Chapter 4 Study Guide: Completing the Accounting Cycle
Covers the worksheet, closing entries, the accounting cycle, correcting entries, and the classified
balance sheet.
LO1 — The Worksheet
A multi-column working paper for preparing financial statements. It's not a permanent accounting
record, and using one is optional.
Column order (Dr./Cr. pairs): Trial Balance → Adjustments → Adjusted Trial Balance → Income
Statement → Balance Sheet
5 steps to prepare it:
1. Enter the trial balance (straight from the ledger)
2. Enter the adjustment data
3. Enter the adjusted balances — these columns must total and balance
4. Extend each adjusted balance to the right statement column: revenues/expenses → Income
Statement; assets/liabilities/equity → Balance Sheet
5. Total the statement columns, compute net income or loss, and complete the worksheet
Where net income goes (commonly tested):
• Income Statement columns → debit side (balances the excess of revenue/credits)
• Balance Sheet columns → credit side (net income increases owner's equity)
• A net loss is the mirror image of this.
From worksheet to statements: the Income Statement comes from the Income Statement columns;
the Owner's Equity Statement and Balance Sheet come from the Balance Sheet columns; adjusting
entries come from the Adjustments columns (but still need to be journalized and posted separately).
LO2 — Closing Entries & the Post-Closing Trial Balance
Temporary accounts (closed to zero every period): all revenues, all expenses, Owner's Drawings
Permanent accounts (carried forward, never closed): all assets, all liabilities, Owner's Capital
The 4 closing entries, in order:
Step Debit Credit
1. Close revenues Revenue account(s) Income Summary
2. Close expenses Income Summary Expense account(s)
3. Close Income Summary Income Summary (if net income) Owner's Capital
4. Close Drawings Owner's Capital Owner's Drawings
Trap: Drawings closes directly to Owner's Capital — never through Income Summary. Drawings isn't
an expense.
Post-closing trial balance proves the permanent accounts are still in balance heading into the next
period. It contains only permanent accounts — no revenues, expenses, drawings, or Income
Summary.
LO3 — The Accounting Cycle & Correcting Entries
The 9-step accounting cycle:
1. Analyze transactions
2. Journalize transactions
3. Post to the ledger
4. Prepare a trial balance
5. Journalize & post adjusting entries
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize & post closing entries
9. Prepare a post-closing trial balance
Correcting entries are only made when an error is found — they're not a routine step. They must be
posted before closing entries. You can either write one correcting entry, or reverse the wrong entry
and journalize the correct one.
3-step method to find a correcting entry:
1. Write what was recorded (the incorrect entry)
2. Write what should have been recorded (the correct entry)
3. The difference between the two is your correcting entry
Example: A $700 cash payment for salaries was mistakenly debited to Supplies instead of Salaries
and Wages Expense.
• Incorrect: Dr. Supplies 700 / Cr. Cash 700
• Correct: Dr. Salaries and Wages Expense 700 / Cr. Cash 700
• Correcting entry: Dr. Salaries and Wages Expense 700 / Cr. Supplies 700
LO4 — The Classified Balance Sheet
Groups similar assets together and similar liabilities together, instead of listing accounts randomly.
Assets Liabilities & Owner's Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant & equipment Owner's (Stockholders') equity
Intangible assets
Current assets — convertible to cash, sold, or used up within 1 year or the operating cycle,
whichever is longer. Listed by liquidity: Cash → Short-term investments → Accounts receivable →
Notes receivable → Inventory → Supplies → Prepaid expenses
Long-term investments — stocks/bonds of other companies; land or buildings not used in
operations; long-term notes receivable
Property, plant & equipment (PPE) — long useful life, currently in use. Also called “fixed assets” or
“plant assets.”
Accumulated depreciation = total depreciation expensed on the asset so far (shown as a deduction
from cost).
Intangible assets — long-lived, no physical substance: goodwill, patents, copyrights, trademarks,
franchises
Current liabilities — due within 1 year or the operating cycle. List notes payable first, then accounts
payable, then the rest by size. Examples: accounts payable, salaries/wages payable, notes payable,
interest payable, taxes payable, current portion of long-term debt
Long-term liabilities — due after 1 year: bonds payable, long-term notes payable, mortgages
payable
Trap: “Current maturities of long-term debt” is a current liability, not long-term — it's the part due
within the next year.
Owner's equity: Proprietorship → one Capital account · Partnership → a Capital account per
partner · Corporation → Common Stock + Retained Earnings
Quick Self-Check
1. Net income is shown on the worksheet in the → income statement debit column and balance
sheet credit column
2. Correct liquidity order for current assets → cash, accounts receivable, inventory, prepaid
expenses
3. Patents and copyrights are classified as → intangible assets
4. Not a long-term liability → current maturities of long-term debt
Before the Exam, Make Sure You Can
☐ List the 5 worksheet steps in order, and say where net income goes in each column pair
☐ Name the temporary accounts and the permanent accounts
☐ Write all 4 closing entries in order, from memory
☐ List all 9 steps of the accounting cycle in order
☐ Solve a correcting-entry problem using the 3-step method
☐ Sort a list of accounts into the correct classified balance sheet section