3. 4 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 balance sheet. Completing the Accounting Cycle

4. Preview of Chapter 4 Accounting Principles Eleventh Edition Weygandt Kimmel Kieso

5.  Multiple-column form used in preparing financial statements.  Not a permanent accounting record.  Five step process.  Use of worksheet is optional. LO 1 Prepare a worksheet. Steps in Preparing a Worksheet Using a Worksheet

6. LO 1 Prepare a worksheet. Illustration 4-1 Steps in Preparing a Worksheet

7. LO 1 Prepare a worksheet. 1. Prepare a Trial Balance on the Worksheet Trial balance amounts come directly from ledger accounts. Include all accounts with balances. Steps in Preparing a Worksheet Illustration 4-2

8. LO 1 Prepare a worksheet. Illustration 3-23 General journal showing adjusting entries Adjusting Journal Entries (Chapter 3) Steps in Preparing a Worksheet

9. LO 1 Prepare a worksheet. 2. Enter the Adjustments in the Adjustments Columns (a) (b) (a) (g) (c) (d) (e) (b) (e) (f) (g) (c) Enter adjustment amounts, total adjustments columns, and check for equality. Add additional accounts as needed. 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 in Preparing a Worksheet

10. LO 1 Prepare a worksheet. 3. Complete the Adjusted Trial Balance Columns (a) (b) (a) (g) (c) (d) (e) (b) (e) (f) (g) (c) Total the adjusted trial balance columns and check for equality. Steps in Preparing a Worksheet

11. LO 1 Prepare a worksheet. 4. Extend Amounts to Financial Statement Columns (a) (b) (a) (g) (c) (d) (e) (b) (e) (f) (g) (c) Extend all revenue and expense account balances to the income statement columns. Steps in Preparing a Worksheet

12. LO 1 Prepare a worksheet. (a) (b) (a) (g) (c) (d) (e) (b) (e) (f) (g) (c) Steps in Preparing a Worksheet Compute Net Income or Net Loss. 5. Total Columns, Compute Net Income (Loss)

13. Net income is shown on a worksheet 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. Review Question LO 1 Prepare a worksheet. Steps in Preparing a Worksheet

14.  Income statement is prepared from the income statement columns.  Balance sheet and owner’s equity statement are prepared from the balance sheet columns.  Companies journalize and post adjusting entries. LO 1 Prepare a worksheet. Preparing Statements from a Worksheet Using a Worksheet

15. LO 1 Prepare a worksheet. Illustration 4-4 Preparing Statements from a Worksheet

16. Illustration 4-4 Preparing Statements from a Worksheet LO 1 Prepare a worksheet.

17. LO 1 Preparing Statements from a Worksheet Illustration 4-4

18.  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. LO 1 Prepare a worksheet. Using a Worksheet Preparing Adjusting Entries from a Worksheet

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

20. Closing entries formally recognize, in the general ledger, the transfer of  net income (or net loss) and  owner’s drawings/ Dividend to owner’s capital/ Retained Earnings. LO 2 Explain the process of closing the books. Closing entries are only made at the end of the annual accounting period. Closing the Books Preparing Closing Entries

21. A Norm, a Rule and a Question

22. The Closing Process  Transferring (“pouring”) the balances in revenue and expense accounts into the Income Summary account.  Transferring the balance in Income Summary to Owner’s Capital/Retained Earnings.  Transferring the balance in the Owner’s drawings/ Dividends account to Owner’s Capital/ Retained Earnings..

23. The Closing Process Close Revenues Close Expenses

24. The Closing Process

25. Income Summary u Temporary account u Exists only during the closing process u Does not appear on any financial statement Income Summary u Temporary account u Exists only during the closing process u Does not appear on any financial statement The Closing Process Close Income Summary

26. The Closing Process

27. Close Owner’s Drawing’s/ Dividends Summary of Steps  Close Revenues to Income Summary  Close Expenses to Income Summary  Close Income Summary to Owner’s Capital / Retained Earnings  Close Owner’s Drawings/ Dividends to Owner’s Capital/ Retained Earnings Summary of Steps  Close Revenues to Income Summary  Close Expenses to Income Summary  Close Income Summary to Owner’s Capital / Retained Earnings  Close Owner’s Drawings/ Dividends to Owner’s Capital/ Retained Earnings

28. Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year Revenues have a normal balance on the credit side. Revenues 25,000

29. Revenues 25,000 How do we bring Revenues to a $0 balance? Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

30. Remember: To reduce a credit balance account, debit the account. Revenues 25,000 How do we bring Revenues to a $0 balance? Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

31. Revenues 25,000 We need to debit the account for $25,000 to reduce the account to $0. How do we bring Revenues to a $0 balance? Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

32. Revenues 25,000 We need to debit the account for $25,000 to reduce the account to $0. 0 How do we bring Revenues to a $0 balance? 25,000 Closing Journal Entries T- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

33. Closing Journal Entries T- Account Example  In the previous example, a $25,000 debit was made to close out Revenues. Income Summary  A corresponding $25,000 credit must be made to Income Summary. Income SummaryRevenues 25,000 0

34. Closing Journal Entries T- Account Example  In the previous example, a $25,000 debit was made to close out Revenues. Income Summary  A corresponding $25,000 credit must be made to Income Summary. Revenues 25,000 0 Income Summary 25,000

35. Closing Journal Entries General Journal Example Closing Journal Entries use the same format as other journal entries: GENERAL JOURNAL Page: 1 DateDescriptionRefDebitCredit MM/DD Account Name###$$$ Account Name###$$$ To record closing entry

36. Closing Journal Entries General Journal Example On 12/31/99, Revenues has a $25,000 balance at year-end. Prepare the journal entry to close the account. GENERAL JOURNAL Page: 97 DateDescriptionRefDebitCredit

37. GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRevenues25,000 Income Summary25,000 to close Revenues Closing Journal Entries General Journal Example On 12/31/99, Revenues has a $25,000 balance at year- end. Prepare the journal entry to close the account.

38. GENERAL JOURNAL Page: 97 DateDescriptionRefDebitCredit 31-DecRevenues25,000 Income Summary 25,000 to close Revenues Post the entry to the Revenue account. ACCOUNT NAME: REVENUES ACCOUNT No.400 DateDescriptionRefDebitCreditBalance End of Year Balance25,000 Closing Journal Entries General Journal Example

39. GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRevenues40025,000 Income Summary25,000 to close Revenues Post the entry to the Revenue account. ACCOUNT NAME: REVENUESACCOUNT No.400 DateDescriptionPRDebitCreditBalance End of Year Balance25,000 31-DecClose to Income SummaryG9725,0000 Closing Journal Entries General Journal Example

40. GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRevenues40025,000 Income Summary60025,000 to close Revenues ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 Closing Journal Entries General Journal Example Also, post to the Income Summary account.

41. GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit Closing Journal Entries General Journal Example On 12/31/99, Rent Expense was $8,000 and Salaries Expense was $15,000. Prepare the closing journal entry.

42. GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecIncome Summary23,000 Rent Expense8,000 Salaries Expense15,000 to close expenses Closing Journal Entries General Journal Example On 12/31/99, Rent Expense was $8,000 and Salaries Expense was $15,000. Prepare the closing journal entry.

43. ACCOUNT NAME: RENT EXPENSEACCOUNT No.515 DateDescriptionPRDebitCreditBalance 31-DecBalance8,000 31-DecIncome SummaryG978,0000 Closing Journal Entries General Journal Example After posting, the Rent Expense and Salaries Expense accounts have $0 balances. ACCOUNT NAME: SALARIES EXPENSEACCOUNT No.507 DateDescriptionPRDebitCreditBalance 31-DecBalance15,000 31-DecIncome SummaryG9715,0000

44. Closing Journal Entries General Journal Example ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 31-DecTo close ExpensesG9723,0002,000 Page: GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings.

45. Closing Journal Entries General Journal Example ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 31-DecTo close ExpensesG9723,0002,000 Page: 97 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecIncome Summary6002,000 Retained Earnings2,000 After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings.

46. Closing Journal Entries General Journal Example ACCOUNT NAME: INCOME SUMMARYACCOUNT No.600 DateDescriptionPRDebitCreditBalance 31-DecTo close RevenuesG9725,000 31-DecTo close ExpensesG9723,0002,000 31-DecTo close R/EG972,0000 GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecIncome Summary6002,000 Retained Earnings2,000 After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings.

47. GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit Closing Journal Entries General Journal Example On 12/31/99, the Dividends account has a $1,300 balance. Prepare the closing entry.

48. GENERAL JOURNAL Page: 97 DateDescriptionPRDebitCredit 31-DecRetained Earnings1,300 Dividends1,300 to close dividends Closing Journal Entries General Journal Example On 12/31/99, the Dividends account has a $1,300 balance. Prepare the closing entry.

49. Closing Journal Entries General Journal Example Assuming Retained Earnings had a pre-closing ending balance of $7,000,... ACCOUNT NAME: Retained EarningsACCOUNT No.310 DateDescriptionPRDebitCreditBalance 31-DecBalance7,000 31-DecTo close Income SummaryG972,0009,000 31-DecTo close DividendsG971,3007,700 … after posting the closing of the Income Summary and Dividends accounts, the ending balance is $7,700.

50. LO 2 Explain the process of closing the books. Illustration 4-6 Owner’s Capital is a permanent account; all other accounts are temporary accounts. Owner’s Drawing is closed directly to Capital and not to Income Summary because Owner’s Drawing is not an expense. Note: Closing the Books

51. Closing Entries Illustrated Illustration 4-7 Closing entries journalized Closing the Books

52. Posting Closing Entries Closing the Books Illustration 4-8 LO 2

53. Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries. Preparing a Post-Closing Trial Balance Illustration 4-9 LO 3

54. 1. Analyze business transactions 2. Journalize the transactions 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance 4. Prepare a trial balance 3. Post to ledger accounts 5. Journalize and post adjusting entries Illustration 4-12 LO 4 State the required steps in the accounting cycle. Summary of the Accounting Cycle

55. LO 6 Identify the sections of a classified balance sheet.  Presents a snapshot at a point in time.  To improve understanding, companies group similar assets and similar liabilities together. AssetsLiabilities and Owner’s Equity Current assetsCurrent liabilities Long-term investmentsLong-term liabilities Property, plant, and equipmentOwner’s (Stockholders’) equity Intangible assets Illustration 4-17 Standard Classifications The Classified Balance Sheet

56. LO 6 The Classified Balance Sheet Illustration 4-18

57. LO 6 The Classified Balance Sheet Illustration 4-18

58. LO 6 Identify the sections of a classified balance sheet.  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. Current Assets The Classified Balance Sheet

59. LO 6 Identify the sections of a classified balance sheet. Usually listed in the order they expect to convert them into cash. The Classified Balance Sheet Current Assets Illustration 4-19

60. 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. LO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet Question

61. LO 6 Identify the sections of a classified balance sheet.  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. Long-Term Investments The Classified Balance Sheet Illustration 4-20

62. LO 6 Identify the sections of a classified balance sheet.  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. Property, Plant, and Equipment The Classified Balance Sheet

63. LO 6 Identify the sections of a classified balance sheet. Property, Plant, and Equipment The Classified Balance Sheet Illustration 4-21

64. LO 6 Identify the sections of a classified balance sheet.  Assets that do not have physical substance. Intangible Assets The Classified Balance Sheet Illustration 4-22

65. Patents and copyrights are a.Current assets. b.Intangible assets. c.Long-term investments. d.Property, plant, and equipment. LO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet Question

66. LO 6 Identify the sections of a classified balance sheet.  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. Current Liabilities The Classified Balance Sheet

67. LO 6 Identify the sections of a classified balance sheet. Illustration 4-23 Current Liabilities The Classified Balance Sheet

68. LO 6 Identify the sections of a classified balance sheet.  Obligations a company expects to pay after one year. Long-Term Liabilities The Classified Balance Sheet Illustration 4-24

69. 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 LO 6 Identify the sections of a classified balance sheet. The Classified Balance Sheet Question

70. LO 6 Identify the sections of a classified balance sheet.  Proprietorship - one capital account.  Partnership - capital account for each partner.  Corporation - Capital Stock and Retained Earnings. Owner’s Equity The Classified Balance Sheet Illustration 4-25