CHAPTER 4
COMPLETING THE ACCOUNTING CYCLE
LEARNING 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 COR-
RECTING ENTRIES.
6. IDENTIFY THE SECTIONS OF A CLASSIFIED BALANCE
SHEET.
*7. PREPARE REVERSING ENTRIES.
CHAPTER REVIEW
Preparing a Worksheet
1. (L.O. 1) The steps in preparing a worksheet are:
d. Extend adjusted trial balance amounts to appropriate financial statement columns.
2. A worksheet is a multiple-column form that may be used in the adjustment process and in pre-
paring financial statements. The basic form of a worksheet consists of the following columns:
Balance Sheet
Dr. Cr.
Dr.
Dr. Dr.
Dr. Cr.
Cr.
Cr. Cr.
Income
Statement
Adjusted
Trial Balance
Account Titles Trial Balance Adjustments
3. For each account in the worksheet, the amount in the adjusted trial balance columns is equal to
and posted.
4. After the worksheet has been completed the statement columns contain all data that are required
balance sheet columns.
5. Using a worksheet accountants can prepare financial statements before adjusting entries are
journalized and posted.
6. A worksheet is not a journal and it cannot be used as a basis for posting to ledger accounts.
Closing Entries
7. (L.O. 2) Closing entries formally recognize in the ledger the transfer of net income (or loss) and
9. The drawing, revenue, and expense accounts are temporary (nominal) accounts. Asset accounts,
10. A temporary account, Income Summary, is used in closing revenue and expense accounts to
11. In closing the books of a proprietorship:
a. Debit each revenue account for its balance, and credit Income Summary for total revenues.
Drawings for the same amount.
Post-Closing Trial Balance
12. (L.O. 3) After all closing entries have been journalized and posted, a post-closing trial balance
Steps in the Accounting Cycle
13. (L.O. 4) The required steps in the accounting cycle are:
a. Analyze business transactions.
b. Journalize the transactions.
c. Post to ledger accounts.
d. Prepare a trial balance.
f. Prepare an adjusted trial balance.
g. Prepare financial statements: Income statement, Owner’s equity statement, Balance sheet.
h. Journalize and post closing entries.
i. Prepare a post-closing trial balance.
14. A reversing entry is the exact opposite of an adjusting entry. The preparation of reversing entries
Correcting Entries
15. (L.O. 5) Errors that occur in recording transactions should be corrected as soon as they are
discovered by preparing correcting entries. Correcting entries:
16. To determine the correcting entry, it is useful to compare the incorrect entry with the correct entry,
prepare the correct entry.
Classified Balance Sheet
17. (L.O. 6) Financial statements become more useful when the elements are classified into signifi-
cant subgroups. A classified balance sheet generally has the following standard classifications:
Liabilities and
Assets Owner’s Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and Owner’s equity
equipment
Intangible assets
Assets
18. Current assets are assets that a company expects to convert to cash or use up within one year
19. The operating cycle of a company is the average time that it takes to purchase inventory, sell it
4-4 Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only)
20. Long-term investments are generally investments in stocks and bonds of other companies that
are normally held for many years.
21. Property, plant, and equipment are assets with relatively long useful lives that a company is
currently using in operating the business.
22. Intangible assets do not have physical substance yet often are very valuable.
Liabilities
24. Long-term liabilities are obligations that a company expects to pay after one year.
Owner’s Equity
25. The content of the owner’s equity section varies with the form of business organization. In a
two accounts: Capital Stock and Retained Earnings.
Form of Balance Sheet
26. A balance sheet is most often presented in report form with the assets shown above the liabilities
and owner’s equity. It may also be presented in account form with the assets section placed on
the left and the liabilities and owner’s equity section on the right.
Reversing Entries
*27. (L.O. 7) A reversing entry is made at the beginning of the next accounting period. The purpose
of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting
entry.
*28. Reversing entries are most often used to reverse two types of adjusting entries: accrued revenues
and accrued expenses.
LECTURE OUTLINE
A. Using a Worksheet.
1. A worksheet is a multiple-column form used in the adjustment process
and in preparing financial statements.
2. The steps in the preparation of a worksheet:
financial statement columns.
e. Step 5: Total the statement columns, compute the net income (or net
loss), and complete the worksheet.
3. A worksheet facilitates the preparation of financial statements because it
organizes the account balances and the statements can be prepared
the accountant.
5. A worksheet is not a journal, and it cannot be used as a basis for posting
to ledger accounts. The company must record adjusting entries in the
journal, and then post them to the ledger.
B. Preparing Closing Entries.
2. Closing entries produce a zero balance in each temporary account
(revenue and expense accounts and the Owner’s Drawings account) so
3. There are four closing entries:
a. Debit each revenue account for its balance, and credit Income Sum-
mary for total revenues.
b. Debit Income Summary for total expenses, and credit each expense
account for its balance.
ACCOUNTING ACROSS THE ORGANIZATION
Recent surveys have reported that the average company now takes only six to
seven days to close, rather than 20 days. Knowing exactly where you are finan–
cially all the time allows the company to respond faster than competitors.
Who else benefits from a shorter closing process?
investors.
C. Preparing a Post-Closing Trial Balance.
1. The purpose of the post-closing trial balance is to prove the equality of
the permanent account balances carried forward into the next accounting
period.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 4-7
2. The post-closing trial balance will contain only permanent—balance
sheet—accounts since all temporary accounts will have zero balances.
D. Summary of the Accounting Cycle.
1. Analyze business transactions.
2. Journalize the transactions.
3. Post to ledger accounts.
4. Prepare a trial balance.
5. Journalize and post adjusting entries: Deferrals/Accruals.
6. Prepare an adjusted trial balance.
7. Prepare financial statements.
8. Journalize and post closing entries.
9. Prepare a post-closing trial balance.
E. Correcting Entries.
journalizing and posting correcting entries.
2. Companies make correcting entries whenever they discover an error,
not only at the end of an accounting period.
preparing the correct entry.