Ch04 - Financial Accounting

Financial Accounting

Instructor : Gustavo Tanaka

Chapter : 4

Completing the Accounting Cycle

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.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Using a Using a WorksheetWorksheet

Steps in preparation

Preparing financial statements

Preparing adjusting entries

Intangible assets

Property, plant, and equipment

Long-term investments

Current assets

Equity

Non-current liabilities

Current liabilities

Reversing entries—An optional step

Correcting entries—An avoidable step

Preparing closing entries

Posting closing entries

Preparing a post-closing trial balance

Closing the Closing the BooksBooks

Summary of Summary of Accounting Accounting

CycleCycle

Summary of Summary of Accounting Accounting

CycleCycle

Classified Classified Statement of Statement of

Financial Financial PositionPosition

Classified Classified Statement of Statement of

Financial Financial PositionPosition

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

Integral Case 1

1End-of-Period Spreadsheet (Work Sheet)Exhibit 1

Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Accounts are listed in the Trial Balance column using the ending balance found in the general ledger.

Flow of Accounting Information

Trial Balance

Adjustments are entered here. Two possibilities:

1. Deferrals – Existing balances are changed.2. Accruals – New information is entered.

Adjustments are combined with the trial balance. Account

balances are now adjusted.

Trial Balance

Revenue and expense balances in the Adjusted Trial Balance column are extended

to the Income Statement column.

Adjusted TB

Income State. Balance Sheet

Asset, liability, capital stock, and dividends balances in the Adjusted

Trial Balance column are extended to the Balance Sheet column.

Adjusted TB

Income State. Balance Sheet

The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column.

1. Dividends2. Utilities Expense3. Accumulated

Depreciation—Equipment4. Unearned Rent

5. Fees Earned6. Accounts Payable7. Rent Revenue8. Supplies

Example Exercise 4-11

Flow of Accounts into Financial Statements

1. Balance Sheet column2. Income Statement column3. Balance Sheet column4. Balance Sheet column5. Income Statement column6. Balance Sheet column7. Income Statement column8. Balance Sheet column

1Example Exercise 4-1 (continued)

For Practice: PE 4-1A, PE 4-1B

Follow My Example 4-1

The income statement is prepared directly from the Income Statement or Adjusted Trial Balance columns of the spreadsheet (work sheet).

to retained earnings statement

Financial Statements Prepared from Work SheetExhibit 2

In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for Dimple Consulting Co. for the current year, the Debit column total is $678,450, and the Credit column total is $599,750 before the amount of net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet (work sheet), what is the amount of net income or net loss?

Determining the Net Income from End-of-Period Spreadsheet

A net income of $78,700 ($678,450 – $599,750) would be reported. When the Debit column of the Balance Sheet columns is more than the Credit column, net income is reported. If the Credit column exceeds the Debit column, a net loss is reported.

The first item presented on the retained earnings statement is the balance of the Retained Earnings account at the beginning of the period.

Retained Earnings Statement

from the income statement

to the balance sheet

2Financial Statements Prepared from Work Sheet (continued)

Exhibit 2

Zack Gaddis owns and operates Gaddis Employment Services. On January 1, 2009, Retained Earnings had a balance of $186,000. During the year, an additional $40,000 of capital stock was issued for cash and dividends of $25,000 were paid. For the year ended December 31, 2009, Gaddis Employment Services reported a net income of $18,750. Prepare a retained earnings statement for the year ended December 31, 2009.

Retained Earnings Statement

Retained earnings, January 1, 2009 $186,000Dividends $ 25,000Less net income 18,750Decrease in retained earnings 6,250Retained earnings, December 31, 2009 $179,750

GADDIS EMPLOYMENT SERVICESRETAINED EARNINGS STATEMENT

For the Year Ended December 31, 2009

The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance columns of the spreadsheet (or work sheet).

A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

Balance Sheet

Cash and other assets that are expected to be converted into cash, sold or used up usually within a year or less, through the normal operations of the business, are called current assets.

• Cash

• Accounts Receivable

• Supplies

Notes receivable are written promises by the customer to pay the amount of the note and possibly interest at an agreed rate.

