The International University, VNU-HCM

School of Business

FINANCIAL ACCOUNTING
Sem 2 (2019-2020)
Lecturer: Mr. Vu Tuan Anh, CMA, MSA
Email: anhtv@hcmiu.edu.vn (preferred)
Tutor: TBA
 PREVIEW OF LECTURE 4

4-2
 LECTURE
Completing the
4 Accounting Cycle
LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Prepare a worksheet.
2. Explain the process of closing the books.
3. Describe the content and purpose of a post-closing trial balance.
4. State the required steps in the accounting cycle.
5. Explain the approaches to preparing correcting entries.
6. Identify the sections of a classified statement of financial position.

4-3
 Using a Worksheet
Learning
Worksheet Objective 1
Prepare a
worksheet.
 Multiple-column form used in preparing
financial statements.

 Not a permanent accounting record.

 May be a computerized worksheet using an electronic

spreadsheet program such as Excel.

 Prepared using a five step process.

 Use of worksheet is optional.

4-4 LO 1
 Steps in Preparing a Worksheet Illustration 4-1
Form and procedure
for a worksheet

4-5
 Steps in Preparing a Worksheet Illustration 4-2

1. PREPARE A TRIAL BALANCE ON THE WORKSHEET

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500
Prepaid Insurance 600
Equipment 5,000
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 1,200
Share Capital-Ordinary 10,000
Dividends 500
Service Revenue 10,000

Salaries and Wages Exp. 4,000

Rent Expense 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

4-6 LO 1
 Steps in Preparing a Worksheet
Illustration 3-23
General journal showing
adjusting entries

Adjusting
Journal
Entries
(Chapter 3)

4-7
 Steps in Preparing a Worksheet Illustration 4-2

2. ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200
Supplies 2,500 (a) 1,500
Prepaid Insurance 600 (b) 50
Equipment 5,000
Adjustments Key:
Notes Payable 5,000 (a) Supplies Used.
Accounts Payable 2,500
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Share Capital-Ordinary 10,000
(c) Depreciation Expensed.
Dividends 500
Service Revenue 10,000 (d) 400 (d) Service Revenue Recognized.
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200
(e) Service Revenue Accrued.
Rent Expense 900 (f) Interest Accrued.
Totals 28,700 28,700
Supplies Expense (a) 1,500 (g) Salaries Accrued.
Insurance Expense (b) 50
Accumulated Depreciation (c) 40
Depreciation Expense (c) 40
Accounts Receivable (e) 200
(f)
Enter adjustment amounts, total
Interest Expense 50
Interest Payable (f) 50 adjustments columns,
Salaries and Wages Payable (g) 1,200 and check for equality.
Totals 3,440 3,440

Add additional accounts as needed.

4-8 LO 1
 Steps in Preparing a Worksheet Illustration 4-2

3. COMPLETE THE ADJUSTED TRIAL BALANCE COLUMNS

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital-Ordinary 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200
Rent Expense 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500
Insurance Expense (b) 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40
Accounts Receivable (e) 200 200
Interest Expense (f) 50 50
Interest Payable (f) 50 50
Salaries and Wages Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190

Total the adjusted trial balance

4-9 columns and check for equality. LO 1
 Steps in Preparing a Worksheet Illustration 4-2

4. EXTEND AMOUNTS TO FINANCIAL STATEMENT COLUMNS

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200
Supplies 2,500 (a) 1,500 1,000
Prepaid Insurance 600 (b) 50 550
Equipment 5,000 5,000
Notes Payable 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 (d) 400 800
Share Capital-Ordinary 10,000 10,000
Dividends 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50
Salaries and Wages Payable (g) 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600

Extend all revenue and expense account

4-10
balances to the income statement columns. LO 1
 Steps in Preparing a Worksheet Illustration 4-2

