Chapter 03 – The Accounting Cycle: End of the Period
3-1
Chapter 3
The Accounting Cycle: End of the Period
INSTRUCTOR’S MANUAL
Authors’ Perspectives
PART A: The Measurement Process
LO3-1 Understand when revenues and expenses are recorded.
Year-end procedures – Chapter 2 introduced students to the measurement of transactions
during the period. Chapter 3 focuses on the accounting process at the end of the period:
1. Record and post adjusting entries (complete the measurement process)
2. Prepare financial statements (the reporting process → communicate)
3. Record and post closing entries (the closing process)
• Illustration 3-1 (with video) provides a clear distinction of the accounting process during
Adjusting entries – We can help students understand why adjusting entries are needed by first
explaining accrual-basis accounting versus cash-basis accounting. Under accrual-basis
accounting, adjusting entries are used to record changes in assets and liabilities (and recognize
the related revenues and expenses) that have occurred during the period but that we have not yet
recorded by the end of the period. Under cash-basis accounting, we record transactions only at
Chapter 03 – The Accounting Cycle: End of the Period
3-2
Common Mistake: It’s easy for beginning students to think that revenue should be recorded
only when cash is received and that expenses should be recorded only when cash is paid, as
this is how they’ve always thought about these common transactions in their own lives.
Part A continues with timeline demonstrations of the four types of adjusting entries. The use of
timelines is another reminder that adjusting entries are used to record changes in assets and
liabilities (and recognize the related revenues and expenses) at the end of the year, separate from
PART B: The Reporting Process: Financial Statements
LO3-5 Prepare financial statements using the adjusted trial balance.
Financial Statements – With the adjusted trial balance, students are ready to prepare financial
statements for Eagle Soccer Academy in Part B.
• Illustration 3-11 provides a clear depiction of how the amounts in the adjusted trial
balance flow to the financial statements. The illustration also shows how these financial
statements are linked.
course.
PART C: The Closing Process
Chapter 03 – The Accounting Cycle: End of the Period
3-3
LO3-6 Demonstrate the purposes and recording of closing entries.
LO3-7 Post closing entries and prepare a post-closing trial balance.
Closing entries – In Part C, the accounting cycle is completed by introducing students to the
closing process for Eagle Soccer Academy. The purposes of closing entries can be reinforced by
Be sure to warn students that they are not closing the Retained Earnings account. During the
year, we temporarily record transactions involving revenues, expenses, and dividends in separate
accounts (such as Service Revenue, Salaries Expense, and Dividends), but at the end of the year
these account balances are transferred to a single account (Retained Earnings). Retained
Additional Resources – At the end of this document, instructors will see additional resources
they might find helpful in their class. The traditional 10-column worksheet for Eagle Soccer
Self-Study Materials
■ Let’s Review—Accrual-basis compared with cash-basis (p. 118).
■ Let’s Review—Adjusting entries (p. 128).
Chapter 03 – The Accounting Cycle: End of the Period
3-4
Key Points by Learning Objective
Throughout the chapter, Key Points provide quick synopses of the critical pieces of information
LO3-1 Understand when revenues and expenses are recorded.
The revenue recognition principle states that we record revenue in the period in which we
LO3-2 Distinguish between accrual-basis and cash-basis accounting.
The difference between accrual-basis accounting and cash-basis accounting is timing. Under
LO3-3 Demonstrate the purposes and recording of adjusting entries.
Adjusting entries are a necessary part of accrual-basis accounting. They are used to record
changes in assets and liabilities (and their related revenues and expenses) that have occurred
LO3-4 Post adjusting entries and prepare an adjusted trial balance.
We post adjusting entries to the general ledger to update the account balances.
LO3-5 Prepare financial statements using the adjusted trial balance.
Chapter 03 – The Accounting Cycle: End of the Period
3-5
We prepare the income statement, statement of stockholders’ equity, and balance sheet from the
LO3-6 Demonstrate the purposes and recording of closing entries.
