WILEY

IFRS EDITION

Prepared by
Coby Harmon
University
4-1
of California, Santa Barbara
Westmont College

PREVIEW OF CHAPTER 4

Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
4-2

CHAPTER

4 Completing the
Accounting Cycle
LEARNING OBJECTIVES
After studying this chapter, you should be able to:

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.

4-3
 Using a Worksheet
Learning
Worksheet Objective 1
Prepare a
worksheet.
 Multiple-column form used in preparing
financial statements.

 Not a permanent accounting record.

 May be a computerized worksheet using an electronic

spreadsheet program such as Excel.

 Prepared using a five step process.

 Use of worksheet is optional.

4-4 LO 1

Steps in Preparing a Worksheet Illustration 4-1

Form and procedure
for a worksheet

4-5

Steps in Preparing a Worksheet Illustration 4-2

1. PREPARE A TRIAL BALANCE ON THE WORKSHEET

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

4-6 LO 1
 Steps in Preparing a Worksheet
Illustration 3-23
General journal showing
adjusting entries

Adjusting
Journal
Entries
(Chapter 3)

4-7

Steps in Preparing a Worksheet Illustration 4-2

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 Recognized.
(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.

4-8 LO 1

Steps in Preparing a Worksheet Illustration 4-2

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

4-9 columns and check for equality. LO 1
 Steps in Preparing a Worksheet Illustration 4-2

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

balances to the income statement columns.
4-10 LO 1

Steps in Preparing a Worksheet Illustration 4-2

5. TOTAL COLUMNS, COMPUTE NET INCOME (LOSS)

(a)
(b)

(d)

(d)
(e)
(g)

(a)
(b)
(c)
(c)
(e)
(f)
(f)
(g)

Compute Net Income or Net Loss.

4-11 LO 1

Preparing Financial Statements from a

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 can prepare financial statements before they

journalize and post adjusting entries.

4-12 LO 1
 Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-13 LO 1

Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-14 LO 1

4-15 Illustration 4-3

Financial statements from a worksheet
LO 1
 Preparing Adjusting Entries from a
Worksheet

 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.

4-16 LO 1

> DO IT!

Susan Elbe is preparing a worksheet. Explain to Susan how she

should extend the following adjusted trial balance accounts to the
financial statement columns of the worksheet.

Cash Statement of financial position

(debit column)
Accumulated
Depreciation
Statement of financial position
Accounts Payable (credit column)

Dividends Income statement

Service Revenue (debit column)

Salaries and Income statement

Wages Expense (credit column)

4-17 LO 1

Closing the Books

Learning
At the end of the accounting period, the Objective 2
Explain the process of
company makes the accounts ready for the closing the books.

next period.

Illustration 4-4
Temporary versus permanent accounts
4-18 LO 2
 Preparing Closing Entries

Closing entries formally recognize in the ledger the transfer of

 net income (or net loss) and

 Dividends
to Retained Earnings.

Companies generally journalize and post closing entries only

at the end of the annual accounting period.
Closing entries produce a zero balance in each temporary
account.

4-19 LO 2

Illustration 4-5
Diagram of closing
• HELPFUL HINT process—corporation

The Dividends account is

closed directly to Retained
Earnings and not to Retained earnings is a
Income Summary because permanent account. All
dividends are not an other accounts are
temporary accounts.
expense.

4-20 LO 2

Illustration 4-6
4-21
Closing entries journalized LO 2
 Posting
Closing
Entries

Illustration 4-7
Posting of closing entries

4-22 LO 2

Preparing a Post-Closing Trial Balance

Learning
Post-closing trial balance Objective 3
Describe the content
and purpose of a post-
 Lists permanent accounts and their closing trial balance.

balances after the journalizing and

posting of closing entries.

 Purpose is to prove the equality of the permanent account

balances carried forward into the next accounting period.

 Only contains balances for permanent—statement of

financial position—accounts.

 All temporary accounts will have zero balances.

4-23 LO 3

Illustration 4-8

Illustration 4-8
4-24 Post-closing trial balance LO 3
 Learning Objective 4
The Accounting Cycle State the required steps in the
accounting cycle.

