Completing The Accounting Cycle: Financial Accounting, IRFS Weygandt Kimmel Kieso

Chapter 4
Completing the
Accounting Cycle
Financial Accounting, IRFS

Weygandt Kimmel Kieso
Slide
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 statement of

financial position.
Slide
4-2
Completing the Accounting Cycle
Classified
Summary of
Using a Closing the Statement of
Accounting
Worksheet Books Financial
Cycle
Position
Steps in Preparing closing Reversing Intangible assets

preparation entries entries—An Property, plant,
Preparing Posting closing optional step and equipment
financial entries Correcting Long-term
statements Preparing a post- entries—An investments
Preparing closing trial avoidable step
Current assets
adjusting entries balance
Equity
Non-current
liabilities
Current liabilities
Slide
4-3
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.
Slide
4-4 SO 1 Prepare a worksheet.
Steps in Preparing a Worksheet
Illustration 4-1
Slide
4-5
SO 1 Prepare a worksheet.
Illustration 4-2
Illustration: Preparing a trial balance
Slide
1. Prepare a Trial Balance on the Worksheet
Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Advertising Supplies 2,500
Prepaid Insurance 600
Office Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Share Capital 10,000
Dividends 500
Service Revenue 10,000
Salaries Expense 4,000

Rent 900
Totals 28,700 28,700
Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.
Slide
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Slide
2. Enter the Adjustments in the Adjustments Columns
Cash 15,200
Advertising Supplies 2,500 (a) 1,500
Prepaid Insurance 600 (b) 50
Office Equipment 5,000
Adjustments Key:
Notes Payable 5,000 (a) Supplies Used.
Accounts Payable 2,500
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Share Capital 10,000
(c) Depreciation Expensed.
Dividends 500
Service Revenue 10,000 (d) 400 (d) Service Revenue Earned.
(e) 200
Salaries Expense 4,000 (g) 1,200
(e) Service Revenue Accrued.
Rent 900 (f) Interest Accrued.
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 (g) Salaries Accrued.
Insurance Expense (b) 50
Accumulated Depreciation (c) 40
Depreciation Expense (c) 40
(e)
Accounts Receivable 200 Enter adjustment amounts, total
(f)
Interest Expense 50
Interest Payable (f) 50 adjustments columns,
(g)
Salaries Payable 1,200 and check for equality.
Totals 3,440 3,440
Add additional accounts as needed.

Slide
3. Complete the Adjusted Trial Balance Columns
Cash 15,200 15,200
Advertising Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Office Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200
Rent 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 1,500
Insurance Expense (b) 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40
(e)
Accounts Receivable 200 200
(f)
Interest Expense 50 50
Interest Payable (f) 50 50
(g)
Salaries Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190
Total the adjusted trial balance

Slide columns and check for equality.
4. Extend Amounts to Financial Statement Columns
Cash 15,200 15,200
Advertising Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Office Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries Expense 4,000 (g) 1,200 5,200 5,200
Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40 40
(e)
Accounts Receivable 200 200
(f)
Interest Expense 50 50 50
Interest Payable (f) 50 50
(g)
Salaries Payable 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600
Extend all revenue and expense account

Slide balances to the income statement columns.
4. Extend Amounts to Financial Statement Columns
Cash 15,200 15,200 15,200
Advertising Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Office Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 (d) 400 800 800
Share Capital 10,000 10,000 10,000
Dividends 500 500 500
(e) 200
Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a)1,500 1,500 1,500
Accumulated Depreciation (c) 40 40 40
(e)
Accounts Receivable 200 200 200
(f)
Interest Payable (f) 50 50 50
(g)
Salaries Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Extend all asset, liability, and equity account

balances to the statement of financial position
Slide
4-12 columns.
5. Total Columns, Compute Net Income (Loss)
Cash 15,200 15,200 15,200
Advertising Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Office Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 (d) 400 800 800
Share Capital 10,000 10,000 10,000
Dividends 500 500 500
(e) 200
Rent 900 900 900
Totals 28,700 28,700
Advertising Supplies Expense (a) 1,500 1,500 1,500
Accumulated Depreciation (c) 40 40 40
(e)
Accounts Receivable 200 200 200
(f)
Interest Payable (f) 50 50 50
(g)
Salaries Payable 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net income 2,860 2,860
Totals 10,600 10,600 22,450 22,450
Slide Compute Net Income or Net Loss.

Review Question
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. statement of financial position debit column only.
c. income statement credit column and statement of
financial position debit column.
d. income statement debit column and statement of
financial position credit column.
Slide
Preparing Financial Statements from a Worksheet
Worksheet
Income statement is prepared from the income
statement columns.
Statement of financial position and retained earnings

statement are prepared from the statement of
financial position columns.
Companies journalize and post adjusting entries.
Slide
Illustration 4-4
Slide
4-16
Illustration 4-4
Slide
4-17
Illustration 4-4
Slide
4-18
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.
Slide
Preparing Adjusting Entries from a Worksheet
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Slide
Closing the Books
At the end of the accounting period, the company makes

the accounts ready for the next period.
Illustration 4-5
Slide
4-21 SO 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
dividends
to Retained Earnings.
Closing entries are only at the end of the annual

accounting period.
Slide
4-22 SO 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 Retained Earnings is a
because Dividends are not permanent account; all
other accounts are
an expense. temporary accounts.
Slide
4-23 SO 2
Closing the Books
Illustration 4-7
Closing entries
journalized
Closing
entries
need to
be
posted
Slide
4-24
Closing the Books
Illustration 4-8
Posting of
closing entries
Posting
closing
entries
Slide
4-25
Preparing a Post-Closing Trial Balance
Purpose is to prove the equality of the permanent account
balances after journalizing and posting of closing entries.
Temporary
accounts
will have
zero
balances.
Illustration 4-9
Slide
4-26
SO 3
Slide
4-27
Summary of the Accounting Cycle
Illustration 4-12
1. Analyze business transactions
9. Prepare a post-closing trial

2. Journalize the transactions
balance
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
Slide
4-28 SO 4 State the required steps in the accounting cycle.
Correcting Entries—An 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.
Slide
4-29 SO 5 Explain the approaches to preparing correcting entries.
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
Slide
Illustration (Case 2): On May 18, Mercato purchased on account
office equipment costing $450. The transaction was journalized
and posted as a debit to Delivery Equipment $45 and a credit to
Accounts Payable $45. The error was discovered on June 3.
Incorrect Delivery equipment 45

entry Accounts payable 45
Office equipment 450
Correct
entry Accounts payable 450
Office equipment 450

Correcting
Delivery equipment 45
entry
Accounts payable 405
Slide
Slide
4-32
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
Assets Equity and Liabilities

Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets
Slide
4-33 SO 6 Identify the sections of a classified statement of financial position.
Intangible Assets
Assets that do not have physical substance.
Slide
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.
Slide
₩
Property, Plant, and Equipment

Illustration 4-20
(in billions)
Slide
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.
Slide
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.
Slide
Current Assets
Illustration 4-22
Slide
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.
Slide
Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation – Share Capital and Retained Earnings.
Illustration 4-23
Slide
Non-current Liabilities
Obligations a company expects to pay after one year.
Slide
Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Slide
Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable
Slide
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.
Slide
Current Liabilities
Slide
Understanding U.S. GAAP
Key Differences
Procedures used to prepare the worksheet are the same for
all companies under both IFRS and GAAP.
Both GAAP and IFRS are consistent regarding the type of
financial statements prepared.
IFRS requires that specific items be reported on the
statement of financial position, whereas no such general
standard exists in GAAP.
Slide
4-47
Similarities
o Both require note disclosures on accounting policies and
judgments.
o Comparative prior period information must be presented
and financial statements must be prepared annually.
o Current/noncurrent classification for assets and liabilities is
normally required.
o Like IFRS, a classified statement of financial position is
usually used under GAAP.
Slide
4-48
Key Differences
IFRS companies may report PP&E first in their statements of
financial position. This presentation is not used under
GAAP.
Under IFRS, companies, under certain conditions, can report
property, plant and equipment at cost or at fair value.
While the use of the term “reserve” is discouraged by GAAP,
it is used extensively under IFRS.
Slide
4-49
Looking to the Future

The IASB and FASB are working on a project to converge
their standards related to financial statement presentation.
Proposal is that each of the statements will be organized in
the same format.
The same classifications used in the statement of financial
position would also be used in the income statement and
the statement of cash flows.
Slide
4-50
APPENDIX Reversing Entries
Reversing Entries
It is often helpful to reverse some of the adjusting entries
before recording the regular transactions of the next
period.
Companies make a reversing entry at the beginning of
the next accounting period.
Each reversing entry is the exact opposite of the
adjusting entry made in the previous period.
The use of reversing entries does not change the
amounts reported in the financial statements.
Slide
4-51 SO 7 Prepare reversing entries.
Illustration: To illustrate the optional use of reversing entries for

accrued expenses, we will use the salaries expense transactions for
Pioneer Advertising Agency.
1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries
earned between October 15 and October 26.
2. October 31 (adjusting entry): Salaries earned between October
29 and October 31 are $1,200. The company will pay these in the
November 9 payroll.
3. November 9 (subsequent salary entry): Salaries paid are $4,000.
Of this amount, $1,200 applied to accrued wages payable and
$2,800 was earned between November 1 and November 9.
Slide
Illustration 4A-1
With Reversing Entries
(per appendix)
Initial Salary Entry

Oct. 26 Same entry
Adjusting Entry
Oct. 31 Same entry
Closing Entry
Oct. 31 Same entry
Reversing Entry
Nov. 1 Salaries payable 1,200
Salaries expense 1,200
Subsequent Salary Entry

Nov. 9 Salaries expense 4,000
Cash 4,000
Slide
Illustration 4A-2
Postings with
reversing
entries
Slide
Copyright
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Reproduction or translation of this work beyond that permitted in
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Request for further information should be addressed to the
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Slide
4-55

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Chapter 4

Financial Accounting, IRFS

2. Explain the process of closing the books.

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

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

Steps in Preparing closing Reversing Intangible assets

Salaries Expense 4,000

Trial balance amounts come

Add additional accounts as needed.

Total the adjusted trial balance

Extend all revenue and expense account

Extend all asset, liability, and equity account

Slide Compute Net Income or Net Loss.

Statement of financial position and retained earnings

Companies journalize and post adjusting entries.

Journalizing and posting of adjusting entries follows

At the end of the accounting period, the company makes

Closing entries formally recognize, in the general

Closing entries are only at the end of the annual

to Retained Earnings and

9. Prepare a post-closing trial

8. Journalize and post

6. Prepare an adjusted trial 5. Journalize and post

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

Incorrect Delivery equipment 45

Office equipment 450

Presents a snapshot at a point in time.

Standard Classifications Illustration 4-17

Assets Equity and Liabilities

Property, Plant, and Equipment

The Classified Statement of Financial Position

Property, Plant, and Equipment

Operating cycle is the average time it takes from the

Completing the Accounting Cycle

Completing the Accounting Cycle

Completing the Accounting Cycle

Completing the Accounting Cycle

Looking to the Future

Illustration: To illustrate the optional use of reversing entries for

Initial Salary Entry

Subsequent Salary Entry

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