1 4 Completing the Accounting Cycle. 2 5 4-1 3 Spreadsheet (Work Sheet) Trial Balance...

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4

Completing Completing the the

Accounting Accounting CycleCycle

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3

Spreadsheet (Work Sheet)Spreadsheet (Work Sheet)

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Accounts are listed in the Trial Balance column using the ending balance found in the general ledger. 6

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Adjustments are entered here. Two possibilities:

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

Trial Balance




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Adjustments are combined with the trial balance. Account balances are now adjusted.

Trial Balance



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

to the Income Statement column.

Adjusted TB


Income State. Balance Sheet


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Asset, liability, owner’s equity, and drawing balances in the Adjusted

Trial Balance column are extended to the Balance Sheet column.

Adjusted TB


Income State. Balance Sheet


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Prepare financial statements from adjusted

account balances.

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914

4-2

To balance sheet

1015

(Concluded)

From statement of owner’ equity

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A classified balance sheet is a balance sheet that was expanded by adding subsections for current

assets; property, plant, and equipment; and current liabilities.

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Cash and other assets that are expected to be converted into cash, sold or used

up usually within a year or less, through the normal operations of the business are called current assets.

Cash Accounts Receivable Supplies

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

agreed rate.

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Property, plant, and equipment (also called fixed assets) include assets that depreciate

over a period of time. Land is an exception as it is not subject to depreciation.

Equipment Machinery Buildings Land

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

Accounts payable Wages payable Interest payable Unearned fees

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Liabilities not due for a long time (usually more than one

year) are long-term liabilities.

Notes payableMortgage payableBond payable

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Owner’s equity is the owner’s right to the assets of the business.

Owner’s equity is added to the total liabilities, and the total must

be equal to the total assets.

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Example Exercise 4-4

The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007 balance sheet of Hindsight Consulting.

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4-2

1. Jason Corbin, Capital 5. Cash2. Notes Receivable (due 6. Unearned Rent

in 6 months) months)3. Notes Payable (due in 7. Accumulated

Depr.—2009) Equipment

4. Land 8. Accounts Payable

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

period are called temporary accounts or nominal accounts.

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To report amounts for only one period, temporary accounts should have zero

balances at the beginning of the period. At the end of the period the

revenue and expense account balances are transferred to Income Summary.

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The balance of Income Summary is then transferred to the owner’s capital account. The balance of the owner’s drawing account is also transferred to

the owner’s capital account. The entries that transfer these balances are

called closing entries.

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2334

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

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Income Summary 16,840

120

16,960

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24

Wages Expense

Rent Expense

Depreciation Expense

Utilities Expense

Supplies Expense

Insurance Expense

Bal. 200

Miscellaneous Expense

Bal. 455

Income Summary

Debit Income Summary for the total expenses

and credit each expense account for its balance.

16,9609,855

Bal. 4,525

Bal. 1,600

Bal. 50

Bal. 985

Bal. 2,040

455

200

2,040

985

50

1,600

4,525

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25

Chris Clark, Capital

Bal. 25,000

Chris Clark, Drawing

Bal. 4,000

Income Summary

16,9609,8557,105

7,105

Debit Income Summary for the

amount of its balance (in this case, the net

income) and credit the capital account.

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Chris Clark, Capital

Bal. 25,0007,105

Chris Clark, Drawing

Bal. 4,000 4,000

4,000

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Debit the capital account for the balance of the

drawing account, and credit drawing

for the same amount.

4-3

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4-3

Step 4Step 4

Step 3Step 3

Step 2Step 2

Step 1Step 1

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After the closing entries are posted, all of the

temporary accounts have zero balances.

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The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting.


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

Terry Lambert, Capital

$615,850Terry Lambert, Drawing

25,000Fees Earned

380,450Wages Expense

250,000Rent Expense

65,000Supplies Expense

18,250Miscellaneous Expense

6,200

Journalize the four entries required to close the accounts.40

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4-3Exhibit 7 Post-Closing Trial Balance

NetSolutionsPost-Closing Trial Balance

December 31, 2007Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 200 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 28 105 00

29 545 00 29 545 00

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The accounting process that begins with analyzing and journalizing

transactions and ends with preparing the accounting records for the next period’s transactions is called the

accounting cycle. There are ten steps in the accounting cycle.

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2. Transactions are posted to the ledger.

3. An unadjusted trial balance is prepared.

4. Adjustment data are assembled and analyzed.

5. An optional end-of-period spreadsheet (work sheet) is prepared.

1. Transactions are analyzed and recorded in the journal.

The Accounting Cycle 4-4

Continued

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7. An adjusted trial balance is prepared.

8. Financial statements are prepared.

9. Closing entries are journalized and posted to the ledger.

10. A post-closing trial balance is prepared.

6. Adjusting entries are journalized and posted to the ledger.

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The annual accounting period adopted by a business is known as its fiscal

year. When a business adopts a fiscal year that ends when business activities

have reached the lowest point in its annual operation, such a fiscal year is

also called the natural year.

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The financial history of a business may be shown by a series of balance sheets and income statements, as displayed below.

Financial History of a Business

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The end-of-period spreadsheet (work sheet) shown in the following slides does not have the usual spreadsheet headings due to space constraints.

