Completing the Accounting Cycle
Chapter 4
Wild and Shaw
Fundamental Accounting Principles
25th Edition
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Chapter 4 Learning Objectives
CONCEPTUAL
C1 Explain and prepare a classified balance sheet.
ANALYTICAL
A1 Compute and analyze the current ratio.
PROCEDURAL
P1 Prepare a work sheet and explain its usefulness.
P2 Prepare closing entries and a post-closing trial balance.
P3 Appendix 4A – Prepare reversing entries and explain their purpose.
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Learning Objective P1
Prepare a work sheet and
explain its usefulness.
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Benefits of a Work Sheet
Helps in
Reduces risk of preparing
errors. financial
statements.
Not a
required
report. Shows the
Links accounts
and adjustments effects of
to financial proposed
statements. transactions.
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Learning Objective P1: Prepare a work sheet and explain its usefulness.
Use of a Work Sheet
Five steps:
Step 1: Enter Unadjusted Trial Balance
Step 2: Enter Adjustments
Step 3: Prepare Adjusted Trial Balance
Step 4: Sort Adjusted Trial Balance Amounts
to Financial Statements
Step 5: Total Statement Columns, Compute
Income or Loss, and Balance Columns
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Learning Objective P1: Prepare a work sheet and explain its usefulness.
Work Sheet Example
Exhibit
4.1
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Learning Objective P1: Prepare a work sheet and explain its usefulness.
Learning Objective P2
Prepare closing entries and a
post-closing trial balance.
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4-8
Closing Process
1. Resets revenue,
expense, and
Identify accounts
withdrawal account
for closing.
balances to zero at the
end of the period.
Record and post
2. Updates the balance in
closing entries.
the owner’s capital
account to match the
amount reported on
the statement of Prepare post-closing
owner’s equity and the trial balance.
balance sheet.
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
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Temporary and
Permanent Accounts
Revenues Assets
Withdrawals
Liabilities
Expenses
Owner’s
Capital
Temporary Permanent
Accounts Accounts
Income
Summary The closing process
applies only to
temporary accounts.
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
4 - 10
Recording Closing Entries
1. Close Credit Balances in Revenue Accounts to
Income Summary.
2. Close Debit Balances in Expense accounts to
Income Summary.
3. Close Income Summary account to Owner’s
Capital.
4. Close Withdrawals to Owner’s Capital.
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
4 - 11
Recording Closing Entries Example
Exhibit
4.3
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
Post-Closing Trial Balance
List of permanent accounts and their
balances after posting closing entries.
Total debits and credits must be equal.
All temporary accounts have a zero
balance.
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
Post-Closing Trial Balance Example
Exhibit
4.6
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
4 - 14
Accounting Cycle
Exhibit
4.7
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Learning Objective P2: Prepare closing entries and a post-closing trial balance.
Learning Objective C1
Explain and prepare a
classified balance sheet.
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4 - 16
Classified Balance Sheet
Exhibit
4.8
Current items are expected to come due (collected and
owed) within the longer of one year or the company’s
normal operating cycle.
Most operating cycles are less than one year, so most
companies use a one year period in deciding what assets
and liabilities are current.
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Learning Objective C1: Explain and prepare a classified balance sheet.
4 - 17
Classified Balance Sheet Example
Exhibit
4.9
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Learning Objective C1: Explain and prepare a classified balance sheet.
4 - 18
Current Assets
Current assets are expected to be sold,
collected, or used within one year or the
company’s operating cycle, whichever is
longer.
Examples: cash, short-term investments,
accounts receivable, short-term notes
receivable, merchandise inventory, and
prepaid expenses.
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Learning Objective C1: Explain and prepare a classified balance sheet.
4 - 19
Long-Term Investments
Long-term investments are expected to be held for
more than one year or the operating cycle.
Examples: notes receivable and investments in stocks
and bonds expected to be held for more than the
longer of one year or the operating cycle.
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Learning Objective C1: Explain and prepare a classified balance sheet.
4 - 20
Plant Assets
Plant assets are tangible long-lived assets used to
produce or sell products and services.
Examples: equipment, machinery, buildings, and
land that are used to sell products and services.
Also called property, plant, and equipment (PP&E)
or fixed assets.
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Learning Objective C1: Explain and prepare a classified balance sheet.
4 - 21
Intangible Assets
Intangible assets are long-term assets that benefit
business operations but lack physical form.
Examples: patents, trademarks, copyrights,
franchises, and goodwill.
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Learning Objective C1: Explain and prepare a classified balance sheet.
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Current Liabilities
Current liabilities are liabilities due within the longer of
one year or the company’s operating cycle.
Examples: accounts payable, wages payable, taxes
payable, interest payable, and unearned revenues.
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Learning Objective C1: Explain and prepare a classified balance sheet.
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Long-Term Liabilities
Long-term liabilities are liabilities not due within the
longer of one year or the company’s operating cycle.
Examples: notes payable, mortgages payable, bonds
payable, and lease obligations.
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Learning Objective C1: Explain and prepare a classified balance sheet.
4 - 24
Equity
Equity is the owner’s claim on the assets.
For a proprietorship, reported in owner’s capital
account.
Equity is not separated into current and noncurrent
categories.
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Learning Objective C1: Explain and prepare a classified balance sheet.
Learning Objective A1
Compute and analyze the
current ratio.
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4 - 26
Current Ratio
Helps assess the company’s ability to pay its
debts in the near future
Exhibit
Current assets
Current ratio = Current liabilities 4.10
Exhibit
4.11
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Learning Objective A1: Compute and analyze the current ratio.
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Exercises
4-27
4 - 28
Exercise
4-28
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4-29
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