Lecture Accounting principles (8th edition) – Chapter 4: Completing the accounting cycle
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Chapter
4-1
CHAPTER 4
COMPLETING THE
ACCOUNTING
CYCLE
Accounting Principles, Eighth Edition
Chapter
4-2
Study Objectives
Study Objectives
1.
Prepare a worksheet.
2.
Explain the process of closing the books.
3.
Describe the content and purpose of a postclosing 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
4-3
Completing the Accounting Cycle
Completing the Accounting Cycle
Using
Usingaa
Worksheet
Worksheet
Closing
Closingthe
the
Books
Books
Steps in
preparation
Preparing
financial
statements
Preparing
adjusting entries
Preparing
closing entries
Posting closing
entries
Preparing a
post-closing trial
balance
Chapter
4-4
Summary
Summaryof
of
Accounting
Accounting
Cycle
Cycle
Reversing
entries—An
optional step
Correcting
entries—An
avoidable step
Classified
Classified
Balance
BalanceSheet
Sheet
Current assets
Long-term
investments
Property, plant,
and equipment
Intangible assets
Current liabilities
Long-term
liabilities
Owner’s equity
Using A Worksheet
Using A Worksheet
Worksheet
A multiplecolumn form used in preparing financial
statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.
Chapter
4-5
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
Illustration 42
Chapter
4-6
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
Example
The trial balance for Undercover Roofing for the month ended March 31, 2008, is as
follows.
Trial Balance
Other data:
Account Titles
Dr.
Cr.
1. Supplies on hand total $140.
Cash
$ 2,500
Accounts Receivable
1,800
2. Depreciation for March is $200.
Roofing Supplies
1,100
3. Unearned revenue amounted to $130
Equipment
6,000
Accumulated Depreciation
$ 1,200
on March 31.
Accounts Payable
1,400
4. Accrued salaries are $350.
Unearned Revenue
300
I. Spy, Capital
I. Spy, Drawing
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Chapter
4-7
7,000
600
3,000
700
200
$ 12,900
Instructions
a. Prepare and complete the worksheet.
$ 12,900
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
1. Prepare a Trial Balance on the Worksheet
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
I. Spy, Capital
I. Spy, Drawing
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Trial Balance
Dr.
Cr.
2,500
1,800
1,100
6,000
1,200
1,400
300
7,000
600
3,000
700
200
12,900
12,900
Adjustments
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
Trial balance amounts come
directly from ledger accounts.
Include all accounts
with balances.
Chapter
4-8
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
2. Enter the Adjustments in the Adjustments Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
I. Spy, Capital
I. Spy, Drawing
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Trial Balance
Dr.
Cr.
2,500
1,800
1,100
6,000
1,200
1,400
300
7,000
600
3,000
700
200
12,900
12,900
Add additional
accounts as needed.
Chapter
4-9
Adjustments
Dr.
Cr.
(a)
960
(b)
200
(c)
170
(d)
350
1,680
(c) 170
(d) 350
(a) 960
(b) 200
1,680
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
Adjustments Key:
(a) Supplies used.
(b) Depreciation expense.
(c) Service revenue earned.
(d) Salaries accrued.
Enter adjustment amounts,
total adjustments columns,
and check for equality.
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
3. Complete the Adjusted Trial Balance Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
I. Spy, Capital
I. Spy, Drawing
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Chapter
4-10
Trial Balance
Dr.
Cr.
2,500
1,800
1,100
6,000
1,200
1,400
300
7,000
600
3,000
700
200
12,900
12,900
Adjustments
Dr.
Cr.
(a)
960
(b)
200
(c)
170
(c) 170
(d) 350
(a) 960
(b) 200
1,680
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
7,000
600
3,170
1,050
200
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
960
200
(d)
350
1,680
Total the adjusted trial
balance columns and check for
equality.
13,450
350
13,450
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
I. Spy, Capital
I. Spy, Drawing
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Trial Balance
Dr.
Cr.
2,500
1,800
1,100
6,000
1,200
1,400
300
7,000
600
3,000
700
200
12,900
12,900
Adjustments
Dr.
Cr.
(a)
960
(b)
200
(c)
170
(c) 170
(d) 350
(a) 960
(b) 200
1,680
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
7,000
600
3,170
1,050
200
960
200
(d)
350
1,680
13,450
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
3,170
1,050
200
960
200
350
13,450
2,410
3,170
Extend all revenue and expense account
balances to the income statement columns.
Chapter
4-11
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
4. Extend Amounts to Financial Statement Columns
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
I. Spy, Capital
I. Spy, Drawing
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Chapter
4-12
Trial Balance
Dr.
Cr.
2,500
1,800
1,100
6,000
1,200
1,400
300
7,000
600
3,000
700
200
12,900
12,900
Adjustments
Dr.
Cr.
(a)
960
(b)
200
(c)
170
(c) 170
(d) 350
(a) 960
(b) 200
1,680
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
7,000
600
3,170
1,050
200
960
200
(d)
350
1,680
13,450
Extend all asset, liability, and equity
account balances to the balance sheet
columns.
