Financial Accounting

Chapter 4
Completing the
Accounting Cycle
Chapter Outline
Learning Objectives
LO 1 Prepare a worksheet.
LO 2 Prepare closing entries and a post-closing trial
balance.
LO 3 Explain the steps in the accounting cycle and how
to prepare correcting entries.
LO 4 Identify the sections of a classified statement of
financial position.
Copyright ©2019 John Wiley & Son, Inc. 3

The Worksheet
• Multiple-column form used in preparing financial
statements
• Not a permanent accounting record
• May be a computerized worksheet
• Prepared using a five step process
• Use of worksheet is optional
LO 1 Copyright ©2019 John Wiley & Son, Inc. 4

Yazici Advertising
ILLUSTRATION 4.1
Worksheet
Form for a worksheet
For the Month Ended October 31, 2020
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
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
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Service Revenue 1,200 (d) 400 800 800
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Expense Step 1
4,000 (g) Step
1,200 2 Step 3
5,200 5,200 Step 4
Rent Expense 900
Prepare a Enter 900
Enter 900 Extend adjusted
Totals 28,700 28,700
Supplies Expense trial balance (a)adjustment
1,500 adjusted
1,500 balances to appropriate
1,500
Insurance Expense on the (b) 50 data. balances.
50 statement columns.
50
Accumulated Depreciation worksheet. (c) 40 40 40
Depreciation Expense (c) 40 40 40
Step 5
Accounts Receivable (e) 200 200 Total the statement
200
Interest Expense (f) 50 50 50 columns,
Interest Payable (f) 50 50 compute net income 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 (or net
10,600loss), and
22,450 19,590
Net Income complete
2,860 worksheet. 2,860
Totals 10,600 10,600 22,450 22,450

Yazici Advertising
Step 1 Worksheet
ILLUSTRATION 4.2
Preparing a trial balance
Statement of
Adjusted Income Financial
Trial Balance Adjustments Trial Balance Statement Position
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Owner's Capital 10,000 10,000 10,000
(e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 Trial balance
50 amounts50 come
Accumulated Depreciation
Depreciation Expense (c) 40
(c) directly from
40
40
ledger
40 accounts.
40
40
Accounts Receivable (e) 200 200 200

Include all accounts
Interest Expense (f) 50 50 50
with balances.
Interest Payable (f) 50 50 50
Totals 3,440 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
Step 2 Enter Adjustments
The adjustments are the same as in Illustration 3.23.
a. Yazici debits an additional account, Supplies Expense, ₺1,500 for the cost of
supplies used, and credits Supplies ₺1,500.
b. Yazici debits an additional account, Insurance Expense, ₺50 for the insurance
that has expired, and credits Prepaid Insurance ₺50.
c. The company needs two additional depreciation accounts. It debits
Depreciation Expense ₺40 for the month’s depreciation, and credits
Accumulated Depreciation—Equipment ₺40.
d. Yazici debits Unearned Service Revenue ₺400 for services performed, and
credits Service Revenue ₺400.
e. Yazici debits an additional account, Accounts Receivable, ₺200 for services
performed but not billed, and credits Service Revenue ₺200.
f. The company needs two additional accounts relating to interest. It debits
Interest Expense ₺50 for accrued interest, and credits Interest Payable ₺50.
g. Yazici debits Salaries and Wages Expense ₺1,200 for accrued salaries, and
credits an additional account, Salaries and Wages Payable, ₺1,200.
Yazici Advertising
Step 2 Worksheet
ILLUSTRATION 4.3
Entering the adjustments

Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Equipment 5,000 5,000
Adjustments Key: 5,000
Notes Payable 5,000 (a)5,000Supplies Used 5,000
Unearned Service Revenue 1,200 (d) 400 (b) 800 Insurance Expired 800
Owner's Capital 10,000
Owner's Drawings 500 500
(c)10,000
Depreciation Expensed 500
10,000
Service Revenue 10,000 (d) 400 (d)

