Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter

Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 4 Completing the Accounting Cycle Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Completing the Accounting Cycle Preview Using a Worksheet Closing the Books • Steps in preparation • Preparing financial statements • Preparing adjusting entries • Preparing closing entries • Posting closing entries • Preparing a postclosing trial balance Summary of the Accounting Cycle • Reversing entries – an optional step • Correcting entries – an avoidable step Classified Balance Sheet • Current assets • Long-term investments • Property, plant and equipment • Intangible assets • Current liabilities • Long-term liabilities • Owner’s equity

Chapter Outline Learning Objectives LO 1 Prepare a worksheet. LO 2 Prepare closing entries and a post-closing trial balance. LO 3 Explain the steps in the accounting cycle and how to prepare correcting entries. LO 4 Identify the sections of a classified balance sheet. Copyright © 2018 John Wiley & Son, Inc. 3

The Worksheet • Multiple-column form used in preparing financial statements • Not a permanent accounting record • May be a computerized worksheet • Prepared using a five step process • Use of worksheet is optional LO 1 Copyright © 2018 John Wiley & Son, Inc. 4

Pioneer Advertising Worksheet For the Month Ended October 31, 2020 Account Titles Cash Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Unearned Service Revenue Owner's Capital Owner's Drawings Service Revenue Salaries and Wages Expense Rent Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries and Wages Payable Totals Net Income Totals LO 1 Trial Balance Dr. Cr. 15, 200 2, 500 600 5, 000 2, 500 1, 200 10, 000 500 10, 000 4, 000 Step 1 900 Prepare a 28, 700 trial balance on the worksheet. Adjustments Dr. Cr. (a) 1, 500 (b) 50 (d) 400 (e) 200 (g) 1, 200 Step 2 Enter adjustment (a) 1, 500 data. (b) 50 (c) 40 (e) 200 (f) 50 (f) 50 (g) 1, 200 3, 440 Adjusted Trial Balance Dr. Cr. 15, 200 1, 000 550 5, 000 2, 500 800 10, 000 500 10, 600 5, 200 Step 3 900 Enter adjusted 1, 500 50 balances. 40 40 200 50 50 1, 200 30, 190 Copyright © 2018 John Wiley & Son, Inc. ILLUSTRATION 4. 1 Form for a worksheet Income Statement Balance Sheet Dr. Cr. 15, 200 1, 000 550 5, 000 2, 500 800 10, 000 500 10, 600 5, 200 Step 4 900 Extend adjusted balances to appropriate 1, 500 statement columns. 50 40 Step 5 40 Total the statement 200 50 columns, 50 compute net income 1, 200 (or net loss), and 7, 740 10, 600 22, 450 19, 590 complete worksheet. 2, 860 10, 600 22, 450 5

Step 1 Account Titles Cash Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Unearned Service Revenue Owner's Capital Owner's Drawings Service Revenue Salaries and Wages Expense Rent Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Expense Accounts Receivable Interest Expense Interest Payable Salaries and Wages Payable Totals Net Income Totals Pioneer Advertising Worksheet For the Month Ended October 31, 2020 Trial Balance Dr. Cr. 15, 200 2, 500 600 5, 000 2, 500 1, 200 10, 000 500 10, 000 4, 000 900 28, 700 Include all accounts with balances. LO 1 Adjustments Dr. Cr. (a) 1, 500 (b) 50 (d) 400 (e) 200 (g) 1, 200 (a) 1, 500 (b) 50 (c) 40 (e) 200 (f) 50 (f) 50 (g) 1, 200 3, 440 Adjusted Trial Balance Dr. Cr. 15, 200 1, 000 550 5, 000 2, 500 800 10, 000 500 10, 600 5, 200 900 1, 500 50 40 40 200 50 50 1, 200 30, 190 ILLUSTRATION 4. 2 Preparing a trail balance Income Statement Dr. Cr. 10, 600 5, 200 900 1, 500 50 40 50 7, 740 10, 600 2, 860 10, 600 Trial balance amounts come directly from ledger accounts. Copyright © 2018 John Wiley & Son, Inc. Balance Sheet Dr. Cr. 15, 200 1, 000 550 5, 000 2, 500 800 10, 000 500 40 200 50 1, 200 22, 450 19, 590 2, 860 22, 450 6

