Accounting Principle Kieso 8e - Ch04

CHAPTER 4
The Accounting Cycle: Components for Completion

Accounting Principles, Eighth Edition
Chapter 4-1
Study 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 the Accounting Cycle
Using a Worksheet Steps in preparation Preparing financial statements Preparing adjusting entries
Closing the Books Preparing closing entries Posting closing entries Preparing a post-closing trial balance
Summary of Accounting Cycle Reversing entriesAn optional step Correcting entriesAn avoidable step
Classified Balance Sheet Current assets
Chapter 4-3
Long-term investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Owners equity
Using A 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
LO 1 Prepare a worksheet.
Steps in Preparing a Worksheet

Illustration 4-2
Chapter 4-5

P4-1A The trial balance for Undercover Roofing for the month ended March 31, 2008, is as follows.
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
Other data: 1. Supplies on hand total $140. 2. Depreciation for March is $200. 3. Unearned revenue amounted to $130 on March 31. 4. Accrued salaries are $350. Instructions a. Prepare and complete the worksheet.
Chapter 4-6

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.
Include all accounts with balances.

Chapter 4-7
Trial balance amounts come directly from ledger accounts.

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 Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 1,100 (a) 960 6,000 (b) 200 1,200 1,400 300 (c) 170 7,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 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.
Chapter 4-8
Add additional accounts as needed.
Enter adjustment amounts, total adjustments columns, and check for equality.

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 Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 1,100 (a) 960 6,000 (b) 200 1,200 1,400 300 (c) 170 7,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 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 13,450 350 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr.
Chapter 4-9
Total the adjusted trial balance columns and check for equality.

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 Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 1,100 (a) 960 6,000 (b) 200 1,200 1,400 300 (c) 170 7,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 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 13,450 350 13,450 Income Statement Dr. Cr. Balance Sheet Dr. Cr.
3,170 1,050 200 960 200 2,410 3,170
Chapter 4-10
Extend all revenue and expense account balances to the income statement columns.

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 Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 1,100 (a) 960 6,000 (b) 200 1,200 1,400 300 (c) 170 7,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 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 13,450 350 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 2,410 3,170 11,040 350 10,280
Chapter 4-11
Extend all asset, liability, and equity account balances to the balance sheet columns.

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 Adjustments Dr. Cr. Dr. Cr. 2,500 1,800 1,100 (a) 960 6,000 (b) 200 1,200 1,400 300 (c) 170 7,000 600 (c) 170 3,000 (d) 350 700 200 12,900 12,900 (a) 960 (b) 200 (d) 350 1,680 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 13,450 350 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 2,410 760 3,170 3,170 3,170 11,040 11,040 350 10,280 760 11,040
Compute Net income or Net loss.

Chapter 4-12
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 4-13
Preparing Financial Statements from a Worksheet
Worksheet
Income statement is prepared from the income statement columns.
Balance sheet and owners equity statement are prepared from the balance sheet columns.
Companies journalize and post adjusting entries.
Chapter 4-14

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 4-15
3,170
$ 1,050 960 200 200 $ 2,410 760

b. Prepare an owners 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 $ 7,000 760 (600) 7,160
Chapter 4-16

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 4-17
2,500 1,800 140 4,440
6,000 1,400 $
4,600 9,040
1,400 350 130 1,880 7,160 9,040
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 4-18

c. Journalize the adjusting entries from the
adjustments columns of the worksheet.

Account Title Supplies expense Roofing supplies Depreciation expense Accumulated depreciation Unearned revenue Service revenue Salaries expense Salaries payable Ref.
Date Mar. 31
Debit 960
Credit 960
200 200 170 170 350 350

Chapter 4-19
Discussion Question
Q4-2. Explain the purpose of the worksheet.
See notes page for discussion

Chapter 4-20
Closing the Books

At the end of the accounting period, the company makes the accounts ready for the next period.
Illustration 4-5
Chapter 4-21
LO 2 Explain the process of closing the books.
Closing the Books

Closing entries formally recognize, in the general ledger, the transfer of net income (or net loss) and owners drawing to owners capital. Only at the end of the annual accounting period.
Chapter 4-22
Closing the Books
Note: Owners Drawing is closed directly to Capital and not to Income Summary because Owners Drawing is not an expense.
Illustration 4-6
Owners Capital is a permanent account; all other accounts are temporary accounts.
Chapter 4-23
Closing the Books

d. Journalize the closing entries from the financial statement columns of the worksheet.
Service revenue Income summary
Closing Entries need to be Posted Income summary Salary expense Supplies expense Depreciation expense Miscellaneous expense Income summary I. Spy, Capital I. Spy, Capital I. Spy, Drawing
Chapter 4-24
3,170
2,410
3,170 1,050 960 200 200 760 600
760 600
Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries. All temporary accounts will have zero balances.
Account Titles Cash Accounts Receivable Roofing Supplies Equipment Accumulated Depreciation Accounts Payable Salaries payable Unearned Revenue I. Spy, Capital Totals Post-Closing Trial Balance Dr. Cr. $ 2,500 1,800 140 6,000 $ 1,400 1,400 350 130 7,160 $ 10,440 $ 10,440
Chapter 4-25
LO 3 Describe the content and purpose of a post-closing trial balance.
Summary of the Accounting Cycle

1. Analyze business transactions 9. Prepare a post-closing trial balance 8. Journalize and post closing entries 7. Prepare financial statements 6. Prepare an adjusted trial balance 2. Journalize the transactions 3. Post to ledger accounts
Illustration 4-12
4. Prepare a trial balance 5. Journalize and post adjusting entries
Chapter 4-26
LO 4 State the required steps in the accounting cycle.
Correcting EntriesAn Avoidable 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
LO 5 Explain the approaches to preparing correcting entries.