10,600Service Revenue
10,600 Recognized
(e) 200
Salaries and Wages Expense 4,000 (g) 1,200 5,200 (e) Service Revenue Accrued
5,200
Rent Expense 900 900 (f) Interest
900Accrued
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 (g) Salaries
1,500Accrued
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 Enter adjustment
40 amounts, total
Accounts Receivable (e) 200 200 adjustments columns, and200check
Interest Payable (f) 50 50
for equality. 50
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Totals Add additional accounts as needed. 10,600 10,600 22,450 22,450

Yazici Advertising
Step 3 Worksheet
ILLUSTRATION 4.4
Entering adjusted balances

Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Owner's Capital 10,000 10,000 10,000
(e) 200
Totals 28,700 28,700
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Totals
Check equality of adjusted trial balance columns. 10,600 10,600 22,450 22,450

Yazici Advertising
Step 4 Worksheet
ILLUSTRATION 4.5
Extending adjusted trial balance amounts

Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Owner's Capital 10,000 10,000 10,000
(e) 200
Totals 28,700 28,700
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Totals Extend adjusted trial balance amounts to appropriate 10,600
financial 10,600 22,450 22,450
statement columns.
Yazici Advertising
Step 5 Worksheet
ILLUSTRATION 4.6
Compute net income or net loss

Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Owner's Capital 10,000 10,000 10,000
(e) 200
Totals 28,700 28,700
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Totals Compute net income or net loss. 10,600 10,600 22,450 22,450

Steps in Preparing a Worksheet
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. statement of financial position debit column only.
c. income statement credit column and statement
of financial position debit column.
d. income statement debit column and statement of
financial position credit column.

Preparing Financial Statements from a
Worksheet
• Income statement is prepared from the income
statement columns
• Statement of financial position and owner’s equity
statement are prepared from the statement of
financial position columns
• Companies can prepare financial statements before
they journalize and post adjusting entries

Preparing Statements from a Worksheet
Yazici Advertising
Income Statement
Revenues
Service revenue ₺10,600
Expenses
Salaries and wages expense ₺5,200
Supplies expense 1,500
Rent expense 900
Insurance expense 50
Interest expense 50
Depreciation expense 40
Total expenses 7,740
Net income ₺2,860
ILLUSTRATION 4.7
LO 1 Financial statements from a worksheet Copyright ©2019 John Wiley & Son, Inc. 14
Preparing Statements from a Worksheet
Yazici Advertising
Owner’s Equity Statement
Owner’s capital, October 1 ₺ 0
Add: Investments ₺10,000
Net income 2,860 12,860
12,860
Less: Drawings 500
Owner’s capital, October 31 ₺12,360
ILLUSTRATION 4.7
Yazici Advertising
Statement of Financial Position
October 31, 2020
Assets
Cash ₺15,200
Accounts receivable 200
Supplies 1,000
Prepaid insurance 550
Equipment ₺5,000
Less: Accumulated depreciation 40 4,960
Total assets ₺21,910
Liabilities and Owner’s Equity
Liabilities
Notes payable ₺5,000
Accounts payable 2,500
Interest payable 50
Unearned service revenue 800
Salaries and wages payable 1,200
Total liabilities ₺ 9,550
Owner’s equity
Owner’s capital 12,360
Total owner’s equity and liabilities ₺21,910
ILLUSTRATION 4.7
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

DO IT! 1 Worksheet
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)
Owner’s Drawings Statement of financial position (debit)
Accumulated Depreciation Statement of financial position (credit)
Service Revenue Income statement (credit)
Accounts Payable Statement of financial position (credit)
Salaries and Wages Expense Income statement (debit)

Closing the Books
At the end of the accounting period, the company makes
the accounts ready for the next period.
Trial Adjusting
Analyze Journalize Post
Balance Entries
Adjusted Post-Closing
Financial Closing
Trial Trial
Balance Statements Entries
Balance

Closing the Books ILLUSTRATION 4.8
Temporary versus permanent
accounts
TEMPORARY PERMANENT
These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner's drawings account Owner's capital account

Preparing Closing Entries
Closing entries formally recognize in the ledger the
transfer of:
• Net income (or net loss) to owner’s capital
• Owner’s drawings to owner’s capital
Produce a zero balance in each temporary account.
Companies generally journalize and post closing entries
only at end of the annual accounting period.

