ACCOUNTING—

INDONESIA ADAPTATION
4 TH EDITION—VOLUME 1
Carl S. Warren
James M. Reeve
Jonathan E.Duchac
Ersa Tri Wahyuni
Amir Abadi Jusuf
 CHAPTER 4

COMPLETING THE ACCOUNTING

CYCLE
Learning Objectives
Flow of Accounting Information (slide 1 of 3)
Flow of Accounting Information (slide 2 of 3)

The unadjusted trial balance verifies that the

total of the debit balances equals the total of the
credit balances.

If the trial balance totals are unequal, an error

has occurred. Any errors must be found and
corrected before the end-of-period process can
continue.
Flow of Accounting Information (slide 3 of 3)

 The adjustments are added to or subtracted from the amounts

in the Unadjusted Trial Balance columns to arrive at the
amounts inserted in the Adjusted Trial Balance column.
 The totals of the Adjusted Trial Balance columns verify that
the totals of the debit and credit balances are equal after
adjustment.
Exhibit 2: Financial Statements, SolusiNet
(slide 1 of 2)
Exhibit 2: Financial Statements, SolusiNet
(slide 2 of 2)
Income Statement

 The income statement is prepared directly from the Adjusted

Trial Balance beginning with fees earned.
 The expenses are listed in order of size, beginning with the
larger items. Miscellaneous expense is the last item,
regardless of its amount.
Statement of Owner’s Equity

 The first item presented on the statement of owner’s equity is

the balance of the owner’s capital account at the beginning of
the period, then followed by the net income (or net loss) and
the drawing account balance, are used to determine the ending
owner’s capital account balance.
Statement of Financial Position
Assets

Current Assets Fixed Assets

• Assets that are expected to
be converted to cash or
sold or used up usually
within one year or less,
through the normal
operations of the business.
• Cash, notes receivable,
account receivable,
supplies, and prepaid
expenses.
• Has useful life more than
one year and usually
depreciated
• Example of fixed assets
are land, building,
machinery, and equipment
Liabilities

Due within a short

time (usually one
year or less)
Current Liabilities
Notes payable,
account payable,
Amounts the tax payable, wages
business owes to payable
creditors
Long-term Due more than one
Liabilities year
Owner’s Equity
 The owner’s right to the assets of the business is presented on
the statement of financial position below the liabilities
section.

Total owner’s Total

Total Assets
Equity Liabilities
Permanent Accounts Vs. Temporary
Accounts

Permanent accounts or real accounts reported on the

statements of financial position.
• They are carried forward from year to year.

The balances of the accounts reported on the income

statement and owner’s drawing account are not carried
forward from year to year.
• Accounts report amounts for only one period, they are called
temporary accounts or nominal accounts.
• Temporary accounts are not carried forward because they relate
only to one period.
Closing Entries
The entries that transfer these temporary balances are called
closing entries.
The closing process involves the following four steps:
The Balance of Revenue Accounts
transferred to an account called Income Summary.

The Balance of Expense Accounts

transferred to an account called Income Summary

The Balance of Income Summary (Net Income or Net Loss)

transferred to the owner’s capital account

The Balance of the Owner’s Drawing Accounts

transferred to the owner’s capital account.
Exhibit 3: The Closing Process
Income summary

Income Summary is a temporary account that is only used during the

closing process.

At the beginning of the closing process, Income Summary has no balance.

During the closing process, Income Summary will be debited and credited
for various amounts.

At the end of the closing process, Income Summary will again have no
balance.