5. TOTAL COLUMNS, COMPUTE NET INCOME (LOSS)

Adjusted Income Statement of
Trial Balance Adjustments Trial Balance Statement Financial Position
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15,200 15,200 15,200
Supplies 2,500 (a) 1,500 1,000 1,000
Prepaid Insurance 600 (b) 50 550 550
Equipment 5,000 5,000 5,000
Notes Payable 5,000 5,000 5,000
Accounts Payable 2,500 2,500 2,500
Unearned Revenue 1,200 (d) 400 800 800
Share Capital-Ordinary 10,000 10,000 10,000
Dividends 500 500 500
Service Revenue 10,000 (d) 400 10,600 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200 5,200
Rent Expense 900 900 900
Totals 28,700 28,700
Supplies Expense (a) 1,500 1,500 1,500
Insurance Expense (b) 50 50 50
Accumulated Depreciation (c) 40 40 40
Depreciation Expense (c) 40 40 40
Accounts Receivable (e) 200 200 200
Interest Expense (f) 50 50 50
Interest Payable (f) 50 50 50
Salaries and Wages Payable (g) 1,200 1,200 1,200
Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590
Net Income 2,860 2,860
Totals 10,600 10,600 22,450 22,450
Compute Net Income or Net Loss.
4-11 LO 1
 Steps in Preparing a Worksheet

Question
Which of the following statements is incorrect concerning the
worksheet?
a. The worksheet is essentially a working tool of the
accountant.
b. The worksheet is distributed to management and other
interested parties.
c. The worksheet cannot be used as a basis for posting to
ledger accounts.
d. Financial statements can be prepared directly from the
worksheet before journalizing and posting the adjusting
entries.
4-12 LO 1
 Preparing Financial Statements from a
Worksheet

 Income statement is prepared from the income statement

columns.

 Statement of financial position and retained earnings

statement are prepared from the statement of financial
position columns.

 Companies can prepare financial statements before they

journalize and post adjusting entries.

4-13 LO 1
 Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-14 LO 1
 Preparing Statements from a Worksheet

Illustration 4-3
Financial statements from a worksheet

4-15 LO 1
 Illustration 4-3
4-16
Financial statements from a worksheet
LO 1
 Preparing Adjusting Entries from a
Worksheet

 Adjusting entries are prepared from the adjustments

columns of the worksheet.

 Journalizing and posting of adjusting entries follows the

preparation of financial statements when a worksheet is
used.

4-17 LO 1
 > DO IT!

Susan Elbe is preparing a worksheet. Explain to Susan how she

should extend the following adjusted trial balance accounts to the
financial statement columns of the worksheet.

Cash Statement of financial position

(debit column)
Accumulated
Depreciation
Statement of financial position
Accounts Payable (credit column)

Dividends Income statement

Service Revenue (debit column)

Salaries and Income statement

Wages Expense (credit column)

4-18 LO 1
 Closing the Books
Learning
At the end of the accounting period, the Objective 2
Explain the process of
company makes the accounts ready for the closing the books.

next period.

Illustration 4-4
Temporary versus permanent accounts
4-19 LO 2
 Preparing Closing Entries

Closing entries formally recognize in the ledger the transfer of

 net income (or net loss) and
 Dividends
to Retained Earnings.

Companies generally journalize and post closing entries only

at the end of the annual accounting period.
Closing entries produce a zero balance in each temporary
account.

4-20 LO 2
 Illustration 4-5
Diagram of closing
• HELPFUL HINT process—corporation

The Dividends account is

closed directly to Retained
Earnings and not to Retained earnings is a
Income Summary because permanent account. All
dividends are not an other accounts are
temporary accounts.
expense.

4-21 LO 2
 Illustration 4-6
4-22
Closing entries journalized LO 2
 Posting
Closing
Entries

Illustration 4-7
Posting of closing entries

4-23 LO 2
 > DO IT!

The worksheet for Hancock Company shows the following in

the financial statement columns:
Dividends €15,000
Common stock €42,000
Net income €18,000
Prepare the closing entries at December 31 that affect equity.

