Chapter 4
The Accounting Cycle Continued
Chapter Overview
The chapter begins with an introduction to adjusting entries. Some transactions cannot be observed by the
company and, therefore, are not recorded as often as a sales or cash payment entry. Examples of these
transactions are wear and tear on equipment or the expiration of insurance. Adjusting entries are used to
allocate revenue and expenses properly based upon the accounting period used and to adjust the balance
sheet accounts and income statement accounts to reflect an accurate balance. At the end of the accounting
period and after preparing a trial balance, businesses record adjusting entries. They utilize a worksheet to
organize and check the financial data before preparing financial statements.
A worksheet consists of a trial balance, adjusting entries, and an adjusted trial balance. Each of these
areas has its own debit and credit columns to help review the account balances. For each of these areas,
Learning Objectives
After studying Chapter 4, your students should gain proficiency in the following:
2. Complete the Worksheet.
Chapter 4 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
1 Worksheet theory 1 5 Easy
2 Adjusting entry theory 1 5 Easy
3 Adjusting process 1 5 Easy
Concept Checks
1 Adjustment for Supplies 1 5 Easy
2 Adjustment for Prepaid Rent 1 10 Easy
Exercises (Set A)
4A-1 Financial Stmt. Placement 3 5 Easy
4A-2 Adjusting Entries 1 10 Easy
Exercises (Set B)
4B-1 Financial Stmt. Placement 3 5 Easy
Problems (Set A)
4A-1 Adjusting Entries & Worksheet 1 15 Easy
4A-2 Adjusting Entries & Worksheet 1. 2 30 Medium
Problems (Set B)
4B-1 Adjusting Entries & Worksheet 1 15 Easy
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Financial Report Problem
Reading Amazon’s Annual Report 1 20 Medium
Chapter 4
The Accounting Cycle Continued
Learning Unit 4-1: Explaining Adjustments and How to Record
Them on a Worksheet
Summary: An accountant uses a worksheet to organize and check data before preparing financial
statements necessary to complete the accounting cycle. The accounts listed on the far left of the
worksheet are taken from the ledger. The rest of the worksheet has five sections: the trial balance,
adjustments, adjusted trial balance, income statement, and balance sheet. Each of these sections is divided
Key Concepts: Worksheet, adjusting, historical cost, depreciation, residual value, accumulated
Lecture Outline:
1. Adjusting Entries are:
a. necessary entries at the end of the year or the period
2. The common adjusting entries:
a. Adjusting Computer Supplies – to adjust the asset balance to the amount of assets on hand and
adjust the expense to the amount of supplies used during the year.
Dr. Computer supplies expense XX
Cr. Computer Supplies XX
Dr. Depreciation expense XX
Cr. Accumulated Depreciation XX
iv. The residual value is the estimated value of an asset after all allowable depreciation has
been taken.
d. Adjusting the Salaries Accrued Account – to record the salaries owed to employees but not
recorded as of the end of the year.
Dr. Office salaries expense XX
Cr. Salaries payable XX
Teaching Tips/Strategy: Use the Discussion Questions #2, #3 and #4 to illustrate the
importance of the adjusting entries in the business accounting cycle.
Provide examples of how an asset declines in value with usage or the periodic allocating of the
asset cost to an expense account. Use the Frost Company in the Demonstration Summary
Problem to illustrate the concepts of cost, residual value, useful life, depreciation expense and
accumulated depreciation. Explain to the students the differences between the annual
Learning Unit 4-2: The Worksheet (Step 5 of the Accounting Cycle)
Summary: The Adjusted Trial Balance is the section after all adjustments are done in the worksheet.
The balances presented in the adjusted trial balance are the result of adding or subtracting the adjustments
posted in the adjustments columns to balance amounts in the unadjusted trial balance (first two columns
Key Concepts: None
Lecture Outline:
1. Worksheet or Spreadsheet
a. An informal columnar report used by accountants to aid in completing the accounting cycle.
b. Purpose: to organize and check accounts before the preparation of the trial balance and financial
2. The income statement columns are completed as follow:
a. Transfer the accounts in the adjusted trial balance that are income or expense accounts
3. The balance sheet columns are the next section of the worksheet and are completed as follows:
a. Transfer the balance from assets, contra-assets, liabilities, capital, and withdrawals from the
4. The difference added to the income statement section and the difference added to the balance sheet
section are the same in value although one is a debit balance and one is a credit balance.
a. If the adjusting amount has a debit balance in the Income Statement side and a credit balance in
the Balance Sheet side, the amount is equal to the amount of net income.
Teaching Tips/Strategy: Use Concept Check #5 to review worksheet placement. Use Exercise
4A-4 or 4B-4 as classwork or assigned work to practice completing a worksheet.
Use the “Ten–Minute Quiz” question #9 to reinforce the Learning Objective 4-2 concept.
