CHAPTER
4
Completing the Accounting Cycle
Q UIZ AND T EST H INTS
The following hints may be helpful to you in preparing for a quiz or a test over
the material covered in Chapter 4.
1. Terminology is important in this chapter. Review the “Key Terms” section at
the end of the chapter and be sure you understand each term. Do the
Matching and Fill-in-the-Blank exercises included in this Study Guide.
2. The flow of accounting information from the unadjusted trial balance into the
adjusted trial balance and financial statements is an important part of this
chapter. This flow of accounting information is summarized in the end-ofperiod spreadsheet (work sheet) shown in Exhibit 1, which you should review. Your instructor may or may not assign the end-of-chapter appendix on
how to prepare the end-of-period spreadsheet (work sheet). If your instructor
assigns this appendix, you may be provided with a partially completed
spreadsheet on a test and be asked to complete it.
3. Be thoroughly familiar with the financial statements presented in Exhibit 2 in
the text. Know the financial statement captions and how the statements tie
together. In a test situation, you may be provided with partially completed financial statements that you would be asked to complete.
4. You should be able to prepare the closing entries in general journal form.
You may have to prepare these entries from an end-of-period spreadsheet
(work sheet), adjusted trial balance, income statement, statement of owner’s
equity, or ledger.
5. The accounting cycle is an essential part of accounting. Expect multiplechoice or other types of short answer questions related to the accounting
cycle. Review the accounting cycle, which is summarized in Exhibit 8.
6. A comprehensive illustration of the accounting cycle is provided on pages
157–168. Many instructors give a test after Chapter 4 to make sure you understand each step in the accounting cycle. You should carefully review this
illustration, which summarizes each of the ten steps in the accounting cycle.
44
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Name:
Chapter 4
45
7. Review the GPS graphic at the beginning of the chapter and the “At A
Glance” section at the end of the chapter. Read and review each of the Key
Points and related Learning Outcomes. For each Learning Outcome that has
an Example Exercise, locate the Example Exercise in the chapter and be
sure that you understand the solution and can work a similar item on a test.
If you have any questions about an Example Exercise, read the section of
the chapter immediately preceding the Example Exercise.
8. If your instructor covers the Financial Analysis and Interpretation item at the
end of the chapter, you should know how to compute and interpret working
capital.
9. Your instructor may or may not have discussed the material in the end-oftext appendix (Appendix B) on reversing entries. If your instructor covered
the appendix, you should know what adjusting entries normally require reversing entries, and be able to prepare reversing entries.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
46
Chapter 4
M ATCHING
Instructions: Match each of the statements below with its proper term. Some
terms may not be used.
A.
B.
C.
D.
E.
F.
G.
H.
I.
accounting cycle
adjusted trial balance
adjusting entries
closing entries
closing spreadsheet (work
sheet)
current assets
current liabilities
end-of-period spreadsheet
(work sheet)
fiscal year
J.
K.
L.
M.
N.
O.
P.
Q.
R.
S.
Income Summary
long-term liabilities
natural business year
note receivable
owner’s equity
permanent assets
post-closing trial balance
property, plant, and equipment
real accounts
temporary accounts
____
1. A spreadsheet (work sheet) that managers and accountants may
use to see the impact of adjustments on the financial statements.
____
2. Cash and other assets that are expected to be converted to cash or
sold or used up, usually within one year or less, through the normal
operations of the business.
____
3. A customer’s written promise to pay an amount and possibly interest
at an agreed-upon rate.
____
4. Liabilities that will be due within a short time (usually one year or less)
and that are to be paid out of current assets.
____
5. Liabilities that usually will not be due for more than one year.
____
6. An account to which the revenue and expense account balances are
transferred at the end of a period.
____
7. The trial balance prepared after the closing entries have been posted.
____
8. The annual accounting period adopted by a business.
____
9. A fiscal year that ends when business activities have reached the
lowest point in an annual operating cycle.
____ 10. The process that begins with analyzing and journalizing transactions
and ends with the post-closing trial balance.
____ 11. The entries that transfer the balances of the revenue, expense, and
drawing accounts to the owner’s capital account.
____ 12. The section of the balance sheet that includes equipment, machinery,
buildings, and land.
____ 13. Accounts that report amounts for only one period.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Name:
Chapter 4
47
F ILL IN THE B LANK —P ART A
Instructions: Answer the following questions or complete the statements by
writing the appropriate words or amounts in the answer blanks.
1. A(n) ____________ _____________ is a work sheet that managers and
accountants may use to see the impact of adjustments on the financial
statements.
