CHAPTER

Financial Accounting
3
Content
1. The recording process

2. Adjusting the Accounts

3. Completing the Accounting Cycle

 Financial Accounting

▪ Financial Accounting can be defined as an information system

that provides reports to users about the economic activities and
condition of a business.
▪ The day-to-day processing of an organisation’s financial
transactions and the summarising of those transactions to satisfy
the information needs of external users.
▪ Subject to many rules and regulations (a regulatory framework)
imposed by company legislation, stock exchange regulations and
financial reporting standards.
The Recording Process
 The Account
◆ Record of increases and decreases in a specific asset,
liability, stockholders’ equity, revenue, or expense item.
◆ Debit = “Left”
◆ Credit = “Right”

Account Name
An account can Debit / Dr. Credit / Cr.
be illustrated in a
T-account form.
Debits and Credits

DEBIT AND CREDIT PROCEDURES

Double-entry system
◆ Each transaction must affect two or more
accounts to keep the basic accounting
equation in balance.

◆ Recording done by debiting at least one account and

crediting at least one other account.

◆ DEBITS must equal CREDITS.

 Debits and Credits

If the sum of Debit entries are greater than the sum of

Credit entries, the account will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000
 Debits and Credits

If the sum of Credit entries are greater than the sum of

Debit entries, the account will have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000
Debits and Credits

Assets ◆ Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.

◆ Liabilities – Credits should

Normal Balance
exceed debits.
Chapter

◆ Normal balance is on the

3-23

increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24
 Debits and Credits

Equity ◆ Issuance of share capital and

Debit / Dr. Credit / Cr.
revenues increase equity (credit).

◆ Dividends and expenses decrease

Normal Balance
equity (debit).
Chapter
3-25

Share Capital-Ordinary Retained Earnings Dividends

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-25 3-25 3-23
Debits and Credits

Revenues ◆ The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the shareholders.

◆ The effect of debits and credits on

Normal Balance
revenue accounts is the same as
Chapter
3-26
their effect on equity.

◆ Expenses have the opposite

Expenses
Debit / Dr. Credit / Cr.
effect: expenses decrease equity.

Normal Balance

Chapter
3-27
 Debits and Credits
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expenses Chapter
3-25
Revenues
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26
 Summary of Debit/Credit Rules

Statement of
Financial Position Income Statement
Asset = Liability + Equity Revenue - Expense

Debit

Credit
Summary of Debit/Credit Rules

Question
Debits:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Summary of Debit/Credit Rules

Question
Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Equity
Relationships

Equity relationships
Summary of Debit/Credit Rules

Relationship among the assets, liabilities, and equity of a

business:
Summary of debit/credit
rules

The equation must be in balance after every transaction.

Total Debits must equal total Credits.
> DO IT!
Kate Browne, president of Hair It Is Company SA, has just rented
space in a shopping mall in which she will open and operate a beauty
salon. A friend has advised Kate to set up a double-entry set of
accounting records in which to record all of her business transactions.
Identify the balance sheet accounts that Hair It Is Company will
likely use to record the transactions needed to establish and open the
business. Also, indicate whether the normal balance of each account
is a debit or a credit.
Assets Liabilities Equity

Cash (debit) Notes Payable (credit) Share Capital-Ordinary

Supplies (debit) (credit)
Accounts Payable
Equipment (debit) (credit)
 The Account
Business documents, such as a sales receipt, a
check, or a bill, provide evidence of the transaction.

Analyze each transaction Enter transaction in a journal Transfer journal information to

ledger accounts
The recording process
Steps in the Recording Process

The Journal
◆ Book of original entry.

◆ Transactions recorded in chronological

order.

◆ Contributions to the recording process:

1. Discloses the complete effects of a transaction.

2. Provides a chronological record of transactions.

3. Helps to prevent or locate errors because the debit

and credit amounts can be easily compared.
The Journal

JOURNALIZING - Entering transaction data in the journal.

Illustration: On September 1, shareholders invested €15,000 cash
in the corporation in exchange for ordinary shares, and Softbyte
purchased computer equipment for €7,000 cash.

