CHAPTER 4
COMPLETING THE ACCOUNTING CYCLE
LEARNING OBJECTIVES
1. PREPARE A WORKSHEET.
2. PREPARE CLOSING ENTRIES AND A POST-CLOSING
TRIAL BALANCE.
3. EXPLAIN THE STEPS IN THE ACCOUNTING CYCLE
AND HOW TO PREPARE CORRECTING ENTRIES.
4. IDENTIFY THE SECTIONS OF A CLASSIFIED BALANCE
SHEET.
*5. PREPARE REVERSING ENTRIES.
*6. COMPARE THE PROCEDURES FOR THE CLOSING
PROCESS UNDER GAAP AND IFRS.
CHAPTER REVIEW
Preparing a Worksheet
1. (L.O. 1) The steps in preparing a worksheet are:
a. Prepare a trial balance on the worksheet.
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
Closing Entries
7. (L.O. 2) Closing entries formally recognize in the ledger the transfer of net income (or loss) and
dividends to retained earnings as shown in the retained earnings statement.
10. A temporary account, Income Summary, is used in closing revenue and expense accounts to
minimize the amount of detail in the permanent retained earnings account.
11. In closing the books of a corporation:
a. Debit each revenue account for its balance, and credit Income Summary for total revenues.
Post-Closing Trial Balance
12. After all closing entries have been journalized and posted, a post-closing trial balance is
prepared. The purpose of this trial balance is to prove the equality of the permanent account
balances that are carried forward into the next accounting period.
Steps in the Accounting Cycle
13. (L.O. 3) The required steps in the accounting cycle are:
a. Analyze business transactions.
b. Journalize the transactions.
14. A reversing entry is the exact opposite of an adjusting entry. The preparation of reversing entries
is an optional bookkeeping procedure that is not a required step in the accounting cycle.
Correcting Entries
15. Errors that occur in recording transactions should be corrected as soon as they are discovered by
preparing correcting entries. Correcting entries:
Classified Balance Sheet
17. (L.O. 4) 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
18. Current assets are assets that a company expects to convert to cash or use up within one year
or its operating cycle, whichever is longer. Current assets are listed in the order of their liquidity.
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
Stockholders” Equity
25. The content of the owner’s equity section varies with the form of business organization. In a
Form of Balance Sheet
26. A balance sheet is most often presented in report form with the assets shown above the liabilities
and stockholders’ equity. It may also be presented in account form with the assets section
placed on the left and the liabilities and stockholders’ equity section on the right.
Reversing Entries
Closing Procedures Under IFRS and GAAP
*29. The similarities and differences between IFRS and GAAP are:
a. Similarities
(1) The closing process is essentially the same under both sets of standards.
(2) IFRS requires a statement of financial position similar to the balance sheet under GAAP.
(3) IFRS follows the same guidelines for distinguishing between current and noncurrent
assets and liabilities.
b. Differences
(1) IFRS recommends, but does not require, the use of the title “statement of financial
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:
a. Step 1: Prepare a trial balance on the worksheet.
3. A worksheet facilitates the preparation of financial statements because it
organizes the account balances and the statements can be prepared
before the adjusting entries are journalized and posted.
B. Preparing Closing Entries.
1. Closing entries formally recognize in the ledger the transfer of net income
each temporary account may be used to accumulate data in the next
accounting period separate from the data of prior periods.
3. There are four closing entries:
a. Debit each revenue account for its balance, and credit Income Sum-
mary for total revenues.
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?
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.
D. Summary of the Accounting Cycle.
1. Analyze business transactions.
2. Journalize the transactions.
E. Correcting Entries.
1. Companies should correct errors, as soon as they discover them, by
journalizing and posting correcting entries.
ACCOUNTING ACROSS THE ORGANIZATION
Yale Express, a short-haul trucking firm, turned over much of its cargo to local
truckers to complete deliveries and waited 20 days to receive the local truckers’
bills. However, Republic Carloading, a nationwide, long-distance freight
forwarder whom Yale merged with, frequently did not receive bills from truckers
until months after the year-end.
What might Yale Express have done to produce more accurate financial state–
ments without waiting months for Republic’s outstanding transportation bills?
F. The Classified Balance Sheet.
1. Current assets are assets that a company expects to convert to cash or
use up within one year or its operating cycle, whichever is longer. On the
balance sheet, companies usually list current assets in the order in which
they expect to convert them into cash (order of liquidity).
2. Long-term investments are generally investments in stocks and bonds of
other companies that are normally held for many years. This category
also includes long–term assets (land, buildings) not currently being used
in operations, and long-term notes receivable.
*G. Reversing Entries.
1. Companies make reversing entries at the beginning of the next account-
ing period. Each reversing entry is the exact opposite of the adjusting
entry made in the previous period.
IFRS
A Look at IFRS
The classified balance sheet, although generally required internationally, contains certain
variations in format when reporting under IFRS.
KEY POINTS
SIMILARITIES
• The procedures of the closing process are applicable to all companies, whether they are
using IFRS or GAAP.
DIFFERENCES
• IFRS recommends but does not require the use of the title “statement of financial
position” rather than balance sheet.
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. An important purpose of closing entries is to set permanent account balances to zero in
order to begin the next period.
True False
2. The preparation of reversing entries is a required step in the accounting cycle.
True False
3. A worksheet can be used as a basis for posting the adjustments to the ledger.
True False
4. The content of the owner’s equity section of a proprietorship is the same as the content
of the owners’ equity section of a corporation.
True False
5. Adjustments are journalized and posted only at the end of an accounting period, whereas
correcting entries are journalized and posted whenever an error is discovered.
True False
6. Current assets are resources that can be converted into cash, but are not expected to be
converted within one year.
True False
7. Long-term liabilities such as lease liabilities, mortgages payable, and bonds payable are
expected to be paid from existing current assets.
True False
8. The balance of accumulated depreciation will appear in the credit side of the worksheet’s
Balance Sheet column.
True False
9. The relationship between current assets and current liabilities is important in evaluating
a company’s liquidity.
True False
10. Intangible assets are not listed on the balance sheet because they do not have physical
substance.
True False
Multiple Choice
1. The worksheet is a type of
a. financial statement.
b. permanent accounting record.
c. working paper.
d. journal.
2. In preparing closing entries, which of the following columns of the worksheet are the
most helpful?
a. The Adjustments column
b. The Adjusted Trial Balance columns
c. The Income Statement columns
d. The Balance Sheet columns
3. The proper sequence for the accounting cycle is
a. analyze, journalize, post, adjust, prepare statements, close.
b. post, journalize, analyze, prepare statements, close, adjust.
c. prepare statements, journalize, post, adjust, close, analyze.
d. journalize, post, close, prepare statements, adjust, analyze.
4. After all the closing entries have been posted, the balance of the income summary will be
a. a debit if a net income has occurred.
b. a debit if a net loss has occurred.
c. a credit if a net loss has occurred.
d. zero.
5. The post-closing trial balance will
a. be prepared before closing entries are posted to the ledger.
b. contain both income statement and balance sheet accounts.
c. contain only balance sheet accounts.
d. contain only income statement accounts.
ANSWERS TO QUIZ
True/False
Multiple Choice