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 statements 4. Prepare a trial balance

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

Illustration 4-11
4-25
Steps in the accounting cycle
LO 4

Correcting Entries—An Avoidable Step

Learning
 Unnecessary if accounting records are Objective 5
Explain the approaches
free of errors. to preparing correcting
entries.

 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.

4-26 LO 5

Correcting Entries—An Avoidable Step

CASE 1: On May 10, Bai Co. journalized and posted a NT$500 cash
collection on account from a customer as a debit to Cash NT$500 and a
credit to Service Revenue NT$500. The company discovered the error
on May 20, when the customer paid the remaining balance in full.

Incorrect Cash 500

entry
Service Revenue 500
Correct Cash 500
entry
Accounts Receivable 500

Correcting Service Revenue 500

entry Accounts Receivable 500

4-27 LO 5
 Correcting Entries—An Avoidable Step

CASE 2: On May 18, Mercato purchased on account equipment

costing NT$4,500. The transaction was journalized and posted as a
debit to Equipment NT$450 and a credit to Accounts Payable NT$450.
The error was discovered on June 3.

Incorrect Equipment 450

entry
Accounts Payable 450
Correct Equipment 4,500
entry
Accounts Payable 4,500

Correcting Equipment 4,050

entry Accounts Payable 4,050

4-28 LO 5

> DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

1. A payment of Salaries and Wages Expense of $600 was

debited to Supplies and credited to Cash, both for $600.

2. A collection of $3,000 from a client on account was debited

to Cash $200 and credited to Service Revenue $200.

3. The purchase of supplies on account for $860 was debited

to Supplies $680 and credited to Accounts Payable $680.
Correct the errors without reversing the incorrect entry.

4-29 LO 5

> DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

1. A payment of Salaries and Wages Expense of $600 was

debited to Supplies and credited to Cash, both for $600.

Correct the error without reversing the incorrect entry.

Salaries and Wages Expense 600

Supplies 600

4-30 LO 5
 > DO IT!

Sanchez Company discovered the following errors made in

January 2017 .
2. A collection of $3,000 from a client on account was debited
to Cash $200 and credited to Service Revenue $200.

Correct the error without reversing the incorrect entry.

Service Revenue 200

Cash 2,800
Accounts Receivable 3,000

4-31 LO 5

> DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

3. The purchase of supplies on account for $860 was debited

to Supplies $680 and credited to Accounts Payable $680.

Correct the error without reversing the incorrect entry.

Supplies ($860 - $680) 180

Accounts Payable 180

4-32 LO 5

Statement of Financial Position

Learning
 Presents a snapshot at a point in time. Objective 6
Identify the sections of
a classified statement
 To improve understanding, companies of financial position.

group similar assets and similar liabilities

together.

Standard Classifications

Assets Equity and Liabilities

Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets
Illustration 4-16
Standard statement of financial position classifications
4-33 LO 6
 Illustration 4-17
Classified statement
of financial position

4-34 LO 6

Illustration 4-17
Classified statement
of financial position

4-35 LO 6

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.

4-36 LO 6
 Current Assets

Illustration 4-21
Current assets section Accounts usually listed in the reverse order they
expect to convert them into cash. (IFRS)
Accounts usually listed in the order they expect to
4-37 convert them into cash. (TR&US GAAP) LO 6

Long-Term Investments

 Investments in ordinary shares and bonds of other

companies.
 Investments in non-current assets such as land or buildings
that a company is not using in its operating activities.

Illustration 4-20
Long-term investments section
4-38 LO 6

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 asset’s life.

4-39 LO 6
 Property, Plant, and Equipment

Illustration 4-19
Property, plant, and equipment section

4-40 LO 6

Intangible Assets

 Assets that do not have physical substance.

Illustration 4-18
Intangible assets section

4-41 LO 6

Current Liabilities

 Obligations company is to pay within the coming year or

its operating cycle, whichever is longer.

 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.

4-42 LO 6
 Current Liabilities

Illustration 4-24
Current liabilities section

4-43 LO 6

Non-Current Liabilities

 Obligations a company expects to pay after one year.

Illustration 4-23
Non-current liabilities section

4-44 LO 6

Equity

 Proprietorship - one capital account.

 Partnership - capital account for each partner.
 Corporation – Share Capital and Retained Earnings.

Illustration 4-22
4-45 Equity section LO 6