Property, plant, and equipment (also called fixed assets) include assets that depreciate over a period of time. Land is an exception as it is not subject to depreciation.• Equipment

• Machinery

• Buildings

• Land

Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets are called current liabilities.• Accounts payable

• Wages payable

• Interest payable

• Unearned fees

Liabilities not due for a long time (usually more than one year) are long-term liabilities. • Notes payable

• Mortgage payable

• Bond payable

Stockholders’ equity is the stockholders’ right to the assets of the business. The stockholders’ equity consists of capital stock and retained earnings. The stockholders’ equity is added to the total liabilities, and the total must be equal to the total assets.

from the retained earnings statement

2Financial Statements Prepared from Work Sheet (continued)Exhibit 2

The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability; (d) long-term liability; or (e) stockholders’ equity section of the December 31, 2009 balance sheet of Hindsight Consulting.

1. Capital Stock 5. Cash2. Notes Receivable (due 6. Unearned Rent

in 6 months) 7. Accumulated Depr.—

3. Notes Payable (due in Equipment2011) 8. Accounts Payable

4. Land

Classified Balance Sheet

1. Stockholders’ equity2. Current asset3. Long-term liability4. Property, plant, and

equipment

5. Current asset6. Current liability7. Property, plant, and

equipment

8. Current liability

Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.

Closing Entries

To report amounts for only one period, temporary accounts should have zero balances at the beginning of the period. At the end of the period the revenue and expense account balances are transferred to Income Summary.

Closing Entries

The balance of Income Summary is then transferred to Retained Earnings. The balance of the Dividends account is also transferred to Retained Earnings. The entries that transfer these balances are called closing entries.

Closing Entries

The Closing ProcessExhibit 3

Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Income Summary 16,840

16,960

3Flowchart of Closing Entries for NetSolutions (continued) Exhibit 4

Wages Expense

Rent Expense

Depreciation Expense

Utilities Expense

Supplies Expense

Insurance Expense

Bal. 200

Miscellaneous Expense

Bal. 455

Income Summary

Debit Income Summary for the total expenses and

credit each expense account for its balance.

16,960

Bal. 4,525

Bal. 1,600

Bal. 50

Bal. 985

Bal. 2,040

3Flowchart of Closing Entries for NetSolutions (continued)Exhibit 4

Retained Earnings

Bal. 0

Dividends

Bal. 4,000

Income Summary

16,9609,8557,105

Debit Income Summary for the

amount of its balance (in this case, the net income) and credit Retained Earnings.

3Flowchart of Closing Entries for NetSolutions (continued)

Exhibit 4

Retained Earnings

Bal. 25,0007,105

Dividends

Bal. 4,000 4,000

4,000 Debit Retained Earnings for the

balance of the dividends account, and

credit the dividends account.

Flowchart of Closing Entries for NetSolutions (continued)

Exhibit 4

Exhibit 4 Flowchart of Closing Entries for NetSolutions (summary)

Stockholders’ Equity

Closing Entries for NetSolutions

Step 2

Step 3

Step 1

Step 4

Exhibit 5

After the closing entries are posted, all of the temporary accounts have zero balances.

Closing Entries

3Ledger for NetSolutions (continued)Exhibit 6

Ledger for NetSolutions (continued)

3Exhibit 6

Ledger for NetSolutions (continued)Exhibit 6

Ledger for NetSolutions (concluded)Exhibit 6

After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are taken from the ledger of Cabriolet Services Co.

Retained Earnings

$615,850Dividends

25,000Fees Earned

380,450Wages Expense

250,000Rent Expense

65,000Supplies Expense

18,250Miscellaneous Expense

Journalize the four entries required to close the accounts.

Closing Entries

July 31 Fees Earned…………………………….. 380,450Income Summary…………………. 380,450

31 Income Summary……………………… 339,450Wages Expense…………………… 250,000Rent Expense……………………… 65,000Supplies Expense………………… 18,250Miscellaneous Expense…………. 6,200

31 Income Summary………………………. 41,000Retained Earnings…...…………… 41,000

31 Retained Earnings……………………… 25,000Dividends……………….………….. 25,000

A post-closing trial balance is prepared after the closing entries have been posted. The purpose of the PCTB is to verify that the ledger is in balance at the beginning of the next period.