Closing entries serve two purposes: (1) to transfer the balances of temporary accounts (revenues,
LO3-7 Post closing entries and prepare a post-closing trial balance.
After we post the closing entries to the general ledger, the balance of Retained Earnings equals
Chapter 03 – The Accounting Cycle: End of the Period
3-6
A
As
ss
si
ig
gn
nm
me
en
nt
t
C
Ch
ha
ar
rt
ts
s
Questions
Learning
Objective(s)
Topic
Time
(Min.)
1
LO3-1
Discuss the revenue recognition principle
5
2
LO3-1
Discuss the matching principle
5
3
LO3-1
Discuss the matching principle
5
accounting
5
LO3-2
Record revenue under accrual-basis accounting
5
6
LO3-2
Record revenue under cash-basis accounting
5
7
LO3-2
Record an expense under accrual-basis accounting
5
8
LO3-2
Record an expense under cash-basis accounting
5
9
LO3-3
Understand the purposes of adjusting entries
5
10
LO3-3
Define prepayments and accruals
5
11
LO3-3
Provide an example of a prepaid expense
5
12
LO3-3
Provide an example of an unearned revenue
5
13
LO3-3
Provide an example of an accrued expense
5
14
LO3-3
Provide an example of an accrued revenue
5
15
LO3-3
Record an adjusting entry
5
16
LO3-3
Understand the effects of an adjusting entry
5
17
LO3-3
Record an adjusting entry
5
LO3-3
Understand the effects of an adjusting entry
5
LO3-4
Recognize the purpose of an adjusted trial balance
5
21
LO3-5
Explain a classified balance sheet
5
22
LO3-5
5
23
LO3-6
Describe the two purposes of closing entries
5
24
LO3-6
Explain the closing of temporary accounts
5
25
LO3-6
Record closing entries
5
26
LO3-6
Determine the balance of retained earnings
5
earnings
LO3-7
Understand the post-closing trial balance
5
Chapter 03 – The Accounting Cycle: End of the Period
Brief
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
BE3-1
LO3-1
Determine revenues to be recognized
5
BE3-2
LO3-1
Determine expenses to be recognized
5
BE3-3
LO3-1
Calculate net income
5
cash, cash-basis net income, and accrual-basis net
income
BE3-5
LO3-1, 3-2
Determine accrual-basis and cash-basis net income
10
BE3-6
LO3-3
Record the adjusting entry for supplies
10
BE3-7
LO3-3
Record the adjusting entry for prepaid rent
10
BE3-8
LO3-3
Record the adjusting entry for prepaid insurance
10
BE3-9
LO3-3
Record the adjusting entry for depreciation
10
BE3-10
LO3-3
Record the adjusting entry for deferred revenue
10
BE3-11
LO3-3
Record the adjusting entry for salaries payable
10
LO3-3
Record the adjusting entry for interest payable
10
BE3-13
LO3-3
Record the adjusting entry for interest receivable
10
BE3-14
LO3-5
Assign accounts to financial statements
5
BE3-15
LO3-5
Understand the purpose of financial statements
5
BE3-16
LO3-5
Prepare an income statement
10
BE3-17
LO3-5
10
BE3-18
LO3-5
Prepare a classified balance sheet
15
BE3-19
LO3-6
Record closing entries
10
BE3-20
LO3-7
Prepare a post-closing trial balance
10
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
E3-1
LO3-1
Determine the timing of revenue recognition
5
E3-2
LO3-1
Determine the timing of expense recognition
5
E3-3
LO3-2
Differentiate cash-basis revenues from accrual-basis
revenues
5
E3-5
LO3-1
Determine the amount of net income
10
E3-6
Organize the steps in the accounting cycle
E3-7
LO3-3
Record adjusting entries
10
E3-8
LO3-3
Record year-end adjusting entries
5
E3-9
LO3-3
Calculate the effects on net income of not recording
adjusting entries
5
Chapter 03 – The Accounting Cycle: End of the Period
3-8
E3-11
LO3-3, 3-4
Calculate the effects on the accounting equation of
not recording adjusting entries
5
E3-12
LO3-3
Record year-end adjusting entries
10
E3-13
LO3-3
Record year-end adjusting entries
15
E3-14
Prepare an adjusted trial balance
20
E3-15
LO3-5
Calculate the balance of retained earnings
10
LO3-5
Prepare financial statements from an adjusted trial
balance
20
E3-17
LO3-6
Record closing entries
10
Record closing entries and prepare a post-closing
trial balance
10
adjusted trial balance, financial statements,
and closing entries
Complete the accounting cycle
45
Problems
Learning
Objective(s)
Topic
Time
(Min.)
