CHAPTER 4

Completing the Accounting Cycle

Preview Of Chapter 4

Using a Worksheet
Steps in Preparing a Worksheet
◆ Multiple-column form used in preparing financial statements.
◆ Not a permanent accounting record.
◆ Five step process.
◆ Use of worksheet is optional.
 1. Prepare a Trial Balance on the Worksheet

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Owner's Capital 10,000
Owner's Drawing 500
Service Revenue 10,000

Salaries Expense 4,000

Rent Expense 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

Adjusting Journal Entries

(Chapter 3)

General journal showing

adjusting entries
 2. Enter the Adjustments in the Adjustments Columns

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500 (a) 1,500
Prepaid Insurance
Office Equipment
600
5,000
(b) 50 Adjustments Key:
Notes Payable
Accounts Payable
5,000
2,500
(a) Supplies Used.
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Owner's Capital 10,000
Owner's Drawing 500 (c) Depreciation Expensed.
Service Revenue 10,000 (d) 400
(e)
(d) 200 (d) Service Revenue Earned.
(g) 1,200
Salaries Expense
Rent Expense
4,000
900 (d)
(d)
(e) Service Revenue Accrued.
Totals 28,700 28,700 (f) Interest Accrued.
Supplies Expense (a) 1,500
Insurance Expense (b)
(d) 50 (g) Salaries Accrued.
Accumulated Depreciation (c) 40
Depreciation Expense (c) 40
Accounts Receivable (e) 200
Interest Expense (f)
(d)
50
Interest Payable (d) (f) 50
Salaries Payable (g) 1,200
(d)

Totals 3,440 (d)

3,440

Enter adjustment
amounts, total
Add additional adjustments columns,
accounts as and check for equality.
needed.
 3. Complete the Adjusted Trial Balance Columns

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Office Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Owner's Capital 10,000 10,000
Owner's Drawing 500 500
Service Revenue 10,000 (d) 400 10,600
(d) 200
(e)
Salaries Expense 4,000 (g) 1,200 (d) 5,200
Rent Expense 900 (d) 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500
Insurance Expense (b)
(d)
50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40
Accounts Receivable (e) 200 200
Interest Expense (f)
(d) 50 50
Interest Payable (d) (f) 50 50
Salaries Payable (g) 1,200
(d) 1,200
Totals 3,440 (d) 3,440 30,190 30,190

Total the adjusted trial balance

columns and check for equality.
 4. Extend Amounts to Financial Statement Columns

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Office Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Owner's Capital 10,000 10,000
Owner's Drawing 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e)
(d) 200

Salaries Expense 4,000 (g)1,200 (d) 5,200 5,200

Rent Expense 900 (d) 900 900
Totals 28,700 28,700
Supplies Expense (a)1,500 1,500 1,500
Insurance Expense (b)
(d) 50 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200
Interest Expense (f)
(d)
50 50 50
Interest Payable
(d) (f) 50 50
Salaries Payable (g) 1,200
(d)
1,200
(d)
Totals 3,440 3,440 30,190 30,190 7,740 10,600

Extend all revenue and expense account

balances to the income statement columns.
 5. Total Columns, Compute Net Income (Loss)
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a)1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Office Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawing 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e)
(d) 200

Salaries Expense 4,000 (g)1,200 (d)

5,200 5,200
Rent Expense 900 (d)
900 900
Totals 28,700 28,700
Supplies Expense (a)1,500 1,500 1,500
Insurance Expense (b)
(d)
50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f)
(d)
50 50 50
Interest Payable (d) (f) 50 50 50
Salaries Payable (g)1,200
(d)
1,200 1,200
Totals 3,440 (d)
3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450

Compute Net Income or Net Loss.

 Preparing Statements from a Worksheet
◆ Income statement is prepared from the income statement columns.
◆ Balance sheet and owner’s equity statement are prepared from the balance sheet
columns.
◆ Companies journalize and post adjusting entries.
 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.

Closing the Books

At the end of the accounting period, the company makes the accounts ready for the next
period.
 Preparing Closing Entries
Closing entries formally recognize, in the general ledger, the transfer of
◆ net income (or net loss) and
◆ owner’s drawing
to owner’s capital.

Closing entries are only made at the end of the annual accounting period.

Note:
Owner’s Drawing is
closed directly to
Capital and not to
Income Summary Owner’s Capital is a
permanent account; all
because Owner’s other accounts are
temporary accounts.
Drawing is not an
expense.
Closing Entries
Posting
Closing
Entries
 Preparing a Post-Closing Trial Balance
Purpose is to prove the equality of the permanent account balances after journalizing and
posting of closing entries.
 Summary of the Accounting Cycle

1. Analyze business transactions

9. Prepare a post-closing 2. Journalize the

trial balance transactions

8. Journalize and post 3. Post to ledger accounts

closing entries

7. Prepare financial 4. Prepare a trial balance

statements

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

Correcting Entries—An Avoidable Step

◆ Unnecessary if the records are error-free.

◆ 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.
 Correcting Entries—An Avoidable Step
Illustration (Case 1): On May 10, Mercato Co. journalized and posted a $50 cash collection
on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The
company discovered the error on May 20, when the customer paid the remaining balance in
full.

Incorrect Equipment 45
entry Accounts Payable 45
Equipment 450
Correct
entry Accounts Payable 450
Equipment 405
Correcting
entry Accounts Payable 405

The Classified Balance Sheet

◆ Presents a snapshot at a point in time.
◆ To improve understanding, companies group similar assets and similar liabilities
together.

Standard Classifications

Assets Liabilities and Owner’s

Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Owner’s (Stockholders’)
equity
Intangible assets
The Classified Balance Sheet
 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.

Usually listed in the order they expect to convert them into cash.

Long-Term Investments
◆ Investments in stocks and bonds of other companies.
◆ Investments in long-term assets such as land or buildings that a company is not currently
using in its operating activities.
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.
Intangible Assets
◆ Assets that do not have physical substance .

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.
Long-Term Liabilities
◆ Obligations a company expects to pay after one year.

Owner’s Equity
◆ Proprietorship - one capital account.
◆ Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.