GENERAL JOURNAL

Date Account Title Ref. Debit Credit

Sept. 1 Cash 15,000
Share Capital—Ordinary 15,000

Equipment 7,000
Cash 7,000
The Journal

SIMPLE AND COMPOUND ENTRIES

Illustration: On July 1, Tsai Company purchases a delivery truck
costing NT$420,000. It pays NT$240,000 cash now and agrees to
pay the remaining NT$180,000 on account. Compound journal entry

GENERAL JOURNAL

Date Account Title Ref. Debit Credit

July 1 Equipment 420,000
Cash 240,000
Accounts Payable 180,000
> DO IT!

As president and sole shareholder, Kate Browne engaged in

the following activities in establishing her salon, Hair It Is
Company SA.

1. Opened a bank account in the name of Hair It Is Company

SA and deposited €20,000 of her own money in this
account in exchange for ordinary shares.

2. Purchased equipment on account (to be paid in 30 days)

for a total cost of €4,800.

3. Interviewed three applicants for the position of beautician.

Prepare the entries to record the transactions.

> DO IT!

Prepare the entries to record the transactions.

1. Opened a bank account and deposited €20,000.

Cash 20,000
Share Capital—Ordinary 20,000

2. Purchased equipment on account (to be paid in 30 days)

for a total cost of €4,800.
Equipment 4,800
Accounts Payable 4,800

3. Interviewed three applicants for the position of beautician.

No entry
Steps in the Recording Process

The Ledger
◆ General Ledger contains all the asset,
liability, and equity accounts.
The Ledger

STANDARD FORM OF ACCOUNT Three-column

form of account
 Posting

Transferring
journal entries
to the ledger
accounts.
Posting

Question
Posting:

a. normally occurs before journalizing.

b. transfers ledger transaction data to the journal.

c. is an optional step in the recording process.

d. transfers journal entries to ledger accounts.

 The Recording Process Illustrated

Follow these steps:

1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.
Investment of
cash by
shareholders
Purchase of office equipment
Receipt of cash
for future
service
Payment of monthly
rent
Payment for
insurance
Purchase of supplies on credit
 The Recording Process Illustrated

Hiring of employees
Declaration and payment of
dividend
Payment of
salaries
Receipt of cash for services
performed
> DO IT!
Como Company SpA recorded the following transactions in a general
journal during the month of March. Post these entries to the Cash
account.

Mar. 4 Cash 2,280

Service Revenue 2,280
15 Salaries and Wages Expense 400
Cash 400
19 Utilities Expense 92
Cash 92
General journal
entries
General journal
entries
General ledger
 The Trial Balance

A trial balance
◆ is a list of accounts and their balances
at a given time.

◆ proves the mathematical equality of debits and credits after

posting.

The steps for preparing a trial balance are:

1. List the account titles and their balances.

2. Total the debit and credit columns.

3. Prove the equality of the two columns.

Trial Balance
Limitations of a Trial Balance

Trial balance may balance even when:

1. A transaction is not journalized.

2. A correct journal entry is not posted.

3. A journal entry is posted twice.

4. Incorrect accounts are used in journalizing or posting.

5. Offsetting errors are made in recording the amount of a

transaction.
Currency Signs and Underlining

Currency Signs
◆ Do not appear in journals or ledgers.
◆ Typically used only in the trial balance and the financial
statements.
◆ Shown only for the first item in the column and for the total
of that column.

Underlining
◆ A single line is placed under the column of figures to be
added or subtracted.
◆ Totals are double-underlined.
> DO IT!
2. Adjusting the Accounts
Timing Issues

Accountants divide the economic life of a business into

artificial time periods (Time Period Assumption).

.....
Jan. Feb. Mar. Apr. Dec.

◆ Generally a month, a quarter, or a year.

◆ Also known as the “Periodicity Assumption”

Fiscal and Calendar Years

◆ Monthly and quarterly time periods are called interim

periods.

◆ 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.

