CHAPTER 3 & 4

KEY CONCEPTS
1. Fiscal vs Calendar Years
2. Cash vs Accrual Accounting
3. Adjusting Entries
4. Correcting Entries
5. Qualities of Financial Information
6. Closing Entries
7. Accounting Cycle
8. Classified Balance Sheet
Fiscal and Calendar Years

 Monthly and quarterly time periods are called interim

periods. (Accounting periods of less than a year)
 Most large companies must prepare both quarterly and
annual financial statements.
 Fiscal Year = Accounting time period that is one year
in length.
 Calendar Year = January 1 to December 31.
 Time Period Assumption: Accounting assumption that the
economic life of a business can be divided into artificial time
periods

LO 1
Accrual- versus Cash-Basis Accounting

Accrual-Basis Accounting
 Transactions recorded in the periods in which the
events occur.
 Companies recognize revenues when they perform
services (rather than when they receive cash).
 Expenses are recognized when incurred (rather than
when paid).
 In accordance with generally accepted accounting
principles (GAAP).

LO 1
Accrual- versus Cash-Basis Accounting

Cash-Basis Accounting
 Revenues recognized when cash is received.
 Expenses recognized when cash is paid.
 Cash-basis accounting is not in accordance with
generally accepted accounting principles (GAAP)
(Nguyên tắc kế toán đc chấp nhận chung ).

LO 1
Recognizing Revenues and Expenses

REVENUE RECOGNITION PRINCIPLE

Recognize revenue in the
accounting period in which the
performance obligation is
satisfied.

LO 1
Recognizing Revenues and Expenses

EXPENSE RECOGNITION PRINCIPLE

Match expenses with revenues
in the period when the company
makes efforts that generate those
revenues.

“Let the expenses

follow the revenues.”

LO 1
Illustration 3-1
GAAP relationships in
revenue and expense
recognition

LO 1
 The Need for Adjusting Entries

Adjusting Entries (ghi nhận thu chi, cơ bản là khi có 1 hoạt động thu chi xảy ra thì có
it nhất 2 khoản phải thay đổi)
 Ensure that the revenue recognition and expense recognition principles are
followed.
 Necessary because the trial balance may not contain up-to-date and complete
data.
 Required every time a company prepares financial statements.
 Will include one income statement account and one balance sheet account.
 That can be classified as Deferrals (prepaid expense or unearned revenues) or
Accruals (Accrued revenues or Accrued Expenses)
 Such entries ensure that companies recognize revenues in the period in which the
performance obligation is satisfied and recognize expenses in the period
LO 1 in which
The Need for Adjusting Entries

Question
Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which
they are incurred.
b. revenues are recorded in the period in which
services are performed.
c. balance sheet and income statement accounts
have correct balances at the end of an accounting
period.
d. all of the above.

LO 1
 Types of Adjusting Entries
Illustration 3-2
Categories of adjusting entries

Deferrals Accruals

1. Prepaid Expenses. Expenses 1. Accrued Revenues.

deferral records paid in cash before they are Revenues for services
cash transaction used or consumed. performed but not yet received
before
revenue/expense in cash or recorded.
and
2. Unearned Revenues. 2. Accrued Expenses.
accrual records
revenue/expense Cash received before services Expenses incurred but not yet
transaction before are performed. paid in cash or recorded.
cash 

Deferral là dự toán có nghĩa là trc khi nó xảy ra, accrual là đã xảy ra rồi
LO 1
Types of Adjusting Entries

Trial Balance – Each account is analyzed to determine

whether it is complete and up-to-date.
Illustration 3-3

LO 1
DO IT! 1 Timing Concepts

A list of concepts is provided in the left column below, with a description of the
concept in the right column below. There are more descriptions provided than
concepts. Match the description of the concept to the concept.

