John Wiley & Sons, Inc. © 2005Chapter 4Completion of the Accounting CyclePrepared by Naomi KarolinskiMonroe Community CollegeandMarianne BradfordBryant CollegeAccounting Principles, 7thEditionWeygandt •Kieso •KimmelAfter studying this chapter, you should be able to:1prepare a work sheet2explain the process of closing the books3describe the content and purpose of a post-closing trial balance4state the required steps in the accounting cycle5explain the approaches to preparing correcting entries6identify the sections of a classified balance sheetCHAPTER4 COMPLETION OF THE ACCOUNTING CYCLE•Work Sheet–multiple-column form used for the adjustment process and preparing financial statements–a working tool for the accountant–not a permanent accounting record•Work Sheet –makes preparation of adjusting entries and financial statements easierWORK SHEETSTUDY OBJECTIVE 1FORM AND PROCEDURE FOR A WORK SHEET•Work sheet–is not a permanent accounting record•When used–financial statements are prepared from the work sheet–adjustments are journalized and posted from the work sheet after financial statementsWORK SHEETSTEPS IN PREPARING A WORK SHEET1prepare trial balance 2enter adjustments in the adjustments columns3enter adjusted balances in adjusted trial balance columns4extend adjusted trial balance amounts to appropriate financial statement columns5total the statement columns, compute net income (loss), and complete the work sheetPREPARING A WORK SHEET 1PREPARING A TRIAL BALANCEPIONEER ADVERTISING AGENCYWork SheetFor the Month Ended October 31, 2005AdjustedTrial BalanceAdjustmentsTrial BalanceAccount TitlesDr.Cr.Dr.Cr.Dr.Cr.CashAdvertising SuppliesPrepaid InsuranceOffice EquipmentquipmentNotes PayableAccounts PayableUnearned RevenueC.R. Byrd, CapitalC.R. Byrd, DrawingService RevenueSalaries ExpenseRent ExpenseTotals. 0015,200 0002,500 0000600 0005,000 5,000 2,500 1,200 000010,000 0000500 10,0000004,000 0000900 0028,700 28,700PREPARING A WORK SHEET 2ENTER THE ADJUSTMENTSPIONEER ADVERTISING AGENCYWork SheetFor the Month Ended October 31, 2005AdjustedTrial BalanceAdjustmentsTrial BalanceAccount TitlesDr.Cr.Dr.Cr.Dr.Cr.Cash15,200Advertising Supplies2,500Prepaid Insurance600Office Equipment5,000Notes Payable5,000Accounts Payable2,500Unearned Revenue1,200C.R. Byrd, Capital10,000C.R. Byrd, Drawing500Service Revenue10,000Salaries Expense4,000Rent Expense900Totals28,70028,700Advertising Supplies ExpenseInsurance ExpenseAccum. Depr –Off Equip—Depreciation ExpenseAccounts ReceivableInterest ExpenseInterest PayableSalaries PayableTotals3,4403,440a 1,500 b 50 d 400d400e 200 g 1,200a 1,500 b 50 c 40 c 40 e 200 f 50 f 50 g 1,200PREPARING A WORK SHEET 3ENTER ADJUSTED BALANCESPIONEER ADVERTISING AGENCYWork SheetFor the Month Ended October 31, 2005AdjustedTrial BalanceAdjustmentsTrial BalanceAccount TitlesDr.Cr.Dr.Cr.Dr.Cr.Cash15,20015,2001,0005505,0005005,2009001,5005040502005,0002,50080010,00010,60040501,200Advertising Supplies2,500a1,500Prepaid Insurance600b50Office Equipment5,000Notes Payable5,000Accounts Payable2,500Unearned Revenue1,200d400C.R. Byrd, Capital10,000C.R. Byrd, Drawing500Service Revenue10,000d400e200Salaries Expense4,000g1,200Rent Expense900Totals28,70028,700Advertising Supplies Expensea1,500Insurance Expenseb50Accum. Depr –Off Equip—c40Depreciation Expensec40Interest Expensef50Accounts Receivablee200Interest Payablef50Salaries Payableg1,200Totals3,4403,44030,19030,190PREPARING A WORK SHEET 4EXTEND ADJUSTED BALANCESPIONEER ADVERTISING AGENCYWork SheetFor the Month Ended October 31, 2005AdjustedIncomeTrial BalanceStatementBalance SheetAccount TitlesDr.Cr.Dr.Cr.Dr.Cr.Cash15,200Advertising Supplies1,000Prepaid Insurance550Office Equipment5,000Notes Payable5,000Accounts Payable2,500Unearned Revenue800C.R. Byrd, Capital10,000C.R. Byrd, Drawing500Service Revenue10,600Salaries Expense5,200Rent Expense900Advertising Supplies Expense1,500Insurance Expense50Accum. Depr. —Office Equip.40Depreciation Expense40Interest Expense50Accounts Receivable200Interest Payable50Salaries Payable1,200Totals30,19030,1907,74010,600Net Income2,860Totals10,60010,60010,600.0 5,200.0 0000000 900.00000000 1,500.000000000 50.0000000 40 550PREPARING A WORK SHEET 4EXTEND ADJUSTED BALANCESPIONEER ADVERTISING AGENCYWork SheetFor the Month Ended October 31, 2005AdjustedIncomeTrial BalanceStatementBalance SheetAccount