Chapter 4

Completing the
Accounting Cycle

Chapter
4-1 Accounting Principles, Ninth Edition
 Study
Study Objectives
Objectives

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 balance sheet.

Chapter
4-2
 Completing
Completing the
the Accounting
Accounting Cycle
Cycle

Summary of
Using a Closing the Classified
Accounting
Worksheet Books Balance Sheet
Cycle

Steps in Preparing closing Reversing entries Current assets

preparation entries —An optional step Long-term
Preparing financial Posting closing Correcting entries investments
statements entries —An avoidable Property, plant, and
Preparing Preparing a post- step equipment
adjusting entries closing trial Intangible assets
balance
Current liabilities
Long-term liabilities
Owner’s equity

Chapter
4-3
 Using
Using AA Worksheet
Worksheet

Worksheet
A multiple-column form used in preparing
financial statements.

Not a permanent accounting record.

Five step process.

Use of worksheet is optional.

Chapter
4-4 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 4-1

Chapter
4-5 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration:
Illustration 4-2
Preparing a trial balance

Chapter
4-6 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
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
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
C. R. Byrd, Capital 10,000
C. R. Byrd, Drawing 500
Service Revenue 10,000

Salaries Expense 4,000

Rent 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger
accounts.
Include all accounts
with balances.

Chapter
4-7 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

Chapter
4-8 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
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
Advertising Supplies 2,500 (a) 1,500
Prepaid Insurance 600 (b) 50
Office Equipment 5,000 Adjustments Key:
Notes Payable
Accounts Payable
5,000
2,500
(a) Supplies Used.
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
C. R. Byrd, Capital 10,000
C. R. Byrd, Drawing 500 (c) Depreciation Expensed.
Service Revenue 10,000 (d) 400 (d) Service Revenue Earned.
(e) 200
Salaries Expense 4,000 (g) 1,200 (e) Service Revenue Accrued.
Rent 900 (f) Interest Accrued.
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 (g) Salaries Accrued.
Insurance Expense (b) 50
Accumulated Depreciation (c) 40
Depreciation Expense (c) 40
(e) 200
Accounts Receivable
Interest Expense (f)
50
Enter adjustment amounts,
Interest Payable (f) 50 total adjustments columns,
(g)
Salaries Payable 1,200 and check for equality.
Totals 3,440 3,440

Chapter Add additional accounts as needed.

4-9 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
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
Advertising 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
C. R. Byrd, Capital 10,000 10,000
C. R. Byrd, Drawing 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200
Rent 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 1,500
Insurance Expense (b) 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40
Accounts Receivable (e) 200 200
(f)
Interest Expense 50 50
Interest Payable (f) 50 50
Salaries Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190

Total the adjusted trial balance

Chapter columns and check for equality.
4-10 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
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
Advertising 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
C. R. Byrd, Capital 10,000 10,000
C. R. Byrd, Drawing 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200 5,200
Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200
(f)
Interest Expense 50 50 50
Interest Payable (f) 50 50
Salaries Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600

Extend all revenue and expense account

Chapter balances to the income statement columns.
4-11 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
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 15,200
Advertising 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
C. R. Byrd, Capital 10,000 10,000 10,000
C. R. Byrd, Drawing 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200 5,200
Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
(f)
Interest Expense 50 50 50
Interest Payable (f) 50 50 50
Salaries Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

Extend all asset, liability, and equity account

Chapter balances to the balance sheet columns.
4-12 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
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
Advertising 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
C. R. Byrd, Capital 10,000 10,000 10,000
C. R. Byrd, Drawing 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200 5,200
Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries Payable (g) 1,200 1,200 1,200
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
Chapter Compute Net Income or Net Loss.
4-13 SO 1 Prepare a worksheet.
 Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet

Review Question
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. balance sheet debit column only.
c. income statement credit column and balance
sheet debit column.
d. income statement debit column and balance
sheet credit column.

Chapter
4-14 SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet

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.