f Accrual-basis accounting.
1. ___ (a) Monthly and quarterly time periods.
e Calendar year. (b) Efforts (expenses) should be matched
2. ___
with results (revenues).
c Time period assumption.
3. ___ (c) Accountants divide the economic life of
4. ___
b Expense recognition a business into artificial time periods.
principle. (d) Companies record revenues when they
receive cash and record expenses
when they pay out cash.
(e) An accounting time period that starts on
January 1 and ends on December 31.
(f) Companies record transactions in the
period in which the events occur.
LO 1
Supplies

Illustration: Pioneer Advertising

purchased supplies costing $2,500 on
October 5. Pioneer recorded the payment
by increasing (debiting) the asset
Supplies. This account shows a balance
of $2,500 in the October 31 trial balance.
An inventory count at the close of
business on October 31 reveals that
$1,000 of supplies are still on hand.

Oct. 31 Supplies Expense 1,500

Supplies 1,500

LO 2
Insurance

Illustration: On October 4, Pioneer

Advertising paid $600 for a one-year fire
insurance policy. Coverage began on October
1. Pioneer recorded the payment by
increasing (debiting) Prepaid Insurance. This
account shows a balance of $600 in the
October 31 trial balance. Insurance of $50
($600 ÷ 12) expires each month.

Oct. 31 Insurance Expense 50

Prepaid Insurance 50

LO 2
Depreciation

 Buildings, equipment, and motor vehicles

(assets that provide service for many years) are
recorded as assets, rather than an expense, on
the date acquired.

 Depreciation is the process of allocating the cost

of an asset to expense over its useful life. (là
sự giảm sút giá trị của một tài sản trong thời kì sử dụng)

 Depreciation does not attempt to report the actual

change in the value of the asset.

► Allocation concept, not a valuation concept.

LO 2
Depreciation

Illustration: For Pioneer Advertising, assume

that depreciation on the equipment is $480 a
year, or $40 per month.

Oct. 31
Depreciation expense 40
Accumulated depreciation 40

Accumulated Depreciation is called

a contra asset account.

LO 2
Depreciation

STATEMENT PRESENTATION
 Accumulated Depreciation is a contra asset account
(credit).
 Offsets related asset account on the balance sheet.
 Book value is the difference between the cost of any
depreciable asset and its accumulated depreciation.
Illustration 3-8

LO 2
 Unearned Revenues
increasing (crediting) a liability account

Illustration: Pioneer Advertising received

$1,200 on October 2 from R. Knox for
advertising services expected to be
completed by December 31. Unearned
Service Revenue shows a balance of $1,200
in the October 31 trial balance. Analysis
reveals that the company performed $400 of
services in October.

Oct. 31 Unearned Service Revenue 400

Service Revenue 400

LO 2
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these

selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
An analysis of the accounts shows the following.
1. Insurance expires at the rate of $100 per month.
2. Supplies on hand total $800.
3. The equipment depreciates $200 a month.
4. During March, services were performed for one-half of the unearned
service revenue.
Prepare the adjusting entries for the month of March.
LO 2
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these

selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.

1. Insurance expires at the rate of $100 per month.

Insurance Expense 100

Prepaid Insurance 100

LO 2
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these

selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.

2. Supplies on hand total $800.

Supplies Expense 2,000

Supplies 2,000

LO 2
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these

selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.

3. The equipment depreciates $200 a month.

Depreciation Expense 200

Accumulated Depreciation—Equipment 200

LO 2
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond Company, on March 31, 2017, includes these

selected accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment $5,000
Unearned Service Revenue 9,200
Prepare the adjusting entries for the month of March.

4. During March, services were performed for one-half of the unearned

service revenue.

Unearned Service Revenue 4,600

Service Revenue 4,600

LO 2
Accrued Revenues

Illustration: In October Pioneer Advertising

performed services worth $200 that were not
billed to clients on or before October 31.

Oct. 31

Accounts Receivable 200

Service Revenue 200

On November 10, Pioneer receives cash of $200 for the services

performed.