P3-1A
LO3-1, 3-2
Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2A
LO3-1, 3-2
Convert cash-basis accounting to accrual-basis
accounting
25
P3-3A
LO3-3
Record adjusting entries
25
P3-4A
LO3-3
Record adjusting entries
15
P3-5A
LO3-5
Prepare financial statements from an adjusted trial
balance when net income is positive
30
P3-6A
Record closing entries and prepare a post-closing
trial balance
15
P3-7A
Complete the accounting cycle after adjusting
entries
60
P3-9A
Complete the full accounting cycle
60
Determine accrual-basis and cash-basis revenues
and expenses
20
P3-2B
Convert cash-basis accounting to accrual-basis
accounting
25
P3-3B
LO3-3
Record adjusting entries
25
Chapter 03 – The Accounting Cycle: End of the Period
3-9
P3-5B
LO3-5
Prepare financial statements from an adjusted trial
balance
30
P3-6B
LO3-6, 3-7
Record closing entries and prepare a post-closing
trial balance
15
P3-7B
Complete the accounting cycle after adjusting
entries
60
P3-8B
Complete the full accounting cycle
60
P3-9B
Complete the full accounting cycle
60
Additional
Perspectives
Topic
Time
(Min.)
AP3-1
Continuing Problem: Great Adventures
60
AP3-2
Financial Analysis: American Eagle Outfitters, Inc.
20
AP3-3
Financial Analysis: The Buckle, Inc.
20
Comparative Analysis: American Eagle Outfitters, Inc. vs. The
Buckle, Inc.
AP3-5
Ethics
20
AP3-6
Internet Research
30
AP3-7
Written Communication
25
Chapter 03 – The Accounting Cycle: End of the Period
Alternate Let’s Review
Problem #1
Heat Company experienced the following set of events:
October: Provides services to customers on account.
November: Receives cash from customers for services provided in October.
Required:
1. Indicate in which month Heat records revenues under
a. Accrual-basis accounting.
b. Cash-basis accounting.
2. Indicate in which month Cavalier records expenses under
a. Accrual-basis accounting.
b. Cash-basis accounting.
Solution:
Chapter 03 – The Accounting Cycle: End of the Period
3-11
Problem #2
Below are four scenarios for December.
Required:
For each of the scenarios:
1. Indicate the type of adjusting entry needed.
2. Record the transaction described and the period-end adjusting entry.
Scenario 1:
On December 1, a company purchases one year of rent in advance for $9,600 ($800/month).
Solution
Adjusting entry type: Prepaid expense.
Scenario 2:
On December 2, a company receives $2,700 cash from a customer in an agreement to provide
services of $900 each month for the next three months, beginning in December.
Chapter 03 – The Accounting Cycle: End of the Period
Solution
Adjusting entry type: Unearned revenue.
September 2 (external transaction)
Credit
December 31 (adjusting entry)
Scenario 3:
On December 31, a company receives a utility bill of $1,800 for the month. The company plans
to pay the bill on January 3.
Solution
Adjusting entry type: Accrued expense.
December 31 (adjusting entry)
Debit
Credit
January 3 (external transaction)
Scenario 4:
Customers receiving $700 of services from a company have not been billed as of the end of
December. These customers will be billed on January 4 and are expected to pay the full amount
owed on January 9.