Because Income Summary has the effect of clearing the revenue and
expense accounts of their balances, it is sometimes called a clearing account.
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Four Closing Entries
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Exhibit 4: Flowchart of Closing Entries for
SolusiNet
Exhibit 5: Closing Entries, SolusiNet
Solusinet’s Closing
 The closing entries are posted to SolusiNet’ ledger as shown
in Exhibit 5.
 After the closing entries are posted, SolusiNet’ ledger has the
following characteristics:
 The balance of Cristina, Capital of Rp28,105,000 agrees
with the amount reported on the statement of owner’s
equity and the statement of financial position.
 The revenue, expense, and drawing accounts will have zero
balances. As shown in Exhibit 6, the closing entries are
normally identified in the ledger as “Closing.”
Post-Closing Trial Balance
 A post-closing trial balance is prepared after the closing
entries have been posted.
 The purpose of the post-closing (after closing) trial balance is
to verify that the ledger is in balance at the beginning of the
next period.
 The accounts and amounts should agree exactly with the
accounts and amounts listed on the statement of financial
position at the end of the period.
Exhibit 6: Ledger, SolusiNet (slide 1 of 4)
Exhibit 6: Ledger, SolusiNet (slide 2 of 4)
Exhibit 6: Ledger, SolusiNet (slide 3 of 4)
Exhibit 6: Ledger, SolusiNet (slide 4 of 4)
Exhibit 7: Post-Closing Trial
Balance, SolusiNet
Accounting Cycle
Illustration of the Accounting Cycle
(slide 1 of 6)

 Assume that for several years Rahma Lulu has operated a

part-time consulting business from her home. As of April 1,
2016, Rahma decided to move to rented quarters and to
operate the business on a full-time basis. The business will be
known as Rahma Consulting.
Illustration of the Accounting Cycle
(slide 2 of 6)

During April, Rahma Consulting entered into the following transactions:

Apr. 1.
The following assets were received from Rahma Lulu: cash,
Rp13,100,000; accounts receivable, Rp3,000,000; supplies, Rp1,400,000;
and office equipment, Rp12,500,000. There were no liabilities received.

Apr 1
Paid three months’ rent on a lease rental contract, Rp4,800,000.

Apr2
Paid the premiums on property and casualty insurance policies,
Rp1,800,000.
Illustration of the Accounting Cycle
(slide 3 of 6)

Apr 4
Received cash from clients as an advance payment for services to be
provided and recorded it as unearned fees, Rp5,000,000.

Apr. 5.
Purchased additional office equipment on account from Data Media,
Rp2,000,000.

Apr 6
Received cash from clients on account, Rp1,800,000.

Apr 10
Paid cash for a newspaper advertisement, Rp120,000.
Illustration of the Accounting Cycle
(slide 4 of 6)

Apr 12
Paid Data Media for part of the debt incurred on April 5, Rp1,200,000.

Apr12.
Recorded services provided on account for the period April 1–12,
Rp4,200,000.

Apr 14.
Paid part-time receptionist for two weeks’ salary, Rp750,000.

Apr 17.
Recorded cash from cash clients for fees earned during the period
April 1–16, Rp6,250,000.
Illustration of the Accounting Cycle
(slide 5 of 6)

Apr18.
Paid cash for supplies, Rp800,000.

Apr 20.
Recorded services provided on account for the period April 13–20, Rp2,100,000.

Apr 24.
Recorded cash from cash clients for fees earned for the period April 17–24,
Rp3,850,000.

Apr 26.
Received cash from clients on account, Rp5,600,000.

Apr 27.
Paid part-time receptionist for two weeks’ salary, Rp750,000.
Illustration of the Accounting Cycle
(slide 6 of 6)

Apr29.
Paid telephone bill for April, Rp130,000.

Apr30.
Paid electricity bill for April, Rp200,000.

Apr 30.
Recorded cash from cash clients for fees earned for the period April 25–30,
Rp3,050,000.

Apr 30.
Recorded services provided on account for the remainder of April, Rp1,500,000.

