounting Cycle
Reversing entries -
an optional step
Correcting entries-
an avoidable step
Classified
Balance
Sheet
Standard
classification
Balance sheet
illustration
PREVIEW OF CHAPTER 4
4. A work sheet is a multiple-column form that
may be used in the adjustment process and in
preparing financial statements.
It is a working tool or a supplementary
device for the accountant and not a
permanent accounting record.
Use of a work sheet should make
the preparation of adjusting entries
and financial statements easier.
WORK SHEET
6. The use of a work sheet is optional.
When a work sheet is used, financial statements
are prepared from the worksheet.
Adjustments are journalized and posted from
the work sheet after financial statements are
prepared.
WORK SHEET
7. STEPS IN PREPARING
A WORKSHEET
1 Prepare a trial balance on the worksheet
2 Enter the adjustments in the adjustments
columns
3 Enter adjusted balances in the adjusted
trial balance columns
4 Extend adjusted trial balance amounts
to appropriate financial statement
columns
5 Total the statement columns, compute net
income (loss), and complete the worksheet
13. GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
2002
a
Oct. 31
b
31
c
31
d
31
e
31
f
31
g
31
ADJUSTING ENTRIES
JOURNALIZED
Advertising Supplies Expense 1,500
Advertising Supplies 1,500
Insurance Expense 50
Prepaid Insurance 50
Depreciation Expense 40
Accumulated Depreciation - Office Equipment 40
Unearned Revenue 400
Service Revenue 400
Accounts Receivable 200
Service Revenue 200
Interest Expense 50
Interest Payable 50
Salaries Expense
1,200 Salaries Payable
1,200
14. PIONEER ADVERTISING AGENCY
Income Statement
For the Month Ended October 31, 2002
Revenues
Service Revenue
Expenses
Salaries expense
Advertising supplies expense
Rent expense
Insurance expense
Interest expense
Depreciation expense
Total expenses
Net income
PREPARATION OF FINANCIAL STATEMENTS
INCOME STATEMENT
$ 10,600
$ 5,200
1,500
900
50
50
40
7,740
The income statement is
prepared from the income
statement columns of the
work sheet.
15. PREPARATION OF FINANCIAL STATEMENTS
RETAINED EARNINGS STATEMENT
$ -0-
2,860
2,860
500
$ 2,360
The Retained Earnings
statement is prepared from
the balance sheet columns
of the work sheet.
16. $ 15,200
200
$ 5,000
1,000 2,500
550
50 $ 5,000
800
1,200
40 4,960
9,550
10,000
2,360
$ 21,910 $ 21,910
PIONEER ADVERTISING AGENCY
Balance Sheet
October 31, 2002
Assets Liabilities and Stockholders’ Equity
Cash Liabilities
Accounts receivable Notes payable
Advertising supplies Accounts payable
Prepaid insurance Interest payable
Office equipment Unearned Revenue
Less: Accumulated Salaries payable
depreciation Total liabilities
Stockholders’ equity
Common Stock
Retained earnings
Total liabilities and
Total assets stockholders’ equity
PREPARATION OF FINANCIAL STATEMENTS
BALANCE SHEET
The balance sheet is prepared from the
balance sheet columns of the work sheet.
17. ILLUSTRATION 4-5
TEMPORARY VERSUS PERMANENT ACCOUNTS
TEMPORARY (NOMINAL) PERMANENT (REAL)
These
accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Dividends Stockholders’ equity
18. CLOSING ENTRIES
Closing entries formally recognize in the
ledger the transfer of net income (loss) and
dividends to retained earnings.
Journalizing and posting closing entries is a
required step in the accounting cycle.
A temporary account, Income Summary, is
used in closing revenue and expense
accounts to minimize the amount of detail in
the permanent retained earnings account.
19. ILLUSTRATION 4-6
DIAGRAM OF CLOSING PROCESS
1
2
1 Debit each revenue account for its balance, and credit
Income Summary for total revenues.
2 Debit Income Summary for total expenses, and credit each
expense account for its balance.
20. 3
3 Debit (credit) Income Summary and credit (debit)
Retained Earnings for the amount of net income (loss).
ILLUSTRATION 4-6
DIAGRAM OF CLOSING PROCESS
21. 4
4 Debit Retained Earnings for the balance in the Dividends
account and credit Dividends for the same amount.
ILLUSTRATION 4-6
DIAGRAM OF CLOSING PROCESS
22. GENERAL JOURNAL
Date Account Titles and Explanation Ref. Debit Credit
2002 (1)
Oct. 31 Service Revenue 400
Income Summary 350
(To close revenue account)
INCOME SUMMARY NO.350
Date Explanation Debit Credit Balance
2002
Oct. 31 10,600 10,600
31
31
Service Revenue NO. 400
Date Explanation Debit Credit Balance
2002
Oct. 31 10,600
31 –0–
10,600
ILLUSTRATION 4-7
CLOSING ENTRIES JOURNALIZED
10,600
10,600
23. INCOME SUMMARY NO. 350
Date Explanation Debit Credit Balance
2002
Oct. 31 10,600 10,600
31 7,740 2,860
GENERAL JOURNAL
Date Ref. Debit Credit
(2)
Oct. 31 350
726
Advertising Supplies Expense 611
729
Insurance Expense 722
905
Depreciation Expense 711
Account Titles and Explanation
2002
Income Summary
Salaries Expense
Rent Expense
Interest Expense
(To close expense
accounts)
7,740
5,200
1,500
900
50
50
40
ILLUSTRATION 4-7
CLOSING ENTRIES JOURNALIZED
26. CAUTIONS RELATING TO
CLOSING ENTRIES
A couple of cautions relating to closing entries:
1 Avoid unintentionally doubling the revenue
and expense balances rather than zeroing
them.