4-24 LO 2
 Preparing a Post-Closing Trial Balance
Learning
Post-closing trial balance Objective 3
Describe the content
and purpose of a post-
 Lists permanent accounts and their closing trial balance.

balances after the journalizing and

posting of closing entries.
 Purpose is to prove the equality of the permanent account
balances carried forward into the next accounting period.
 Only contains balances for permanent—statement of
financial position—accounts.
 All temporary accounts will have zero balances.

4-25 LO 3
 Illustration 4-8

Illustration 4-8
4-26 Post-closing trial balance LO 3
 Learning Objective 4
The Accounting Cycle State the required steps in the
accounting cycle.

1. Analyze business transactions

9. Prepare a post-closing trial

2. Journalize the transactions
balance

8. Journalize and post closing

3. Post to ledger accounts
entries

7. Prepare financial statements 4. Prepare a trial balance

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

Illustration 4-11
4-27
Steps in the accounting cycle
LO 4
 Correcting Entries—An Avoidable Step
Learning
 Unnecessary if accounting records are Objective 5
Explain the approaches
free of errors. to preparing correcting
entries.

 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.

4-28 LO 5
 Correcting Entries—An Avoidable Step

CASE 1: On May 10, Bai Co. journalized and posted a NT$500 cash
collection on account from a customer as a debit to Cash NT$500 and
a credit to Service Revenue NT$500. The company discovered the
error on May 20, when the customer paid the remaining balance in full.

Incorrect Cash 500

entry
Service Revenue 500
Correct Cash 500
entry
Accounts Receivable 500

Correcting Service Revenue 500

entry Accounts Receivable 500

4-29 LO 5
 Correcting Entries—An Avoidable Step

CASE 2: On May 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.

Incorrect Equipment 450

entry
Accounts Payable 450
Correct Equipment 4,500
entry
Accounts Payable 4,500

Correcting Equipment 4,050

entry Accounts Payable 4,050

4-30 LO 5
 > DO IT!

Sanchez Company discovered the following errors made in

January 2017 .

1. A payment of Salaries and Wages Expense of $600 was

debited to Supplies and credited to Cash, both for $600.

2. A collection of $3,000 from a client on account was debited

to Cash $200 and credited to Service Revenue $200.

3. The purchase of supplies on account for $860 was debited

to Supplies $680 and credited to Accounts Payable $680.

Correct the errors without reversing the incorrect entry.

4-31 LO 5
 Statement of Financial Position
Learning
 Presents a snapshot at a point in time. Objective 6
Identify the sections of
a classified statement
 To improve understanding, companies of financial position.

group similar assets and similar liabilities

together.

Standard Classifications

Assets Equity and Liabilities

Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets
Illustration 4-16
Standard statement of financial position classifications
4-32 LO 6
 Illustration 4-17
Classified statement
of financial position

4-33 LO 6
 Illustration 4-17
Classified statement
of financial position

4-34 LO 6
 Intangible Assets

 Assets that do not have physical substance.

Illustration 4-18
Intangible assets section

4-35 LO 6
 Property, Plant, and Equipment

 Long useful lives.

 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.

4-36 LO 6
 Property, Plant, and Equipment

Illustration 4-19
Property, plant, and equipment section

4-37 LO 6
 Long-Term Investments

 Investments in ordinary shares and bonds of other

companies.
 Investments in non-current assets such as land or buildings
that a company is not using in its operating activities.

Illustration 4-20
Long-term investments section
4-38 LO 6
 Current Assets

 Assets that a company expects to convert to cash or use

up within one year or the operating cycle, whichever is
longer.

 Operating cycle is the average time it takes from the

purchase of inventory to the collection of cash from
customers.

4-39 LO 6
 Current Assets

Illustration 4-21
Current assets section Accounts usually listed in the reverse order they
expect to convert them into cash.

4-40 LO 6
 Equity

 Proprietorship - one capital account.

 Partnership - capital account for each partner.
 Corporation – Share Capital and Retained Earnings.