Learning Unit 4-3: The Financial Statements from the Worksheet
(Step 6 of the Accounting Cycle)
Summary: The formal financial statements can be prepared from the worksheet completed in Learning
Unit 4-2. To ensure the accuracy of the figures, we double-check that all entries are recorded correctly,
Key Concepts: None
Lecture Outline:
1. Check to make sure the entries on the worksheet are correct and in balance.
a. Verify the following items:
i. Double-check that all entries are recorded in the appropriate column
ii. The correct amounts are entered in the proper places
iii. The addition is correct across the columns
iv. The columns are added correctly
b. Prepare the income statement (Figure 4.13)
i. Every figure on the formal statement is on the worksheet.
equity.
c. Preparing the statement of owner’s equity. (Figure 4.14)
i. Check the ledger account for the beginning capital figure. Having additional investments
by owner usually signals the amount on the worksheet is not the beginning balance.
ii. Net income from the income statement is added to the balance in owner’s equity.
iii. Net losses from the income statement are subtracted from the balance in owner’s equity.
d. Preparing the balance sheet (Figure 4.15)
i. Column totals on the worksheet do not match the formal balance in the balance equation.
ii. The owner’s equity figure is the same as ending capital balance on the statement of
owner’s equity.
Teaching Tips/Strategy: Review the “Success Coach” LU 4-3 to review the checks and
procedures needed to utilize the worksheet to prepare the financial statements. Use Exercise 4A-5
or 4B-5 as classwork and/or homework to prepare financial statements using a worksheet.
Use the “Ten-Minute Quiz” question #10 to reinforce Learning Objective 4-3 concept.
Teaching Tips/Strategy: Each chapter contains a “Try It!” at the end of each Learning Unit. The
“Try its!” are intended as practice for students and/or as checking of student understanding. There
Name Date Section
CHAPTER 4
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. Which is the proper order of accounting cycle activities?
1 A trial balance is prepared
2 Business Transactions occur and analyzed
3 Financial Statements are prepared
4 Information from the journal is posted to the ledger
5 Journal entries are recorded in the general journal
6 The worksheet is completed
a. 5, 2, 6, 1, 4, 3
b. 1, 3, 6, 5, 4, 2
c. 2, 5, 4, 1, 6, 3
d. 2, 5, 1, 6, 3, 4
2. The purpose of adjusting entries is to:
a. record revenues in the period in which they are earned
b. record expenses in the period in which they are incurred
c. the balances on the income statement and balance sheet are correct
d. all of the above
3. Which of the following accounts is not commonly adjusted in an adjusting entry?
a. cash – adjusted to match the bank statement
b. office supplies – adjusted to record supplies used during the period
c. prepaid rent – adjusted to record rent expense
d. equipment – adjusted to record depreciation
4. At the end of its fiscal year, the company had only $100 of office supplies on hand but the
supplies account listed $550. What is the year end adjusting journal entry?
a. debit supplies and credit supplies expense for $100
b. debit supplies expense and credit supplies for $100
c. debit supplies and credit supplies expense for $450
d. debit supplies expense and credit supplies for $450
5. On March 1, Babko Company paid $1,500 for 6 months rent. What is the adjusting entry for the
fiscal year ending June 30?
a. debit rent expense and credit prepaid rent for $750
b. debit prepaid rent and credit rent expense for $750
c. debit rent expense and credit prepaid rent for $1,000
d. debit prepaid rent and credit rent expense for $1,000
6. Annual equipment depreciation is calculated as $5,000. What is the adjusting journal entry?
a. debit equipment and credit depreciation expense for $5,000
b. debit depreciation expense and credit accumulated depreciation for $5,000
c. debit accumulated depreciation and credit equipment for $5,000
d. debit accumulated depreciation and credit depreciation expense for $5,000
7. Employees are paid every two weeks. On December 31, employees are owed $2,500 in salaries
since the last payday on December 22. What is the adjusting journal entry?
a. debit cash and credit salaries expense
b. debit salaries expense and credit cash
c. debit salaries payable and credit salaries expense
d. debit salaries expense and credit salaries payable
8. Adjustments for prepaid expenses:
a. decrease revenues and increase assets
b. decrease assets and increase expenses
c. decrease assets and increase revenues
d. decrease expenses and increase assets
9. Which is correct concerning the adjusted trial balance?
a. An adjusted trial balance lists all ledger account balances separated by assets and liabilities.
b. An adjusted trial balance is a method used to prove the accounting to date has been posted
properly.
c. An adjusted trial balance is prepared after adjusting entries have been journalized and posted.
d. The balance sheet accounts in the adjusted trial balance have the proper financial statement
amounts.
10. In a worksheet, the debit and credit columns listed in the Balance Sheet and Income Statement
area:
a. do not have debits equal credits, and the difference is the net income or net loss
b. prove that debits equal credits
c. prove the balance in owner’s equity
d. are formal financial statements
Answer Key to Chapter 4 Quiz