Nov. 10 Cash 200

Accounts Receivable 200
LO 3
Accrued Expenses

ACCRUED INTEREST
Illustration: Pioneer Advertising signed a three-month note
payable in the amount of $5,000 on October 1. The note requires
Pioneer to pay interest at an annual rate of 12%.
Illustration 3-17

Oct. 31 Interest expense 50

Interest payable 50

LO 3
Summary of Basic Relationships
Illustration 3-22

LO 3
DO IT! 3 Adjusting Entries for Accruals

Micro Computer Services began operations on August 1, 2017. At the

end of August 2017, management prepares monthly financial
statements. The following information relates to August.
1. At August 31, the company owed its employees $800 in
salaries and wages that will be paid on September 1.
2. On August 1, the company borrowed $30,000 from a local
bank on a 15-year mortgage. The annual interest rate is 10%.
3. Revenue for services performed but unrecorded for August
totaled $1,100.
Prepare the adjusting entries needed at August 31, 2017.

LO 3
DO IT! 3 Adjusting Entries for Accruals

Prepare the adjusting entries needed at August 31, 2017.

1. At August 31, the company owed its employees $800 in
salaries and wages that will be paid on September 1.
Salaries and Wages Expense 800
Salaries and Wages Payable 800

2. On August 1, the company borrowed $30,000 from a local

bank on a 15-year mortgage. The annual interest rate is 10%.
Interest Expense250
Interest Payable 250

3. Revenue for services performed but unrecorded for August

totaled $1,100.
Accounts Receivable 1,100
Service Revenue 1,100
LO 3
DO IT! 4 Trial Balance

(a) Determine the net income for the quarter April 1 to June 30.
(b) Determine the total assets and total liabilities at June 30, 2017, for Skolnick Co.
(c) Determine the amount of owner’s capital at June 30, 2017. LO 4
DO IT! 4 Trial Balance

LO 4
DO IT! 4 Trial Balance

LO 4
DO IT! 4 Trial Balance

LO 4
LEARNING APPENDIX 3B: Discuss financial reporting
6
OBJECTIVE concepts.

Qualities of Useful Information

Two fundamental qualities, relevance and faithful representation.

Relevance
 Make a difference in a business decision.
 Provides information that has predictive value and
confirmatory value.
 Materiality is a company-specific aspect of relevance.
► An item is material when its size makes it likely to influence
the decision of an investor or creditor.

LO 6
Correcting Entries — An Avoidable Step

 Unnecessary if accounting records are free of errors.

 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.

LO 3
Correcting Entries—An Avoidable Step

CASE 1: On May 10, Mercato Co. journalized and posted a $50 cash
collection on account from a customer as a debit to Cash $50 and a
credit to Service Revenue $50. The company discovered the error on
May 20, when the customer paid the remaining balance in full.

Incorrect Cash 50
entry
Service Revenue
50
Correct Cash 50
entry
Accounts Receivable
50
Correcting Service Revenue 50
entry Accounts Receivable
50

LO 3
Correcting Entries—An Avoidable Step

CASE 2: On May 18, Mercato purchased on account equipment

costing $450. The transaction was journalized and posted as a debit to
Equipment $45 and a credit to Accounts Payable $45. The error was
discovered on June 3.

Incorrect Equipment 45
entry
Accounts Payable
45
Correct Equipment 450
entry
Accounts Payable
450
Correcting Equipment 405
entry Accounts Payable
405

LO 3
LO 3
DO IT! 3 Correcting Entries

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.

LO 3
DO IT! 3 Correcting Entries

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.

Correct the error without reversing the incorrect entry.

Salaries and Wages Expense 600

Supplies 600

LO 3
DO IT! 3 Correcting Entries

Sanchez Company discovered the following errors made in

January 2017 .

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

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

Correct the error without reversing the incorrect entry.

Service Revenue 200

Cash 2,800
Accounts Receivable 3,000

LO 3
DO IT! 3 Correcting Entries

Sanchez Company discovered the following errors made in

January 2017 .

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

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

Correct the error without reversing the incorrect entry.

