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CHAPTER 4
COMPLETING THE ACCOUNTING CYCLE

Chapter Preview
§ In this chapter, we will study the remaining steps in
PRINCIPLES OF ACCOUNTING the accounting cycle, especially the closing process,
again using Yazici Advertising A.Ş. as an example.
Then, we will consider correcting entries and
classified statements of financial position.

Source:
Weygandt, Kimmel, Kieso:Financial Accounting with International Financial Reporting Standards, 4th Edition, Wiley & Sons.
Wild, Kwok, Shaw, Chiappetta, Principles of Financial Accounting, 2/e, McGraw-Hill.
Compile slides: Nguyễn Thị Thu

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CHAPTER OUTLINE LEARNING OBJECTIVE 2
PREPARE CLOSING ENTRIES AND A POST-CLOSING
TRIAL BALANCE
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CLOSING THE BOOKS PREPARING CLOSING ENTRIES

At the end of the accounting period, the company

makes the accounts ready for the next period.
Closing entries formally recognize in the ledger the
transfer of:
• Net income (or net loss) to owner’s capital
• Dividends to retained earnings
Produce a zero balance in each temporary account.
Companies generally journalize and post closing
entries only at end of the annual accounting period.

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CLOSING ENTRIES ILLUSTRATED

PREPARING CLOSING ENTRIES
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POST-CLOSING TRIAL BALANCE

POSTING CLOSING ENTRIES

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GENERAL

GL, TEMPORARY ACCOUNTS

LEDGER,
PERMANENT
ACCOUNTS
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LEARNING OBJECTIVE 3
EXPLAIN THE STEPS IN THE ACCOUNTING CYCLE
AND HOW TO PREPARE CORRECTING ENTRIES
1. Analyze business
transactions

9. Prepare a post-closing 2. Journalize the

trial balance transactions

8. Journalize and post 3. Post to ledger

ACTION PLAN closing entries accounts
• Close revenue and expense accounts to Income Summary.
7. Prepare financial
•Close Income Summary to Retained Earnings. statements
4. Prepare a trial balance
•Close Dividends to Retained Earnings.
6. Prepare an adjusted 5. Journalize and post
trial balance adjusting entries

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THE ACCOUNTING CYCLE THE ACCOUNTING CYCLE
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THE ACCOUNTING CYCLE THE ACCOUNTING CYCLE

THE ACCOUNTING CYCLE

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OVERVIEW OF THE ACCOUNTING CYCLE 20

Transactions

Journals

Accounts

Trial Babance Adjusting

Post-closing Adjusted
Closing
Trial Balance Trial Balance

Financial
Statements
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CORRECTING ENTRIES—AVOIDABLE STEP CORRECTING ENTRIES – CASE 1
Case 1: On May 10, Mercato Co. journalized and posted a
NT$500 cash collection on account from a customer as a debit to
• Unnecessary if accounting records are free of Cash and a credit to Service Revenue for NT$500. The error was
errors discovered when the customer paid the remaining balance in full.
• Made whenever an error is discovered
• Must be posted before closing entries
Instead of preparing a correcting entry, it is possible
to reverse the incorrect entry and then prepare
the correct entry.
Cash Accounts Receivable Service Revenue
(10/5) 500 (20/5) 500 (20/5) 500 (10/5) 500

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CORRECTING ENTRIES – CASE 2
Case 2: On May 10, 18, Mercato purchased on account
equipment costing NT$4,500. The transaction was journalized and
posted as a debit to Equipment NT$450 and a credit to Accounts
Payable NT$450. The error was discovered on June 3.
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LEARNING OBJECTIVE 4
IDENTIFY THE SECTIONS OF A CLASSIFIED
STATEMENT OF FINANCIAL POSITION
• Presents a snapshot at a point in time
• To improve understanding, companies group
similar assets and similar liabilities together

Assets Equity and Liabilities

Intangible assets Equity
Property, plant, & equipment Non-current liabilities
Equipment Accounts Payable
Long-term investments Current liabilities
(18/5) 450 (18/5) 450 Current assets
(3/6) 4,050 (3/6) 4,050
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CLASSIFIED STATEMENT OF FINANCIAL POSITION

CLASSIFIED STATEMENT OF FINANCIAL POSITION

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INTANGIBLE ASSETS SECTION PROPERTY, PLANT, AND EQUIPMENT
• Long useful lives
Long-lived assets that do not have physical substance. • 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
• Sometimes called fixed assets or plant assets

Current assets are listed:

a. in the reverse order of expected
conversion to cash.
b. by importance.
c. by longevity.
d. by size.
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LONG-TERM INVESTMENTS CURRENT ASSETS
• Investments in stocks and bonds of other companies • Assets that a company expects to convert to cash or use up
within one year or the operating cycle, whichever is longer
• Investments in long-term assets such as land or buildings • Operating cycle is the average time that it takes to
that are not currently being used in operating activities
§ purchase inventory,
• Long-term notes receivable § sell it on account, and
§ collect cash from customers

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CURRENT ASSETS EQUITY
The correct order of presentation in a classified statement of
financial position for the following current assets is: • Proprietorship - one capital account
a. accounts receivable, cash, prepaid insurance, inventory. • Partnership - capital account for each partner
b. prepaid insurance, inventory, accounts receivable, cash. • Corporation – Share Capital—Ordinary and
c. cash, accounts receivable, inventory, prepaid insurance. Retained Earnings
d. inventory, cash, accounts receivable, prepaid insurance.

Current assets are listed:

a. in the reverse order of expected conversion to cash.
b. by importance.
c. by longevity.
d. by size.
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NON-CURRENT LIABILITIES CURRENT LIABILITIES
• Obligations company has to pay within coming year or its
Obligations a company expects to pay after one year. operating cycle, whichever is longer
• Common examples are accounts payable, salaries and
wages payable, notes payable, interest payable, income
taxes payable, and current maturities of long-term obligations
• Liquidity - ability to pay obligations expected to be due within
the next year

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