 Fiscal and Calendar Years

Question
The time period assumption states that:

a. companies must wait until the calendar year is

completed to prepare financial statements.

b. companies use the fiscal year to report financial

information.

c. the economic life of a business can be divided into

artificial time periods.

d. companies record information in the time period in

which the events occur.
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).
 Accrual- versus Cash-Basis Accounting

Cash-Basis Accounting
◆ Revenues are recorded when cash is received.

◆ Expenses are recorded when cash is paid.

◆ Cash-basis accounting is not in accordance with

International Financial Reporting Standards (IFRS).
 Recognizing Revenues and Expenses

REVENUE RECOGNITION PRINCIPLE

Recognize revenue in the
accounting period in which
the performance obligation
is satisfied.
 Recognizing Revenues and Expenses

EXPENSE RECOGNITION PRINCIPLE

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

“Let the expenses follow

the revenues.”
IFRS relationships
in revenue and
expense recognition
 Recognizing Revenues and Expenses

Question
The revenue recognition principle states that:

a. revenue should be recognized in the accounting period in

which a performance obligation is satisfied.

b. expenses should be matched with revenues.

c. the economic life of a business can be divided into artificial

time periods.

d. the fiscal year should correspond with the calendar year.

> DO IT!
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
b Expense recognition
4. ___ 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.
 The Basics of Adjusting Entries

Adjusting Entries
◆ 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

statement of financial position account.
 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. statement of financial position and income statement accounts

have correct balances at the end of an accounting period.

d. All the responses above are correct.

 Types of Adjusting Entries
Deferrals Accruals

1. Prepaid Expenses. 1. Accrued Revenues.

Expenses paid in cash Revenues for services
before they are used or performed but not yet
consumed. received in cash or recorded.

2. Unearned Revenues. 2. Accrued Expenses.

Cash received before Expenses incurred but not
services are performed. yet paid in cash or recorded.

Categories of adjusting entries

▪ Each account is analyzed to determine whether it is complete
and up-to-date for financial statement purposes.
Adjusting Entries for Deferrals

Deferrals are expenses or revenues that are recognized at

a date later than the point when cash was originally
exchanged. There are two types:
◆ Prepaid expenses and

◆ Unearned revenues.
 PREPAID EXPENSES

Payments of expenses that will benefit more than one

accounting period.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

◆ insurance ◆ rent
◆ supplies ◆ buildings and equipment
◆ advertising
 PREPAID EXPENSES

◆ Expire either with the passage of time or through use.

◆ Adjusting entry:
► Increase (debit) to an expense account and

► Decrease (credit) to an asset account.

Adjusting entries for prepaid

expenses
 PREPAID EXPENSES

Illustration: Yazici Advertising Inc. Inc.

purchased supplies costing ₺2,500 on
October 5. Yazici recorded the purchase
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
Adjustment for
supplies
 PREPAID EXPENSES

Illustration: On October 4, Yazici Advertising

Inc. paid ₺600 for a one-year fire insurance
policy. Coverage began on October 1. Yazici
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
Adjustment for
insurance
 PREPAID EXPENSES

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.

◆ Depreciation does not attempt to report the actual

change in the value of the asset.
PREPAID EXPENSES

Illustration: For Yazici 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.

• HELPFUL HINT
All contra accounts have increases,
decreases, and normal balances opposite to
the account to which they relate.
Adjustment for depreciation
 PREPAID EXPENSES

Statement Presentation
◆ Accumulated Depreciation is a contra asset account
(credit).
◆ Appears just after the account it offsets (Equipment) on
the balance sheet.
◆ Book value is the difference between the cost of any
depreciable asset and its accumulated depreciation.

Statement of financial position presentation of accumulated depreciation

 PREPAID EXPENSES

Accounting for prepaid expenses

UNEARNED REVENUES

Receipt of cash that is recorded as a liability because the

service has not been performed.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

◆ Rent ◆ Magazine subscriptions
◆ Airline tickets ◆ Customer deposits
 UNEARNED REVENUES

◆ Adjusting entry is made to record the revenue for

services performed during the period and to show the
liability that remains at the end of the accounting period.

