Chapter 4

Completing the
Accounting Cycle
Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
of Thomson Learning. All rights reserved.
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Some
Some of of the
the action
action hashas been
been automated,
automated,
so
so click
click the
themouse
mouse whenwhen you
you see
see this
this
lightning
lightning bolt
bolt in
in the
thelower
lower right-hand
right-hand
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corner of of the
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screen. YouYou can
can point
point and
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click anywhere
anywhere on on the
the screen.
screen.
 Objectives
Objectives
1. Review the seven basic steps of the accounting cycle.
2. Prepare a work After
sheet. studying this
After studying this
3. Prepare financial statements from a work sheet.
4.
chapter,
chapter, you
you should
should
Prepare adjusting and closing entries from a work sheet.
5. Explain what is meantbebyable
be able to:
to: year and the natural
the fiscal
business year.
6. Analyze and interpret the financial solvency of a
business by computing working capital and the current
ratio.
 Seven
Seven Basic
Basic Steps
Steps of
of the
the
Accounting
Accounting Cycle
Cycle
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data are
assembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.
Assets
Assets are
are commonly
commonly divided
divided into
into classes
classes
and
and that
that two
two of
of these
these classes
classes are
are current
current
assets
assets and
and property,
property, plant,
plant, and
and equipment.
equipment.
That’s
That’s correct.
correct. Cash
Cash and
and other
other
assets
assets that
that are
are expected
expected to to be
be
converted
converted into
into cash,
cash, sold,
sold, or
or
used
used up
up usually
usually in
in less
less than
than aa
year
year are
are current
current assets.
assets.
 Well…
Well… besides
besides cash,
cash, there’s
there’s
notes
notes receivable,
receivable, accounts
accounts
For
For example?
example? receivable,
receivable, supplies,
supplies, and
and
other
other prepaid
prepaid items.
items.
 There
There are
are some
some exceptions,
exceptions, butbut
that’s
that’s basically
basically correct.
correct. Assets
Assets
such as office So,
So, assets
assets
equipment, that
that have
have aa life
life
such as office equipment,
machinery, over
over
buildings, andaa year
year
land are
are listed
listed under
under
machinery, buildings, and land
would appear under thatproperty,
property,
heading. plant,
plant, and
and
would appear under that heading.
equipment.
equipment.
Liabilities
Liabilities due
due usually
usually within
within one
one
year
year or
or less
less and
and that
that are
are to
to be
be paid
paid
out
out of
of current
current assets
assets are
are called
called
current
current liabilities.
liabilities.

√ Accounts payable
√ Wages payable
√ Interest payable
√ Unearned fees
 Liabilities
Liabilities not
not due
due for
for
more
more than
than aa year
year usually
usually
are
are long-term
long-term liabilities.
liabilities.

Mortgage note
payable
Mortgage payable
Bond payable
 The
The work
work sheet
sheet isis aa useful
useful
device
device forfor understanding
understanding the the
flow
flow of
of accounting
accounting datadata from
from
the
the unadjusted
unadjusted trial
trial balance
balance toto
the
the financial
financial statements.
statements.
 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Prepared
Prepared from
from thethe general
general ledger.
ledger.
Accounts
Accounts are
are listed
listed in
in the
the following
following
order:
order: assets,
assets, liabilities,
liabilities, owner’s
owner’s
equity,
equity, revenues,
revenues, andand expenses.
expenses.
 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments
Adjustments are are entered
entered here.
here.
Two
Two possibilities:
possibilities:
1.
1. Deferrals
Deferrals –– Existing
Existing balances
balances are
are
changed.
changed.
2.
2. Accruals
Accruals –– New
New information
information isis
entered.
entered.
 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments
Adjustments are are combined
combined with
with
the
the trial
trial balance.
balance. Account
Account
balances
balances areare now
now adjusted.
adjusted.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 The
The Unadjusted
Unadjusted
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000 Trial
Trial Balance
Balance
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800
16 Miscellaneous Expense 455
17 42,600 42,600
18
19
20
21
22
(a)
(a) The
The Supplies
Supplies account
account has
has aa debit
debit ofof
$2,000.
$2,000. A A count
count of
of supplies
supplies atat the
the end
end of
of
the
the period
period reveals
reveals that
that $760
$760 isis on
on hand.
hand.
Therefore,
Therefore, $1,240
$1,240 inin supplies
supplies was
was used
used
during
during the
the two-month
two-month period.
period.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18
19
20
21
22
(b)
(b)The
The Prepaid
Prepaid Insurance
Insurance account
account has has aa
debit
debit balance
balance ofof $2,400,
$2,400, which
which
represents
represents prepayment
prepayment ofof insurance
insurance forfor
24
24 months
months beginning
beginning December
December 1. 1.
Thus,
Thus, the
the insurance
insurance expense
expense for
for this
this
month
month isis $100
$100 ($2,400
($2,400 ÷÷ 24).
24).
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19
20
21
22
Accounts are added as needed.
(c)
(c) The
The Unearned
Unearned RentRent account
account hashas aa credit
credit
balance
balance of
of $360,
$360, which
which represents
represents the the
receipt
receipt of
of three-months’
three-months’ rent
rent beginning
beginning
with
with December
December 1. 1. Thus,
Thus, the
the rent
rent revenue
revenue
for
for December
December isis $120.
$120.