ILLUSTRATION 4.9
Preparing Closing Entries Diagram of closing process—
proprietorship
(Individual) Income (Individual)

Expenses Summary Revenues
2 1
3
Key:
1. Close Revenues to Income Owner’s Owner’s
Summary. Drawings Capital
2. Close Expenses to Income
Summary.
4
3. Close Income Summary to Owner’s
Capital.
4. Close Owner’s Drawings to
Owner’s Capital.

Closing Entries Illustrated ILLUSTRATION 4.10
Closing entries journalized
GENERAL JOURNAL Page J3

Date Account Titles and Explanations Ref. Debit Credit
2020
Oct. 31 Service Revenue 400 10,600
Income Summary 350 10,600
(To close revenue account)
31 Income Summary 350 7,740
Supplies Expense 631 1,500
Depreciation Expense 711 40
Insurance Expense 722 50
Salaries and Wages Expense 726 5,200
Rent Expense 729 900
Interest Expense 729 50
(To close expense accounts)
Closing Entries Illustrated ILLUSTRATION 4.10
Closing entries journalized

2020
Oct. 31 Income Summary 350 2,860
Owner’s Capital 301 2,860
(To close net income to capital)
31 Owner’s Capital 301 500
Owner’s Drawings 306 500
(To close drawings to capital)

Posting
Closing
Entries
ILLUSTRATION 4.11
Copyright ©2019 John

LO 2 25
Wiley & Son, Inc.
Yazici Advertising
Post-Closing Trial Balance
October 31, 2020
Debit Credit
Cash ₺15,200
Accounts Receivable 200
Supplies 1,000
Prepaid Insurance 550
Equipment 5,000
Accumulated Depreciation ₺ 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Service Revenue 800
Salaries and Wages Payable 1,200
Interest Payable 50
Owner’s Capital 12,360
ILLUSTRATION 4.12
₺21,950 ₺21,950
DO IT! 2 Closing Entries
Hancock Heating has the following balances in selected accounts of
its adjusted trial balance.
Accounts Payable €27,000 Owner’s Drawings €15,000
Service Revenue 98,000 Owner’s Capital 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Supplies Expense 7,000
Expense 51,000
Prepare the closing entries at December 31.
Service Revenue 98,000
Income Summary 98,000

Expense 51,000
Salaries and Wages Expense 51,000
Rent Expense 22,000
Supplies Expense 7,000

Expense 51,000
Owner’s Drawings 15,000

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
4. Prepare a trial balance
statements
6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

1. Analyze Business Transactions
Assets Liabilities Owner’s Equity
Accounts Notes Unearned Owner's Owner's
Date Cash + Equipment = Payable + Payable + Revenue + Capital - Drawings + Revenue - Expense
1 +₺10,000 +₺10,000
1 +₺5,000 +₺5,000
2 +1,200 +₺1,200
3 -1,200 -₺1,200
4 +250 -₺250
Partial Schedule

2. Journalize the Transactions
Date Explanation Ref. Debit Credit
2020
Oct. 1 Cash 101 10,000
Owners’ Capital 301 10,000
1 Equipment 157 5,000
Notes Payable 200 5,000
2 Cash 101 1,200
Unearned Revenue 209 1,200
3 Rent Expense 729 900
Cash 101 900
LO 3 ILLUSTRATION 2.29 Copyright ©2019 John Wiley & Son, Inc. 32

3. Post to the Ledger Accounts
On October 1, C. R. Byrd invests ₺10,000 cash in an advertising
Transaction
company called Yazici Advertising.
Date Titles Ref. Debit Credit
Journal
Oct. 1 Cash 101 10,000
Entry
Owner's Capital 301 10,000
Cash 101 Owner's Capital 301

Posting
Oct. 1 10,000 Oct. 1 10,000

Yazici Advertising
4. Prepare Trial Balance
October 31, 2020
a Trial Debit Credit
Balance Cash ₺15,200
Supplies 2,500
Equipment 5,000
Notes Payable ₺ 5,000
Unearned Service Revenue 1,200
Owner’s Drawings 500
Rent Expense 900
₺28,700 ₺28,700