◆ Results in a decrease (debit) to a liability account and

an increase (credit) to a revenue account.
Adjusting entries
for unearned
revenues
 UNEARNED REVENUES

Illustration: Yazici Advertising Inc. 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
Service revenue accounts after adjustment
 UNEARNED REVENUES

Accounting for unearned

revenues
> DO IT!
The ledger of Zhu Company on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.
(amounts in thousands) 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. One-half of the unearned service revenue was performed in
March.
Prepare the adjusting entries for the month of March.
> DO IT!
The ledger of Zhu Company on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.
(amounts in thousands) 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
> DO IT!
The ledger of Zhu Company on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.
(amounts in thousands) 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
> DO IT!
The ledger of Zhu Company on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.
(amounts in thousands) 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
> DO IT!
The ledger of Zhu Company on March 31, 2017, includes these
selected accounts before adjusting entries are prepared.
(amounts in thousands) 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. One-half of the unearned service revenue was performed in
March.

Unearned Service Revenue 4,600

Service Revenue 4,600
 Adjusting Entries for Accruals

Accruals are made to record

◆ Revenues for services performed but not

yet recorded at the statement date
(accrued revenues).

OR

◆ Expenses incurred but not yet paid or recorded at the

statement date (accrued expenses).
 ACCRUED REVENUES

Revenues for services performed but not yet received in cash

or recorded.

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

◆ Rent ◆ Services performed
◆ Interest
 ACCRUED REVENUES

◆ Adjusting entry records the receivable that exists and

records the revenues for services performed.

◆ Adjusting entry:
► Increases (debits) an asset account and
► Increases (credits) a revenue account.

Adjusting entries
for accrued
revenues
 ACCRUED REVENUES

Illustration: In October, Yazici Advertising

Inc. performed services worth ₺200 that were
not billed to clients in October.

Oct. 31

Accounts Receivable 200

Service Revenue 200

On November 10, Yazici receives cash of ₺200 for the services

performed.

Nov. 10 Cash 200

Accounts Receivable 200
Adjustment for accrued revenue
 ACCRUED REVENUES

Accounting for accrued revenues

 ACCRUED EXPENSES

Expenses incurred but not yet paid in cash or recorded.

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

◆ Interest
◆ Taxes
◆ Salaries
 ACCRUED EXPENSES

◆ Adjusting entry records the obligation and recognizes the

expense.

◆ Adjusting entry:
► Increase (debit) an expense account and
► Increase (credit) a liability account.
Adjusting entries
for accrued
expenses
 ACCRUED INTEREST

Illustration: Yazici Advertising Inc. signed a three-month note

payable in the amount of ₺5,000 on October 1. The note requires
Yazici to pay interest at an annual rate of 12%.
Formula for
computing
interest

Oct. 31 Interest Expense 50

Interest Payable 50
Adjustment for accrued interest
 ACCRUED SALARIES AND WAGES

Illustration: Yazici paid salaries and wages on October 26; the

next payment of salaries will not occur until November 9. The
employees receive total salaries of ₺2,000 for a five-day work
week, or ₺400 per day. Thus, accrued salaries at October 31 are
₺1,200 (₺400 x 3 days).
Calendar showing
Yazici’s pay
periods
Adjustment for accrued salaries and wages
 ACCRUED EXPENSES

Accounting for accrued expenses

> DO IT!

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 ¥8,000 in
salaries and wages that will be paid on September 1.
2. On August 1, the company borrowed ¥300,000 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 ¥11,000.
Prepare the adjusting entries needed at August 31, 2017.
> DO IT!

Prepare the adjusting entries needed at August 31, 2017.

1. At August 31, the company owed its employees ¥8,000 in
salaries and wages that will be paid on September 1.
Salaries and Wages Expense 8,000
Salaries and Wages Payable 8,000
2. On August 1, the company borrowed ¥300,000 from a local
bank on a 15-year mortgage. The annual interest rate is 10%.
Interest Expense 2,500
Interest Payable 2,500

3. Revenue for services performed but unrecorded for August

totaled ¥11,000.
Accounts Receivable 11,000
Service Revenue 11,000
 Summary of Basic Relationships

Summary of adjusting entries

 The Adjusted Trial Balance and
Financial Statements

Preparing the Adjusted Trial Balance

◆ Prepared after all adjusting entries are
journalized and posted.