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Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit123456789

10111213141516171819202122

The The unadjusted unadjusted

trial balance trial balance is checked is checked

for equality.for equality.

The The unadjusted unadjusted

trial balance trial balance is checked is checked

for equality.for equality.

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Unadjusted Adjusted Trial Balance Adjustments Trial Balance

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Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600


10111213141516171819202122

(a) 1,240

(a) 1,240

Cost of Cost of supplies on supplies on hand at end hand at end of period is of period is

$760.$760.

Cost of Cost of supplies on supplies on hand at end hand at end of period is of period is

$760.$760.

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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600


10111213141516171819202122

Insurance Expense (b) 200

Accounts are added as needed.

(b) 200

The The insurance insurance

expense for expense for December is December is

$200 $200 ($2,400/12)($2,400/12)

The The insurance insurance

expense for expense for December is December is

$200 $200 ($2,400/12)($2,400/12)

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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 200Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600


10111213141516171819202122

Insurance Expense (b) 200

(c) 120

Rent Revenue (c) 120

Rent revenue Rent revenue earned earned during during

December December was $120.was $120.

Rent revenue Rent revenue earned earned during during

December December was $120.was $120.

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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 200Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600


10111213141516171819202122

Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250

(d) 250

Wages Wages accrued but accrued but not paid at not paid at the end of the end of December December

totaled $250.totaled $250.

Wages Wages accrued but accrued but not paid at not paid at the end of the end of December December

totaled $250.totaled $250.

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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 200Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600


10111213141516171819202122

Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250

(e) 500

(e) 500

Fees accrued Fees accrued at the end of at the end of December December

but not but not recorded recorded

total $500.total $500.

Fees accrued Fees accrued at the end of at the end of December December

but not but not recorded recorded

total $500.total $500.

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Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 200Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600


10111213141516171819202122

Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250Depreciation Expense (f) 50Accum. Depreciation (f) 50

Depreciation Depreciation of office of office

equipment is equipment is $50 for $50 for

December.December.

Depreciation Depreciation of office of office

equipment is equipment is $50 for $50 for

December.December.


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42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit


123456789

10111213141516171819202122

Insurance Expense (b) 200 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

To make To make more more space, space, let’s let’s

remove remove the the

heading.heading.

To make To make more more space, space, let’s let’s

remove remove the the

heading.heading.

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42,600 42,600


10111213141516171819202122232425


2,360 2,360Summed Summed

and and ruledruled

Summed Summed and and

ruledruled

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The next step is to add or subtract the adjustments from (to) the

amounts found in the Unadjusted Trial Balance columns and enter the results in the Adjusted Trial

Balance columns.

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42,600 42,600


10111213141516171819202122232425


2,360 2,360

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Cash 2,065 2,065Accounts Receivable 2,220 (e) 500 2,720Supplies 2,000 (a) 1,240 760Prepaid Insurance 2,400 (b) 200 2,200Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 360 (c) 120 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,340 (e) 500 16,840Wages Expense 4,275 (d) 250 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 800 (a) 1,240 2,040Miscellaneous Expense 455 455

42,600 42,600


10111213141516171819202122232425

Insurance Expense (b) 200 200 Rent Revenue (c) 120 120 Wages Payable (d) 250 250 Depreciation Expense (f) 50 50 Accum. Depreciation (f) 50 50

2,360 2,360 43,400 43,400

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Because of space constraints, the Unadjusted

Trial Balance and the Adjustments columns will

not be shown in the following slides.

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Cash 2,065Accounts Receivable 2,720Supplies 760Prepaid Insurance 2,200Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 240Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,840Wages Expense 4,525Rent Expense 1,600Utilities Expense 985Supplies Expense 2,040Miscellaneous Expense 455


Adjusted Trial Balance Income Statement Balance Sheet

123456789

10111213141516171819202122232425

Insurance Expense 200 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50

43,400 43,40068

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The next step is to extend amounts in the Adjusted Trial Balance columns to the Income Statement and Balance

Sheet columns.

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Cash 2,065Accounts Receivable 2,720Supplies 760Prepaid Insurance 2,200Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 240Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,840Wages Expense 4,525Rent Expense 1,600Utilities Expense 985Supplies Expense 2,040Miscellaneous Expense 455



123456789

10111213141516171819202122232425

Insurance Expense 200 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50

43,400 43,40070

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Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,200 2,200Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455



123456789

10111213141516171819202122232425

Insurance Expense 200 200 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50

43,400 43,40071

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The Income Statement and Balance Sheet

columns are totaled.

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123456789

10111213141516171819202122232425


43,400 43,40073

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123456789

10111213141516171819202122232425


43,400 43,400 9,855 16,960 33,545 26,440

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The net income or net loss is determined. Then

the Income Statement and Balance Sheet

columns are totaled and double-ruled.

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123456789

10111213141516171819202122232425


43,400 43,400 9,855 16,960 33,545 26,440

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123456789

10111213141516171819202122232425


43,400 43,400 9,855 16,960 33,545 26,440

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Net income 7,105 7,10516,960 16,960 33,545 33,545

6078

9,855 16,960 33,545 26,4407,105 7,105

16,960 16,960 33,545 33,545

Income Statement Balance Sheet

Net IncomeNet IncomeNet Net

IncomeIncome

The difference between the Income Statement column totals is the net income (or net loss) for the period.

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