5. Journalize and Post Adjusting Entries
Transaction Yazici used supplies costing ₺1,500.
Basic The expense Supplies Expense is increased ₺1,500, and the asset
Analysis Supplies is decreased ₺1,500.
Date Titles Ref. Debit Credit
Journal
Oct. 31 Supplies Expense 1,500
Entry
Supplies 1,500
Supplies Supplies Expense

Posting
Oct. 5 2,500 Oct. 31 1,500 Oct. 31 1,500
Oct. 31 1,000 Oct. 31 1,500

Yazici Advertising
Adjusted Trial Balance
October 31, 2020
6. Prepare Debit Credit
Cash ₺15,200
an Adjusted Accounts Receivable
Supplies
200
1,000
Trail Balance Prepaid Insurance
Equipment
550
5,000
Accumulated Depreciation—Equipment ₺ 40
Notes Payable 5,000
Interest Payable 50
Unearned Revenue 800
Owner’s Drawings 500
Supplies Expense 1,500
Rent Expense 900
Insurance Expense 50
Interest Expense 50
ILLUSTRATION 3.25
Depreciation Expense 40
₺30,190 ₺30,190
7. Prepare Financial Statements Partial
Statements
Yazici Advertising
Income Statement
Revenues
Service revenue ₺10,600
Yazici Advertising
Owner’s Equity Statement
Owner’s capital, October 1 ₺ 0
Yazici Advertising
October 31, 2020
Assets
Cash ₺15,200
Accounts receivable 200
8. Journalize and Post Closing Entries
2020
Oct. 31 Service Revenue 400 10,600
Income Summary 350 10,600
(To close revenue account)
31 Income Summary 350 7,740
Supplies Expense 631 1,500
Depreciation Expense 711 40
Partial Insurance Expense 722 50
Schedule Salaries and Wages Expense 726 5,200
Rent Expense 729 900
Interest Expense 729 50
(To close expense accounts)
9. Prepare a Yazici Advertising
Post-Closing October 31, 2020
Trial Cash
Debit
₺15,200
Credit
Balance Accounts Receivable 200

Supplies 1,000
Equipment 5,000
Accumulated Depreciation ₺ 40
Notes Payable 5,000
Unearned Service Revenue 800
Interest Payable 50
ILLUSTRATION 4.12
₺21,950 ₺21,950

Correcting Entries—An Avoidable Step
• Unnecessary if accounting records are free of errors
• 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.

Case 1: On May 10, Mercato 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.
Cash 500
Incorrect
entry Service Revenue 500
Cash 500
Correct
Accounts Receivable 500
entry
Service Revenue 500
Correcting Accounts Receivable 500
entry

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

DO IT! 3 Correcting Entries
Sanchez Company discovered the following errors made in January
2020 (amounts in thousands).
1. A payment of Salaries and Wages Expense of INR600 was
debited to Supplies and credited to Cash, both for INR600.
2. A collection of INR3,000 from a client on account was debited
to Cash INR200 and credited to Service Revenue INR200.
3. The purchase of supplies on account for INR860 was debited to
Supplies INR680 and credited to Accounts Payable INR680.
Correct the errors without reversing the incorrect entry.

1. A payment of Salaries and Wages Expense of INR600 was
debited to Supplies and credited to Cash, both for INR600.
Salaries and Wages Expense 600
Supplies 600
2. A collection of INR3,000 from a client on account was debited
to Cash INR200 and credited to Service Revenue INR200.
Service Revenue 200
Cash 2,800
Accounts Receivable 3,000

3. The purchase of supplies on account for INR860 was debited to
Supplies INR680 and credited to Accounts Payable INR680.
Supplies (INR860 - INR680) 180
Accounts Payable 180

Classified Statement of Financial Position
• Presents a snapshot at a point in time
• To improve understanding, companies group similar
assets and similar liabilities together
Assets Liabilities and Equity

Current assets Equity
Long-term investments Non-current liabilities
Property, plant, and equipment Current liabilities
Intangible assets
ILLUSTRATION 4.20
Standard statement of financial position classifications