Step 2 Enter Adjustments The adjustments are the same as in Illustration 3. 23. a. Pioneer debits an additional account, Supplies Expense, $1, 500 for the cost of supplies used, and credits Supplies $1, 500. b. Pioneer debits an additional account, Insurance Expense, $50 for the insurance that has expired, and credits Prepaid Insurance $50. c. The company needs two additional depreciation accounts. It debits Depreciation Expense $40 for the month’s depreciation, and credits Accumulated Depreciation—Equipment $40. d. Pioneer debits Unearned Service Revenue $400 for services performed, and credits Service Revenue $400. e. Pioneer debits an additional account, Accounts Receivable, $200 for services performed but not billed, and credits Service Revenue $200. f. The company needs two additional accounts relating to interest. It debits Interest Expense $50 for accrued interest, and credits Interest Payable $50. g. Pioneer debits Salaries and Wages Expense $1, 200 for accrued salaries, and credits an additional account, Salaries and Wages Payable, $1, 200. LO 1 Copyright © 2018 John Wiley & Son, Inc. 7

Step 2 Pioneer Advertising Worksheet For the Month Ended October 31, 2020 Trial Balance Adjustments Account Titles Dr. Cr. 15, 200 Cash 2, 500 (a) 1, 500 Supplies 600 (b) 50 Prepaid Insurance Equipment 5, 000 Notes Payable 5, 000 Accounts Payable 2, 500 Unearned Service Revenue 1, 200 (d) 400 Owner's Capital 10, 000 Owner's Drawings 500 Service Revenue 10, 000 (d) 400 (e) 200 4, 000 (g) 1, 200 Salaries and Wages Expense Rent Expense 900 Totals 28, 700 Supplies Expense (a) 1, 500 Insurance Expense (b) 50 Accumulated Depreciation (c) 40 Depreciation Expense (c) 40 Accounts Receivable (e) 200 Interest Expense (f) 50 Interest Payable (f) 50 Salaries and Wages Payable (g) 1, 200 Totals 3, 440 Net Income Totals Add additional accounts as needed. LO 1 ILLUSTRATION 4. 3 Entering the adjustments Adjusted Income Trial Balance Statement Balance Sheet Dr. Cr. Dr. Cr. 15, 200 1, 000 550 Adjustments Key: 5, 000 (a)5, 000 Supplies Used 2, 500 (b) Insurance Expired 800 10, 000 (c)10, 000 Depreciation Expensed 500 (d) 10, 600 Recognized Service Revenue Accrued 5, 200 (e) Service 5, 200 900 (f) Interest 900 Accrued 1, 500 (g) Salaries 1, 500 Accrued 50 40 amounts, 40 Enter adjustment 40 total 200 adjustments columns, 200 check and 50 for equality. 50 1, 200 30, 190 7, 740 10, 600 22, 450 19, 590 2, 860 10, 600 22, 450 Copyright © 2018 John Wiley & Son, Inc. 8

Step 3 Pioneer Advertising Worksheet For the Month Ended October 31, 2020 Adjusted Trial Balance Adjustments Trial Balance Account Titles Dr. Cr. 15, 200 Cash 2, 500 (a) 1, 500 1, 000 Supplies 600 (b) 50 550 Prepaid Insurance Equipment 5, 000 Notes Payable 5, 000 Accounts Payable 2, 500 Unearned Service Revenue 1, 200 (d) 400 800 Owner's Capital 10, 000 Owner's Drawings 500 Service Revenue 10, 000 (d) 400 10, 600 (e) 200 4, 000 (g) 1, 200 5, 200 Salaries and Wages Expense Rent Expense 900 Totals 28, 700 Supplies Expense (a) 1, 500 Insurance Expense (b) 50 Accumulated Depreciation (c) 40 Depreciation Expense (c) 40 Accounts Receivable (e) 200 Interest Expense (f) 50 Interest Payable (f) 50 Salaries and Wages Payable (g) 1, 200 Totals 3, 440 30, 190 Net Income Totals Check equality of adjusted trial balance columns. LO 1 Copyright © 2018 John Wiley & Son, Inc. ILLUSTRATION 4. 4 Entering adjusted balances Income Statement Dr. Cr. 10, 600 5, 200 900 1, 500 50 40 50 7, 740 10, 600 2, 860 10, 600 Balance Sheet Dr. Cr. 15, 200 1, 000 550 5, 000 2, 500 800 10, 000 500 40 200 50 1, 200 22, 450 19, 590 2, 860 22, 450 9