Apr 30.
Rahma withdrew Rp6,000,000 for personal use.
Step 1. Analyzing and Recording
Transaction in the Journal
The first step in the accounting cycle is to analyze and record
transactions in the journal using the double-entry accounting
system.
1. Carefully read the description of the transaction to determine
whether an asset, liability, owner’s equity, revenue, expense,
or drawing account is affected.
2. For each account affected by the transaction, determine
whether the account increases or decreases.
3. Determine whether each increase or decrease should be
recorded as a debit or a credit.
4. Record the transaction using a journal entry.
Rahma Consulting’s Chart of Account
Step 2. Posting Transactions
to The Ledger
Periodically, the transactions recorded in the journal are posted
to the accounts in the ledger.
1. The date is entered in the Date column of the account.
2. The amount is entered into the Debit or Credit column of the
account.
3. The journal page number is entered in the Posting Reference
column.
4. The account number is entered in the Posting Reference
(Post. Ref.) column in the journal.
Exhibit 10: Journal Entries for April,
Rahma Consulting (slide 1 of 3)
Exhibit 10: Journal Entries for April,
Rahma Consulting (slide 2 of 3)
Exhibit 10: Journal Entries for April,
Rahma Consulting (slide 3 of 3)
 Step 3. Preparing an Unadjusted
Trial Balance

An unadjusted trial balance is prepared to determine

whether any errors have been made in posting the debits
and credits to the ledger.

It indicates only that the debits and the credits are equal.

If the two totals of a trial balance are not equal, an error

has occurred that must be discovered and corrected.
Exhibit 11: Unadjusted Trial Balance,
Rahma Consulting
Step 4. Assembling and Analyzing
Adjustment Data (slide 1 of 2)

 Before the financial statements can be prepared, the accounts

must be updated.
 The four types of accounts that normally require adjustment
include:
 prepaid expenses
 unearned revenue
 accrued revenue
 accrued expenses
 depreciation expense
Step 4. Assembling and Analyzing
Adjustment Data (slide 2 of 2)

The following data have been assembled on April 30, 2016, for
analysis of possible adjustments for Rahma Consulting:
a. Insurance expired during April is Rp300,000.
b. Supplies on hand on April 30 are Rp1,350,000.
c. Depreciation of office equipment for April is Rp330,000.
d. Accrued receptionist salary on April 30 is Rp120,000.
e. Rent expired during April is Rp1,600,000.
f. Unearned fees on April 30 are Rp2,500,000.
Step 5. Preparing an Optional End-of-
Period Spreadsheet
 An end-of-period spreadsheet is useful in showing the flow of
accounting information from the unadjusted trial balance to
the adjusted trial balance.
 It is useful in analyzing the impact of proposed adjustments
on the financial statements.
Exhibit 12: End-of-Period Spreadsheet,
Rahma Consulting
Step 6. Journalizing and Posting
Adjusting Entries
Step 7. Preparing an Adjusted
Trial Balance
 After the adjustments have been journalized and posted, an
adjusted trial balance is prepared to verify the equality of the
total of the debit and credit balances.
Exhibit 14: Adjusted Trial
Balance, Rahma Consulting
Step 8. Preparing the Financial
Statements
 The statements can be prepared
directly from the adjusted trial Income
Statement
balance, the end-of-period
spreadsheet, or the ledger.
Statement of
Owner’s
Equity