Cheng Ltd.
October 31, 2020
Assets
Current assets
Cash NT$ 6,600
Debt investments 2,000
Accounts receivable 7,000
Notes receivable 1,000
Inventory 3,000
Supplies 2,100
Prepaid insurance 400
Total current assets NT$22,100
Long-term investments
Stock investments 5,200
Investment in real estate 2,000 7,200
Property, plant, and equipment
Land 10,000
Equipment NT$24,000
Less: Accumulated depreciation– equipment 5,000 19,000 29,000
Intangible assets
Patents 3,100
Total assets NT$61,400

Classified statement of financial position
Cheng Ltd.
October 31, 2020
Liabilities and Owner’s Equity
Current liabilities
Notes payable NT$ 11,000
Accounts payable 2,100
Unearned service revenue 900
Salaries and wages payable 1,600
Interest payable 450
Total current liabilities NT$16,050
Long-term liabilities
Mortgage payable 10,000
Notes payable 1,300
Total long-term liabilities 11,300
Total liabilities 27,350
Owner’s equity
Owner’s capital 34,050
Total liabilities and owner’s equity NT$61,400

Classified statement of financial position
Intangible Assets
• Long-lived assets that do not have physical substance
ILLUSTRATION 4.22
Nokia
Statement of Financial Position (partial)
(in millions)
Intangible assets
Capitalized development costs € 244
Goodwill 6,257
Other intangible assets 3,913
€10,414

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
• Sometimes called fixed assets or plant assets

Property, Plant, and Equipment
Laclede Group ILLUSTRATION 4.23

(₩ in billions )
Property, plant, and equipment
Land ₩2,604
Buildings ₩9,487
Structures 1,568
Machinery 36,956
Vehicles 226
Other 10,600 58,837
Less: Accumulated depreciation 32,617
₩28,824

Long-Term Investments
• Investments in stocks and bonds of other companies
• Investments in non-current assets such as land or
buildings that are not currently being used in
operating activities
• Long-term notes receivable
ILLUSTRATION 4.24
Alphabet Inc.
(in thousands)
Long-term investments
Non-marketable equity investments $1,469

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 that it takes to
 purchase inventory,
 sell it on account, and
 collect cash from customers

Current Assets ILLUSTRATION 4.25
Tesco
(£ in millions)
Current assets
Inventories £2,430
Trade and other receivables 1,311
Derivative financial instruments 97
Current tax assets 6
Short-term investments 360
Cash and cash equivalents 1,788
Total current assets £5,992
Accounts usually listed in order liquidity.
Current Assets
The correct order of presentation in a classified
statement of financial position for the following current
assets is:
a. accounts receivable, cash, prepaid insurance,
inventory.
b. prepaid insurance, inventory, accounts receivable,
cash.
c. cash, accounts receivable, inventory, prepaid
insurance.
d. inventory, cash, accounts receivable, prepaid
insurance.
Owner’s Equity
• Proprietorship - one capital account
• Partnership - capital account for each partner
• Corporation - Common Stock and Retained Earnings
Halie Capital Ltd. ILLUSTRATION 4.26

(in thousands)
Equity
Share capital £ 685,934
Retained earnings 1,406,747
Total equity £2,092,681

Non-Current Liabilities
• Obligations a company expects to pay after one year.
Siemens ILLUSTRATION 4.27

(in millions)
Non-current liabilities
Long-term debt € 14,260
Pension plans and similar commitments 4,361
Provisions 2,533
Deferred tax liabilities 726
Other non-current liabilities 2,752
€24,632
Current Liabilities
• Obligations company is to pay within 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
• Common examples are accounts payable, salaries and
wages payable, notes payable, interest payable,
income taxes payable, current maturities of long-term
obligations
• Liquidity - ability to pay obligations expected to be
due within the next year
Current Liabilities
Siemens ILLUSTRATION 4.28

(in millions)
Current liabilities
Trade payables € 8,860
Current provisions 5,165
Other current financial liabilities 2,427
Income taxes payable 1,970
Current maturities for long-term debt 1,819
Other current liabilities 22,210
€42,451