Post-Closing Trial Balance

Post-Closing Trial BalanceExhibit 7

Integral Case 2

A multiple-column form used in preparing financial statements.

Not a permanent accounting record.

Five step process.

Use of worksheet is optional.

Using A WorksheetUsing A WorksheetUsing A WorksheetUsing A Worksheet

SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

Worksheet

Steps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a WorksheetSteps in Preparing a Worksheet

Illustration 4-1

Illustration:

Illustration 4-2Preparing a trial balance

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 Prepaid Insurance 600 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 Share Capital 10,000 Dividends 500 Service Revenue 10,000

Salaries Expense 4,000 Rent 900

Totals 28,700 28,700

Financial PositionAdjusted Income

Trial Balance Adjustments Trial Balance StatementStatement of

1. Prepare a Trial Balance on the Worksheet

Trial balance amounts come directly from ledger accounts.

Include all accounts with balances.

56 SO 1 Prepare a worksheet.SO 1 Prepare a worksheet.

Illustration 3-22General journal showing adjusting entries

Adjusting Journal Entries

(Chapter 3)

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 Advertising Supplies 2,500 1,500 Prepaid Insurance 600 50 Office Equipment 5,000 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 1,200 400 Share Capital 10,000 Dividends 500 Service Revenue 10,000 400

200 Salaries Expense 4,000 1,200 Rent 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 Insurance Expense 50 Accumulated Depreciation 40 Depreciation Expense 40 Accounts Receivable 200 Interest Expense 50 Interest Payable 50 Salaries Payable 1,200

Totals 3,440 3,440

2. Enter the Adjustments in the Adjustments Columns

(a)(b)

(e)(f)

(f)(g)

Enter adjustment amounts, total adjustments columns,and check for equality.

Add additional accounts as needed.

Adjustments Key:

(a) Supplies Used.(b) Insurance Expired.(c) Depreciation Expensed.(d) Service Revenue Earned.(e) Service Revenue Accrued.(f) Interest Accrued.(g) Salaries Accrued.

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Share Capital 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600

200 Salaries Expense 4,000 1,200 5,200 Rent 900 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 Insurance Expense 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 Accounts Receivable 200 200 Interest Expense 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190

3. Complete the Adjusted Trial Balance Columns

(a)(b)

(e)(f)

(f)(g)

Total the adjusted trial balance columns and check for equality.

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 Prepaid Insurance 600 50 550 Office Equipment 5,000 5,000 Notes Payable 5,000 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 400 800 Share Capital 10,000 10,000 Dividends 500 500 Service Revenue 10,000 400 10,600 10,600

200 Salaries Expense 4,000 1,200 5,200 5,200 Rent 900 900 900

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 Interest Expense 50 50 50 Interest Payable 50 50 Salaries Payable 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600

Statement of Adjusted IncomeTrial Balance Adjustments Trial Balance Statement Financial Position

4. Extend Amounts to Financial Statement Columns

(a)(b)

(e)(f)

(f)(g)

Extend all revenue and expense account balances to the income statement columns.

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office 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 1,200 400 800 800 Share Capital 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 1,200 1,200 1,200

Totals 3,440 3,440 30,190 30,190 7,740 10,600 22,450 19,590

Financial Position Adjusted Income

Trial Balance Adjustments Trial Balance Statement Statement of

SO 1 Prepare a SO 1 Prepare a worksheet.worksheet.

4. Extend Amounts to Financial Statement Columns

Extend all asset, liability, and equity account balances to the statement of

financial position columns.

