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Chapter 4 Completing t h e Accounting Cycle

Income Summary
Salaries Expense
Depreciation Expense
Utilities Expense
Interest Expense
Advertising Expense
Supplies Expense
Insurance Expense
(To close expense accounts)
Retained Earnings
Income Summary
(To close net loss to retained earnings)
Retained Earnings
Dividends
(To close dividends to retained earnings)

SUMMARY OF STUDY OBJECTIVES

PLUS

1 Prepare a worksheet. The steps in preparing a worksheet

are: (a) Prepare a trial balance on the worksheet. (b) Enter
the adjustments in the adjustments columns. (c) Enter
adjusted balances in the adjusted trial balance columns.
(d) Extend adjusted trial balance amounts to appropriate
financial statement columns. (e) Total the statement columns,
compute net income (or net loss), and complete the worksheet.
2 Explain the process of closing the books. Closing the
books occurs at the end of an accounting period. The
process is to journalize and post closing entries and then
rule and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses
to Income Summary, Income Summary to Retained
Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed.

4 State the required steps in the accounting cycle. The

3 Describe the content and purpose of a post-closing

trial balance. A post-closing trial balance contains the
balances in permanent accounts that are carried forward
to the next accounting period. The purpose of this trial
balance is to prove the equality of these balances.

categorizes assets as intangibles; property, plant, and

equipment; long-term investments; and current assets.
Liabilities are classified as either non-current or current.
There is also an equity
- . section, which varies with the form
of business organization.

required steps in the accounting cycle are: (1) analyze business transactions, (2) journalize the transactions, (3) post to
ledger accounts, (4) prepare a trial balance, (5) journalize
and post adjusting entries, (6) prepare an adjusted trial
balance, (7) prepare financial statements, (8) journalize
and post closing entries, and (9) prepare a 'post-closing
trial balance.
5 Explain the approaches to preparing correcting entries.
One way to determine the correcting entry is to compare the
incorrect entry with the correct entry. After comparison, the
company makes a correcting entry to correct the accounts.
An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry.
6 Identify the sections of a classified statement of financial position. A classified statement of financial position

n
PLUS

GLOSSARY
Classified statement of financial position A statement of

Current assets Assets that a company expects to convert to

financial position that contains standard classifications or

sections. (p. 164).

Current liabilities Obligations that a company expects to pay

Closing entries Entries made at the end of an accounting

period to transfer the balances of temporary accounts to a

permanent equity account, Retained Earnings. (p. 155).
Entries to correct errors made in
recording transactions. (p. 162).

Correcting entries

cash or use up within one year. (p. 167).

within the coming year. (p. 169).
Equity The ownership claim of shareholders on total assets.
It is to a corporation what owner's equity is to a proprietorship. (P. 168).