2. A(n) ____________ ____________________ is a customer’s written promise to pay an amount and possibly interest at an agreed rate.
3. 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 ________________
____________________.
4. In the end-of-period spreadsheet (work sheet), the adjusted trial balance
amount for office equipment is extended to the _____________________
______________ Debit column.
5. In the end-of-period spreadsheet (work sheet), the adjusted trial balance
amount for the owner’s drawing account is extended to the
______________________ ______________ Debit column.
6. After all of the account balances have been extended to the Income
Statement columns of the end-of-period spreadsheet (work sheet), the totals of the Debit and Credit columns are $89,900 and $99,500, respectively. The difference of $9,600 is the __________ _______________ for
the period.
7. After all of the account balances have been extended to the Balance Sheet
columns of the end-of-period spreadsheet (work sheet), the totals of the
Debit and Credit columns are $94,300 and $110,500, respectively. The
difference of $16,200 is the __________ _______________ for the period.
8. Revenue and expense account balances are transferred to the
_______________ _______________ account at the end of a period.
9. The drawing account is closed at the end of the period by crediting it for its
balance and debiting the _______________ _______________ account.
10. The fees earned account is closed at the end of the period by debiting
it for its balance and crediting the _______________ _______________
account.
11. The income summary account (net income) is closed at the end of the
period by debiting it for its balance and crediting the _______________
_______________ account.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
48
Chapter 4
12. The trial balance prepared after the closing entries have been posted is
called the _________-_______________ trial balance.
13. The ____________________ _____________ begins with analyzing and
journalizing transactions and ends with the post-closing trial balance.
14. The year that ends when business activities have reached the lowest
point in the annual operating cycle is called the _______________
_______________ _______________.
F ILL IN THE B LANK —P ART B
Instructions: Answer the following questions or complete the statements by
writing the appropriate words or amounts in the answer blanks.
1. Cash and other assets that are expected to be converted to cash or sold
or used up within one year or less through the normal operations of the
business are classified on the balance sheet as _________________
_________________.
2. The __________________, _______________, and _________________,
section of the balance sheet includes equipment, machinery, buildings, and
land.
3. Liabilities that will not be due for usually more than one year are classified
on the balance sheet as __________-__________ __________________.
4. In the end-of-period spreadsheet (work sheet), the adjusted amount for depreciation
expense
is
extended
to
the
_______________
__________________ Debit column.
5. In the end-of-period spreadsheet (work sheet), the adjusted amount for the
fees earned account is extended to the _______________
__________________ Credit column.
6. After all of the account balances have been extended to the Income
Statement columns of the end-of-period spreadsheet (work sheet), the totals of the Debit and Credit columns are $120,000 and $115,000, respectively. The difference of $5,000 is the ___________ ______________ for
the period.
7. After all of the account balances have been extended to the Balance Sheet
columns of the end-of-period spreadsheet (work sheet), the totals of the
Debit and Credit columns are $280,000 and $240,000, respectively. The
difference of $40,000 is the ___________ ______________ for the period.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Name:
Chapter 4
49
8. The _______________ _______________ transfer the balances of the
revenue, expense, and drawing accounts to the owner’s capital account.
9. Revenue and expense account balances are transferred to the
_______________ ________________ account at the end of a period.
10. The drawing account is closed at the end of the period by crediting it and
debiting the _______________ ________________ account.
11. The office salaries expense account is closed at the end of the period by
crediting it and debiting the ______________ _______________ account.
12. The income summary account (net loss) is closed at the end of the period
by crediting it and debiting the _______________ ________________
account.
13. The ______________ ______________ is the annual accounting period
adopted by a business.
14. Companies with fiscal years often have highly __________ _________.
M ULTIPLE C HOICE
Instructions: Circle the best answer for each of the following questions.
1. Notes receivable are written claims against:
a. creditors
b. owner’s equity
c. customers
d. assets
2. In an end-of-period spreadsheet (work sheet), the:
a. adjusted trial balance amounts are extended to the Income Statement
and Balance Sheet columns
b. the Adjustment columns are totaled
c. adjustments are extended to the Adjusted Trial Balance columns
d. all the above
3. If in the end-of-period spreadsheet (work sheet) the Income Statement
Credit column is greater than the Income Statement Debit column:
a. a net income exists
b. a net loss exists
c. an asset account is debited
d. a liability account is credited
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
50
Chapter 4
4. After all of the account balances have been extended to the Balance Sheet
columns of the end-of-period spreadsheet (work sheet), the totals of the
Debit and Credit columns are $377,750 and $387,750, respectively. What
is the amount of net income or net loss for the period?