Step 4 Pioneer Advertising Worksheet For the Month Ended October 31, 2020 ILLUSTRATION 4. 5 Extending adjusted trial balance amounts Adjusted Income Trial Balance Adjustments Trial Balance Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. 15, 200 Cash 2, 500 (a) 1, 500 1, 000 Supplies 600 (b) 50 550 Prepaid Insurance Equipment 5, 000 Notes Payable 5, 000 Accounts Payable 2, 500 Unearned Service Revenue 1, 200 (d) 400 800 Owner's Capital 10, 000 Owner's Drawings 500 Service Revenue 10, 000 (d) 400 10, 600 (e) 200 4, 000 (g) 1, 200 5, 200 Salaries and Wages Expense Rent Expense 900 Totals 28, 700 Supplies Expense (a) 1, 500 Insurance Expense (b) 50 50 Accumulated Depreciation (c) 40 40 Depreciation Expense (c) 40 40 Accounts Receivable (e) 200 Interest Expense (f) 50 50 Interest Payable (f) 50 50 Salaries and Wages Payable (g) 1, 200 Totals 3, 440 30, 190 7, 740 10, 600 22, 450 19, 590 Net Income 2, 860 Totals 10, 600 22, 450 Extend adjusted trial balance amounts to appropriate financial statement columns. LO 1 Copyright © 2018 John Wiley & Son, Inc. 10

Step 5 Pioneer Advertising Worksheet For the Month Ended October 31, 2020 Trial Balance Adjustments Account Titles Dr. Cr. 15, 200 Cash 2, 500 (a) 1, 500 Supplies 600 (b) 50 Prepaid Insurance Equipment 5, 000 Notes Payable 5, 000 Accounts Payable 2, 500 Unearned Service Revenue 1, 200 (d) 400 Owner's Capital 10, 000 Owner's Drawings 500 Service Revenue 10, 000 (d) 400 (e) 200 4, 000 (g) 1, 200 Salaries and Wages Expense Rent Expense 900 Totals 28, 700 Supplies Expense (a) 1, 500 Insurance Expense (b) 50 Accumulated Depreciation (c) 40 Depreciation Expense (c) 40 Accounts Receivable (e) 200 Interest Expense (f) 50 Interest Payable (f) 50 Salaries and Wages Payable (g) 1, 200 Totals 3, 440 Net Income Totals Compute net income or net loss. LO 1 Adjusted Trial Balance Dr. Cr. 15, 200 1, 000 550 5, 000 2, 500 800 10, 000 500 10, 600 5, 200 900 1, 500 50 40 40 200 50 50 1, 200 30, 190 Copyright © 2018 John Wiley & Son, Inc. ILLUSTRATION 4. 6 Compute net income or net loss Income Statement Dr. Cr. 10, 600 5, 200 900 1, 500 50 40 50 7, 740 10, 600 2, 860 10, 600 Balance Sheet Dr. Cr. 15, 200 1, 000 550 5, 000 2, 500 800 10, 000 500 40 200 50 1, 200 22, 450 19, 590 2, 860 22, 450 11

Steps in Preparing a Worksheet Net income is shown on a worksheet in the: a. income statement debit column only. b. balance sheet debit column only. c. income statement credit column and balance sheet debit column. d. income statement debit column and balance sheet credit column. LO 1 Copyright © 2018 John Wiley & Son, Inc. 12

Preparing Financial Statements from a Worksheet • Income statement is prepared from the income statement columns • Balance sheet and owner’s equity statement are prepared from the balance sheet columns • Companies can prepare financial statements before they journalize and post adjusting entries LO 1 Copyright © 2018 John Wiley & Son, Inc. 13

Preparing Statements from a Worksheet Pioneer Advertising Income Statement For the Month Ended October 31, 2020 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Rent expense Insurance expense Interest expense Depreciation expense Total expenses Net income LO 1 ILLUSTRATION 4. 7 Financial statements from a worksheet $10, 600 $5, 200 1, 500 900 50 50 40 Copyright © 2018 John Wiley & Son, Inc. 7, 740 $2, 860 14

Preparing Statements from a Worksheet Pioneer Advertising Owner’s Equity Statement For the Month Ended October 31, 2020 Owner’s capital, October 1 Add: Investments Net income $10, 000 2, 860 Less: Drawings Owner’s capital, October 31 LO 1 ILLUSTRATION 4. 7 Financial statements from a worksheet Copyright © 2018 John Wiley & Son, Inc. $ 0 12, 860 500 $12, 360 15