(a)(b)

(e)(f)

(f)(g)

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 15,200 15,200 15,200 Advertising Supplies 2,500 1,500 1,000 1,000 Prepaid Insurance 600 50 550 550 Office 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 1,200 400 800 800 Share Capital 10,000 10,000 10,000 Dividends 500 500 500 Service Revenue 10,000 400 10,600 10,600

Totals 28,700 28,700

Advertising Supplies Expense 1,500 1,500 1,500 Insurance Expense 50 50 50 Accumulated Depreciation 40 40 40 Depreciation Expense 40 40 40 Accounts Receivable 200 200 200 Interest Expense 50 50 50 Interest Payable 50 50 50 Salaries Payable 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

Financial Position Adjusted Income

Trial Balance Adjustments Trial Balance Statement Statement of

5. Total Columns, Compute Net Income (Loss)

(a)(b)

(e)(f)

(f)(g)

Compute Net Income or Net Loss.

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 journalize and post adjusting entries.

Preparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a WorksheetPreparing Financial Statements from a Worksheet

Worksheet

Illustration 4-4

The 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.

Preparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a Worksheet

Adjusting Entries

Preparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a WorksheetPreparing Adjusting Entries from a Worksheet

Illustration 3-22General journal showing adjusting entries

Adjusting Journal Entries

(Chapter 3)

At the end of the accounting period, the company makes the accounts ready for the next period.

Closing the BooksClosing the BooksClosing the BooksClosing the Books

SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.

Illustration 4-5

Closing entriesClosing entries formally recognize, in the general ledger, the transfer of

net income (or net loss) and

dividends

to Retained Earnings.

SO 2 Explain the process of closing the books.SO 2 Explain the process of closing the books.

Closing entries are only at the end of the annual accounting period.

SO 2SO 2

Illustration 4-6

Retained Earnings is a permanent account; all

other accounts are temporary accounts.

Dividends are closed directly to Retained Earnings and not to Income Summary

because Dividends are not an expense.

Closing entries

need to be

posted

Illustration 4-7Closing entries journalized

Posting closing entries

Illustration 4-8Posting of closing entries

Purpose is to prove the equality of the permanent account balances after journalizing and posting of closing entries.

Preparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial BalancePreparing a Post-Closing Trial Balance

Temporary accounts will have zero balances.

Illustration 4-9

SO 3SO 3

Net income is shown on a worksheet in the:

a. income statement debit column only.

b. statement of financial position debit column only.

c. income statement credit column and statement of financial position debit column.

d. income statement debit column and statement of financial position credit column.

Review Question

Summary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting CycleSummary of the Accounting Cycle

1. Analyze business transactions1. Analyze business transactions

2. Journalize the transactions 2. Journalize the transactions

6. Prepare an adjusted trial balance

7. Prepare financial statements

8. Journalize and post closing entries

9. Prepare a post-closing trial balance

4. Prepare a trial balance4. Prepare a trial balance

3. Post to ledger accounts3. Post to ledger accounts

5. Journalize and post adjusting entries

Illustration 4-12

SO 4 State the required steps in the accounting cycle.SO 4 State the required steps in the accounting cycle.

Integral Case 2

Correcting entries

are unnecessary if the records are error-free.

are 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.

Correcting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable StepCorrecting Entries—An Avoidable Step

SO 5 Explain the approaches to preparing correcting entries.SO 5 Explain the approaches to preparing correcting entries.

Illustration (Case 1):Illustration (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.

Cash 50Incorrect entry Service revenue

50Cash 50Correct

entry Accounts receivable 50Service revenue 50Correcting Correcting

entryentry Accounts receivable 50

Illustration (Case 2):Illustration (Case 2): On May 18, Mercato purchased on account office equipment costing $450. The transaction was journalized and posted as a debit to Delivery Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3.

Delivery equipment 45Incorrect entry Accounts payable

45Office equipment 450

Accounts payable 450

Office equipment 450Correcting Correcting

entryentryDelivery equipment

45Accounts payable 405

Correct entry

The Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial PositionThe Classified Statement of Financial Position

SO 6 Identify the sections of a classified statement of financial position.SO 6 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, and equipment Non-current liabilities

Long-term investments Current liabilities

Current assets

Illustration 4-17Standard Classifications

Assets that do not have physical substance.

Intangible Assets

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.

Property, Plant, and Equipment

Illustration 4-20

Property, Plant, and Equipment

(in billions)

₩₩₩

Investments in stocks and bonds of other companies.