TitlesDr.Cr.Dr.Cr.Dr.Cr.Cash15,200Advertising Supplies1,000Prepaid Insurance550Office Equipment5,000Notes Payable5,000Accounts Payable2,500Unearned Revenue800C.R. Byrd, Capital10,000C.R. Byrd, Drawing500Service Revenue10,60010,600Salaries Expense5,2005,200RentExpense900900Advertising Supplies Expense1,5001,500Insurance Expense5050Accum. Depr. —Office Equip.40Depreciation Expense4040Interest Expense5050Accounts Receivable200Interest Payable50Salaries Payable1,200Totals30,19030,1907,74010,60022,45019,590Net Income2,8602,860Totals10,60010,60022,45022,45015,200 1,000 5 550 5,000 5,000 2,500 800 10,000 550040200 50 1,200ADJUSTING ENTRIES JOURNALIZEDGENERAL JOURNALDateAccount Titles and ExplanationRef.DebitCredit2005aOct. 31b31c31d31e31f31g31Advertising Supplies Expense 1,500Advertising Supplies 1,500Insurance Expense 50Prepaid Insurance 50Depreciation Expense 40Accumulated Expense 40Unearned Fees 400Fees Earned 400Accounts Receivable 200Fees Earned 200Interest Expense 50Interest Payable 50Salaries Expense 1,200Salaries Payable 1,200PREPARATION OF FINANCIAL STATEMENTSINCOME STATEMENTPIONEER ADVERTISING AGENCYIncome StatementFor the Month Ended October 31, 2005RevenuesService revenueExpensesSalaries expenseAdvertising supplies expenseRent expenseInsurance expenseInterest expenseDepreciation expenseTotal expensesNet incomeThe income statement is prepared from the income statement columns of the work sheet.$10,600$5,2001,5009005050407,740$ 2,860PREPARATION OF FINANCIAL STATEMENTSOWNER’S EQUITY STATEMENTPIONEER ADVERTISING AGENCYOwner’s Equity StatementFor the Month Ended October 31, 2005C.R. Byrd, Capital, October 1Add: InvestmentsNet incomeLess: DrawingsC.R. Byrd, Capital, October 31The owner’s equity statement is prepared from the balance sheet columns of the work sheet.$ -0-$10,0002,860 12,86012,860500$12,360PREPARATION OF FINANCIAL STATEMENTS BALANCE SHEETThe balance sheet is prepared from the balance sheet columns of the work sheet. PIONEER ADVERTISING AGENCY Balance Sheet October 31, 2005 Assets Liabilities and Owner’s Equity Cash Liabilities Accounts receivable Notes payable Advertising supplies Accounts payable Prepaid insurance Interest payable Office equipment Unearned revenue Less: Accumulated Salaries payable depreciation Total liabilities Owner’s equity C.R. Byrd, Capital Total liabilities and owner’s Total assets equity $ 15,2002001,000550$5,00040 4,960$21,910$ 5,0002,500508001,2009,55012,360$21,910Chapter 4A work sheet can be thought of as a(n)a.permanent accounting recordb.optional device used by accountantsc.part of the general ledgerd.part of the journalChapter 4A work sheet can be thought of as a(n)a.permanent accounting recordb.optional device used by accountantsc.part of the general ledgerd.part of the journalTEMPORARY VERSUS PERMANENT ACCOUNTSSTUDY OBJECTIVE 2TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed All revenue accounts All asset accountsAll expense accounts All liability accountsOwner’s drawing Owner’s capital account CLOSING ENTRIES•Closing entries–Formally transfers net income (loss) and owner’s drawings to owner’s capital–Journalizing and posting is a required step in the accounting cycle•Income Summary–A temporary account–Used in closing revenue and expense accounts–Minimizes the details in the permanent owner’s capital accountDIAGRAM OF CLOSING PROCESSPROPRIETORSHIP INCOME SUMMARY (INDIVIDUAL)REVENUES121Debit each revenue account for its balance, and credit Income Summary for total revenues.2Debit Income Summary for total expenses, and credit each expense account for its balance.(INDIVIDUAL)EXPENSESDIAGRAM OF CLOSING PROCESS33Debit (credit) Income Summary and credit (debit) owner’s capital for the amount of net income (loss). INCOME SUMMARY OWNER’SCAPITALDIAGRAM OF CLOSING PROCESS44Debit owner’s capital for the balance in the owner’s drawing account and credit owner’s drawing for the same amount.OWNER’SCAPITAL OWNER’S DRAWING CLOSING ENTRIES JOURNALIZEDSERVICE REVENUENo. 350DateExplanationDebitCreditBalance2002 Oct. 3110,600–0–INCOME SUMMARYNo. 400DateExplanationDebitCreditBalance2002 Oct. 3110,60010,60010,600 GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit 2005 Oct. 31 Service Revenue 400 10,600 Income Summary 350 10,600 (To close revenue account) CLOSING ENTRIES JOURNALIZEDINCOME SUMMARYNo. 