4-1

Completing the
Chapter 4 Accounting Cycle
Learning Objectives
After studying this chapter, you should be able to:

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 statement of financial position.

4-2
 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)

Accumulated Depreciation Statement of financial position (credit)
Accounts Payable Statement of financial position (credit)
Dividends Statement of financial position (debit)
Service Revenue Income statement (credit)
Salaries and Wages Expense Income statement (debit)

4-3 LO 1
 Closing the Books

At the end of the accounting period, the company makes

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

4-4 LO 2 Explain the process of closing the books.

 Closing the Books

Preparing Closing Entries

Closing entries formally recognize, in the general ledger, the
transfer of
 net income (or net loss) and
 dividends
to retained earnings.

Closing entries are only made at the end of the annual

accounting period.

4-5 LO 2 Explain the process of closing the books.

 Closing the Books

Note:
Dividends are closed directly Illustration 4-6

to retained earnings and not

to Income Summary because
Retained earnings is a
dividends are not an permanent account; all
other accounts are
expense. temporary accounts.

4-6 LO 2
 Closing the Books

Closing
Entries
Illustrated

Illustration 4-7
Closing entries
journalized

4-7
 Closing the Books

Posting
Closing
Entries

Illustration 4-8

4-8 LO 2
 The worksheet for Hancock Company shows the following in the
financial statement columns:
Dividends €15,000
Share Capital-ordinary €42,000
Net income €18,000
Prepare the closing entries at December 31 that affect equity.

Income summary 18,000

Retained earnings 18,000
Retained earnings 15,000
Dividends 15,000

4-9
LO 1
 Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account

balances after journalizing and posting of closing entries.

Illustration 4-9

4-10 LO 3
 Summary of the Accounting 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

4-11 LO 4 State the required steps in the accounting cycle.

 Summary of the Accounting Cycle

Correcting Entries—An Avoidable Step

 Unnecessary if the records are error-free.

 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.

4-12 LO 5 Explain the approaches to preparing correcting entries.

 Correcting Entries—An Avoidable 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
4-13 LO 5 Explain the approaches to preparing correcting entries.
 Correcting Entries—An Avoidable 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
4-14 LO 5 Explain the approaches to preparing correcting entries.
 The Classified Statement of Financial Position

 Presents a snapshot at a point in time.

 To improve understanding, companies group similar
assets and similar liabilities together.

Standard Classifications
Illustration 4-17

4-15 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Illustration
4-18

4-16 LO 6
 The Classified Statement of Financial Position

Illustration
4-18

4-17 LO 6
 The Classified Statement of Financial Position

Intangible Assets
 Assets that do not have physical substance.
Illustration 4-19

4-18 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Question
Patents and copyrights are

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

4-19 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

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.

4-20 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Property, Plant, and Equipment

Illustration 4-20

4-21 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Long-Term Investments
 Investments in ordinary shares and bonds of other
companies.
 Investments in non-current assets such as land or buildings
that a company is not using in its operating activities.
Illustration 4-21

4-22 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

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.

4-23 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Assets Illustration 4-22

Usually listed in the reverse order they expect to convert them into cash.

4-24 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Question
Assets that a company expects to convert to cash or use up
within one year or its operating cycle, whichever is longer
are called:

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

4-25 LO 6 Identify the sections of a classified statement of financial position.

 Baxter Hoffman recently received the following information related to Hoffman
Company’s December 31, 2014, statement of financial position.
Prepaid insurance $ 2,300 Inventory $3,400
Cash 800 Accumulated depreciation—
Equipment 2,700 Equipment 10,700
Accounts receivable 1,100
Prepare the asset section of Hoffman Company’s statement of financial position.

4-26
LO 6
 The Classified Statement of Financial Position

Equity
 Proprietorship - one capital account.
 Partnership - capital account for each partner.
 Corporation – Share Capital and Retained Earnings.

Illustration 4-23

4-27 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Non-Current Liabilities
 Obligations a company expects to pay after one year.
Illustration 4-24

4-28 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Liabilities
 Obligations company is to pay within the 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.

 Liquidity - ability to pay obligations expected to be due

within the next year.

4-29 LO 6 Identify the sections of a classified statement of financial position.

 The Classified Statement of Financial Position

Current Liabilities
Illustration 4-25

4-30 LO 6 Identify the sections of a classified statement of financial position.

 The following accounts were taken from the financial statements of Callahan
Company.

Match each of the following accounts to its proper statement of financial

position classification, shown below. If the item would not appear on a
statement of financial position, use “NA.”
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Non-current liabilities (NCL)
Property, plant, and equipment (PPE) Equity (E)
Intangible assets (IA)

4-31 LO 6