P. 1
ch04 fundamental of financial accounting by edmonds (4th edition)

ch04 fundamental of financial accounting by edmonds (4th edition)

|Views: 112|Likes:
Published by awais_azeemi

More info:

Categories:Types, School Work
Published by: awais_azeemi on Sep 23, 2009
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PPT, PDF, TXT or read online from Scribd
See more
See less

09/29/2012

pdf

text

original

Fundamental Financial Accounting Concepts

Fourth Edition
by Edmonds, McNair, Milam, Olds

PowerPoint® presentation by J. Lawrence Bergin

4- 2

Chapter 4
The Recording Process

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 3

The Accounting Cycle...
q

q

q

Transactions occur in the normal course of business. We record them in our records with a JOURNAL ENTRY (called “Journalizing”). Journal entries are posted to the GENERAL LEDGER (called “Posting”). ADJUSTING ENTRIES are made (journalized) and posted to the LEDGER.

Transactions

Financial Statements

The Process
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 4

Accounting cycle continued...
q

q q

A trial balance may be prepared. It shows the balance (amount and whether debit or credit) of each account. A trial balance is NOT the same as a “Balance Sheet”, which is a formal financial statement. Financial statements are written. Closing journal entries are made (journalized) and posted to the ledger (and
another trial balance, called the “after-closing” or “post-closing” trial balance may be prepared).

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 5

DOUBLE-ENTRY ACCOUNTING
q q q q q

q

Each account can be increased or decreased. Debit means “left side” Credit means “right side” Assets are increased with debits and decreased with credits Liabilities and permanent Stockholders’ Equity are increased with credits and decreased with debits In each journal entry, i.e. recording of a transaction, the DEBITS = CREDITS. (No exceptions!)
© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

4- 6

T-Accounts
ASSETS • In a transaction that increases an asset, put that amount on the left side of the asset account. Increase

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 7

T-Accounts
ASSETS • In a transaction that increases an asset, put that amount on the left side of the asset account. Increase Decrease

• In a transaction that decreases an asset, put that amount on the right side of the asset account. In our accounting records we never cross out, or subtract or change a number. Instead we use debits and credits to change the balances of the account.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 8

T-Accounts
Calculate the balance of any account, at any time by: 1. drawing a line across the T-acccount under the last posted entry. 2. Adding the amounts on the left side and adding the amounts on the right side of the account. 3. Subtract the two totals and put the difference on the side with the larger total.
1000 total on debit side 1000 – 150 = 850
McGraw-Hill/Irwin

CASH 200 100 500 50 300 Bal. 850

150 total on credit side

© The McGraw-Hill Companies, Inc., 2003

4- 9

T-accounts: Assets
DEBITS on the left!! CASH debits increase assets
e.g., when we receive cash, we debit the CASH account

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 10

T-accounts: Assets
Credits on the right!! CASH debits increase assets
e.g., when we receive cash, we debit the CASH account

credits decrease assets
e.g., when we disburse cash, we credit the CASH account

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 11

T-accounts: Liabilities and Equity
Debits on the left! Credits on the right!!

Accounts Payable credits increase liabilities

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 12

T-accounts: Liabilities and Equity
Debits on the left! Credits on the right!!

Accounts Payable credits Increase liabilities
e.g., when we record an amount we owe someone

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 13

T-accounts: Liabilities and Equity
Debits on the left! Credits on the right!!

Accounts Payable debits decrease liabilities credits Increase liabilities
e.g., when we record an amount we owe someone

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 14

T-accounts: Liabilities and Equity
Debits on the left! Credits on the right!!

Accounts Payable debits decrease liabilities
e.g., when we pay off some of our accounts payable

credits Increase liabilities
e.g., when we record an amount we owe someone

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 15

T-Accounts
Permanent Equity accts work like liability accounts do: LIABILITIES debits decrease liabilities credits increase liabilities Permanent Equity Accts.are Com. Stk. & Ret.Earn. debits decrease Cm. Stk. & Ret. Earn. credits increase Cm. Stk. & Ret. Earn.

