Chapter 4. Completing The Accounting Cycle

Chapter 4.
Completing the Accounting Cycle
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Copyright © John Wiley & Sons, Inc.

Chapter Outline
Learning Objectives
LO 1 Prepare a worksheet.
LO 2 Prepare closing entries and a post-closing trial balance.
LO 3 Explain the steps in the accounting cycle and how to
prepare correcting entries.
LO 4 Identify the sections of a classified statement of financial
position.
Copyright © John Wiley & Sons, Inc.

Learning Objective 1
Prepare a Worksheet.
Copyright © John Wiley & Sons, Inc. LO 1

The Worksheet
• Multiple-column form used in preparing financial

statements
• Not a permanent accounting record
• May be a computerized worksheet
• Prepared using a five-step process
• Use of worksheet is optional

Worksheet
Illustration 4.1: Form and Procedure for a worksheet

Worksheet: Step 1
Illustration 4.2: Preparing a trial balance

Step 2
• Enter all adjustments in the
adjustments columns.
• If additional accounts are

needed, insert them on the
lines immediately below
the trial balance totals.
• Use letters to cross-

reference the debit and
credit adjustments.
• Total adjustments columns

and check for equality.
Illustration 4.3: Entering the adjustments in the

adjustments columns

Step 3
• Combine trial balance
amounts with
adjustment amounts
to obtain the adjusted
trial balance.
• Total adjusted trial

balance columns and
check for equality.
Illustration 4.4: Entering adjusted balances in the adjusted trial balance columns

Step 4
• Extend all revenue and
expense account
balances to the income
statement columns.
• Extend all asset and
liability account
balances, Share Capital-
Ordinary, Retained
Earnings and Dividends
to the statement of
financial position
columns.
Illustration 4.5: Extending the adjusted trial balance amounts to appropriate financial statement columns

Step 5 – Illustration Part 1
• Total each of the financial

statement columns. The
net income or loss for the
period is the difference
between the totals of the
two income statement
columns.
• If either the income
statement columns or the
statement of financial
position columns are not
equal after the net income
or net loss has been
entered, there is an error
in the worksheet.
Illustration 4.6: Computing net income or net loss and completing the worksheet.

Step 5 – Illustration Part 2
Illustration 4.6: Computing net income or net loss and completing the worksheet.

Steps in Preparing a Worksheet Review Question
Which of the following statements is incorrect concerning the

worksheet?
a. The worksheet is essentially a working tool of the accountant.
b. The worksheet is distributed to management and other interested
parties.
c. The worksheet cannot be used as a basis for posting to ledger
accounts.
d. Financial statements can be prepared directly from the worksheet
before journalizing and posting the adjusting entries.

Preparing Financial Statements from
a 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 can prepare financial statements before
they journalize and post adjusting entries

Preparing Adjusting Entries from a
Worksheet
• Adjusting entries are prepared from the
adjustments columns of worksheet
• Journalizing and posting of adjusting entries follows
the preparation of financial statements when a
worksheet is used

Prepare Closing Entries and a Post-
Closing Trial Balance.

Closing the Books
At the end of the accounting period, the company
makes the accounts ready for the next period.

Temporary versus Permanent Accounts
Illustration 4.8: Temporary versus permanent accounts

Preparing Closing Entries
Closing entries formally recognize in the ledger the
transfer of:
• Net income (or net loss) and Dividends to
retained earnings
• Produce a zero balance in each temporary
account.
• Companies generally journalize and post closing
entries only at the end of the annual accounting
period.

Preparing Closing Entries Diagram
Illustration 4.9: Diagram of closing process

Closing Entries Illustrated
Illustration 4.10: Closing entries journalized

Posting Closing Entries
Illustration 4.11: Posting of closing entries

Illustration 4.12
Illustration 4.12: Post-closing trial balance

Illustration 4.13 (Partial)
Illustration 4.13 (Partial): General ledger, permanent accounts

Illustration 4.14 (Partial)
Illustration 4.14 (Partial): General ledger, temporary accounts

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 Supplies Expense 7,000
Expense 51,000
Prepare the closing entries at December 31.