FOR
REN
T
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20
21
22
(d)
(d) Wages
Wages accrued
accrued but
but not
not paid
paid at
at
the
the end
end of
of December
December total
total $250.
$250.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21
22
(e)
(e) Fees
Fees accrued
accrued at
at the
the end
end of
of
December,
December, butbut not
not recorded,
recorded,
total
total $500.
$500.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21
22
(f)
(f) Depreciation
Depreciation ofof the
the office
office
equipment
equipment isis $50
$50 for
for December.
December.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21 Depreciation Expense (f) 50
22 Accum. Depreciation (f) 50
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
To
Trial Balance
To make
make more
Adjustments
more Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 space,
space, let’s
let’s remove
remove
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 the
the heading.
heading. (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21 Depreciation Expense (f) 50
22 Accum. Depreciation (f) 50
 Adjusted 31
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
Depreciation Expense (f) 50
21
Accum. Depreciation
Summed
Summed (f) 50
22
23 and
and 2,260 2,260
24
25
ruled
ruled
Next,
Next, the
the unadjusted
unadjusted Trial
Trial
Balance
Balance columns
columns andand the
the
Adjustments
Adjustments columns
columns areare
combined
combined to to determine
determine thethe
amounts
amounts displayed
displayed inin the
the
Adjusted
Adjusted Trial
Trial Balance.
Balance.
 Adjusted 33
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21 Depreciation Expense (f) 50
22 Accum. Depreciation (f) 50
23 2,260 2,260
24
25
 Adjusted 34
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,220 (e) 500 2,720
3 Supplies 2,000 (a) 1,240 760
4 Prepaid Insurance 2,400 (b) 100 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 360 (c) 120 240
9 Chris Clark, Capital 25,000 25,000
10 Chris Clark, Drawing 4,000 4,000
11 Fees Earned 16,340 (e) 500 16,840
12 Wages Expense 4,275 (d) 250 4,525
13 Rent Expense 1,600 1,600
14 Utilities Expense 985 985
15 Supplies Expense 800 (a) 1,240 2,040
16 Miscellaneous Expense 455 455
17 42,600 42,600
18 Insurance Expense (b) 100 100
19 Rent Revenue (c) 120 120
20 Wages Payable (d) 250 250
21 Depreciation Expense (f) 50 50
22 Accum. Depreciation (f) 50 50
23 2,260 2,260 43,400 43,400
24
25
 The Work Sheet

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

Revenue
Revenue and
and expense
expense balances
balances in
in
the
the Adjusted
Adjusted Trial
Trial Balance
Balance column
column
are
are extended
extended to
to the
the Income
Income
Statement
Statement column.
column.
 The Work Sheet