Supplies ($860 - $680) 180

Accounts Payable 180

LO 3
Qualities of Useful Information

Two fundamental qualities, relevance and faithful representation.

Faithful Representation
 Information accurately depicts what really happened.
 Information must be
► complete (nothing important has been omitted),

► neutral (is not biased toward one position or another), and

► free from error.

LO 6
 Qualities of Useful Information

ENHANCING QUALITIES

Comparability Information is Information has the

results when verifiable if quality of
different companies independent understandability
use the same observers, using the if it is presented in a
accounting same methods, obtain clear and concise
principles. similar results. fashion.

Consistency means
that a company uses For accounting information
the same accounting to have relevance, it must
principles and methods be timely.
from year to year.

LO 6
Assumptions in Financial Reporting
Illustration 3B-2

Monetary Unit Economic Entity

Requires that only those things States that every economic
that can be expressed in entity can be separately
money are included in the identified and accounted
accounting records. for.

LO 6
Assumptions in Financial Reporting
Illustration 3B-2

Time Period Going Concern

States that the life of a The business will remain
business can be divided into in operation for the
artificial time periods. foreseeable future.

LO 6
Principles of Financial Reporting

MEASUREMENT PRINCIPLES

Historical Cost Fair Value

Or cost principle, Indicates that
dictates that assets and
companies record liabilities should
assets at their be reported at fair
cost. value (the price
received to sell an
asset or settle
a liability).

LO 6
Principles of Financial Reporting

Revenue Expense
Full Disclosure
Recognition Recognition
Principle
Principle Principle
Requires that Dictates that Requires that
companies efforts companies disclose
recognize revenue (expenses) be all circumstances
in the accounting matched with and events that
period in which the results would make a
performance (revenues). Thus, difference to
obligation is expenses follow financial
satisfied. revenues. statement users.

LO 6
LEARNING
OBJECTIVE
1 Prepare a worksheet.

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.

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

STEP 1: PREPARE A TRIAL BALANCE ON THE WORKSHEET

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Owner's Capital 10,000
Owner's Drawings 500
Service Revenue 10,000

Salaries and Wages Exp. 4,000

Rent Exp. 900
Totals 28,700 28,700

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

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

Adjusting
Journal
Entries
(Chapter 3)

LO 1
 Steps in Preparing a Worksheet Illustration 4-3

STEP 2: ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Accounts Payable 2,500
(a) Supplies Used.
Unearned Revenue 1,200 (d) 400 (b) Insurance Expired.
Owner's Capital 10,000
Owner's Drawings 500
(c) Depreciation Expensed.
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 Exp. 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
Interest Expense (f) 50
Enter adjustment amounts, total
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.

LO 1
 Steps in Preparing a Worksheet Illustration 4-4

STEP 3: COMPLETE THE ADJUSTED TRIAL BALANCE COLUMNS

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Owner's Capital 10,000 10,000
Owner's Drawings 500 500
Service Revenue 10,000 (d) 400 10,600
(e) 200
Salaries and Wages Exp. 4,000 (g) 1,200 5,200
Rent Exp. 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
Net Income
Totals Total the adjusted trial balance
columns and check for equality.
LO 1
 Steps in Preparing a Worksheet Illustration 4-5

STEP 4: EXTEND AMOUNTS TO FINANCIAL STATEMENT COLUMNS

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 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 Exp. 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
Totals Extend adjusted trial balance amounts to
appropriate financial statement columns.
LO 1
 Steps in Preparing a Worksheet Illustration 4-6

STEP 5: TOTAL COLUMNS, COMPUTE NET INCOME (LOSS)

Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
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
Owner's Capital 10,000 10,000 10,000
Owner's Drawings 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 Exp. 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.
LO 1
LEARNING Prepare closing entries and a post-closing trial
OBJECTIVE
2 balance.

At the end of the accounting period, the company makes

the accounts ready for the next period.