Patents and copyrights are
a. Current assets
b. Intangible assets
c. Long-term investments
d. Property, plant, and equipment

Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable

DO IT! 4 Statement of Financial Position Classifications
Match each of the following to its proper statement of financial position classification, shown
below. If the item would not appear on a statement of financial position, use “NA.”
CL Salaries and wages payable LTI Stock investments (long-term)
NA Service revenue PPE Equipment
CL Interest payable PPE Accumulated depreciation
IA Goodwill NA Depreciation expense
CA Debt investments (short-term) OE Owner’s capital
NCL Mortgage payable (due in 3 years) CL Unearned service revenue
Current assets (CA) Current liabilities (CL)

Long-term investments (LTI) Non-current liabilities (NCL)
Property, plant, and equipment (PPE) Owner’s equity (OE)
Intangible assets (IA)

Appendix 4A Reversing Entries
• It is often helpful to reverse some adjusting entries
before recording regular transactions of the next
period
• Companies make a reversing entry at beginning of
next accounting period
• Each reversing entry is exact opposite of adjusting
entry made in previous period
• Use of reversing entries does not change amounts
reported in the financial statements

Reversing Entries Example
We use the salaries expense transactions for Yazici Advertising as
illustrated in Chapters 2, 3, and 4.
1. October 26 (initial salary entry): Yazici pays ₺4,000 of salaries
and wages earned between October 15 and October 26.
2. October 31 (adjusting entry): Salaries and wages earned
between October 29 and October 31 are ₺1,200. The company
will pay these in the November 9 payroll.
3. November 9 (subsequent salary entry): Salaries and wages paid
are ₺4,000. Of this amount, ₺1,200 applied to accrued salaries
and wages payable and ₺2,800 was earned between November
1 and November 9.

Reversing Entries Example ILLUSTRATION 4A.1
With Reversing Entries

(per appendix)
Initial Salary Entry

Oct. 26 Same entry
Adjusting Entry
Oct. 31 Same entry
Closing Entry
Oct. 31 Same entry
Reversing Entry
Nov. 1 Salaries and Wages Payable 1,200
Subsequent Salary Entry

Nov. 9 Salaries and Wages Expense 4,000
Cash 4,000

Reversing Entries Example
ILLUSTRATION 4A.2
Postings with reversing
entries
Salaries and Wages Expense

10/26 Paid 4,000 10/31 Closing 5,200
10/31 Adjusting 1,200
11/9 Paid 5,200 11/1 Reversing 1,200
Salaries and Wages Payable

11/1 Reversing 1,200 10/31 Adjusting 1,200

A Look at U.S. GAAP
Key Points
Similarities
• The procedures of the closing process are applicable to all
companies, whether they are using IFRS or GAAP.
• IFRS generally requires a classified statement of financial position
similar to the classified balance sheet under GAAP.
• IFRS follows the same guidelines as GAAP for distinguishing between
current and non-current assets and liabilities.

A Look at U.S. GAAP
Key Points
Differences
• IFRS officially uses the term statement of financial position in its
literature, while in the United States it is often referred to as the
balance sheet.
• IFRS requires that specific items be reported on the statement of
financial position, whereas no such general standard exists in GAAP.
• While IFRS companies often report non-current assets before current
assets in their statements of financial position, this is never seen
under GAAP.

A Look at U.S. GAAP
Key Points
Differences
• Under IFRS, current assets are usually listed in the reverse order of
liquidity. For example, under GAAP cash is listed first, but under IFRS
it is listed last.
• GAAP has many differences in terminology from what are shown in
your textbook.
• Both GAAP and IFRS are increasing the use of fair value to report
assets. However, at this point IFRS has adopted it more broadly. As
examples, under IFRS, companies can apply fair value to property,
plant, and equipment, and in some cases intangible assets.

A Look at U.S. GAAP
Looking to the Future
The IASB and the FASB are working on a project related to financial
statement presentation. A key feature of the proposed framework is that
each of the statements will be organized in the same format, to separate
an entity’s financing activities from its operating and investing activities
and, further, to separate financing activities into transactions with owners
and creditors. Thus, the same classifications used in the statement of
financial position would also be used in the income statement and the
statement of cash flows.