BE4-9 At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries. 1. A collection on account from a customer was recorded as a debit to Cash and a credit to Service Revenue for $780.
Incorrect entry
Correct entry
Correcting entry
Chapter 4-28
Cash
Service revenue Cash
780
780 780
Accounts receivable
Service revenue Accounts receivable 780
780
780

BE4-9 At Batavia Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries. 2. The purchase of supplies on account for $1,570 was recorded as a debit to Supplies and a credit to Accounts Payable $1,750.
Incorrect entry
Correct entry
Correcting entry
Chapter 4-29
Supplies
Accounts payable Supplies
1,750
1,750 1,570
Accounts payable
Accounts payable Supplies 180
1,560
180
The Classified Balance Sheet

Presents a snapshot at a point in time.
To improve understanding, companies group similar assets and similar liabilities together.
Standard Classifications
Assets Current assets Long-term investments Property, plant, and equipment Intangible assets
Chapter 4-30
Illustration 4-17
Liabilities and Owners Equity Current liabilities Long-term liabilities Owners (Stockholders) equity
LO 6 Identify the sections of a classified balance 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

Current Assets
Illustration 4-19
Companies usually list current asset accounts in the order they expect to convert them into cash.
Chapter 4-32
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

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

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 assets life.
Chapter 4-35

Property, Plant, and Equipment
Illustration 4-21
Chapter 4-36

Intangible Assets
Assets that do not have physical substance.
Illustration 4-22
Chapter 4-37
Review Question
Patents and copyrights are
a. Current assets. b. Intangible assets. c. Long-term investments. d. Property, plant, and equipment.
Chapter 4-38

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

Current Liabilities
Illustration 4-23
Chapter 4-40

Long-Term Liabilities
Obligations a company expects to pay after one year.
Illustration 4-24
Chapter 4-41
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

Owners Equity
Proprietorship - one capital account.
Partnership - capital account for each partner. Corporation - Capital Stock and Retained Earnings.
Illustration 4-25
Chapter 4-43
Recording Process
Discussion Question
Q4-18. (a) What is the term used to describe the owners equity section of a corporation? (b) Identify the two owners equity accounts in a corporation and indicate the purpose of each.
See notes page for discussion

Chapter 4-44
Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter 4-45

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CHAPTER 4

The Accounting Cycle: Components for Completion

3. Describe the content and purpose of a post-closing trial balance.

5. Explain the approaches to preparing correcting entries.

Completing the Accounting Cycle

Classified Balance Sheet Current assets

Five step process.

Steps in Preparing a Worksheet

Steps in Preparing a Worksheet

Steps in Preparing a Worksheet

Include all accounts with balances.

Trial balance amounts come directly from ledger accounts.

Steps in Preparing a Worksheet

Add additional accounts as needed.

Steps in Preparing a Worksheet

Steps in Preparing a Worksheet

3,170 1,050 200 960 200 2,410 3,170

Steps in Preparing a Worksheet

Steps in Preparing a Worksheet

Compute Net income or Net loss.

Steps in Preparing a Worksheet

Preparing Financial Statements from a Worksheet

Preparing Financial Statements from a Worksheet

$ 1,050 960 200 200 $ 2,410 760

Preparing Financial Statements from a Worksheet

Preparing Financial Statements from a Worksheet

2,500 1,800 140 4,440

1,400 350 130 1,880 7,160 9,040

Preparing Adjusting Entries from a Worksheet

Preparing Financial Statements from a Worksheet

adjustments columns of the worksheet.

200 200 170 170 350 350

Preparing Financial Statements from a Worksheet

See notes page for discussion

Closing the Books

LO 2 Explain the process of closing the books.

Closing the Books

LO 2 Explain the process of closing the books.

Closing the Books

LO 2 Explain the process of closing the books.

Closing the Books

3,170 1,050 960 200 200 760 600

LO 2 Explain the process of closing the books.

Preparing a Post-Closing Trial Balance

LO 3 Describe the content and purpose of a post-closing trial balance.

Summary of the Accounting Cycle

4. Prepare a trial balance 5. Journalize and post adjusting entries

LO 4 State the required steps in the accounting cycle.

Correcting EntriesAn Avoidable Step

must be posted before closing entries.

LO 5 Explain the approaches to preparing correcting entries.

Correcting EntriesAn Avoidable Step

LO 5 Explain the approaches to preparing correcting entries.

Correcting EntriesAn Avoidable Step

LO 5 Explain the approaches to preparing correcting entries.

The Classified Balance Sheet

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet

LO 6 Identify the sections of a classified balance sheet.

The Classified Balance Sheet