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

Asset,
Asset, liability,
liability, owner’s
owner’s equity,
equity, and
and
drawing
drawing balances
balances in
in the
the Adjusted
Adjusted
Trial
Trial Balance
Balance column
column areare extended
extended
to
to the
the Balance
Balance Sheet
Sheet column.
column.
To
To make
make room
room on
on the
the slides
slides for
for
the
the Income
Income statement
statement andand
Balance
Balance Sheet
Sheet columns,
columns, thethe
Trial
Trial Balance
Balance and
and Adjustments
Adjustments
columns
columns havehave been
been removed.
removed.
 Adjusted
Trial Balance Income Statement Balance Sheet
38
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,720
3 Supplies 760
4 Prepaid Insurance 2,300
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 240
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11 Fees Earned 16,840
12 Wages Expense 4,525
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 2,040
16 Miscellaneous Expense 455
17
18 Insurance Expense 100
19 Rent Revenue 120
20 Wages Payable 250
21 Depreciation Expense 50
22 Accum. Depreciation 50
23 43,400 43,400
24
25
Now,
Now, let’s
let’s extend
extend the
the balances
balances
from
fromthe
the Adjusted
Adjusted Trial
Trial
Balance
Balance column.
column.
 Adjusted 40
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 240 240
9 Chris Clark, Capital 25,000 25,000
10 Chris Clark, Drawing 4,000 4,000
11 Fees Earned 16,840 16,840
12 Wages Expense 4,525 4,525
13 Rent Expense 1,600 1,600
14 Utilities Expense 985 985
15 Supplies Expense 2,040 2,040
16 Miscellaneous Expense 455 455
17
18 Insurance Expense 100 100
19 Rent Revenue 120 120
20 Wages Payable 250 250
21 Depreciation Expense 50 50
22 Accum. Depreciation 50 50
23 43,400 43,400
24
25
 These
These four
four
columns
columns are
are
summed.
summed.
 Adjusted 42
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 240 240
9 Chris Clark, Capital 25,000 25,000
10 Chris Clark, Drawing 4,000 4,000
11 Fees Earned 16,840 16,840
12 Wages Expense 4,525 4,525
13 Rent Expense 1,600 1,600
14 Utilities Expense 985 985
15 Supplies Expense 2,040 2,040
16 Miscellaneous Expense 455 455
17
18 Insurance Expense 100 100
19 Rent Revenue 120 120
20 Wages Payable 250 250
21 Depreciation Expense 50 50
22 Accum. Depreciation 50 50
23 43,400 43,400 9,755 16,960 33,645 26,440
24
25
 The
The difference
difference between
between the
the
Income
Income Statement
Statement column
column
totals
totals isis the
the net
net income
income (or
(or net
net
loss)
loss) for
for the
the period.
period.
The
The difference
difference between
between the
the
Balance
Balance Sheet
Sheet column
column totals
totals
isis also
also the
the income
income (or(or net
net
loss)
loss) for
for the
the period.
period.
 Income Statement Balance Sheet

9,755 16,960 33,645 26,440

7,205 7,205
16,960 16,960 33,645 33,645

Net Income Net Income

 NetSolutions
Income Statement
For Two Months Ended December 31, 2005

Fees earned $16,840

Rent revenue 120
Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205

Every amount on this income statement was taken from the

Income Statement column of the work sheet.
 NetSolutions
Statement of Owner’s Equity
For the Two Months Ended December 31, 2005

Chris Clark, Capital, November 1, 2005 $ 0

Investment on November 1, 2005 $25,000
Net income for November and December 7,205
$32,205
Less withdrawals 4,000
Increase in owner’s equity 28,205
Chris Clark, Capital, December 31, 2005 $28,205
From
Either
From
Either the
fromthethe
from the
Balance
income
Balance Sheet
incomeSheet
debit
debit column
statement
column
statement or of
or the
of
the
the work
thework sheet.
worksheet.
work sheet.
sheet.
 NetSolutions
Balance Sheet
December 31, 2005
Assets
Assets Liabilities
Liabilities
Current
Currentassets:
assets: Current
Currentliabilities:
liabilities:
Cash
Cash $$ 2,065
2,065 Accounts
Accountspayable
payable $900
$900
Accounts
Accountsreceivable
receivable 2,720
2,720 Wages
Wagespayable
payable
From
From the
250
250 the
Supplies
Supplies 760
760 Unearned
Unearnedrent
rent Statement
240
Statement
240
Prepaid
Prepaidinsurance 2,300 Total
Totalliabilities $$ 1,390
Total
insurance 2,300 liabilities of Owner’s
1,390
of Owner’s
Totalcurrent
currentassets
assets $$ 7,845
7,845
Property,
Property,plant,
plant,and
and Equity
Equity
equipment:
equipment:
Land
Land $20,000
$20,000
Office
Officeequip.
equip. $1,800
$1,800
Less
Lessaccum.
accum.
depreciation
depreciation 50
50 1,750
1,750 Owner’s
Owner’sEquity
Equity
Total
Totalproperty,
property,plant
plant Chris
ChrisClark,
Clark,Capital
Capital 28,205
28,205
and
andequipment
equipment 21,750
21,750 Total
Totalliabilities
liabilitiesand
and
Total
Totalassets
assets $29,595
$29,595 owner’s
owner’sequity
equity $29,595
$29,595
Adjusting
Adjusting and
and Closing
Closing Entries
Entries
Adjusting
Adjusting entries
entries are
are
recorded
recorded in
in the
the journal
journal at
at the
the
end
end of
of the
the accounting
accounting
period.
period.
Adjusting
Adjusting and
and Closing
Closing Entries
Entries
IfIf aa work
work sheet
sheet has
has been
been
prepared,
prepared, the
the data
data for
for
these
these entries
entries are
are in
in the
the
Adjustments
Adjustments columns.
columns.
 The
The Closing
Closing Process
Process
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary

3 Net Income or Net Loss is

transferred to Owner’s Capital

OWNER’S CAPITAL

4
Drawings are transferred to
Owner’s Capital
 Adjusting
Adjusting and
and Closing
Closing Entries
Entries
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary

3
The
Net Income
The IncomeorSummary
Income Net Loss is
Summary
account does
does not
transferred
account appear
to Owner’s
not on
appearCapital
on
the
the financial
financial statements.
statements.
OWNER’S CAPITAL

4
Drawings are transferred to
Owner’s Capital
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 Income Summary Bal. 16,840

Rent Expense Rent Revenue

Bal. 1,600 Bal. 120
Depreciation Expense
Bal. 50 Note: The
Utilities Expense balances shown
Chris Clark, Capital
Bal. 985 are adjusted
Bal. 25,000
Supplies Expense balances before
Bal. 2,040 closing. The
Insurance Expense following
Bal. 100
Chris Clark, Drawing sequence
Miscellaneous Expense
Bal. 4,000 demonstrates the
Bal. 455
closing process.
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 16,960 Rent Revenue
Bal. 1,600 120 Bal. 120
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985 Chris Clark, Capital Debit each revenue
Bal. 25,000
Supplies Expense account for the
Bal. 2,040
amount of its
Insurance Expense
Bal. 100
balance, and credit
Miscellaneous Expense
Chris Clark, Drawing Income Summary
Bal. 4,000
Bal. 455 for the total
revenue.
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue
Bal. 1,600 1,600
120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital
Debit Income
Bal. 25,000
Supplies Expense Summary for the
Bal. 2,040 2,040
total expenses and
Insurance Expense
Bal. 100
credit each expense
100
Miscellaneous Expense
Chris Clark, Drawing account for its
Bal. 455 455
Bal. 4,000 balance.
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue
1,600 7,205
Bal. 1,600 120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit Income
Supplies Expense
Bal. 25,000
7,205
Summary for the
Bal. 2,040 2,040
amount of its
Insurance Expense
Bal. 100 100
balance (in this
Miscellaneous Expense
Chris Clark, Drawing case, the net
Bal. 4,000
Bal. 455 455 income) and credit
the capital account.
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue
Bal. 1,600 1,600 7,205
120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit the capital
Supplies Expense
4,000 Bal. 25,000
7,205
account for the
Bal. 2,040 2,040
balance of the
Insurance Expense
Bal. 100 100
drawing account,
Miscellaneous Expense
Chris Clark, Drawing and credit drawing
Bal. 4,000 4,000
Bal. 455 455 for the same
amount.
 Review
Review of
of the
the Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525

4,525 Income Summary 16,480 Bal. 16,840
16,840
Rent Expense 9,775 16,960
16,960 Rent Revenue
Bal. 1,600 1,600
1,600 7,205
120 Bal.
120 120
Depreciation Expense
Bal. 50 50
50
Utilities Expense
Close Revenues
Bal. 985 985
985 Chris Clark, Capital
4,000 Bal. 25,000
4,000 Close Expenses
Supplies Expense
7,205
7,205
Bal. 2,040 2,040
2,040 Close Income Summary
Insurance Expense
Bal. 100 100
100 Close Drawing
Chris Clark, Drawing
Miscellaneous Expense
Bal. 4,000 4,000
Bal. 455 455
445
 After
After the
the closing
closing entries
entries
are
are posted,
posted, all
all of
of the
the
temporary
temporary accounts
accounts have
have
zero
zero balances.
balances.
 Post-closing Trial
Post-closing Trial Balance
Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 720 00
Supplies 760 00
Prepaid Insurance 2 300 00
Land 20 000 00
Office Equipment 1 800 00
Accumulated Depreciation 50 00
Accounts Payable 900 00
Wages Payable 250 00
Unearned Rent 240 00
Chris Clark, Capital 28 205 00
29 645 00 29 645 00
 Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
Working Current Current
= –
Capital Assets Liabilities
Working
= $7,845 – $1,390
Capital
Working $6,455
Capital =
 Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
Current Current Current
Ratio = Assets ÷ Liabilities

Current
Ratio = $7,845 ÷ $1,390
Current
= 5.6
Ratio
Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
This
This ratio
ratio implies
implies that
that
NetSolutions
NetSolutions isis able
able to
to pay
pay
its
its current
current liabilities.
liabilities.
 Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
Current Current Current
ratio = Assets ÷ Liabilities

Current
= $7,845 ÷ $1,390
ratio
Current
= 5.6
ratio
Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
NetSolutions
NetSolutions can
can use
use the
the current
current ratio
ratio
to
to make
make comparisons
comparisons across
across
companies
companies and
and with
with industry
industry averages.
averages.
Chapter 4

The
The End
End