Copyright
Copyright © 2019 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Act without the express written permission 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.
Copyright ©2019 John Wiley & Son, Inc. 71

Financial Accounting

Uploaded by

Copyright:

Available Formats

Financial Accounting

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Accounting

Uploaded by

Copyright:

Available Formats

Chapter 4

Copyright ©2019 John Wiley & Son, Inc. 3

LO 1 Copyright ©2019 John Wiley & Son, Inc. 4

LO 1 Copyright ©2019 John Wiley & Son, Inc. 5

Accounts Receivable (e) 200 200 200

Adjusted Income Statement of

Service Revenue 10,000 (d) 400 (d)

LO 1 Copyright ©2019 John Wiley & Son, Inc. 8

Adjusted Income Statement of

LO 1 Copyright ©2019 John Wiley & Son, Inc. 9

Adjusted Income Statement of

Adjusted Income Statement of

LO 1 Copyright ©2019 John Wiley & Son, Inc. 11

LO 1 Copyright ©2019 John Wiley & Son, Inc. 12

LO 1 Copyright ©2019 John Wiley & Son, Inc. 13

LO 1 Copyright ©2019 John Wiley & Son, Inc. 17

LO 1 Copyright ©2019 John Wiley & Son, Inc. 18

LO 2 Copyright ©2019 John Wiley & Son, Inc. 19

All revenue accounts All asset accounts

All expense accounts All liability accounts

Owner's drawings account Owner's capital account

LO 2 Copyright ©2019 John Wiley & Son, Inc. 20

LO 2 Copyright ©2019 John Wiley & Son, Inc. 21

(Individual) Income (Individual)

LO 2 Copyright ©2019 John Wiley & Son, Inc. 22

GENERAL JOURNAL Page J3

GENERAL JOURNAL Page J3

LO 2 Copyright ©2019 John Wiley & Son, Inc. 24

Copyright ©2019 John

LO 2 Copyright ©2019 John Wiley & Son, Inc. 27

LO 2 Copyright ©2019 John Wiley & Son, Inc. 28

LO 2 Copyright ©2019 John Wiley & Son, Inc. 29

9. Prepare a post-closing trial

8. Journalize and post closing

6. Prepare an adjusted trial 5. Journalize and post

LO 3 Copyright ©2019 John Wiley & Son, Inc. 30

LO 3 Copyright ©2019 John Wiley & Son, Inc. 31

LO 3 ILLUSTRATION 2.29 Copyright ©2019 John Wiley & Son, Inc. 32

Cash 101 Owner's Capital 301

LO 3 ILLUSTRATION 2.19 Copyright ©2019 John Wiley & Son, Inc. 33

LO 3 Copyright ©2019 John Wiley & Son, Inc. 34

Supplies Supplies Expense

LO 3 Copyright ©2019 John Wiley & Son, Inc. 35

Balance Accounts Receivable 200

LO 3 Copyright ©2019 John Wiley & Son, Inc. 39

LO 3 Copyright ©2019 John Wiley & Son, Inc. 40

LO 3 Copyright ©2019 John Wiley & Son, Inc. 41

LO 3 Copyright ©2019 John Wiley & Son, Inc. 42

LO 3 Copyright ©2019 John Wiley & Son, Inc. 43

LO 3 Copyright ©2019 John Wiley & Son, Inc. 44

LO 3 Copyright ©2019 John Wiley & Son, Inc. 45

Assets Liabilities and Equity

LO 4 Copyright ©2019 John Wiley & Son, Inc. 46

LO 4 ILLUSTRATION 4.21 Copyright ©2019 John Wiley & Son, Inc. 47

LO 4 ILLUSTRATION 4.21 Copyright ©2019 John Wiley & Son, Inc. 48

LO 4 Copyright ©2019 John Wiley & Son, Inc. 49

LO 4 Copyright ©2019 John Wiley & Son, Inc. 50

Statement of Financial Position (partial)

LO 4 Copyright ©2019 John Wiley & Son, Inc. 51

LO 4 Copyright ©2019 John Wiley & Son, Inc. 52