Additions to these accounts are put on the right.
McGraw-Hill/Irwin

Deductions from these accounts are put on the left.
© The McGraw-Hill Companies, Inc., 2003

4- 16

T-Accounts
Nominal (Temporary) Equity accounts require thought. Question: What effect will an increase in this Nominal account have on Stockholders’ Equity? Answer: An increase in Expenses Answer Expenses & Dividends* decreases profit & thus, decreases debits credits permanent Stk. Equity. Since increase decrease decreases in permanent Stk. Eq. are expenses & expenses & recorded with debits, expense dividends dividends increases are recorded with debits. *Dividends are also called “distributions.” Revenues
debits decrease revenues credits increase revenues

An increase in Revenues increases Net Income & thus, increases permanent Stk. Equity.
© The McGraw-Hill Companies, Inc.,

McGraw-Hill/Irwin

4- 17

Summary of Balance Sheet Accounts and Debits and Credits

Assets
increase decrease

Liabilities
decrease increase

Stockholders’ Equity
decrease increase

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 18

Summary of Debit and Credit rules
q

q

Assets are increased with debits. Assets include
s s s s s s s

q

Cash A/R Inventory Supplies Prepaid Insurance Prepaid Rent Equipment

q

Liabilities and Permanent Owners’ Equity accounts are increased with credits. Liabilities include
s s

all PAYABLES. all UNEARNED revenues

q

Permanent Equity accounts include:
s s

Common Stock Retained Earnings
© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

4- 19

Summary of Debit/Credit rules
Rules for Temporary Owners’ Equity accounts (Nominal accts.)
q

Expense Accts. and Dividends (also called “Distributions”) are increased with debits.

q

q

Revenue accounts are increased with credits. Revenue accounts include:
s s s s s s

Sales Service Revenue Fees Earned Interest Revenue or Interest Income or Interest Earned

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 20

Grand Summary of Debit/Credit Rules
ACCOUNT TITLE
Debit Side Increases in Assets Decreases in Liabilities Decreases in Stockhlder. Eq. Decrease in Common Stock Decrease in Ret. Earn. Decrease in Revenue Increase in Expenses Increase in Dividends
McGraw-Hill/Irwin

Credit Side Decreases in Assets Increases in Liabilities Increases in Stk. Equity Increase in Common Stk. Increase in Ret. Earn. Increase in Revenue Decrease in Expenses Decrease in Dividends
© The McGraw-Hill Companies, Inc., 2003

4- 21

How do journal entries relate to T-accounts?
Journal entries are recorded chronologically as the transactions occur: e.g., On Jan. 6 services are performed for our customers for which we collect $100 cash: Date Account Title Debit Credit Jan. 6 Cash 100
q

The asset “CASH” is increasing. Increases in assets are recorded by DEBITING the asset account.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 22

How do journal entries relate to T-accounts?
Increases in revenue accounts are recorded with CREDITS. q Journal entries are recorded chronologically as the transactions occur: e.g., On Jan. 6 services are performed for $100 cash: Date Account Title Jan. 6 Cash Service Revenue
An explanation goes here.
q

Debit 100

Credit 100

Journal entries are written in a journal and then posted to the general ledger accounts (our t-accounts).
© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

4- 23

General Journal
Date Account Title Jan. 6 Cash Service Revenue Debit 100 Credit 100

Services rendered for cash
Post from General Journal to the General Ledger Cash Service Revenue

100

100

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 24

Normal Balances
The normal balance of any account is the side where you record the INCREASES.

For example, ASSETS are increased by DEBITING them. So, the normal balance of any asset account is a DEBIT balance.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 25

Patriot Company’s 2004 transactions
1. 2. On Jan. 2, issued more Common Stock for $1,000 cash. On Feb. 1, performed services for customers, charging $7,000 on account. 3. On March 7, collected $8,000 cash from customers for services to be provided in the future. 4. On April 9, collected $7,000 of the receivables. 5. On May 3, paid $2,000 salaries in cash. 6. On July 1st purchased office equipment by paying $9,000 cash. (estimates: life=4 years, salvage value=$1,000) 7. On Nov. 1st paid $3,000 to rent office space for the next three months. 8. Year-end adjustment recognizing 1/4 of the services required by transaction #3 have been performed. 9. Year-end depreciation adjustment. 10. Year-end rent adjustment. 11. Year-end adjustment to accrue $600 salaries thru Dec. 31st.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 26

Journal Entries and Retained Earnings
When journalizing the following transactions notice that the Retained Earnings account is NOT debited or credited in any transaction EXCEPT for the final CLOSING ENTRIES. As the Horizontal Statements model shows, Retained Earnings is affected as a RESULT of changes in the specific accounts directly involved in the transaction. It is these specific accounts that are debited and credited in the journal, NOT the Retained Earnings account.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 27

Beginning Balances (ending balances from last year)
Acc't. Cash + Rec. 4,000
Account Titles

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. + =

Rev. + Stk. + Earn. 7,000 2,000
Debit

- Exp. = Inc.