350DateExplanationDebitCreditBalance2002 Oct. 3110,60010,600 312,8607,7405,2001,500900505040 GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit 2005 Oct. 31 Income Summary 350 Salaries Expense 726 Advertising Supplies Expense 631 Rent Expense 729 Insurance Expense 722 Interest Expense 905 Depreciation Expense 911 (To close expense accounts) 7,740CLOSING ENTRIES JOURNALIZEDC. R. BYRD, CAPITALNo. 301DateExplanationDebitCreditBalance2002 Oct. 3110,00010,000 3112,860 INCOME SUMMARY No. 350 Date Explanation Debit Credit Balance 2005 Oct. 31 10,600 10,600 31 7,740 2,860 31 2,860 –0– GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit 2005 (3) Oct. 31 Income Summary 350 2,860 C. R. Byrd, Capital 301 2,860 (To close net income to capital) 2,860CLOSING ENTRIES JOURNALIZEDC. R. BYRD, CAPITALNo. 301DateExplanationDebitCreditBalance2002 Oct. 3110,00010,000 3112,860 3112,360 C. R. BYRD, DRAWING No. 350 Date Explanation Debit Credit Balance 2005 Oct. 31 500 500 31 –0– 500500GENERAL JOURNALDateAccount Titles and ExplanationRef.DebitCredit2005(4)Oct. 31C. R. Byrd, Capital350C. R. Byrd, Drawing301(To close net income tocapital)500500CAUTIONS RELATING TO CLOSING ENTRIESCaution:•Avoid doubling revenue and expense balances•Owner’s Drawing does not move to the Income Summary account. Owner’s drawing is not an expense and it is not a factor in determining net income. POSTING CLOSING ENTRIES•Temporary accounts–All temporary accounts will have zero balances after posting the closing entries–Temporary accounts (revenues and expenses) are totaled, balanced and double ruled•Owner’s capital –Total equity of the owner at the end of the accounting period–No entries are journalized and posted to owner’s capital during the year•Permanent accounts(assets, liabilities, and owner’s capital) not closedDepreciation Expense71140(2)40Interest Expense90550(2)50Insurance Expense72250(2)50Rent Expense729900(2)900Advertising SuppliesExpense6311,500(2)1,500Salaries Expense7264,000(2)5,2001,2005,2005,20022C. R. Byrd, Drawing306500(4)500C. R. Byrd, Capital301(4)50010,000(3)2,86012,360Income Summary350(2)7,740(1)10,600(3)2,86010,60010,600Service Revenue400(1)10,60010,00040020010,60010,600431POSTING OF CLOSING ENTRIESPOST-CLOSING TRIAL BALANCESTUDY OBJECTIVE 3After all closing entries have been journalized the post-closing trial balanceis prepared from the ledger.The purpose of this trial balanceis to prove the equality of the permanent account balances that are carried forward into the next accounting period.POST-CLOSING TRIAL BALANCE1Analyze business transactions2Journalize the transactions3Post to ledger accounts4Prepare a trial balance5Journalize and post adjusting entriesSTEPS IN THE ACCOUNTING CYCLESTUDY OBJECTIVE 46Prepare an adjusted trial balance7Prepare financial statements: Income Statement, Owner’s Equity Statement, Balance Sheet8Journalize and post closing entries9Prepare a post-closing trial balanceSTEPS IN THE ACCOUNTING CYCLE•Reversing entry –Made at the beginning of the next accounting period–Purpose is to simplify the recording of a subsequent transaction related to an adjusting entry–Most often used to reverse two types of adjusting entries: accrued revenues and accrued expensesREVERSING ENTRIESILLUSTRATIVE EXAMPLE OF REVERSING ENTRYCORRECTING ENTRIESSTUDY OBJECTIVE 5•Correcting Entries–errors should be corrected as soon as discovered–correcting entries are unnecessary if records are free of errors–can be journalized and posted whenever an error is discovered–involve any combination of balance sheet and income statement accountsILLUSTRATIVE EXAMPLEOFCORRECTING ENTRY 1Incorrect Entry May 10 (To record collection from customer an account)Correct Entry 10 (To record collection from customer an account)Correcting Entry 20 (To correct entry of May 10)Cash 50Service Revenue50Cash 50Accounts Receivable 50Service Revenue 50Accounts Receivable 50ILLUSTRATIVE EXAMPLEOF CORRECTING ENTRY 2Incorrect Entry May 18 (To record purchase of equipment on account)Correct Entry 18 (To record purchase of equipment on account)Correcting Entry June 3 (To correct entry of May 18)Delivery Equipment 45Accounts Payable45Office Equipment 450Accounts Payable 450Office Equipment 450Delivery Equipment 45Accounts Payable 405Chapter 4The closing entry process consists of closinga.all asset and liability accountsb.out the owner's capital accountc.all permanent accountsd.all temporary accountsChapter 4The closing entry process consists of closinga.all asset and liability accountsb.out the owner's capital accountc.all permanent accountsd.all temporary accountsSTANDARD BALANCE SHEET CLASSIFICATIONSSTUDY OBJECTIVE6AssetsLiabilities and Owner’s Equity•Financial statements become more useful when the elements are classified into significant subgroups.