DO IT! 2: Closing Entries - Solution (1 of 2)
Prepare the closing entries at December 31.

Service Revenue 98,000
Income Summary 98,000

Salaries and Wages Expense 51,000
Rent Expense 22,000
Supplies Expense 7,000

DO IT! 2: Closing Entries - Solution (2 of 2)

Retained Earnings 18,000
Retained Earnings 15,000
Dividends 15,000

Explain the Steps in the Accounting
Cycle and How to Prepare Correcting
Entries.

The Accounting Cycle
Illustration 4.15: Required steps in the accounting cycle

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.

Correcting Entries—Case 1
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 4.16-17: Comparison of entries (16) and Correcting entry (17)

Correcting Entries—Case 2
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.
Illustration 4.18-19: Comparison of entries (18) and Correcting entry (19)

DO IT! 3: Correcting Entries
Sanchez Company discovered the following errors made in

January 2025 (amounts in thousands).
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.

DO IT! 3: Correcting Entries - Solution
1. Salaries and Wages Expense 600

Supplies 600
2. Service Revenue 200
Cash 2,800
Accounts Receivable 3,000
3. Supplies ($860 - $680) 180
Accounts Payable 180

Identify the Sections of a Classified
Statement of Financial Position.

Classified Statement of Financial
Position
• Presents a snapshot at a point in time
• To improve users’ understanding, companies group
together similar assets and similar liabilities
Assets Equity and Liabilities
Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets
Illustration 4.20: Standard statement of financial position classifications

Illustration 4.21
Illustration 4.21:
Classified
statement of
financial position

Illustration 4.21 (continued)
Illustration 4.21: Classified statement of financial position (Continued)

Intangible Assets
Long-lived assets that do not have physical substance.
Illustration 4.22: Intangible assets section

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
• Sometimes called fixed assets or plant assets

Property, Plant, and Equipment
Section
Illustration 4.23: Property, plant, and equipment section

Long-Term Investments
• Investments in stocks and bonds of other companies
that are normally held for many years
• Investments in long-term assets such as land or
buildings that are not currently being used in
operating activities
• Long-term notes receivable
Illustration 4.24: Long-term investments section

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

Current Assets Presentation
Illustration 4.25: Current assets section

Classified Statement of Financial
Position Review Question
Current assets are listed:
a. in the reverse order of expected conversion to
cash.
b. by importance.
c. by longevity.
d. by size.

Current Assets Review Question
The correct order of presentation in a classified
statement of financial position for the following
current assets is:
a. accounts receivable, cash, prepaid insurance,
inventory.
b. prepaid insurance, inventory, accounts receivable,
cash.
c. cash, accounts receivable, inventory, prepaid
insurance.
d. inventory, cash, accounts receivable, prepaid
insurance.
Equity
• Proprietorship - one capital account
• Partnership - capital account for each partner
• Corporation’s equity consists of two accounts – Share
Capital-Ordinary and Retained Earnings
Illustration 4.26: Equity section

Non-Current Liabilities
Obligations a company expects to pay after one year.
Illustration 4.27: Non-current liabilities section

Current Liabilities
• Obligations company has to pay within coming year
or its operating cycle, whichever is longer
• Common examples are accounts payable, salaries
and wages payable, notes payable, interest payable,
income taxes payable, and current maturities of
long-term obligations
• Liquidity - ability to pay obligations expected to be
due within the next year

Current Liabilities – Presentation
Illustration 4.28: Current liabilities section

DO IT! 4: Statement of Financial
Position Classifications
Match each of the following to its proper statement of financial
position classification, shown below. If the item would not appear
on a statement of financial position, use “NA.”
CL Salaries and wages payable LTI Stock investments (long-term)
NA Service revenue PPE Equipment
CL Interest payable PPE Accumulated depreciation
IA Goodwill NA Depreciation expense
CA Debt investments (short-term) E Share capital—ordinary
NCL Mortgage payable (due in 3 years) CL Unearned service revenue
Intangible assets (IA) Equity (E)