Illustration 4-8
Temporary versus permanent accounts
LO 2
Preparing Closing Entries

Closing entries formally recognize in the ledger the transfer of

 net income (or net loss) and
 owner’s drawings
to owner’s capital.

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.

LO 2
Preparing Closing Entries

Illustration 4-9
Diagram of closing
process—proprietorship

Owner’s Capital is a
permanent account. All
other accounts are
temporary accounts.

LO 2
 Preparing Closing Entries

CLOSING
ENTRIES
ILLUSTRATED

Illustration 4-10
Closing entries
journalized
 Posting
Closing
Entries

Illustration 4-11

LO 2
Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account balances

carried forward into the next accounting period. Illustration 4-12
Post-closing trial balance

LO 2
DO IT! 2 Closing Entries

The worksheet for Hancock Company shows the following in the

financial statement columns:
Owner’s Drawings $15,000
Owner’s Capital $42,000
Net income $18,000
Prepare the closing entries at December 31 that affect owner’s
capital.

Income Summary 18,000

Owner’s Capital 18,000
Owner’s Capital 15,000
Owner’s Drawings 15,000

LO 2
LEARNING Explain the steps in the accounting cycle
3
OBJECTIVE and how to prepare correcting entries.

Illustration 4-15
1.
1. Analyze
Analyze business
business transactions
transactions

9.
9. Prepare
Prepare aa post-closing
post-closing 2.
2. Journalize
Journalize the
the
trial
trial balance
balance transactions
transactions

8.
8. Journalize
Journalize and
and post
post 3.
3. Post
Post to
to ledger
ledger accounts
accounts
closing
closing entries
entries

7.
7. Prepare
Prepare financial
financial 4.
4. Prepare
Prepare aa trial
trial balance
balance
statements
statements

6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial 5.
5. Journalize
Journalize and
and post
post
balance
balance adjusting
adjusting entries
entries

LO 3
The Classified Balance Sheet
Illustration 4-21

LO 4
The Classified Balance Sheet
Illustration 4-21

LO 4
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 that it takes to
purchase inventory, sell it on account, and then collect
cash from customers.

LO 4
Current Assets
Illustration 4-22

Usually listed in the order they expect to convert them into cash.

LO 4
Current Assets

Question
The correct order of presentation in a classified balance sheet
for the following current assets is:
a. accounts receivable, cash, prepaid insurance, inventory.
b. cash, inventory, accounts receivable, prepaid insurance.
c. cash, accounts receivable, inventory, prepaid insurance.
d. inventory, cash, accounts receivable, prepaid insurance.

LO 4
Long-Term Investments

 Investments in stocks and bonds of other companies.

 Investments in long-term assets such as land or buildings
that is not currently being used in operating activities.
 Long-term notes receivable.
Illustration 4-23

LO 4
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.

LO 4
 Property, Plant, and Equipment

Illustration 4-24

LO 4
Intangible Assets

 Long-lived assets that do not have physical substance.

Illustration 4-25

LO 4
The Classified Balance Sheet

Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

LO 4
Current Liabilities

 Obligations the 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.
 Common examples are accounts payable, salaries and
wages payable, notes payable, interest payable, income
taxes payable current maturities of long-term obligations.
 Liquidity - ability to pay obligations expected to be due
within the next year.

LO 4
 Current Liabilities

Illustration 4-26

LO 4
LO 4
 Long-Term Liabilities

 Obligations a company expects to pay after one year.

Illustration 4-27

LO 4
The Classified Balance Sheet

Question
Which of the following is not a long-term liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable

LO 4
Owner’s Equity

 Proprietorship - one capital account.

 Partnership - capital account for each partner.
 Corporation - Common Stock and Retained Earnings.

Illustration 4-28

LO 4
DO IT! 4 Balance Sheet Classifications

The following accounts were taken from the financial statements of Callahan
Company.

Match each of the following accounts to its proper balance sheet

classification, shown below. If the item would not appear on a balance sheet,
use “NA.”
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Owner’s equity (OE)
Intangible assets (IA)

LO 4