BB

5,000
Date

5,000 bal.
Credit

GENERAL JOURNAL

GENERAL LEDGER ("T" - Accounts)
Cash bb 5000 Assets = Liabilities + Unearned Serv.Rev. Accounts Receiv. bb 4000 Equity Common Stock Retained Earnings 7000 bb 2000 bb

Prepaid Rent

Office Equipment

Salaries Payable

Service Revenue

Depreciation Exp.

Accumulated Deprec.

Salaries Expense

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 28

Journal Entry Form
When journalizing, the debit portion of the entry is recorded first. The account title is written starting at the left margin. The credit portion is recorded next. The name of the account to be credited is written on the line below the debit and the title is indented. A “line of explanation” may be written next. Skip-a-line between transactions.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 29

1. On Jan. 2, issued Common Stock for $1,000 cash.
Acc't. Cash + 1 1,000
GENERAL JOURNAL
Date

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec.

- Deprec.

= Pay. +

Rev. + Stk. + Earn. 1,000

- Exp. = Inc.

1,000 FA
Debit Credit

Account Titles

Jan. 2

Cash Common Stock
Issued Stock for cash

1000 1000

The asset CASH is increasing. Increases in assets are recorded with Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings DEBITS. bb 5000 bb 4000 7000 bb 2000 bb
1/2 1000 1000 1/2 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. The permanent Stockholders’ Equity account, COMMON STOCK, is increasing. Increases in permanent Equity accounts are recorded with CREDITS. Accumulated Deprec. Salaries Expense Rent Expense

GENERAL LEDGER ("T" - Accounts)

Now let’s POST from the JOURNAL to the LEDGER.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 30

1. On Jan. 2, issued Common Stock for $1,000 cash.
Acc't. Cash + 1 1,000
GENERAL JOURNAL
Date

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec.

- Deprec.

= Pay. +

Rev. + Stk. + Earn. 1,000

- Exp. = Inc.

1,000 FA
Debit Credit

Account Titles

Jan. 2

Cash Common Stock
Issued Stock for cash

1000 1000

GENERAL LEDGER ("T" - Accounts)
Cash 5000 1000 Assets = Liabilities + Unearned Serv.Rev. Accounts Receiv. bb 4000 Equity Common Stock Retained Earnings 7000 bb 2000 bb 1000 1/2

bb 1/2

Prepaid Rent

Office Equipment

Salaries Payable

Service Revenue

Depreciation Exp.

Accumulated Deprec.

Salaries Expense

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 31

2. On Feb. 1, performed customer services for $7,000 on account.
Acc't. Cash + Rec. 7,000
Date

BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev. 7,000
Credit

CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. + =

Rev. + Stk. + Earn. 7,000
Debit

- Exp. = Inc.
7,000

2

GENERAL JOURNAL
Account Titles

Feb. 1

Accounts Receivable Service Revenue
Performed customer services on credit.

7000 7000

The asset ACCOUNTS RECEIVABLE is increasing. Increases in assets are Assets = Liabilities + Equity Cash Accounts recorded with DEBITS. Receiv. Unearned Serv.Rev. Common Stock Retained Earnings bb 5000 bb 4000 7000 bb 2000 bb
1/2

GENERAL LEDGER ("T" - Accounts)

1000

2/17000

1000 1/2

Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. The revenue account, SERVICE REVENUE, is increasing. Increases in 7000 2/1 revenue accounts are recorded with CREDITS. Accumulated Deprec. Salaries Expense Rent Expense

Now let’s POST from the JOURNAL to the LEDGER.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 32

2. On Feb. 1, performed customer services for $7,000 on account.
Acc't. Cash + Rec. 7,000
Date

BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev. 7,000
Credit

CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. + =

Rev. + Stk. + Earn. 7,000
Debit

- Exp. = Inc.
7,000

2

GENERAL JOURNAL
Account Titles

Feb. 1

Accounts Receivable Service Revenue
Performed customer services on credit.

7000 7000

GENERAL LEDGER ("T" - Accounts)
Cash 5000 1000 Assets = Liabilities + Unearned Serv.Rev. Accounts Receiv. bb 4000 2/17000 Equity Common Stock Retained Earnings 7000 bb 2000 bb 1000 1/2

bb
1/2

Prepaid Rent

Office Equipment

Salaries Payable

Service Revenue 7000 2/1

Depreciation Exp.

Accumulated Deprec.

