1. Financial Accounting, 3e Weygandt, Kieso, & Kimmel
Prepared by
Gregory K. Lowry
Mercer University
Marianne Bradford
The University of Tennessee
John Wiley & Sons, Inc.

2. CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE
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.

3. COMPLETION OF THE ACCOUNTING CYCLE Summary of Accounting Cycle
PREVIEW OF CHAPTER 4
COMPLETION OF THE ACCOUNTING CYCLE
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
Using a Work Sheet
Steps in preparation
Preparing financial statements
Preparing adjusting entries
Standard classification
Balance sheet
illustration

4. WORK SHEET
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.

5. ILLUSTRATION 4-1 FORM AND PROCEDURE FOR A WORK SHEET

6. WORK SHEET 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.

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

8. PREPARING A WORKSHEET 1 PREPARING A TRIAL BALANCE
15, , , , , , , , , , ,700

9. PREPARING A WORKSHEET 2 ENTER THE ADJUSTMENTS
a 1, b d d e g 1, a 1, b c c f e f g 1,200

10. PREPARING A WORKSHEET 3 ENTER ADJUSTED BALANCES
15, , , , , , , , , ,200

11. PREPARING A WORKSHEET 4 EXTEND ADJUSTED BALANCES
10, , ,

12. PREPARING A WORKSHEET 4 EXTEND ADJUSTED BALANCES
15, , , , , , ,200

13. ADJUSTING ENTRIES JOURNALIZED
GENERAL JOURNAL
Date
Account Titles and Explanation
Ref.
Debit
Credit
2001 a
Oct. 31 b 31 c d e f g
Advertising Supplies Expense , Advertising Supplies , Insurance Expense Prepaid Insurance Depreciation Expense Accumulated Depreciation - Office Equipment Unearned Revenue Service Revenue Accounts Receivable Service Revenue Interest Expense Interest Payable Salaries Expense , Salaries Payable ,200

14. PREPARATION OF FINANCIAL STATEMENTS INCOME STATEMENT
PIONEER ADVERTISING AGENCY
Income Statement
For the Month Ended October 31, 2001
Revenues
$ 10, $ 5, , , $ 2,860
Service Revenue
Expenses
Salaries expense
The income statement is prepared from the income statement columns of the work sheet.
Advertising supplies expense
Rent expense
Insurance expense
Interest expense
Depreciation expense
Total expenses
Net income

15. PREPARATION OF FINANCIAL STATEMENTS RETAINED EARNINGS STATEMENT
$ , , $ 2,360
The Retained Earnings statement is prepared from the balance sheet columns of the work sheet.

16. PREPARATION OF FINANCIAL STATEMENTS BALANCE SHEET
PIONEER ADVERTISING AGENCY
Balance Sheet
October 31,2001
Assets
Liabilities and Stockholders’ Equity
$ 15, $ 5, , , $ 5, , , , , , $ 21, $ 21,910
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
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 PROCESS1 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. ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS3
3 Debit (credit) Income Summary and credit (debit) Retained Earnings for the amount of net income (loss).

21. ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS
4 Debit Retained Earnings for the balance in the Dividends account and credit Dividends for the same amount.

22. ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED
GENERAL JOURNAL
Date
Account Titles and Explanation
Ref.
Debit
Credit
2001
(1)
10, ,600
10, ,600
Oct. 31
Service Revenue 50
Income Summary 49
(To close revenue account)
INCOME SUMMARY
NO. 49
FEES EARNED
NO. 50
Date
Explanation
Debit
Credit
Balance
Date
Explanation
Debit
Credit
Balance
2001
2001
Oct. 31
10,600
Oct. 31
10,600 31 31
–0– 31

23. ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED
Account Titles and Explanation
2001
Income Summary
Salaries Expense
Rent Expense
Interest Expense
(To close expense
accounts)
GENERAL JOURNAL
Date
Ref.
Debit
Credit
(2)
Oct. 31
7, , ,
7,740 49 60
Advertising Supplies Expense 61 62
Insurance Expense 63 64
Depreciation Expense 65
INCOME SUMMARY
NO. 49
Date
Explanation
Debit
Credit
Balance
2001
Oct. 31
10,600
10,600 31
2,860

24. ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED
2, ,860
2, ,860

25. ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED
RETAINED EARNINGS
NO. 40
Date
Explanation
Debit
Credit
Balance
2001
Oct. 31
2,860 31
2,360

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 divdends through the Income Summary account. Dividends is not an expense, and it is 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, and retained earnings) are not closed.

28. ILLUSTRATION 4-8 POSTING OF CLOSING ENTRIES
Service Revenue 50
(1)
10,600
10,000
400
200 1 2
10,600
10,600 3 2 4

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. ILLUSTRATION 4-9 POST-CLOSING TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Post-Closing Trial Balance
October 31, 2001
Debit
Credit
Cash
The post-closing trial balance is prepared from the permanent accounts in the ledger.
$ 15, , , $ , , , , ,360
$ 21, $ 21,950
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Office Equipment
Accumulated Depreciation — Office Equipment
Notes Payable
The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.
Accounts Payable
Interest Payable
Unearned Revenue
Salaries Payable
Common Stock
Retained Earnings

31. STEPS IN THE ACCOUNTING CYCLE
1 Analyze business transactions
2 Journalize the transactions
3 Post to ledger accounts
4 Prepare a trial balance
5 Journalize and post adjusting entries

32. STEPS IN THE ACCOUNTING CYCLE
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

33. REVERSING ENTRIES
A reversing entry is made at the beginning of the next accounting period.
The purpose of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting entry.
Reversing entries are most often used to reverse two types of adjusting entries: accrued revenues and accrued expenses.

34. ILLUSTRATIVE EXAMPLE OF REVERSING ENTRY
Salaries Expense , Cash , Salaries Expense , Salaries Payable , Income Summary , Salaries Expense , Salaries Payable , Salaries Expense , Salaries Expense , Cash ,000

35. 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 can be journalized and posted whenever an error is discovered.
They involve any combination of balance sheet and income statement accounts

36. ILLUSTRATIVE EXAMPLE OF CORRECTING ENTRY 1
Cash Service Revenue
Cash Accounts Receivable
Service Revenue Accounts Receivable

37. ILLUSTRATIVE EXAMPLE OF CORRECTING ENTRY 2
Delivery Equipment Accounts Payable
Office Equipment Accounts Payable
Office Equipment Delivery Equipment Accounts Payable

38. ILLUSTRATION 4-17 STANDARD BALANCE SHEET CLASSIFICATIONS
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 Invesments Long-Term Liabilities
Property, Plant and Owner’s (Stockholders’) Equity Equipment
Intangible Assets
Assets Liabilities and Owner’s Equity

39. CURRENT ASSETS
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 inventory, accounts receivable and cash.

40. LONG-TERM INVESTMENTS
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 bonds of another company or investment in land held for resale.
10 shares
XYZ stock

41. PROPERTY, PLANT, AND EQUIPMENT
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 and machinery.

42. INTANGIBLE ASSETS
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 used for a specified period of time.

43. CURRENT LIABILITIES
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.

44. LONG-TERM LIABILITIES
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.

45. STOCKHOLDERS’ (OWNERS’) EQUITY
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.

46. ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN REPORT FORM
$ 15, , , $ 5, , $ 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.

47. ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN REPORT FORM
$ 1, , , , , , , , $ 21,910
The balance sheet is most often presented in the report form, with the assets shown above the liabilities and stockholders’ equity.

48. COPYRIGHT
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49. CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE