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Completing the
Accounting Cycle
Financial Accounting, IRFS
Weygandt Kimmel Kieso
Slide
4-1
Study
Study Objectives
Objectives
1.
Prepare a worksheet.
2.
3.
4.
5.
6.
Slide
4-2
Completing
Completing the
the Accounting
Accounting Cycle
Cycle
Using a
Worksheet
Closing the
Books
Steps in
preparation
Preparing closing
entries
Preparing
financial
statements
Posting closing
entries
Preparing
adjusting entries
Summary of
Accounting
Cycle
Classified
Statement of
Financial
Position
Reversing entries
An optional
step
Intangible assets
Correcting
entriesAn
avoidable step
Long-term
investments
Property, plant,
and equipment
Current assets
Equity
Non-current
liabilities
Current liabilities
Slide
4-3
Using
Using A
AWorksheet
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
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 4-1
Slide
4-5
SO 1 Prepare a worksheet.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration:
Slide
4-6
Illustration 4-2
Preparing a trial balance
SO 1 Prepare a worksheet.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
1. Prepare a Trial Balance on the Worksheet
Slide
4-7
SO 1 Prepare a worksheet.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Slide
4-8
SO 1 Prepare a worksheet.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
2. Enter the Adjustments in the Adjustments Columns
(a)
(b)
(d)
(d)
(g)
(e)
(a)
(b)
(c)
(e)
(f)
(c)
(f)
(g)
Slide
4-9
Adjustments Key:
(a) Supplies Used.
(b) Insurance Expired.
(c) Depreciation Expensed.
(d) Service Revenue Earned.
(e) Service Revenue Accrued.
(f) Interest Accrued.
(g) Salaries Accrued.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
3. Complete the Adjusted Trial Balance Columns
(a)
(b)
(d)
(d)
(g)
(e)
(a)
(b)
(c)
(e)
(f)
(c)
(f)
(g)
Slide
4-10
SO 1 Prepare a worksheet.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement Columns
(a)
(b)
(d)
(d)
(g)
(e)
(a)
(b)
(c)
(e)
(f)
(c)
(f)
(g)
Slide
4-11
SO 1 Prepare a worksheet.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement Columns
(a)
(b)
(d)
(d)
(g)
(e)
(a)
(b)
(c)
(e)
(f)
(c)
(f)
(g)
Slide
4-12
SO 1 Prepare a worksheet.
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
5. Total Columns, Compute Net Income (Loss)
(a)
(b)
(d)
(d)
(g)
(e)
(a)
(b)
(c)
(e)
(f)
(c)
(f)
(g)
Slide
4-13
Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
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
4-14
SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
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
4-15
SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4
Slide
4-16
SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4
Slide
4-17
SO 1 Prepare a worksheet.
Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4
Slide
4-18
Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
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
4-19
SO 1 Prepare a worksheet.
Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
Slide
4-20
SO 1 Prepare a worksheet.
P4-1A Thomas Magnum began operations as a private investigator on January 1, 2011. The trial balance columns of
the worksheet for Thomas Magnum, P.I., Inc. at March 31 are as follows.
THOMAS MAGNUM, P.I., INC.
Worksheet
For the Quarter Ended March 31, 2011
Trial Balance
Account Titles
Dr.
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Notes Payable
Accounts Payable
Share Capital Ordinary
Dividends
Service Revenue
Salaries Expense
Travel Expense
Rent Expense
Miscellaneous Expense
Cr.
11,400
5,620
1,050
2,400
30,000
10,000
12,350
20,000
600
13,620
2,200
1,300
1,200
200
55,970
55,970
Other data:
1.Supplies on hand total $380.
2.Depreciation is $1,000 per quarter.
3.Interest accrued on 6-month note payable, issued January 1, $300.
4.Insurance expires at the rate of $200 per month.
5.Services provided but unbilled at March 31 total $530.
Instructions
(a)Enter the trial balance on a worksheet and complete the worksheet.
(b)Prepare an income statement and a retained earnings statement for the quarter and a classified statement of
financial position at March 31.
(c)Journalize the adjusting entries from the adjustments columns of the worksheet.
(d)Journalize the closing entries from the financial statement columns of the worksheet.
Slide
4-21
Closing
Closing the
the Books
Books
At the end of the accounting period, the company makes
the accounts ready for the next period.
Illustration 4-5
Slide
4-22
Closing
Closing the
the Books
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
4-23
Closing
Closing the
the Books
Books
Note:
Dividends are closed directly
to Retained Earnings and
not to Income Summary
because Dividends are not
an expense.
Slide
4-24
Illustration 4-6
Retained Earnings is a
permanent account; all
other accounts are
temporary accounts.
SO 2
Closing
Closing the
the Books
Books
Illustration 4-7
Closing entries
journalized
Closing
entries
need to
be
posted
Slide
4-25
Closing
Closing the
the Books
Books
Illustration 4-8
Posting of
closing entries
Posting
closing
entries
Slide
4-26
Preparing
Preparing aa Post-Closing
Post-Closing Trial
Trial Balance
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
4-27
SO 3
Slide
4-28
Summary
Summary of
of the
the Accounting
Accounting Cycle
Cycle
Illustration 4-12
Slide
4-29
7. Prepare financial
statements
Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
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
4-30
Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
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
entry
Cash
Correct
entry
Cash
Correcting
entry
Slide
4-31
50
Service revenue
50
50
Accounts receivable
Service revenue
Accounts receivable
50
50
50
Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
Step
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
entry
Correct
entry
Correcting
entry
Slide
4-32
Delivery equipment
45
Accounts payable
45
Office equipment
Accounts payable
450
Office equipment
Delivery equipment
Accounts payable
450
450
45
405
Slide
4-33
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Presents a snapshot at a point in time.
To improve understanding, companies group similar
assets and similar liabilities together.
Standard Classifications
Assets
Illustration 4-17
Intangible assets
Equity
Non-current liabilities
Long-term investments
Current liabilities
Current assets
Slide
4-34
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Intangible Assets
Assets that do not have physical substance.
Slide
4-35
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Slide
4-36
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
(in billions)
Slide
4-37
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
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
4-38
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
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.
Slide
4-39
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Current Assets
Illustration 4-22
Slide
4-40
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
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
4-41
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation Share Capital and Retained Earnings.
Illustration 4-23
Slide
4-42
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Non-current Liabilities
Obligations a company expects to pay after one year.
Slide
4-43
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
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
4-44
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
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
4-45
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
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
4-46
The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Current Liabilities
Slide
4-47
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle
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
4-48
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle
Similarities
Slide
4-49
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle
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
4-50
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle
Slide
4-51
APPENDIX
APPENDIX Reversing
Reversing Entries
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
4-52
APPENDIX
APPENDIX Reversing
Reversing Entries
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
4-53
APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Illustration 4A-1
Oct. 31
Same entry
Oct. 31
Closing Entry
Same entry
Reversing Entry
Nov. 1
Salaries payable
Salaries expense
1,200
1,200
Slide
4-54
Salaries expense
Cash
4,000
4,000
APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Illustration 4A-2
Postings with
reversing
entries
Slide
4-55
E4-19 On December 31, the adjusted trial balance of Oslo Employment Agency shows the
following selected data.
Accounts Receivable $24,000
Interest Expense
7,800
Analysis shows that adjusting entries were made to (1) accrue $4,500 of commission revenue and
(2) accrue $1,500 interest expense.
Instructions
a.Prepare the closing entries for the temporary accounts shown above at December 31.
b.Prepare the reversing entries on January 1.
c.Post the entries in (a) and (b). Rule and balance the accounts. (Use T accounts.)
d.Prepare the entries to record (1) the collection of the accrued commissions on January 10 and
(2) the payment of all interest due ($2,500) on January 15.
e.Post the entries in (d) to the temporary accounts.
Slide
4-56
Copyright
Copyright
Copyright 2010 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.
Slide
4-57