Salaries Expense

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 33

1. On Mar. 7, collected $8,000 cash from customers
BALANCE SHEET (and Accounting Equation) for services to be performed STK. EQUITY future. in the INCOME STATEMENT ASSETS LIABILITIES +
=

CASHFLOW STATEMENT
OA,IA,FA $ amt

Acc't. Cash + 3 8,000
Date

PrePaid + Rent

Office + Equip.

Accum.

Salary
= Pay. + =

Unearn 8,000

Com.

Ret. Rev.

Net

Rec.

- Deprec.

Rev. + Stk. + Earn.

- Exp. = Inc.

8,000 OA
Debit Credit

GENERAL JOURNAL
Account Titles

Mar. 7 Cash Unearned Service Revenue
Collected cash for future services.

8000 8000

The asset CASH is increasing. Increases in assets are recordedEquity DEBITS. with Assets = Liabilities +
bb
1/2 3/7

GENERAL LEDGER ("T" - Accounts)
Unearned Serv.Rev. 8000 3/7

The liability account, UNEARNED SERVICE REVENUE, is increasing. Prepaid Office Equipment Salaries Payable Service Revenue Increases Rent in liability accounts are recorded with CREDITS. 2/1 Depreciation Exp. 7000
Accumulated Deprec. Salaries Expense Now let’s POST from the JOURNAL to the LEDGER. Rent Expense

Cash 5000 1000 8000

Accounts Receiv. bb 4000 2/17000

Common Stock 7000 bb 1000 1/2

Retained Earnings 2000 bb

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 34

1. On Mar. 7, collected $8,000 cash from customers
BALANCE SHEET (and Accounting Equation) for services to be performed STK. EQUITY future. in the INCOME STATEMENT ASSETS LIABILITIES +
=

CASHFLOW STATEMENT
OA,IA,FA $ amt

Acc't. Cash + 3 8,000
Date

PrePaid + Rent

Office + Equip.

Accum.

Salary
= Pay. + =

Unearn 8,000

Com.

Ret. Rev.

Net

Rec.

- Deprec.

Rev. + Stk. + Earn.

- Exp. = Inc.

8,000 OA
Debit Credit

GENERAL JOURNAL
Account Titles

Mar. 7 Cash Unearned Service Revenue
Collected cash for future services.

8000 8000

GENERAL LEDGER ("T" - Accounts)
Cash 5000 1000 8000 Prepaid Rent Assets = Liabilities + Unearned Serv.Rev. Accounts Receiv. bb 4000 8000 3/7 2/17000 Equity Common Stock Retained Earnings 7000 bb 2000 bb 1000 1/2

bb
1/2 3/7

Office Equipment

Salaries Payable

Service Revenue 7000 2/1

Depreciation Exp.

Accumulated Deprec.

Salaries Expense

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 35

4. On April 9th, collected $7,000 of the receivables.
Acc't. Cash + 4 7,000
Date

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec. (7,000)

- Deprec.

= Pay. + =

Rev. + Stk. + Earn.

- Exp. = Inc.

7,000 OA
Debit Credit

GENERAL JOURNAL
Account Titles

Apr. 9 Cash Accounts Receivable
Collected $7,000 cash from customers' receivables.

7000 7000

The asset CASH is increasing. Increases in assets are recordedEquity DEBITS. with Assets = Liabilities +
bb
1/2 3/7 4/9

GENERAL LEDGER ("T" - Accounts)
Unearned Serv.Rev. 8000 3/7

The asset account, ACCOUNTS RECEIVABLE, is decreasing. Decreases in Service Revenue Depreciation Exp. asset accounts are Office Equipment CREDITS. recorded with Salaries Payable 7000 2/1
Accumulated Deprec. Salaries Expense Now let’s POST from the JOURNAL to the LEDGER. Rent Expense

Cash 5000 1000 8000 7000 Prepaid Rent

Accounts Receiv. bb 4000 7000 4/9 2/17000

Common Stock 7000 bb 1000 1/2

Retained Earnings 2000 bb

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 36

4. On April 9th, collected $7,000 of the receivables.
Acc't. Cash + 4 7,000
Date

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec. (7,000)

- Deprec.

= Pay. + =

Rev. + Stk. + Earn.

- Exp. = Inc.

7,000 OA
Debit Credit

GENERAL JOURNAL
Account Titles

Apr. 9 Cash Accounts Receivable
Collected $7,000 cash from customers' receivables.

7000 7000

GENERAL LEDGER ("T" - Accounts)
Cash 5000 1/2 1000 3/7 8000 4/9 7000 Prepaid Rent bb Assets = Liabilities + Unearned Serv.Rev. Accounts Receiv. bb 4000 7000 4/9 8000 3/7 2/17000 Equity Common Stock Retained Earnings 7000 bb 2000 bb 1000 1/2

Office Equipment

Salaries Payable

Service Revenue 7000 2/1

Depreciation Exp.

Accumulated Deprec.

Salaries Expense

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 37

5. On May 3, paid $2,000 salaries in cash.
Acc't. Cash + 5 (2,000)
Date

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec.

- Deprec.

= Pay. + =

Rev. + Stk. + Earn. (2,000)
Debit

- Exp. = Inc.
2,000 (2,000)

(2,000) OA

GENERAL JOURNAL
Account Titles Credit

May 3

Salaries Expense Cash
Paid $2,000 salaries in cash.

2000 2000

The expense account, SALARIES EXPENSE, is + increasing. Increases in Assets = Liabilities Equity Unearned Serv.Rev. Cash Receiv. Common Stock Retained Earnings expenses are5/3 Accounts7000DEBITS. recorded with 4/9 bb 5000 2000 bb 4000 8000 3/7 7000 bb 2000 bb
1/2 3/7 4/9

GENERAL LEDGER ("T" - Accounts)

Office Equipment Salaries Service Revenue Depreciation The asset account, CASH, is decreasing. Payable Decreases in asset accounts are Exp. 7000 2/1 recorded with CREDITS. Accumulated Deprec. Salaries Expense 5/3 2000 Rent Expense

1000 8000 7000 Prepaid Rent

2/17000

1000 1/2

Now let’s POST from the JOURNAL to the LEDGER.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 38

5. On May 3, paid $2,000 salaries in cash.
Acc't. Cash + 5 (2,000)
Date

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec.

- Deprec.

= Pay. + =

Rev. + Stk. + Earn. (2,000)
Debit

- Exp. = Inc.
2,000 (2,000)

(2,000) OA

GENERAL JOURNAL
Account Titles Credit

May 3

Salaries Expense Cash
Paid $2,000 salaries in cash.

2000 2000

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings 5000 2000 5/3 bb 4000 7000 4/9 8000 3/7 7000 bb 2000 bb 2/17000 1000 1000 1/2 8000 7000 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. 7000 2/1

bb
1/2 3/7 4/9

Accumulated Deprec.

Salaries Expense 5/3 2000

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 39

1. On July 1, purchased office equipment by paying $9,000 cash.
Acc't. Cash + Rec. BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. + Equip. 9,000 + Rent

INCOME STATEMENT Net

CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. + =

Rev. + Stk. + Earn.

Rev.

- Exp. = Inc.

6 (9,000)
Date

(9,000) I A
Debit Credit

GENERAL JOURNAL
Account Titles

July 1 Office Equipment Cash
Purchased office equipment for $9,000 cash.

9000 9000

The asset, OFFICE EQUIPMENT, is increasing.+ Increases in Equity are assets Assets = Liabilities Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings recorded with DEBITS. 7000 4/9 Unearned 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 bb 2000 bb
1/2 3/7 4/9

GENERAL LEDGER ("T" - Accounts)

Office Equipment Salaries Service Revenue Depreciation The asset account, CASH, is decreasing. Payable Decreases in asset accounts are Exp. 7/1 9000 7000 2/1 recorded with CREDITS. Accumulated Deprec. Salaries Expense 5/3 2000 Rent Expense

1000 9000 7/1 8000 7000 Prepaid Rent

2/17000

1000 1/2

Now let’s POST from the JOURNAL to the LEDGER.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 40

1. On July 1, purchased office equipment by paying $9,000 cash.
Acc't. Cash + Rec. BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. + Equip. 9,000 + Rent

INCOME STATEMENT Net

CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. + =

Rev. + Stk. + Earn.

Rev.

- Exp. = Inc.

6 (9,000)
Date

(9,000) I A
Debit Credit

GENERAL JOURNAL
Account Titles

July 1 Office Equipment Cash
Purchased office equipment for $9,000 cash.

9000 9000

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings 5000 2000 5/3 bb 4000 7000 4/9 8000 3/7 7000 bb 2000 bb 2/17000 1000 9000 7/1 1000 1/2 8000 7000 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. 7/1 9000 7000 2/1

bb
1/2 3/7 4/9

Accumulated Deprec.

Salaries Expense 5/3 2000

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 41

7. On Nov. 1, paid $3,000 to rent office space for the next three months.
Acc't. Cash + Rec. BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. + Rent 3,000 + Equip. INCOME STATEMENT Net Rev. CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. + =

Rev. + Stk. + Earn.

- Exp. = Inc.

7 (3,000)
Date

(3,000) OA
Debit Credit

GENERAL JOURNAL
Account Titles

Nov. 1 Prepaid Rent Cash
Purchased office equipment for $9,000 cash.

3000 3000
GENERAL LEDGER ("T" - Accounts)

The asset PREPAID RENT is increasing. Increases in assets are recorded Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings with DEBITS. bb 5000 2000 5/3 bb 4000 7000 4/9 8000 3/7 7000 bb 2000 bb
1000 9000 7/1 8000 3000 11/1 7000 Prepaid Rent 11/1 3000
1/2 3/7 4/9 2/1 7000

1000 1/2

Salaries Service Revenue Depreciation The asset account,Office Equipment CASH, is decreasing. Payable Decreases in asset accounts are Exp. 7/1 9000 7000 2/1 recorded with CREDITS. Accumulated Deprec. Salaries Expense 5/3 2000 Rent Expense

Now let’s POST from the JOURNAL to the LEDGER.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 42

7. On Nov. 1, paid $3,000 to rent office space for the next three months.
Acc't. Cash + Rec. BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. + Rent 3,000 + Equip. INCOME STATEMENT Net Rev. CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. + =

Rev. + Stk. + Earn.

- Exp. = Inc.

7 (3,000)
Date

(3,000) OA
Debit Credit

GENERAL JOURNAL
Account Titles

Nov. 1 Prepaid Rent Cash
Purchased office equipment for $9,000 cash.

3000 3000
GENERAL LEDGER ("T" - Accounts)

Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings bb 5000 2000 5/3 bb 4000 7000 4/9 8000 3/7 7000 bb 2000 bb 1/2 2/1 7000 1000 9000 7/1 1000 1/2 3/7 8000 3000 11/1 4/9 7000 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. 11/1 3000 7/1 9000 7000 2/1

Accumulated Deprec.

Salaries Expense 5/3 2000

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 43

Adjusting entries...
q

Before financial statements are prepared, adjusting entries must be journalized and posted to make sure that all accounts are properly stated and that nothing has been omitted. Adjustments need to be made for all:
s

q

s

Accruals (Accrued Revenues and Accrued Expenses) Deferrals (Deferred Revenues and Deferred Expenses)
© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

4- 44

8. Year-end adjustment recognizing ¼ of services required by transaction #3 have been performed.
Acc't. Cash + Rec. + BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. Rent + Equip. INCOME STATEMENT Net Rev. 2,000 Credit CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= = =

Pay. +

Rev. 8,000 (2,000)

+ Stk. + Earn. 2,000 Debit

- Exp. = Inc.
2,000

3 8

8,000

8,000 OA

GENERAL JOURNAL
Date

Account Titles

Dec. 31 Unearned Service Revenue Service Revenue
Completed 1/4 of work on $8,000 contract.

2000 2000

The liability account, UNEARNED SERVICE REVENUE, is decreasing. Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Decreases in liabilities are recorded with 8000 3/7 DEBITS. Common Stock Retained Earnings adj 2000 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb
1000 9000 7/1 8000 3000 11/1 7000 Prepaid Rent 11/1 3000
1/2 3/7 4/9 2/1 7000

GENERAL LEDGER ("T" - Accounts)

1000 1/2

Office Equipment Salaries Payable Service Revenue Depreciation The revenue account, SERVICE REVENUE, is increasing. Increases in Exp. 7/1 9000 7000 2/1 2000 adj revenue accounts are recorded with CREDITS. Accumulated Deprec. Salaries Expense 5/3 2000 Rent Expense

Now let’s POST from the JOURNAL to the LEDGER.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 45

8. Year-end adjustment recognizing ¼ of services required by transaction #3 have been performed.
Acc't. Cash + Rec. + BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. Rent + Equip. INCOME STATEMENT Net Rev. 2,000 Credit CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= = =

Pay. +

Rev. 8,000 (2,000)

+ Stk. + Earn. 2,000 Debit

- Exp. = Inc.
2,000

3 8

8,000

8,000 OA

GENERAL JOURNAL
Date

Account Titles

Dec. 31 Unearned Service Revenue Service Revenue
Completed 1/4 of work on $8,000 contract.

2000 2000

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb 1/2 2/1 7000 1000 9000 7/1 1000 1/2 3/7 8000 3000 11/1 4/9 7000 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. 11/1 3000 7/1 9000 7000 2/1 2000 adj

Accumulated Deprec.

