Financial Accounting

with IFRS 5th Edition

Wiley Custom Edition

Chapter 4
Completing the Accounting Cycle
Weygandt ● Kimmel
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Ch 4 Completing the Accounting Cycle Copyright © John Wiley & Sons, Inc. 1
Chapter Outline

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 Learning Objective 2
Prepare Closing Entries
and a Post-Closing Trial
Balance

3
Closing the Books

• At the end of the accounting period, the company makes the

accounts ready for the next period.

• Distinguishes between temporary and permanent.

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Closing the Books

• Temporary accounts relate to a given accounting period.

• Include all income statement accounts and the Dividends account.

• The company closes all temporary accounts at the end of the period.

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Closing the Books

• Permanent accounts relate to one or more future accounting periods.

• Include all statement of financial position accounts, including equity

accounts.

• Permanent accounts are not closed from period to period. Instead,

the company carries forward the balances of permanent accounts
into the next accounting period
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Closing the Books

ILLUSTRATION 4.8 Temporary versus permanent accounts

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Preparing Closing Entries
• At the end of the accounting period, the company transfers
temporary account balances to the permanent equity account,
Retained Earnings, by means of closing entries
• Closing entries formally recognize in the ledger the transfer of:
• Net income (or net loss) to retained earnings
• Dividends to retained earnings

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Preparing Closing Entries
• Closing entries produce a zero balance in each temporary
account.
• Companies generally journalize and post closing entries only at
end of the annual accounting period.

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Preparing Closing Entries

Key:
2 1
1 Close Revenues to
Income Summary.
2 Close Expenses to
Income Summary.
3 Close Income Summary
to Retained Earnings.
Retained Earnings is a 4 Close Dividends to
4 3
permanent account. Retained Earnings.
All other accounts are
temporary accounts.

ILLUSTRATION 4.9 Diagram of closing process

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Ch 4 Completing the Accounting Cycle Copyright © John Wiley & Sons, Inc. ILLUSTRATION 3.26 Adjusted trial balance 11
Closing Entries
Illustrated

ILLUSTRATION 4.10
Closing entries journalized
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Posting Closing
Entries

ILLUSTRATION 4.11
Posting of closing entries

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Preparing a Post-Closing Trial Balance

ILLUSTRATION 4.12 Post-closing trial balance

ILLUSTRATION 3.26 Adjusted trial balance

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 ILLUSTRATION 4.13
General ledger,
permanent accounts

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ILLUSTRATION 4.14 General
ledger, temporary accounts
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DO IT! 2 Closing Entries
Hancock Company has the following balances in selected accounts of its adjusted trial
balance.
Accounts Payable €27,000 Dividends €15,000
Service Revenue 98,000 Share Capital—Ordinary 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Expense 51,000 Supplies Expense 7,000

Prepare the closing entries at December 31.

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DO IT! 2 Closing Entries - Solution

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 Learning Objective 3
Explain the Steps in the
Accounting Cycle and How
to Prepare Correcting
Entries
19
The Accounting Cycle

• Accounting cycle begins with the analysis of business transactions and

ends with the preparation of a post-closing trial balance.

• Companies perform the steps in the cycle in sequence and repeat

them in each accounting period.

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Summary of the Accounting Cycle
• Steps 1–3 may occur daily during the accounting period.
• Steps 4–7 on a periodic basis, such as monthly, quarterly, or annually.
• Steps 8 and 9—closing entries and a post-closing trial balance—
usually take place only at the end of a company’s annual accounting
period.

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Summary of 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

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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The Accounting Cycle

ILLUSTRATION 4.15 Required steps in the accounting cycle

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Correcting Entries
Reversing Entries—An Optional Step
• A reversing entry is the exact opposite of the adjusting entry made in
the previous period.
• Use of reversing entries is an optional bookkeeping procedure; it is
not a required step in the accounting cycle.
Correcting Entries—An Avoidable Step
• Companies should correct errors, as soon as they discover them, by
journalizing and posting correcting entries.
• If the accounting records are free of errors, no correcting entries are
needed.
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Correcting Entries—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.

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Correcting Entries—Avoidable Step
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 and a credit to Service Revenue for NT$500.
The error was discovered when the customer paid the remaining balance in full.

ILLUSTRATION 4.16 Comparison of entries

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Correcting Entries—Avoidable Step
Comparison of the incorrect entry with the correct entry reveals that the debit to Cash
NT$500 is correct. However, the NT$500 credit to Service Revenue should have been
credited to Accounts Receivable. As a result, both Service Revenue and Accounts
Receivable are overstated in the ledger.

ILLUSTRATION 4.17 Correcting entry

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Correcting Entries—Avoidable Step
Case 2: On May 10, 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, when Mercato received
the monthly statement for May from the creditor.

ILLUSTRATION 4.18 Comparison of entries

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Correcting Entries—Avoidable Step
Comparison of the two entries shows that two accounts are incorrect. Equipment is
understated NT$4,050, and Accounts Payable is understated NT$4,050.

ILLUSTRATION 4.19 Correcting entry

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DO IT! 3 Correcting Entries
Sanchez Company discovered the following errors made in January 2025.
1. A payment of Salaries and Wages Expense of $600 was debited to Supplies and
credited to Cash, both for $600.
2. A collection of $3,000 from a client on account was debited to Cash $200 and credited
to Service Revenue $200.
3. The purchase of supplies on account for $860 was debited to Supplies $680 and
credited to Accounts Payable $680.
Correct the errors without reversing the incorrect entry.

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DO IT! 3 Correcting Entries - Solution

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 Learning Objective 4
Identify the Sections of
a Classified Statement
of Financial Position

40
Classified Statement of Financial Position

• Presents a snapshot at a point in time

• To improve understanding, companies group similar assets and

similar liabilities together

• A classified statement of financial position groups together similar

assets and similar liabilities, using a number of standard classifications
and sections.
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Classified Statement of Financial Position
These groupings help financial statement readers determine such things as
(1) Whether the company has enough assets to pay its debts as they come
due
(2) The claims of short and long-term creditors on the company’s total assets.

ILLUSTRATION 4.20 Standard statement of financial position classifications

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ILLUSTRATION 4.21
Classified statement of
financial position

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ILLUSTRATION 4.21
Classified statement of
financial position

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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

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Current Assets
• Common types of current assets are (1) cash, (2) investments
(such as short-term government securities), (3) receivables (notes
receivable, accounts receivable, and interest receivable), (4)
inventories, and (5) prepaid expenses (supplies and insurance).
• On the statement of financial position, companies usually list
these items in the reverse order in which they expect to convert
them into cash.

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Current Assets

ILLUSTRATION 4.25 Current assets section

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