Property, plant, and equipment (PPE) Non-current liabilities (NCL)
Long-term investments (LTI) Current liabilities (CL)
Current assets (CA)
DO IT! 4: Statement of Financial
Position Classifications - Solution
__CL__ Salaries and wages payable __LTI__ share investments (long-term)

__NA__ Service revenue __PPE__ Equipment
__CL__ Interest payable __PPE__ Accumulated depreciation—equipment
__IA__ Goodwill __NA__ Depreciation expense
__CA__ Debt investments (short-term) __E__ Share capital—ordinary
__NCL__ Mortgage payable (due in 3 years) __CL__ Unearned service revenue
Related exercise material: BE4.10, BE4.11, DO IT!4.4, E4.3, E4.9, E4.14, E4.15,
E4.16, and E4.17.

Chapter 4. Completing The Accounting Cycle

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Chapter 4.

Completing the Accounting Cycle

Copyright © John Wiley & Sons, Inc.

Copyright © John Wiley & Sons, Inc.

Copyright © John Wiley & Sons, Inc. LO 1

• Multiple-column form used in preparing financial

Copyright © John Wiley & Sons, Inc. LO 1

Illustration 4.1: Form and Procedure for a worksheet

Copyright © John Wiley & Sons, Inc. LO 1

Illustration 4.2: Preparing a trial balance

• If additional accounts are

• Use letters to cross-

• Total adjustments columns

Illustration 4.3: Entering the adjustments in the

Copyright © John Wiley & Sons, Inc. LO 1

• Total adjusted trial

Copyright © John Wiley & Sons, Inc. LO 1

Copyright © John Wiley & Sons, Inc. LO 1

• Total each of the financial

Copyright © John Wiley & Sons, Inc. LO 1

Copyright © John Wiley & Sons, Inc. LO 1

Which of the following statements is incorrect concerning the

Copyright © John Wiley & Sons, Inc. LO 1

Copyright © John Wiley & Sons, Inc. LO 1

Copyright © John Wiley & Sons, Inc. LO 1

Copyright © John Wiley & Sons, Inc. LO 2

Copyright © John Wiley & Sons, Inc. LO 2

Illustration 4.8: Temporary versus permanent accounts

Copyright © John Wiley & Sons, Inc. LO 2

Copyright © John Wiley & Sons, Inc. LO 2

Illustration 4.9: Diagram of closing process

Illustration 4.10: Closing entries journalized

Illustration 4.11: Posting of closing entries

Illustration 4.12: Post-closing trial balance

Illustration 4.13 (Partial): General ledger, permanent accounts

Illustration 4.14 (Partial): General ledger, temporary accounts

Copyright © John Wiley & Sons, Inc. LO 2

Hancock Company has the following balances in selected

Copyright © John Wiley & Sons, Inc. LO 2

Prepare the closing entries at December 31.

Income Summary 80,000

Copyright © John Wiley & Sons, Inc. LO 2

Income Summary 18,000

Copyright © John Wiley & Sons, Inc. LO 2

Copyright © John Wiley & Sons, Inc. LO 3

Illustration 4.15: Required steps in the accounting cycle

Copyright © John Wiley & Sons, Inc. LO 3

Illustration 4.16-17: Comparison of entries (16) and Correcting entry (17)

Illustration 4.18-19: Comparison of entries (18) and Correcting entry (19)

Sanchez Company discovered the following errors made in

Copyright © John Wiley & Sons, Inc. LO 3

1. Salaries and Wages Expense 600

Copyright © John Wiley & Sons, Inc. LO 3

Copyright © John Wiley & Sons, Inc. LO 4

Copyright © John Wiley & Sons, Inc. LO 4

Copyright © John Wiley & Sons, Inc. LO 4

Copyright © John Wiley & Sons, Inc. LO 4

Illustration 4.22: Intangible assets section

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CL Salaries and wages payable LTI share investments (long-term)