Pioneer Advertising Balance Sheet October 31, 2020 Assets Cash Accounts receivable Supplies Prepaid insurance Equipment $5, 000 Less: Accumulated depreciation 40 Total assets Liabilities and Owner’s Equity Liabilities Notes payable $5, 000 Accounts payable 2, 500 Interest payable 50 Unearned service revenue 800 Salaries and wages payable 1, 200 Total liabilities Owner’s equity Owner’s capital Total liabilities and owner’s equity LO 1 ILLUSTRATION 4. 7 Financial statements from a worksheet Copyright © 2018 John Wiley & Son, Inc. $15, 200 1, 000 550 4, 960 $21, 910 $ 9, 550 12, 360 $21, 910 16

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 LO 1 Copyright © 2018 John Wiley & Son, Inc. 17

DO IT! 1 Worksheet 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 Balance sheet (debit) Owner’s Drawings Balance sheet (debit) Accumulated Depreciation Balance sheet (credit) Service Revenue Income statement (credit) Accounts Payable Balance sheet (credit) Salaries and Wages Expense Income statement (debit) LO 1 Copyright © 2018 John Wiley & Son, Inc. 18

Closing the Books At the end of the accounting period, the company makes the accounts ready for the next period. Analyze Adjusted Trial Balance LO 2 Journalize Financial Statements Post Closing Entries Copyright © 2018 John Wiley & Son, Inc. Trial Balance Adjusting Entries Post-Closing Trial Balance 19

Closing the Books LO 2 ILLUSTRATION 4. 8 Temporary versus permanent accounts TEMPORARY These accounts are closed PERMANENT These accounts are not closed All revenue accounts All asset accounts All expense accounts All liability accounts Owner's drawing account Owner's capital account Copyright © 2018 John Wiley & Son, Inc. 20

Preparing Closing Entries Closing entries formally recognize in the ledger the transfer of: • Net income (or net loss) to owner’s capital • Owner’s drawings to owner’s capital Produce a zero balance in each temporary account. Companies generally journalize and post closing entries only at end of the annual accounting period. LO 2 Copyright © 2018 John Wiley & Son, Inc. 21

Preparing Closing Entries ILLUSTRATION 4. 9 Diagram of closing process— proprietorship Income Summary (Individual) Expenses 2 (Individual) Revenues 1 3 Key: 1. Close Revenues to Income Summary. 2. Close Expenses to Income Summary. 3. Close Income Summary to Owner’s Capital. 4. Close Owner’s Drawings to Owner’s Capital. LO 2 Owner’s Capital Owner’s Drawings 4 Copyright © 2018 John Wiley & Son, Inc. 22

Closing the Books 1. 2. 3. 4. 4 Steps Close credit balances found in the Income Statement accounts to Income Summary. Close debit balances found in the Income Statement accounts to Income Summary. Close Income Summary to Capital. Close Drawing to Capital.

Closing Entries Illustrated ILLUSTRATION 4. 10 Closing entries journalized GENERAL JOURNAL Page J 3 Date Account Titles and Explanations 2020 Oct. 31 Service Revenue Income Summary (To close revenue account) Ref. Debit 400 350 10, 600 31 Income Summary Supplies Expense Depreciation Expense Insurance Expense Salaries and Wages Expense Rent Expense Interest Expense (To close expense accounts) 350 631 711 722 726 729 7, 740 LO 2 Copyright © 2018 John Wiley & Son, Inc. Credit 10, 600 1, 500 40 50 5, 200 900 50 24

Closing Entries Illustrated ILLUSTRATION 4. 10 Closing entries journalized GENERAL JOURNAL Page J 3 Date Account Titles and Explanations 2020 Oct. 31 Income Summary Owner’s Capital (To close net income to capital) Ref. 350 301 2, 860 31 Owner’s Capital Owner’s Drawings (To close drawings to capital) 301 306 500 LO 2 Copyright © 2018 John Wiley & Son, Inc. Debit Credit 2, 860 500 25

Posting Closing Entries ILLUSTRATION 4. 11 LO 2 Copyright © 2018 John Wiley & Son, Inc. 26

Pioneer Advertising Post-Closing Trial Balance October 31, 2020 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Notes Payable Accounts Payable Unearned Service Revenue Salaries and Wages Payable Interest Payable Owner’s Capital LO 2 ILLUSTRATION 4. 12 Post-Closing Trial Balance Debit $15, 200 1, 000 550 5, 000 $21, 950 Copyright © 2018 John Wiley & Son, Inc. Credit $ 40 5, 000 2, 500 800 1, 200 50 12, 360 $21, 950 27

DO IT! 2 Closing Entries Hancock Company has the following balances in selected accounts of its adjusted trial balance. Accounts Payable $27, 000 Service Revenue 98, 000 Rent Expense 22, 000 Salaries and Wages Expense 51, 000 Owner’s Drawings Owner’s Capital Accounts Receivable Supplies Expense $15, 000 42, 000 38, 000 7, 000 Prepare the closing entries at December 31. Service Revenue Income Summary LO 2 Copyright © 2018 John Wiley & Son, Inc. 98, 000 28

DO IT! 2 Closing Entries Accounts Payable $27, 000 Service Revenue 98, 000 Rent Expense 22, 000 Salaries and Wages Expense 51, 000 Owner’s Drawings Owner’s Capital Accounts Receivable Supplies Expense $15, 000 42, 000 38, 000 7, 000 Prepare the closing entries at December 31. Income Summary Salaries and Wages Expense Rent Expense Supplies Expense LO 2 Copyright © 2018 John Wiley & Son, Inc. 80, 000 51, 000 22, 000 7, 000 29

DO IT! 2 Closing Entries Accounts Payable $27, 000 Service Revenue 98, 000 Rent Expense 22, 000 Salaries and Wages Expense 51, 000 Owner’s Drawings Owner’s Capital Accounts Receivable Supplies Expense $15, 000 42, 000 38, 000 7, 000 Prepare the closing entries at December 31. LO 2 Income Summary Owner’s Capital 18, 000 Owner’s Capital Owner’s Drawings 15, 000 18, 000 Copyright © 2018 John Wiley & Son, Inc. 15, 000 30

The Accounting Cycle 1. Analyze business transactions LO 3 9. Prepare a post-closing trial balance 2. Journalize the transactions 8. Journalize and post closing entries 3. Post to ledger accounts 7. Prepare financial statements 4. Prepare a trial balance 6. Prepare an adjusted trial balance 5. Journalize and post adjusting entries Copyright © 2018 John Wiley & Son, Inc. 31

1. Analyze Business Transactions Assets Liabilities Owner’s Equity Accounts Notes Unearned Owner's Date Cash + Equipment = Payable + Revenue + Capital - Drawings + Revenue - Expense 1 +$10, 000 1 +$5, 000 2 +1, 200 +$1, 200 3 -1, 200 -$1, 200 4 +250 -$250 Partial Schedule LO 3 Copyright © 2018 John Wiley & Son, Inc. 32

2. Journalize the Transactions GENERAL JOURNAL Page J 1 Date Explanation 2020 Oct. 1 Cash Owners’ Capital Ref. Debit 101 301 10, 000 1 Equipment Notes Payable 157 200 5, 000 2 Cash Unearned Revenue 101 209 1, 200 3 Rent Expense Cash 729 101 900 LO 3 ILLUSTRATION 2. 29 Copyright © 2018 John Wiley & Son, Inc. Credit 10, 000 5, 000 1, 200 900 33

3. Post to the Ledger Accounts Transaction Journal Entry Posting LO 3 On October 1, C. R. Byrd invests $10, 000 cash in an advertising company called Pioneer Advertising. Date Titles Ref. Debit Oct. 1 Cash Owner's Capital 101 301 10, 000 Oct. 1 ILLUSTRATION 2. 19 Cash 101 10, 000 Copyright © 2018 John Wiley & Son, Inc. Credit 10, 000 Owner's Capital 301 Oct. 1 10, 000 34

4. Prepare a Trial Balance LO 3 Pioneer Advertising Trial Balance October 31, 2020 Cash Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Unearned Service Revenue Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Rent Expense Copyright © 2018 John Wiley & Son, Inc. Debit $15, 200 2, 500 600 5, 000 500 4, 000 900 $28, 700 Credit $ 5, 000 2, 500 1, 200 10, 000 $28, 700 35

5. Journalize and Post Adjusting Entries Transaction Basic Analysis Journal Entry Posting LO 3 Pioneer used supplies costing $1, 500. The expense Supplies Expense is increased $1, 500, and the asset Supplies is decreased $1, 500. Date Titles Oct. 31 Supplies Expense Supplies Oct. 5 Supplies 2, 500 Oct. 31 1, 000 Ref. Debit 1, 500 Credit 1, 500 Supplies Expense Oct. 31 1, 500 Oct. 31 Copyright © 2018 John Wiley & Son, Inc. 1, 500 36