Statement of
Financial
Position
Exhibit 15: Financial Statements, Rahma
Consulting (slide 1 of 2)
Exhibit 15: Financial Statements, Rahma
Consulting (slide 2 of 2)
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Closing Entries
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Step 9. Journalizing and Posting
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Exhibit 16: Closing Entries,
Rahma Consulting
Step 10. Preparing a Post-Closing
Trial Balance
 The purpose of the post-closing trial balance is to verify that
the ledger is in balance at the beginning of the next period.
 The accounts and amounts in the post-closing trial balance
should agree exactly with the accounts and amounts listed on
the statement of financial position at the end of the period.
Exhibit 17: Post-Closing Trial
Balance, Rahma Consulting
Exhibit 18: Ledger, Rahma Consulting
(slide 1 of 4)
Exhibit 18: Ledger, Rahma Consulting
(slide 2 of 4)
Exhibit 18: Ledger, Rahma Consulting
(slide 3 of 4)
Exhibit 18: Ledger, Rahma Consulting
(slide 4 of 4)
Fiscal Year (slide 1 of 2)
 The annual accounting period adopted by a business is known
as its fiscal year.
 Fiscal years begin with the first day of the month selected and
end on the last day of the following twelfth month.
 The period most commonly used is the calendar year. Other
periods are not unusual, especially for businesses organized as
corporations.
 Such a fiscal year is called the natural business year. At the
low point in its operating cycle, a business has more time to
analyze the results of operations and to prepare financial
statements.
Fiscal Year (slide 2 of 2)
 Because companies with fiscal years often have highly seasonal
operations, Investors and others should be careful in interpreting
partial year reports for such companies.
 That is, you should expect the results of operations for these
companies to vary significantly throughout the fiscal year.
Financial Analysis and Interpretation:
Working Capital and Current Ratio (slide 1 of 2)

 The ability to convert assets into cash is called liquidity,

 The ability of a business to pay its debts is called solvency.
 Working capital is the excess of the current assets over its
current liabilities.

Working Capital
=
Current Assets – Current Liabilities
Financial Analysis and Interpretation:
Working Capital and Current Ratio (slide 2 of 2)

 An increase in a company’s current assets increases or

improves its liquidity.
 An increase in working capital increases or improves liquidity
in the sense that current assets are available for uses other
than paying current liabilities.
 A positive working capital implies that the business is able to
pay its current liabilities and is solvent.
SolusiNet Working Capital

 The amount of current assets and current liabilities of Solusi

Net is Rp7,745,000 and Rp1,390,000. As a result its working
capital at the end of 2014 is Rp6,355,000
Working Capital = Current Assets – Current Liabilities
= Rp7,745,000 – Rp1,390,000
= Rp6,355,000
 This amount of working capital implies that SolusiNet is able
to pay its current liabilities.
Current Ratio
 The current ratio is another ratio for measuring liquidity.

 To illustrate, the current ratio for SolusiNet at the end of 2015

is 5.6, computed as follows:
Working Capital Vs. Current Ratio
(slide 1 of 4)

• The current ratio is more useful than working capital in

making comparisons across companies or with industry
averages.
• To illustrate, the following data (in millions rupiah) were
taken from recent financial statements of PT Indofood
Sukses Makmur Tbk., PT Nippon Indosari Corpindo
Tbk., and PT Tiga Pilar Sejahtera Food Tbk.:
Working Capital Vs. Current Ratio
(slide 2 of 4)
Working Capital Vs. Current Ratio
(slide 3 of 4)

 Indofood has more than 53.7 times (Rp42,816,745 compared

to Rp812,991) the current assets as does Nippon Indosari
Corpindo and more than 9.6 times (Rp42,816,745 compared
to Rp4,463,645) the current assets of Tiga Pilar Sejahtera
Food.
 Such size differences makes meaningful comparisons difficult
across companies.
Working Capital Vs. Current Ratio
(slide 4 of 4)

 Nippon Indosari Corpindo appear to be in a stronger short-

term liquidity position in first year, and Tiga Pilar Sejahtera in
second year than Indofood.
 Indofood current ratio has decreased to 1.71 from 1.81.
 Nippon Indosari Corpindo’s current ratio has increased to 2.05
from 1.37.
 Tiga Pilar Sejahtera Food’s current ratio has decreased to 1.62
from 2.66.
Appendix 1: End-of-Period Spreadsheet
(slide 1 of 8)

 Accountants often use spreadsheets for analyzing and

summarizing data. Such spreadsheets are not a formal part of
the accounting records.
 As illustrated in the chapter, the financial statements for
SolusiNet can be prepared directly from the spreadsheet’s
Adjusted Trial Balance columns.
 Some accountants prefer to expand the end-of-period
spreadsheet shown in Exhibit 1 to include financial statement
columns.
Appendix 1: End-of-Period Spreadsheet
(slide 2 of 8)

Step 1. Enter the Title (See Exhibit 20)

 The spreadsheet is started by entering the following data:
1. Name of the business: SolusiNet
2. Type of spreadsheet: End-of-Period Spreadsheet
3. The period of time: For the Two Months Ended December
31, 2015

 Exhibit 20 shows the preceding data entered for SolusiNet.