2 Do not close dividends through the Income
Summary account. Dividends are not
expenses, and they are not a factor in
determining net income.
27. POSTING CLOSING ENTRIES
All temporary accounts have zero balances after posting the
closing entries.
The balance in Retained Earnings represents the accumulated
undistributed earnings of the corporation at the end of the
accounting period.
The Income Summary account is used only in closing. No
entries are journalized and posted to this account during the
year.
As part of the closing process, the temporary accounts
(revenues, expenses and dividends) are totaled, balanced, and
double ruled.
The permanent accounts (assets, liabilities, stockholders’
equity) are not closed.
29. POST-CLOSING
TRIAL BALANCE
After all closing entries have been
journalized and posted, a post-closing
trial balance is prepared.
The purpose of this trial balance is to
prove the equality of the permanent
account balances that are carried
forward into the next accounting
period.
30. PIONEER ADVERTISING AGENCY
Post-Closing Trial Balance
October 31, 2002
Debit Credit
Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Office Equipment
Accumulated Depreciation — Office Equipment
Notes Payable
Accounts Payable
Interest Payable
Unearned Revenue
Salaries Payable
Common Stock
Retained Earnings
ILLUSTRATION 4-9
POST-CLOSING TRIAL BALANCE
15,200
200
1,000
550
5,000
40
5,000
2,500
50
800
1,200
10,000
2,360
$ 21,950 $ 21,950
The post-closing trial
balance is prepared from the
permanent accounts in the
ledger.
The post-closing trial balance
provides evidence that the
journalizing and posting of
closing entries has been
properly completed.
31. 1 Analyze business transactions
2 Journalize the transactions
3 Post to ledger accounts
4 Prepare a trial balance
5 Journalize and post adjusting
entries
STEPS IN THE
ACCOUNTING CYCLE
32. 6 Prepare an adjusted trial balance
7 Prepare financial statements:
Income Statement, Retained
Earnings Statement, Balance Sheet
8 Journalize and post closing entries
9 Prepare a post-closing trial balance
STEPS IN THE
ACCOUNTING CYCLE
33. CORRECTING ENTRIES
Errors that occur in recording transactions
should be corrected as soon as they are
discovered by preparing correcting entries.
Correcting entries are unnecessary if the
records are free of errors.
They involve any combination of balance
sheet and income statement accounts
34. ILLUSTRATIVE EXAMPLE
OF CORRECTING ENTRY 1
Cash 50
Service Revenue 50
Cash 50
Accounts Receivable 50
Service Revenue 50
Accounts Receivable 50
36. Assets Liabilities and Owner’s Equity
Financial statements become more useful when the
elements are classified into significant subgroups.
A classified balance sheet generally has the
following standard classifications:
Current Assets Current Liabilities
Long-Term Investments Long-Term Liabilities
Property, Plant and Owner’s (Stockholders’) Equity
Equipment
Intangible Assets
ILLUSTRATION 4-17
STANDARD BALANCE SHEET CLASSIFICATIONS
37. Current assets are cash and other resources that are
reasonably expected to be realized in cash or sold
or consumed in the business within one year of the
balance sheet date or the company’s operating cycle,
whichever is longer.
Current assets are listed in the order of their
liquidity.
The operating cycle of a company is the average
time that is required to go from cash to cash in producing
revenues.
Examples of current assets are cash, short-term
investments, receivables and prepaid expenses.
CURRENT ASSETS
38. Long-term investments are resources that can
be realized in cash, but the conversion into
cash in not expected within one year or the
operating cycle, whichever is longer.
Examples include investments in stocks and
bonds of another company or investment in
land held for resale.
10 shares
XYZ stock
LONG-TERM
INVESTMENTS
39. Tangible resources of a relatively permanent
nature that are used in the business and not
intended for sale are classified as property,
plant, and equipment.
Examples include land, buildings, machinery,
equipment, and furniture and fixtures.
PROPERTY, PLANT,
AND EQUIPMENT
40. Intangible assets are noncurrent resources
that do not have physical substance.
Examples include patents, copyrights,
trademarks, or trade names that give the
holder exclusive right of use for
a specified period of time.
INTANGIBLE ASSETS
41. Current liabilities are obligations that
are reasonably expected to be paid from
existing current assets or through the
creation of other current liabilities
within one year or the operating cycle,
whichever is longer.
Examples include accounts payable,
wages payable, interest payable, and
current maturities of long-term debt.
CURRENT LIABILITIES
42. Obligations expected to be paid
after one year are classified as
long-term liabilities.
Examples include long-term
notes payable, bonds payable,
mortgages payable, and lease
liabilities.
LONG-TERM
LIABILITIES
43. The content of the owner’s equity section
varies with the form of business organization.
In a proprietorship, there is one capital
account.
In a partnership, there are separate capital
accounts for each partner.
For a corporation, owners’ (stockholders’)
equity is divided into two accounts:
1 Common Stock and
2 Retained Earnings.
STOCKHOLDERS’
(OWNERS’) EQUITY
44. ILLUSTRATION 4-25
CLASSIFIED BALANCE SHEET IN REPORT FORM
$ 15,200
200
1,000
550
16,950
$ 5,000
40
4,960
$ 21,910
A classified balance sheet helps the financial statement user determine 1
the availability of assets to meet debts as they come due and 2 the
claims of short- and long-term creditors on total assets.
46. A reversing entry is made at the
beginning of the next accounting period.
Reversing entries are most often used to
reverse two types of adjusting entries:
accrued revenues and accrued expenses.
Preparation of reversing entries is
optional.
APPENDIX:
REVERSING ENTRIES