Illustration 4-22
4-41 Equity section LO 6
 Non-Current Liabilities

 Obligations a company expects to pay after one year.

Illustration 4-23
Non-current liabilities section

4-42 LO 6
 Current Liabilities

 Obligations company is to pay within the coming year or

its operating cycle, whichever is longer.

 Usually list notes payable first, followed by accounts

payable. Other items follow in order of magnitude.

 Liquidity - ability to pay obligations expected to be due

within the next year.

4-43 LO 6
 Current Liabilities

Illustration 4-24
Current liabilities section

4-44 LO 6
 Statement of Financial Position

Question
The correct order of presentation in a classified statement of
financial position for the following current assets is:

a. accounts receivable, cash, prepaid insurance, inventories.

b. cash, inventories, accounts receivable, prepaid insurance.

c. prepaid insurance, inventories, accounts receivable, cash.

d. inventories, cash, accounts receivable, prepaid insurance.

4-45 LO 6
 Statement of Financial Position

Question
In a classified statement of financial position, assets are usually
classified using the following sequence of categories:
a. current assets; non-current assets; property, plant, and
equipment; intangible assets.
b. tangible assets; property, plant, and equipment; long-term
investments; current assets.
c. current assets; long-term investments; tangible assets;
intangible assets.
d. intangible assets; property, plant, and equipment; long-
term investments; current assets.
4-46 LO 6
 > DO IT!
The following accounts were taken from the financial statements of Callahan
Company.

Match each of the following accounts to its proper statement of financial

position classification, shown below. If the item would not appear on a
statement of financial position, use “NA.”
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Non-current liabilities (NCL)
Property, plant, and equipment (PPE) Equity (E)
Intangible assets (IA)

4-47 LO 6
 > DO IT! – Comprehensive Problem
Marilyn Monroe opened Marilyn’s Maids Cleaning Service on July 1,
2020. During July, the company completed the following transactions.
July 1 Shareholders invested $15,000 cash in the business in
exchange for ordinary shares.
1 Purchased a used truck for $10,000, paying $3,000 cash and
the balance on account.
3 Purchased cleaning supplies for $1,700 on account.
5 Paid $1,800 on a one-year insurance policy, effective July 1.
12 Billed customers $4,200 for cleaning services.
18 Paid $1,000 of amount owed on truck, and $400 of amount
owed on cleaning supplies.
20 Paid $1,900 for employee salaries.
21 Collected $2,400 from customers billed on July 12.
25 Billed customers $2,100 for cleaning services.
31 Paid gasoline for the month on the truck, $400.
31 Declared and paid a $500 cash dividend.
4-48 LO 6
 > DO IT! – Comprehensive Problem

The chart of accounts for Marilyn’s Maids Cleaning Service contains

the following accounts:
No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No.
130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated
Depreciation—Equipment, No. 201 Accounts Payable, No. 212
Salaries and Wages Payable, No. 311 Share Capital—Ordinary, No.
320 Retained Earnings, No. 332 Dividends, No. 350 Income
Summary, No. 400 Service Revenue, No. 633 Gasoline Expense, No.
631 Supplies Expense, No. 711 Depreciation Expense, No. 722
Insurance Expense, and No. 726 Salaries and Wages Expense

4-49 LO 6
 > DO IT! – Comprehensive Problem
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet, and complete the
worksheet.
(1) Unbilled fees for services performed at July 31 were $1,300.
(2) Depreciation on equipment for the month was $200.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $280 of cleaning supplies on hand at July
31.
(5) Accrued but unpaid employee salaries were $630.
(d) Prepare the income statement and retained earnings statement for July,
and a classified statement of financial position at July 31, 2020.
(e) Journalize and post the adjusting entries. Use page J2 for the journal.
(f) Journalize and post the closing entries, and complete the closing process.
Use page J3 for the journal.
(g) Prepare a post-closing trial balance at July 31.

4-50 LO 6