a. $10,000 net income
b. $10,000 net loss
c. $377,750 net income
d. $387,750 net income
5. After all of the account balances have been extended to the Income Statement columns of the end-of-period spreadsheet (work sheet), the totals of
the Debit and Credit columns are $62,300 and $67,600, respectively. What
is the amount of the net income or net loss for the period?
a. $5,300 net income
b. $5,300 net loss
c. $62,300 net income
d. $67,600 net loss
6. Which of the following accounts should be closed to Income Summary at
the end of the fiscal year?
a. Lisa Murray, Drawing
b. Accumulated Depreciation—Equipment
c. Sales
d. Accounts Payable
7. Which of the following accounts will be closed at the end of the fiscal year
by debiting Lisa Murray, Capital?
a. Salaries Expense
b. Sales
c. Lisa Murray, Drawing
d. Accounts Receivable
8. Which of the following accounts will ordinarily appear in the post-closing trial balance?
a. Salaries Expense
b. Lisa Murray, Drawing
c. Sales
d. Lisa Murray, Capital
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Name:
Chapter 4
51
9. The maximum length of an accounting period is normally:
a. 6 months
b. 1 year
c. 2 years
d. 3 years
10. The complete sequence of accounting procedures for a fiscal period is frequently called the:
a. end-of-period spreadsheet (work sheet) process
b. opening and closing cycle
c. accounting cycle
d. fiscal cycle
T RUE /F ALSE
Instructions: Indicate whether each of the following statements is true or false
by placing a check mark in the appropriate column.
True
False
1. The balance of Accumulated Depreciation—Equipment is
extended to the Income Statement columns of the end-ofperiod spreadsheet (work sheet). ........................................
____
____
2. The difference between the Debit and Credit columns of
the Income Statement section of the end-of-period
spreadsheet (work sheet) is normally larger than the difference between the Debit and Credit columns of the Balance Sheet section. .............................................................
____
____
3. The first item normally presented in the statement of owner’s equity is the balance of the owner’s capital account at
the beginning of the period. .................................................
____
____
4. The balance that is transferred from the income summary
account to the capital account is the net income or net loss
for the period........................................................................
____
____
5. The balances of the accounts reported in the balance
sheet are carried from year to year and are called temporary accounts. ..................................................................
____
____
6. An account titled Income Summary is normally used for
transferring the revenue and expense account balances to
the owner’s capital account at the end of the period. ..........
____
____
7. If the Income Statement Debit column is greater than the
Income Statement Credit column of the end-of-period
spreadsheet (work sheet), the difference is net income......
____
____
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
52
Chapter 4
8. A type of work sheet frequently used by accountants prior
to the preparation of financial statements is called a postclosing trial balance. ............................................................
____
____
9. At the end of the period, the balances are removed from
the temporary accounts and the net effect is recorded in
the permanent account by means of closing entries. ..........
____
____
10. The annual accounting period adopted by a business is
known as its fiscal year. .......................................................
____
____
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Name:
Chapter 4
53
E XERCISE 4-1
The account titles and Adjustments columns of the end-of-period spreadsheet
(work sheet) for Sally’s Small Engine Repair are listed below.
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
D
E
Sally’s Small Engine Repair
End-of-Period Spreadsheet (Work Sheet)
For Month Ended August 31, 20-Adjustments
Debit
Credit
Cash
Accounts Receivable
Supplies
Prepaid Rent
Tools/Equipment
Accumulated Depreciation
Accounts Payable
Sally Sand, Capital
Sally Sand, Drawing
Repair Fees
Salary Expense
Miscellaneous Expense
Salaries Payable
Rent Expense
Supplies Expense
Depreciation Expense
(e) 3,200
(c)
(b)
700
560
(d) 1,000
(e) 3,200
(a) 1,500
(a) 1,500
(b)
560
(c)
700
(d) 1,000
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
54
Chapter 4
Instructions: Prepare journal entries for the adjustments indicated for Sally’s
Small Engine Repair.
JOURNAL
PAGE
DATE
DESCRIPTION
POST.
REF.
DEBIT
CREDIT
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
18
18
19
19
20
20
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Name:
Chapter 4
55
E XERCISE 4-2
Instructions: The journal, the income summary account, the service fees
account, the salary expense account, and the supplies expense account of Tony
Brown as of March 31, the first month of the current fiscal year, follow. In the
journal, prepare the entries to close Brown’s revenue and expense accounts
into the income summary account. Then post to the ledger.