Chapter
4-15 SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Chapter
4-16 SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Chapter
4-17 SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Chapter
4-18
Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
Worksheet

Adjusting Entries
The 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.

Chapter
4-19 SO 1 Prepare a worksheet.
Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

Chapter
4-20 SO 1 Prepare a worksheet.
 Closing
Closing the
the Books
Books

At the end of the accounting period, the company

makes the accounts ready for the next period.
Illustration 4-5

Chapter
4-21 SO 2 Explain the process of closing the books.
 Closing
Closing the
the Books
Books

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 at the end of the annual

accounting period.

Chapter
4-22 SO 2 Explain the process of closing the books.
 Closing
Closing the
the Books
Books

Note:
Owner’s Drawing is closed Illustration 4-6

directly to Capital and not

to Income Summary
Owner’s Capital is a
because Owner’s Drawing permanent account; all
other accounts are
is not an expense. temporary accounts.

Chapter
4-23 SO 2 Explain the process of closing the books.
 Closing
Closing the
the Books
Books
Illustration 4-7
Closing entries
journalized

Closing
Entries
need
to be
Posted

Chapter
4-24
 Preparing
Preparing aa Post-Closing
Post-Closing Trial
Trial Balance
Balance

Purpose is to prove the equality of the permanent account

balances after journalizing and posting of closing entries.

Temporary
accounts
will have
zero
balances.

Illustration 4-9

Chapter
4-25
 Summary
Summary of
of the
the Accounting
Accounting Cycle
Cycle
Illustration 4-12
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

Chapter
4-26 SO 4 State the required steps in the accounting cycle.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable Step
Step

Correcting entries
are unnecessary if the records are error-free.

are 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.

Chapter
4-27 SO 5 Explain the approaches to preparing correcting entries.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable Step
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 Cash 50
entry Service revenue 50
Correct Cash 50
entry Accounts receivable 50
Correcting Service revenue 50
entry Accounts receivable 50
Chapter
4-28 SO 5 Explain the approaches to preparing correcting entries.
 Correcting
Correcting Entries—An
Entries—An Avoidable
Avoidable Step
Step
Illustration (Case 2): On May 18, Mercato purchased on
account equipment costing $450. The transaction was
journalized and posted as a debit to Equipment $45 and a
credit to Accounts Payable $45. The error was discovered on
June 3.
Incorrect Equipment 45
entry Accounts payable 45
Correct Equipment 450
entry Accounts payable 450

Correcting Equipment 405

entry Accounts payable 405

Chapter
4-29 SO 5 Explain the approaches to preparing correcting entries.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Presents a snapshot at a point in time.

To improve understanding, companies group

similar assets and similar liabilities together.

Standard Classifications Illustration 4-17

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

Chapter
4-30 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
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.

Chapter
4-31 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Current Assets
Illustration 4-19

Companies usually list current asset accounts in the order they

expect to convert them into cash.
Chapter
4-32 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Review Question
Cash, and other resources that are reasonably
expected to be realized in cash or sold or
consumed in the business within one year or the
operating cycle, are called:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.
Chapter
4-33 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

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.
Illustration 4-20

Chapter
4-34 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

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.

Chapter
4-35 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Property, Plant, and Equipment

Illustration 4-21

Chapter
4-36 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Intangible Assets
Assets that do not have physical substance.
Illustration 4-22

Chapter
4-37 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

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

Chapter
4-38 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Current Liabilities
Obligations the company is to pay within the
coming year.

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.

Chapter
4-39 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Current Liabilities
Illustration 4-23

Chapter
4-40 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Long-Term Liabilities
Obligations a company expects to pay after one year.
Illustration 4-24

Chapter
4-41 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

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

Chapter
4-42 SO 6 Identify the sections of a classified balance sheet.
 The
The Classified
Classified Balance
Balance Sheet
Sheet

Owner’s Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation - Capital Stock and Retained Earnings.
Illustration 4-25

Chapter
4-43 SO 6 Identify the sections of a classified balance sheet.