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
7,000
600
3,170
1,050
200
960
200
350
13,450
2,410
3,170
11,040
350
10,280
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
5. Total Columns, Compute Net Income (Loss)
Account Titles
Cash
Accounts Receivable
Roofing Supplies
Equipment
Accumulated Depreciation
Accounts Payable
Unearned Revenue
I. Spy, Capital
I. Spy, Drawing
Service Revenue
Salaries Expense
Miscellaneous Expense
Totals
Supplies Expense
Depreciation Expense
Salaries Payable
Totals
Net Income
Totals
Trial Balance
Dr.
Cr.
2,500
1,800
1,100
6,000
1,200
1,400
300
7,000
600
3,000
700
200
12,900
12,900
Adjustments
Dr.
Cr.
(a)
960
(b)
200
(c)
170
(c) 170
(d) 350
(a) 960
(b) 200
1,680
Adjusted
Trial Balance
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
7,000
600
3,170
1,050
200
960
200
(d)
350
1,680
13,450
Income
Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
2,500
1,800
140
6,000
1,400
1,400
130
7,000
600
3,170
1,050
200
960
200
350
13,450
2,410
760
3,170
3,170
11,040
3,170
11,040
350
10,280
760
11,040
Compute Net Income or Net Loss.
Chapter
4-13
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Steps in Preparing a Worksheet
Review Question
Net income is shown on a work sheet 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
LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Preparing Financial Statements from a 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
LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Preparing Financial Statements from a Worksheet
b. Prepare an income statement for the month ended March 31, 2008.
Undercover Roofing
Income Statement
For the Month Ended March 31, 2008
Revenues
Service revenues
Expenses
Salaries expense
Supplies expense
Depreciation expense
Miscellaneous expense
Total expenses
Net income
Chapter
4-16
$
3,170
$
2,410
760
$ 1,050
960
200
200
LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Preparing Financial Statements from a Worksheet
b. Prepare an owner’s equity statement for the month ended March 31, 2008.
Undercover Roofing
Statement of Owner's Equity
For the Month Ended March 31, 2008
I. Spy, Capital, March 1
Add: Net income
Less: Drawings
I. Spy, Capital, March 31
Chapter
4-17
$
$
7,000
760
(600)
7,160
LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Preparing Financial Statements from a Worksheet
b. Prepare a balance sheet as of March 31, 2008.
Undercover
Roofing
Balance Sheet
March 31, 2008
Assets
Current assets
Cash
Accounts receivable
Roofing supplies
Total current assets
Property, plant, and equipment
Equipment
Less: Accumulated depreciation
Total assets
Liabilities and Owner's Equity
Current liabilities
Accounts payable
Salaries payable
Unearned revenue
Total current liabilities
Owner's equity
I. Spy, Capital
Total liabilities and owner's equity
Chapter
4-18
$
6,000
1,400
$
$
$
2,500
1,800
140
4,440
4,600
9,040
1,400
350
130
1,880
7,160
9,040
LO 1 Prepare a worksheet.
Preparing Adjusting Entries from a Worksheet
Preparing Adjusting Entries from a 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
LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Preparing Financial Statements from a Worksheet
c. Journalize the adjusting entries from the adjustments columns of
the worksheet.
Da t e
Ma r . 3 1
Ac c o unt T it le
S upplie s e x pe ns e
Re f .
De b it
9 6 0
Ro o f ing s upplie s
De pr e c ia t io n e x pe ns e
9 6 0
2 0 0
Ac c um ula t e d d e pr e c ia t io n
Une a r ne d r e ve nue
2 0 0
1 7 0
S e r vic e r e ve nue
S a la r ie s e x pe ns e
S a la r ie s pa y a b le
Chapter
4-20
C r e d it
1 7 0
3 5 0
3 5 0
LO 1 Prepare a worksheet.
Preparing Financial Statements from a Worksheet
Preparing Financial Statements from a Worksheet
Discussion Question
Q42. Explain the purpose of the worksheet.
See notes page for discussion
Chapter
4-21
LO 1 Prepare a worksheet.
Closing the Books
Closing the Books
At the end of the accounting period, the company makes the
accounts ready for the next period.
Illustration 45
Chapter
4-22
LO 2 Explain the process of closing the books.
Closing the Books
Closing the Books
Closing entries formally recognize, in the general ledger, the
Closing entries
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
4-23
LO 2 Explain the process of closing the books.
Closing the Books
Closing the Books
Note:
Owner’s Drawing is closed directly
to Capital and not to Income
Summary because Owner’s Drawing
is not an expense.
Chapter
4-24
Illustration 46
Owner’s Capital is a permanent
account; all other accounts are
temporary accounts.
LO 2 Explain the process of closing the books.
Closing the Books
Closing the Books
d. Journalize the closing entries from the financial statement columns
of the worksheet.
Closing
Entries
need to be
Posted
Chapter
4-25
Service revenue
Income summary
3,170
Income summary
Salary expense
Supplies expense
Depreciation expense
Miscellaneous expense
2,410
Income summary
I. Spy, Capital
760
I. Spy, Capital
I. Spy, Drawing
600
3,170
1,050
960
200
200
760
600
LO 2 Explain the process of closing the books.
