1. Accounting Principles, 6e Weygandt, Kieso, & Kimmel
Prepared by
Marianne Bradford, Ph. D.
Bryant College
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
PREVIEW OF CHAPTER 4
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
Post-closing trial balance

4. PREVIEW OF CHAPTER 4 Completion of the Accounting Cycle
Summary of Accounting Cycle
Reversing entries –an optional step
Correcting entries-an avoidable step
Classified Financial Statements
Standard classification
Balance sheet illustration

5. STUDY OBJECTIVE 1
Prepare a work sheet.

6. 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 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.

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

8. WORK SHEET The use of a work sheet is optional.
When one is used, financial statements are prepared from the worksheet.
Adjustments are journalized and posted from the work sheet after financial statements are prepared.

9. 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

10. PREPARING A WORKSHEET 1 PREPARING A TRIAL BALANCE
15, , , , , , , , ,
28, ,700

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

12. PREPARING A WORKSHEET 3 ENTER ADJUSTED BALANCES
15, , , , , , , ,
1, ,200

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

14. PREPARING A WORKSHEET 4 EXTEND ADJUSTED BALANCES
15, , ,000
5, , , 40
200
,200

15. ADJUSTING ENTRIES JOURNALIZED
Advertising Supplies Expense 1,500
Advertising Supplies ,500
Insurance Expense
Prepaid Insurance
Depreciation Expense
Accumulated Expense
Unearned Fees
Fees Earned
Accounts Receivable
Fees Earned
Interest Expense
Interest Payable
Salaries Expense ,200
Salaries Payable ,200

16. PREPARATION OF FINANCIAL STATEMENTS INCOME STATEMENT
The income statement is prepared from the income statement columns of the work sheet.
$10,600
$5,200
1,500
900 50 40
7,740
$ 2,860

17. PREPARATION OF FINANCIAL STATEMENTS OWNER’S EQUITY STATEMENT$
$10,000
2, ,860
12,806
500
$12,360
The owner’s equity statement is prepared from the balance sheet columns of the work sheet.

18. PREPARATION OF FINANCIAL STATEMENTS BALANCE SHEET
$ 15,200
200
1,000
550
$5,000
, $21,910
$ 5,000
2,500 50
800
1,200
9,550
12,360
$21,910
The balance sheet is prepared from the balance sheet columns of the work sheet.

19. STUDY OBJECTIVE 2
Explain the process of closing the books.

20. 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
Owner’s drawing Owner’s capital account

21. CLOSING ENTRIES
Closing entries formally recognize in the ledger the transfer of net income (loss) and owner’s drawings to owner’s capital.
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 owner’s capital account.

22. ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS PROPRIETORSHIP2 1
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.

23. ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS3
3 Debit (credit) Income Summary and credit (debit) owner’s capital for the amount of net income (loss).

24. ILLUSTRATION 4-6 DIAGRAM OF CLOSING PROCESS
4 Debit owner’s capital for the balance in the owner’s drawing account and credit owner’s drawing for the same amount.

25. ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED
10,600
10,600
10,600

26. ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED
7,740
7,740
5,200
1,500
900 50 40

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

28. ILLUSTRATION 4-7 CLOSING ENTRIES JOURNALIZED
500
500
500

29. 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 owner’s drawing through the Income Summary account. Owner’s drawing is not an expense, and it is not a factor in determining net income.

30. POSTING CLOSING ENTRIES
All temporary accounts have zero balances after posting the closing entries.
The balance in owner’s capital represents the total equity of the owner at the end of the accounting period.
No entries are journalized and posted to owner’s capital during the year.
As part of the closing process, the temporary accounts (revenues and expenses) are totaled, balanced, and double ruled.
The permanent accounts (assets, liabilities, and owner’s capital) are not closed.

31. ILLUSTRATION 4-8 POSTING OF CLOSING ENTRIES2 1 3 4

32. STUDY OBJECTIVE 3
Describe the content and purpose of a post-closing trial balance.

33. 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.

34. ILLUSTRATION 4-9 POST-CLOSING TRIAL BALANCE
The post-closing trial balance is prepared from the permanent accounts in the ledger.
$ 15,
1,000
550
5,000
$ 40
2,500
800
1,200 50
12,360
The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.
$ 21,950 $ 21,950

35. STUDY OBJECTIVE 4
State the required steps in the accounting cycle.

36. 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

37. STEPS IN THE ACCOUNTING CYCLE
6 Prepare an adjusted trial balance
7 Prepare financial statements: Income statement, Owner’s Equity Statement, Balance Sheet
8 Journalize and post closing entries
9 Prepare a post-closing trial balance

38. 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.

39. ILLUSTRATIVE EXAMPLE OF REVERSING ENTRY
Salaries Expense , Cash ,000
Salaries Expense , Salaries Payable ,200
Income Summary , Salaries Expense ,200
Salaries Payable , Salaries Expense ,200
Salaries Expense , Cash ,000

40. STUDY OBJECTIVE 5
Explain the approaches to preparing correcting entries.

41. 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

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

43. ILLUSTRATIVE EXAMPLE OF CORRECTING ENTRY 2
Delivery Equipment 45
Accounts Payable 45
Office Equipment
Accounts Payable
Delivery Equipment
Accounts Payable

44. STUDY OBJECTIVE 6
Identify the sections of a classified balance sheet.

45. 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 Investments Long-Term Liabilities
Property, Plant and Owner’s (Stockholders’) Equity Equipment
Intangible Assets
Assets Liabilities and Owner’s Equity

46. 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.

47. LONG-TERM INVESTMENTS
Long-term investments are resources that can be realized in cash, but the conversion into cash is 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

48. 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.

49. 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 use for a specified period of time.

50. 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.

51. 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.

52. OWNER’S EQUITY
The content of the owner’s equity section varies with the form of business organization.
In a proprietorship, there is a single owner’s equity account called (Owner’s Name), Capital.
In a partnership, there are separate capital accounts for each partner.
For a corporation, owners’ equity is called stockholders’ equity, and it consists of two accounts: Capital Stock and Retained Earnings.

53. ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN ACCOUNT FORM
$ 15,200
200
1,000
550
16,950
$5,000
,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.

54. ILLUSTRATION 4-25 CLASSIFIED BALANCE SHEET IN REPORT FORM
$ 1,000
2,500 50
800
1,200
5,550
4,000
9,550
12,360
$21,910
The balance sheet is most often presented in the report form, with the assets above liabilities and owner’s equity.

55. COPYRIGHT
Copyright © 2002 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 consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

56. CHAPTER 4 COMPLETION OF THE ACCOUNTING CYCLE