Appendix 1: End-of-Period Spreadsheet
(slide 3 of 8)

Step 2. Enter the Unadjusted Trial Balance

 Enter the unadjusted trial balance on the spreadsheet. The
spreadsheet in Exhibit 20 shows the unadjusted trial balance
for SolusiNet at December 31, 2015.
Appendix 1: End-of-Period Spreadsheet
(slide 4 of 8)

Step 3. Enter the Adjustments (Turn Exhibit 21)

 The adjustments for SolusiNet from Chapter 3 are entered in
the Adjustments columns, as shown in Exhibit 21.
 Cross-referencing (by letters) the debit and credit of each
adjustment is useful in reviewing the spreadsheet.
 It is also helpful for identifying the adjusting entries that need
to be recorded in the journal. This cross-referencing process is
sometimes referred to as keying the adjustments.
Appendix 1: End-of-Period Spreadsheet
(slide 5 of 8)

Step 4. Enter the Adjusted Trial Balance (Turn Exhibit 22)

 The adjusted trial balance is entered by combining the
adjustments with the unadjusted balances for each account.
The adjusted amounts are then extended to the Adjusted Trial
Balance columns, as shown in Exhibit 22.
Appendix 1: End-of-Period Spreadsheet
(slide 6 of 8)

Step 5. Extend the Accounts to the Income

Statement and Statement of Financial Position Columns
(Turn Exhibit 23)
 The adjusted trial balance amounts are extended to the Income
Statement and Statement of Financial Position columns.
 The amounts for revenues and expenses are extended to the
Income Statement columns.
 The amounts for assets, liabilities, owner’s capital, and
drawing are extended to the Statement of Financial Position
columns.
Exhibit 20: Spreadsheet with Unadjusted
Trial Balance Entered
Exhibit 21: Spreadsheet with Unadjusted
Trial Balance and Adjustments
Exhibit 22: Spreadsheet with Unadjusted Trial
Balance, Adjustments, and Adjusted Trial
Balance Entered
Exhibit 23: Spreadsheet with Amounts Extended to
Income Statement and Statement of Financial
Position Columns
Exhibit 24: Completed Spreadsheet
with Net Income Shown
Appendix 1: End-of-Period Spreadsheet
(slide 7 of 8)

Step 6. Total the Income Statement and Statement of Financial Position

Columns, Compute the Net Income or Net Loss, and Complete the
Spreadsheet (Turn Exhibit 24)
 After the account balances are extended to the Income Statement and
Statement of Financial Position columns, each of the columns is totaled.
 The difference between the two Income Statement column totals is the
amount of the net income or the net loss for the period.
 This difference (net income or net loss) will also be the difference between
the two Statement of financial position column totals. If the Income
Statement Credit column total (total revenue) is greater than the Income
Statement Debit column total (total expenses), the difference is the net
income.
 If the Income Statement Debit column total is greater than the Income
Statement Credit column total, the difference is a net loss.
Appendix 1: End-of-Period Spreadsheet
(slide 8 of 8)

As shown in Exhibit 24, the total of the Income

Statement Credit column is Rp16,960,000, and the
total of the Income Statement Debit column is
Rp9,855,000.
Thus, the net income for SolusiNet is Rp7,105,000 as
shown below.
 Total of Income Statement Credit column (revenues) Rp16,960,000
 Total of Income Statement Debit column (expenses) 9,855,000
 Net income (excess of revenues over expenses) Rp 7,105,000