◆ Purpose is to prove the equality of debit balances and credit

balances in the ledger.

◆ Is the primary basis for the preparation of financial

statements.
Adjusted trial
balance
 Preparing the Adjusted Trail Balance

Question
Which of the following statements is incorrect concerning the adjusted
trial balance?
a. An adjusted trial balance proves the equality of the total debit
balances and the total credit balances in the ledger after all
adjustments are made.
b. The adjusted trial balance provides the primary basis for the
preparation of financial statements.
c. The adjusted trial balance lists the account balances segregated
by assets and liabilities.
d. The adjusted trial balance is prepared after the adjusting entries
have been journalized and posted.
 Preparing Financial Statements

Financial Statements are prepared directly from the

Adjusted Trial Balance.

Retained Statement
Income
Earnings of Financial
Statement
Statement Position
 Preparation of the income statement and
retained earnings statement from the adjusted
trial balance
 Preparation of the statement of
financial position from the adjusted
trial balance
> DO IT!
> DO IT!
(a) Determine the net income for the quarter April 1 to June 30.
> DO IT!
(b) Determine the total assets and total liabilities at June 30, 2017,
for Skolnick Co.
> DO IT!
(c) Determine the amount that appears for retained earnings at June
30, 2017.
3. Completing the Accounting Cycle
 Using 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.

Steps in Preparing a Worksheet Illustration 4-1
Form and procedure
for a worksheet
 Steps in Preparing a Worksheet
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.
 Steps in Preparing a Worksheet
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Part 2)
 Steps in Preparing a Worksheet
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.

 Steps in Preparing a Worksheet
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

columns and check for equality.
 Steps in Preparing a Worksheet
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

balances to the income statement columns.
 Steps in Preparing a Worksheet
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.
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.
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.
Preparing Statements from a Worksheet
Preparing Statements from a Worksheet
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.
> 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)
 Closing the Books
▪ At the end of the accounting period, the company makes
the accounts ready for the next period.
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.
 Diagram of closing
process—corporation
• HELPFUL HINT
The Dividends account is
closed directly to Retained
Earnings and not to Retained earnings is a
Income Summary because permanent account.
dividends are not an All other accounts are
temporary accounts.
expense.
Closing entries journalized
Posting
Closing
Entries
> 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.

Income Summary 18,000

Retained Earnings 18,000
Retained Earnings 15,000
Dividends 15,000
Preparing a Post-Closing Trial Balance

Post-closing trial balance

◆ Lists permanent accounts and their
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.
Illustration 4-8
The Accounting Cycle

1. Analyze business transactions

9. Prepare a post-closing 2. Journalize the

trial balance transactions

8. Journalize and post

3. Post to ledger accounts
closing entries

7. Prepare financial
4. Prepare a trial balance
statements

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries

Steps in the accounting cycle

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.
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
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
> 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.

> 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.

Correct the error without reversing the incorrect entry.

Salaries and Wages Expense 600

Supplies 600
> DO IT!

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
> DO IT!

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
 Statement of Financial Position
◆ Presents a snapshot at a point in time.

◆ To improve understanding, companies 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
Standard statement of financial position classifications
Classified
statement of
financial position
Classified
statement of
financial position
 Intangible Assets

◆ Assets that do not have physical substance.

Intangible assets section

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.
 Property, Plant, and Equipment

Property, plant, and equipment section

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.

Long-term investments section

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.
 Current Assets

Current assets section

Accounts usually listed in the reverse order they
expect to convert them into cash.
Equity

◆ Proprietorship - one capital account.

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

Equity section
 Non-Current Liabilities

◆ Obligations a company expects to pay after one year.

Non-current liabilities section

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.
 Current Liabilities

Current liabilities section

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.

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.
> 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)
End of chapter 3