JOURNAL
DATE
PAGE
POST.
REF.
DESCRIPTION
DEBIT
7
CREDIT
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
11
11
12
12
13
13
14
14
15
15
ACCOUNT
DATE
Income Summary
ITEM
ACCOUNT NO.
POST.
REF.
DEBIT
CREDIT
45
BALANCE
DEBIT
CREDIT
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
56
Chapter 4
Service Fees
ACCOUNT
DATE
20–
Mar.
DEBIT
CREDIT
BALANCE
DEBIT
CREDIT
5
4,850.00
4,850.00
31
6
14,375.00
19,225.00
Salary Expense
DATE
ITEM
31
ACCOUNT NO.
POST.
REF.
5
DEBIT
CREDIT
8,550.00
DATE
ITEM
BALANCE
DEBIT
CREDIT
ACCOUNT NO.
POST.
REF.
DEBIT
58
8,550.00
Supplies Expense
ACCOUNT
20–
Mar.
POST.
REF.
50
15
ACCOUNT
20–
Mar.
ITEM
ACCOUNT NO.
CREDIT
67
BALANCE
DEBIT
15
5
2,430.00
2,430.00
25
6
1,720.00
4,150.00
31
6
1,280.00
5,430.00
CREDIT
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Name:
Chapter 4
57
P ROBLEM 4-1
An end-of-period spreadsheet (work sheet) of Castle Shop for the fiscal year
ended April 30, 20--, appears on the following page.
Instructions:
Prepare (1) an income statement, (2) a statement of owner’s equity, and (3) a
balance sheet using the forms on the following pages.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
58
A
1
2
3
4
5
6 Account Title
7 Cash
8 Accounts Receivable
9 Supplies
10 Prepaid Rent
11 Tools & Equipment
12 Accum. Depreciation
13 Accounts Payable
14 Wages Payable
15 Unearned Fees
16 Castle, Capital
17 Castle, Drawing
18 Service Fees
19
20 Wages Expense
21 Supplies Expense
22 Depr. Expense
23 Rent Expense
24 Misc. Expense
25
26 Net Income
27
B
E
F
G
Castle Shop
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended April 31, 20-Unadjusted
Adjusted
Trial Balance
Adjustments
Trial Balance
Dr.
10,056
7,938
3,000
9,504
23,814
C
D
Cr.
Dr.
Cr.
(e) 3,000
(a) 1,200
(b) 792
1,674
7,764
Dr.
10,056
10,938
1,800
8,712
23,814
(c) 1,000
500
3,528
Income
Statement
Dr.
Cr.
17,376
(e) 3,000
(f) 500
(d) 2,000
(a) 1,200
(c) 1,000
(b) 792
81,564
8,492
8,492
J
K
Balance
Sheet
Dr.
10,056
10,938
1,800
8,712
23,814
3,528
34,808
19,376
1,200
1,000
792
6,348
87,564
Cr.
2,674
7,764
2,000
1,500
38,818
3,528
31,308
6,348
81,564
I
2,674
7,764
2,000
1,500
38,818
(d) 2,000
2,000 (f)
38,818
Cr.
H
87,564
34,808
19,376
1,200
1,000
792
6,348
28,716
58,848
______
52,756
6,092
34,808
______
34,808
34,808
58,848
58,848
6,092
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the
publisher.
Chapter 4
Problem 4-1
Name:
Chapter 4
59
(1)
Income Statement
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
60
Chapter 4
(2)
Statement of Owner’s Equity
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Balance Sheet
Name:
(3)
Chapter 4
61
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the
publisher.
62
Chapter 4
P ROBLEM 4-2
Instructions:
(1) On the basis of the data in the Adjustments columns of the end-of-period
spreadsheet (work sheet) in Problem 4-1, journalize the adjusting entries.
(2) On the basis of the data in the Income Statement and Balance Sheet columns of the work sheet in Problem 4-1, journalize the closing entries.
JOURNAL
DATE
DESCRIPTION
PAGE
POST.
REF.
DEBIT
CREDIT
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
18
18
19
19
20
20
21
21
22
22
23
23
24
24
25
25
26
26
27
27
28
28
29
29
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher
Name:
Chapter 4
JOURNAL
DATE
DESCRIPTION
63
PAGE
POST.
REF.
DEBIT
CREDIT
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
11
11
12
12
13
13
14
14
15
15
16
16
17
17
18
18
19
19
20
20
21
21
22
22
23
23
24
24
25
25
26
26
27
27
28
28
29
29
30
30
31
31
32
32
33
33
34
34
35
35
36
36
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.