Salaries Expense 5/3 2000

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 46

9. Year-end depreciation adjustment. ($9000-$1000)/4 yr. = $2,000/yr. So, 1/2 year =$1,000.
Acc't. Cash + Rec. + BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. Rent + Equip. INCOME STATEMENT Net Rev. CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. +

Rev.

+ Stk. + Earn. (1,000)

- Exp. = Inc.
1,000 (1,000)

9

1,000 =

GENERAL JOURNAL
Date

Account Titles

Debit

Credit

Dec. 31 Depreciation Expense Accumulated Depreciation
Half-year Depreciation of Office Equipment.

1000 1000

The expense account, DEPRECIATION EXPENSE, is increasing. Increases Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts with DEBITS. Receiv. Common Stock Retained Earnings in expenses are recorded 7000 4/9 adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 bb 2000 bb
1000 9000 7/1 8000 3000 11/1 7000 Prepaid Rent 11/1 3000
1/2 3/7 4/9 2/1 7000

GENERAL LEDGER ("T" - Accounts)

1000 1/2

The contra-asset account, ACCUMULATED DEPRECIATION, is Office Equipment Salaries Payable Service Revenue Depreciation Exp. increasing. Increases in contra-asset accounts are recorded with adj 1000 7/1 9000 7000 2/1 CREDITS. Note: Debit/Credit rules for CONTRA accounts are the opposite of the Accumulated Deprec. Salaries Expense Rent Expense “regular” accounts. (CONTRA-assets vs. “regular” ASSETS)
1000 adj
5/3 2000

2000 adj

Now let’s POST from the JOURNAL to the LEDGER.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 47

9. Year-end depreciation adjustment. ($9000-$1000)/4 yr. = $2,000/yr. So, 1/2 year =$1,000.
Acc't. Cash + Rec. + BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. Rent + Equip. INCOME STATEMENT Net Rev. CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. +

Rev.

+ Stk. + Earn. (1,000)

- Exp. = Inc.
1,000 (1,000)

9

1,000 =

GENERAL JOURNAL
Date

Account Titles

Debit

Credit

Dec. 31 Depreciation Expense Accumulated Depreciation
Half-year Depreciation of Office Equipment.

1000 1000

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb 1/2 2/1 7000 1000 9000 7/1 1000 1/2 3/7 8000 3000 11/1 4/9 7000 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. 11/1 3000 7/1 9000 7000 2/1 adj 1000 2000 adj

Accumulated Deprec. 1000 adj

Salaries Expense 5/3 2000

Rent Expense

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 48

10. Year-end rent adjustment.
$3000/3 Mo. = $1,000/mo. Nov. & Dec. expired =$2,000.
Acc't. Cash + Rec. + BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. Rent 3,000 (2,000)
Date

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

+ Equip.

- Deprec.

= = =

Pay. +

Rev.

+ Stk. + Earn. (2,000)

- Exp. = Inc.
2,000 (2,000)

7 10

(3,000)

(3,000) OA

GENERAL JOURNAL
Account Titles Debit Credit

Dec. 31

Rent Expense Prepaid Rent
Two months (Nov. & Dec.) prepaid rent expired.

2000 2000

The expense account, RENT EXPENSE, is increasing. Increases in expenses Assets = Liabilities + Equity Unearned Serv.Rev. Cash Receiv. Common Stock Retained Earnings are 5000 2000 with DEBITS. 4/9 adj 2000 8000 3/7 recorded 5/3 Accounts7000 bb bb 4000 7000 bb 2000 bb
1000 8000 7000 Prepaid 11/1 3000
1/2 3/7 4/9

GENERAL LEDGER ("T" - Accounts)

9000 7/1 3000 11/1

2/17000

1000 1/2

Rent The asset2000 adj Office Equipment Salaries Payable account, 7/1 9000 PREPAID RENT, is decreasing.Service Revenue Depreciation Exp. Decreases2/1 adj 1000 are in assets 7000 2000 adj recorded with CREDITS. Accumulated Deprec. 1000 adj Salaries Expense 5/3 2000 Rent Expense adj 2000

Now let’s POST from the JOURNAL to the LEDGER.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 49

10. Year-end rent adjustment.
$3000/3 Mo. = $1,000/mo. Nov. & Dec. expired =$2,000.
Acc't. Cash + Rec. + BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. Rent 3,000 (2,000)
Date

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

+ Equip.

- Deprec.

= = =

Pay. +

Rev.