6. Prepare an Adjusted Trail Balance ILLUSTRATION 3. 25 LO 3 Pioneer Advertising Adjusted Trial Balance October 31, 2020 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation—Equipment Notes Payable Accounts Payable Interest Payable Unearned Revenue Salaries and Wages Payable Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Supplies Expense Rent Expense Insurance Expense Interest Expense Depreciation Expense Copyright © 2018 John Wiley & Son, Inc. Debit $15, 200 1, 000 550 5, 000 Credit $ 40 5, 000 2, 500 50 800 1, 200 10, 000 500 10, 600 5, 200 1, 500 900 50 50 40 $30, 190 37

7. Prepare Financial Statements Partial Statements Pioneer Advertising Income Statement For the Month Ended October 31, 2020 Revenues Service revenue $10, 600 Pioneer Advertising Owner’s Equity Statement For the Month Ended October 31, 2020 $ Owner’s capital, October 1 0 Pioneer Advertising Balance Sheet October 31, 2020 Cash Accounts receivable LO 3 Assets Copyright © 2018 John Wiley & Son, Inc. $15, 200 38

8. Journalize and Post Closing Entries GENERAL JOURNAL Date 2020 Oct. 31 Account Titles and Explanations Service Revenue Income Summary (To close revenue account) 31 Income Summary Supplies Expense Depreciation Expense Insurance Expense Partial Salaries and Wages Expense Schedule Rent Expense Interest Expense (To close expense accounts) LO 3 ILLUSTRATION 4. 10 Copyright © 2018 John Wiley & Son, Inc. Page J 3 Ref. Debit 400 350 10, 600 350 631 711 722 726 729 7, 740 Credit 10, 600 1, 500 40 50 5, 200 900 50 39

9. Prepare a Post-Closing Trial Balance Pioneer Advertising Post-Closing Trial Balance October 31, 2020 Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Notes Payable Accounts Payable Unearned Service Revenue Salaries and Wages Payable Interest Payable Owner’s Capital ILLUSTRATION 4. 12 LO 3 Copyright © 2018 John Wiley & Son, Inc. Debit $15, 200 1, 000 550 5, 000 $21, 950 Credit $ 40 5, 000 2, 500 800 1, 200 50 12, 360 $21, 950 40

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 Copyright © 2018 John Wiley & Son, Inc. 41

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 entry Cash Correcting entry LO 3 50 Service Revenue 50 50 Accounts Receivable Service Revenue Accounts Receivable Copyright © 2018 John Wiley & Son, Inc. 50 50 50 42

Correcting Entries—An Avoidable Step Case 2: On May 10, 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 entry Equipment Correcting entry Equipment LO 3 45 Accounts Payable 45 450 Accounts Payable Copyright © 2018 John Wiley & Son, Inc. 450 405 43

DO IT! 3 Correcting Entries Sanchez Company discovered the following errors made in January 2020. 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 Copyright © 2018 John Wiley & Son, Inc. 44

DO IT! 3 Correcting Entries 1. A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600. Salaries and Wages Expense Supplies 600 2. A collection of $3, 000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. Service Revenue Cash Accounts Receivable LO 3 Copyright © 2018 John Wiley & Son, Inc. 200 2, 800 3, 000 45

DO IT! 3 Correcting Entries 3. The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Accounts Payable $680. Supplies ($860 - $680) Accounts Payable LO 3 Copyright © 2018 John Wiley & Son, Inc. 180 46

Classified Balance Sheet • Presents a snapshot at a point in time • To improve understanding, companies group similar assets and similar liabilities together Assets Liabilities and Owner's Equity Current assets Long-term investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Owner's (Stockholders') equity ILLUSTRATION 4. 20 Standard balance sheet classifications LO 4 Copyright © 2018 John Wiley & Son, Inc. 47

Franklin Company Balance Sheet October 31, 2020 Assets Current assets Cash Debt investments Accounts receivable Notes receivable Inventory Supplies Prepaid insurance Total current assets Long-term investments Stock investments Investment in real estate Property, plant, and equipment Land Equipment Less: Accumulated depreciation– equipment Intangible assets Patents Total assets LO 4 ILLUSTRATION 4. 21 Classified balance sheet $ 6, 600 2, 000 7, 000 1, 000 3, 000 2, 100 400 5, 200 2, 000 $24, 000 5, 000 Copyright © 2018 John Wiley & Son, Inc. $22, 100 7, 200 10, 000 19, 000 29, 000 3, 100 $61, 400 48