•A classified balance sheetgenerally has the following standard classifications:Current AssetsCurrent LiabilitiesLong-Term InvestmentsLong-Term LiabilitiesProperty, Plant andOwner’s (Stockholders’) Equity EquipmentIntangible Assets•Current assets–Cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company’s operating cycle, whichever is longer–Current assets are listed in the order of their liquidity•Operating cycle of a company–This is the average time required to go from cash to cash in producing revenues•Examples–Inventory, accounts receivable and cashCURRENT ASSETS•Long-term investments–Resources which can be realized in cash–Their conversion into cash is not expected within one year or the operating cycle, whichever is longer•Examples–Investments in bonds of another company or investment in land held for resaleXYZ stockLONG-TERM INVESTMENTS•Property, plant, and equipment–Tangible resources, relatively permanent nature, used in the business, and not intended for sale•Examples–Land, buildings, and machineryPROPERTY, PLANT, AND EQUIPMENT•Intangible assets–Non-current resources that do not have physical substance•Examples–Includes patents, copyrights, trademarks, or trade names, gives the holder exclusive right of use for a specified period of timeINTANGIBLE ASSETS•Current liabilities–Obligations reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer•Examples–Accounts payable, wages payable, interest payable and current maturities of long-term debtCURRENT LIABILITIESCURRENT LIABILITIESLiquidityis the ability of a company to pay obligations that are expected to become due within the next year or operating cycle.•Long-term liabilitiesObligations expected to be paid after one year•Examples –Long-term notes payable, bonds payable, mortgages payable, and lease liabilitiesLONG-TERM LIABILITIES•The content of the owner’s equity section –Varies with the form of business organization•Proprietorship –A single owner’s equity account called (Owner’s Name), Capital•Partnership–Separate capital accounts for each partner•Corporation–Called stockholders’ equity, and it consists of two accounts: Capital Stock and Retained EarningsOWNER’S EQUITYCLASSIFIED BALANCE SHEET IN ACCOUNT FORMA classified balance sheet 1availability of assets to meet debts 2claims of short-and long-term creditors on total assets PIONEER ADVERTISING AGENCY Balance Sheet October 31, 2005 Assets Current assets Cash Accounts receivable Advertising supplies Prepaid insurance Total current assets Property, plant, and equipment Office equipment Less: Accumulated depreciation Total assets $ 15,2002001,00055016,950$5,00040 4,960$21,910CLASSIFIED BALANCE SHEET IN REPORT FORMThe balance sheet is most often presented in the report form, with the assets above liabilities and owner’s equity. $ 1,0002,500508001,2005,5504,0009,55012,360$21,910Liabilities and Owner’s EquityCurrent liabilitiesNotes payableAccounts payableInterest payableUnearned revenueSalaries payableTotal current liabilitiesLong-term liabilitiesNotes payableTotal liabilitiesOwner’s equityC. R. Byrd, CapitalTotal liabilities and owner’s equityChapter 4A current asset isa.the last asset purchased by a businessb.an asset which is currently being used to produce a product or servicec.usually found as a separate classification in the income statementd.expected to be realized in cash, sold or consumed within one year of the balance sheet or the company's operating cycle, whichever is longerChapter 4A current asset isa.the last asset purchased by a businessb.an asset which is currently being used to produce a product or servicec.usually found as a separate classification in the income statementd.expected to be realized in cash, sold or consumed within one year of the balance sheet or the company's operating cycle, whichever is longerCOPYRIGHTCopyright © 2005 John Wiley & Sons, Inc. All rights reserved. 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