Investments in long-term assets such as land or buildings that a company is not currently using in its operating activities.

Long-Term Investments

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.

Current Assets

Illustration 4-22

Current Assets

Review Question

Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, are called:

a. Current assets.

b. Intangible assets.

c. Long-term investments.

d. Property, plant, and equipment.

Proprietorship - one capital account.

Partnership - capital account for each partner.

Corporation – Share Capital and Retained Earnings.

Equity

Illustration 4-23

Obligations a company expects to pay after one year.

Non-current Liabilities

Which of the following is not a non-current liability?

a. Bonds payable

b. Current maturities of long-term obligations

c. Long-term notes payable

d. Mortgages payable

Review Question

Which of the following is not a non-current liability?

a. Bonds payable

b. Current maturities of long-term obligations

c. Long-term notes payable

d. Mortgages payable

Obligations the company is to pay within the coming year.

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.

Current Liabilities

Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP

Procedures used to prepare the worksheet are the same for

all companies under both IFRS and GAAP.

Both GAAP and IFRS are consistent regarding the type of

financial statements prepared.

IFRS requires that specific items be reported on the

statement of financial position, whereas no such general

standard exists in GAAP.

Key DifferencesKey Differences

o Both require note disclosures on accounting policies and

judgments.

o Comparative prior period information must be presented

and financial statements must be prepared annually.

o Current/noncurrent classification for assets and liabilities is

normally required.

o Like IFRS, a classified statement of financial position is

usually used under GAAP.

SimilaritiesSimilarities

IFRS companies may report PP&E first in their statements of

financial position. This presentation is not used under

Under IFRS, companies, under certain conditions, can

report property, plant and equipment at cost or at fair value.

While the use of the term “reserve” is discouraged by

GAAP, it is used extensively under IFRS.

Key DifferencesKey Differences

The IASB and FASB are working on a project to converge

their standards related to financial statement presentation.

Proposal is that each of the statements will be organized in

the same format.

The same classifications used in the statement of financial

position would also be used in the income statement and

the statement of cash flows.

Looking to the FutureLooking to the Future

It is often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period.

Companies make a reversing entry at the beginning of the next accounting period.

Each reversing entry is the exact opposite of the adjusting entry made in the previous period.

The use of reversing entries does not change the amounts reported in the financial statements.

SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Reversing Entries

APPENDIX Reversing EntriesReversing EntriesAPPENDIX Reversing EntriesReversing Entries

99 SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Illustration: To illustrate the optional use of reversing entries for

accrued expenses, we will use the salaries expense transactions for

Pioneer Advertising Agency.

1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries

earned between October 15 and October 26.

2. October 31 (adjusting entry): Salaries earned between October

29 and October 31 are $1,200. The company will pay these in the

November 9 payroll.

3. November 9 (subsequent salary entry): Salaries paid are $4,000.

Of this amount, $1,200 applied to accrued wages payable and

$2,800 was earned between November 1 and November 9.

With Reversing Entries (per appendix)

SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Initial Salary Entry

Oct. 26 Same entry

Adjusting Entry

Closing Entry

Reversing Entry

Salaries payable 1,200Salaries expense

1,200Subsequent Salary Entry

Oct. 31 Same entry

Nov. 1

Salaries expense 4,000Cash

Nov. 9

Illustration 4A-1

101 SO 7 Prepare reversing entries.SO 7 Prepare reversing entries.

Illustration 4A-2 Postings with reversingentries

Key Concepts

- A classified balance sheet is a balance sheet that was expanded by adding subsections for current assets; property, plant, and equipment; and current liabilities.

- Accounts that are relatively permanent from year to year are called real accounts. Accounts that report amounts for only one period are called temporary accounts or nominal accounts.

- The accounting process that begins with analyzing and journalizing transactions and ends with preparing the accounting records for the next period’s transactions is called the accounting cycle. There are ten steps in the accounting cycle

Ch04 - Financial Accounting

adjusting

compute net

called real

accounting

financial

balance sheet

income statement

financial

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