Franklin Company Balance Sheet October 31, 2020 Liabilities and Owner’s Equity Current liabilities Notes payable Accounts payable Unearned service revenue Salaries and wages payable Interest payable Total current liabilities Long-term liabilities Mortgage payable Notes payable Total long-term liabilities Total liabilities Owner’s equity Owner’s capital Total liabilities and owner’s equity LO 4 ILLUSTRATION 4. 21 Classified balance sheet Copyright © 2018 John Wiley & Son, Inc. $ 11, 000 2, 100 900 1, 600 450 10, 000 1, 300 $16, 050 11, 300 27, 350 34, 050 $61, 400 49

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 LO 4 § purchase inventory, § sell it on account, and § collect cash from customers Copyright © 2018 John Wiley & Son, Inc. 50

Current Assets ILLUSTRATION 4. 22 SOUTHWEST AIRLINES CO. Balance Sheet (partial) (in millions) Current assets Cash and cash equivalents Short-term investments Accounts receivable Inventories Prepaid expenses and other current assets Total current assets $ 1, 390 369 241 181 420 $4, 456 Accounts usually listed in order liquidity. LO 4 Copyright © 2018 John Wiley & Son, Inc. 51

Current Assets 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 Copyright © 2018 John Wiley & Son, Inc. 52

Long-Term Investments • Investments in stocks and bonds of other companies • Investments in long-term assets such as land or buildings that are not currently being used in operating activities • Long-term notes receivable ILLUSTRATION 4. 23 Alphabet Inc. Balance Sheet (partial) (in thousands) Long-term investments Investments in securities LO 4 Copyright © 2018 John Wiley & Son, Inc. $ 90, 266 53

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 • Sometimes called fixed assets or plant assets LO 4 Copyright © 2018 John Wiley & Son, Inc. 54

Property, Plant, and Equipment Tesla Motors, Inc. Balance Sheet (partial) (in thousands) Property, plant, and equipment Machinery, equipment and office furniture Tooling Leasehold improvements Building and building improvements Land Computer equipment and software Construction in progress Less: Accumulated depreciation Total LO 4 Copyright © 2018 John Wiley & Son, Inc. ILLUSTRATION 4. 24 $322, 394 230, 385 94, 763 67, 707 45, 020 42, 073 76, 294 878, 636 140, 142 $738, 494 55

Intangible Assets • Long-lived assets that do not have physical substance The Walt Disney Company Balance Sheet (partial) (in millions) Intangible assets and goodwill Character/franchise intangibles and copyrights Other amortizable intangible assets Accumulated amortization Net amortizable intangible assets FCC licenses Trademarks Other indefinite lived intangible assets Goodwill LO 4 Copyright © 2018 John Wiley & Son, Inc. ILLUSTRATION 4. 25 $ 5, 830 903 (1, 204) 5, 529 667 1, 218 20 7, 434 27, 881 $35, 315 56

Classified Balance Sheet Patents and copyrights are a. Current assets b. Intangible assets c. Long-term investments d. Property, plant, and equipment LO 4 Copyright © 2018 John Wiley & Son, Inc. 57

Current Liabilities • Obligations company is to pay within 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 Copyright © 2018 John Wiley & Son, Inc. 58

Current Liabilities Marcus Corporation Balance Sheet (partial) ILLUSTRATION 4. 26 (in thousands) Current liabilities Notes payable Accounts payable Current maturities of long-term debt Other current liabilities Income taxes payable Salaries and wages payable Total current liabilities LO 4 Copyright © 2018 John Wiley & Son, Inc. $ 239 24, 242 57, 250 27, 477 11. 215 6, 720 $127, 143 59

Long-Term Liabilities • Obligations a company expects to pay after one year. Nike, Inc. Balance Sheet (partial) ILLUSTRATION 4. 27 (in millions) Long-term liabilities Bonds payable Notes payable Deferred income taxes and other Total long-term liabilities LO 4 Copyright © 2018 John Wiley & Son, Inc. $ 1, 106 51 1, 544 $2, 701 60

Classified Balance Sheet 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 Copyright © 2018 John Wiley & Son, Inc. 61

Owner’s Equity • Proprietorship - one capital account • Partnership - capital account for each partner • Corporation - Common Stock and Retained Earnings Nordstrom, Inc. Balance Sheet (partial) ILLUSTRATION 4. 28 (in thousands) Stockholders’ equity Common stock, 271, 331 shares Retained earnings Total stockholders’ equity LO 4 Copyright © 2018 John Wiley & Son, Inc. $ 685, 934 1, 406, 747 $2, 092, 681 62

DO IT! 4 Balance Sheet Classifications Match each of the following to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA. ” CL Salaries and wages payable LTI Stock investments (long-term) NA Service revenue PPE Equipment CL Interest payable PPE Accumulated depreciation IA Goodwill NA Depreciation expense CA Debt investments (short-term) OE Owner’s capital LTL Mortgage payable (due in 3 years) CL Unearned service revenue Current assets (CA) Long-term investments (LTI) Property, plant, and equipment (PPE) Intangible assets (IA) LO 4 Current liabilities (CL) Long-term liabilities (LTL) Owner’s equity (OE) Copyright © 2018 John Wiley & Son, Inc. 63

Appendix 4 A Reversing Entries • It is often helpful to reverse some adjusting entries before recording regular transactions of the next period • Companies make a reversing entry at beginning of next accounting period • Each reversing entry is exact opposite of adjusting entry made in previous period • Use of reversing entries does not change amounts reported in the financial statements LO 5 Copyright © 2018 John Wiley & Son, Inc. 64

Reversing Entries Example We use the salaries expense transactions for Pioneer Advertising as illustrated in Chapters 2, 3, and 4. 1. October 26 (initial salary entry): Pioneer pays $4, 000 of salaries and wages earned between October 15 and October 26. 2. October 31 (adjusting entry): Salaries and wages 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 and wages paid are $4, 000. Of this amount, $1, 200 applied to accrued salaries and wages payable and $2, 800 was earned between November 1 and November 9. LO 5 Copyright © 2018 John Wiley & Son, Inc. 65

Reversing Entries Example ILLUSTRATION 4 A. 1 With Reversing Entries (per appendix) Oct. 26 Initial Salary Entry Same entry Adjusting Entry Oct. 31 Same entry Oct. 31 Closing Entry Same entry Reversing Entry Nov. 1 Salaries and Wages Payable 1, 200 Salaries and Wages Expense 1, 200 Subsequent Salary Entry Nov. 9 LO 5 Salaries and Wages Expense Cash 4, 000 Copyright © 2018 John Wiley & Son, Inc. 4, 000 66

Reversing Entries Example ILLUSTRATION 4 A. 2 Postings with reversing entries Salaries and Wages Expense 10/26 Paid 4, 000 10/31 Closing 10/31 Adjusting 1, 200 11/9 Paid 5, 200 11/1 Reversing 5, 200 1, 200 Salaries and Wages Payable 11/1 Reversing LO 5 1, 200 10/31 Copyright © 2018 John Wiley & Son, Inc. 1, 200 67

A Look at IFRS Key Points Similarities • The procedures of the closing process are applicable to all companies, whether they are using IFRS or GAAP. • IFRS generally requires a classified statement of financial position similar to the classified balance sheet under GAAP. • IFRS follows the same guidelines as GAAP for distinguishing between current and non-current assets and liabilities. LO 6 Copyright © 2018 John Wiley & Son, Inc. 68

A Look at IFRS Key Points Differences • IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet. • The format of statement of financial position information is often presented differently under IFRS. Although no specific format is required, many companies that follow IFRS present statement of financial position information in this order: § Non-current assets § Current assets § Equity § Non-current liabilities § Current liabilities LO 6 Copyright © 2018 John Wiley & Son, Inc. 69

A Look at IFRS Key Points Differences • Under IFRS, current assets are usually listed in the reverse order of liquidity. For example, under GAAP cash is listed first, but under IFRS it is listed last. • IFRS has many differences in terminology from what are shown in your textbook. • Both GAAP and IFRS are increasing the use of fair value to report assets. However, at this point IFRS has adopted it more broadly. As examples, under IFRS, companies can apply fair value to property, plant, and equipment, and in some cases intangible assets. LO 6 Copyright © 2018 John Wiley & Son, Inc. 70

A Look at IFRS Looking to the Future The IASB and the FASB are working on a project to converge their standards related to financial statement presentation. A key feature of the proposed framework is that each of the statements will be organized in the same format, to separate an entity’s financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors. Thus, the same classifications used in the statement of financial position would also be used in the income statement and the statement of cash flows. The project has three phases. You can follow the joint financial presentation project at the FASB website. LO 6 Copyright © 2018 John Wiley & Son, Inc. 71

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