+ Stk. + Earn. (2,000)

- Exp. = Inc.
2,000 (2,000)

7 10

(3,000)

(3,000) OA

GENERAL JOURNAL
Account Titles Debit Credit

Dec. 31

Rent Expense Prepaid Rent
Two months (Nov. & Dec.) prepaid rent expired.

2000 2000

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb 1/2 2/17000 1000 9000 7/1 1000 1/2 3/7 8000 3000 11/1 4/9 7000 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. 11/1 7/1 9000 3000 2000 adj 7000 2/1 adj 1000 2000 adj

Accumulated Deprec. 1000 adj

Salaries Expense 5/3 2000

Rent Expense adj 2000

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 50

11. Year-end adjustment to accrue $600 salaries.
Acc't. Cash + 11
Date

BALANCE SHEET (and Accounting Equation) ASSETS + STK. EQUITY = LIABILITIES PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec.

- Deprec.

= Pay. +

Rev. + Stk. + Earn. (600)
Debit

- Exp. = Inc.
600 (600)

= 600
GENERAL JOURNAL
Account Titles

Credit

Dec. 31

Salaries Expense Salaries Payable
Accrue $600 salaries incurred, but not yet paid.

600 600

The expense account, SALARIES EXPENSE is increasing. Increases in Assets = Liabilities + Equity Unearned Serv.Rev. Cash are Accounts Receiv. Common Stock Retained Earnings expenses 2000 recorded with DEBITS.2000 8000 3/7 5/3 adj bb 5000 bb 4000 7000 4/9 7000 bb 2000 bb
1000 8000 7000 Prepaid 11/1 3000
1/2 3/7 4/9

GENERAL LEDGER ("T" - Accounts)

9000 7/1 3000 11/1

2/17000

1000 1/2

Rent Office Equipment Salaries Payable Service Revenue Depreciation The liability account,9000 SALARIES PAYABLE, is increasing. Increases in Exp. 7/1 2000 adj 600 adj 7000 2/1 adj 1000 2000 adj liability accounts are recorded with CREDITS. Accumulated Deprec. 1000 adj Salaries Expense 5/3 2000 adj 600 Rent Expense adj 2000

Now let’s POST from the JOURNAL to the LEDGER.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 51

11. Year-end adjustment to accrue $600 salaries.
Acc't. Cash + 11 Rec. + BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. Rent + Equip. INCOME STATEMENT Net Rev. CASHFLOW STATEMENT
OA,IA,FA $ amt

- Deprec.

= Pay. +

Rev.

+ Stk. + Earn. (600)

- Exp. = Inc.
600 (600)

=

600

GENERAL JOURNAL
Date

Account Titles

Debit

Credit

Dec. 31

Salaries Expense Salaries Payable
Accrue $600 salaries incurred, but not yet paid.

600 600

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb 1/2 2/17000 1000 9000 7/1 1000 1/2 3/7 8000 3000 11/1 4/9 7000 Prepaid Rent Office Equipment Salaries Payable Service Revenue Depreciation Exp. 11/1 7/1 9000 3000 2000 adj 600 adj 7000 2/1 adj 1000 2000 adj

Accumulated Deprec. 1000 adj

Salaries Expense 5/3 2000 adj 600

Rent Expense adj 2000

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 52

On Dec. 31, the Patriot Co. paid its stockholders a $400 cash dividend. dividend The “Dividends” account is a “contra-equity” account. An increase in this account results in a decrease in the Retained Earnings portion of equity.
GENERAL JOURNAL
Date

Let’s assume one additional transaction.

Account Titles

Debit

Credit

Dec. 31

Dividends Cash
$400 dividend paid to stockholders.

400 400
GENERAL LEDGER ("T" - Accounts)

bb
1/2 3/7 4/9

Cash 5000 2000 1000 9000 8000 3000 7000 400

Assets = Liabilities + Unearned Serv.Rev. Accounts Receiv. 5/3 adj 2000 8000 3/7 bb 4000 7000 4/9 7/1 2/1 7000
11/1 12/31

Equity Common Stock Retained Earnings 7000 bb 2000 bb 1/2 1000 Dividends

Salaries Payable 600 adj
11/1

12/31 400

Prepaid Rent 3000 2000 adj

Office Equipment 7/1 9000

Service Revenue Depreciation Exp. 7000 2/1 adj 1000 2000 adj Salaries Expense 5/3 2000 adj 600 Rent Expense adj 2000

Accumulated Deprec. 1000 adj

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 53

Calculate ledger account ending balances (eb) after all adjustments have been posted.
GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Unearned Serv.Rev. Cash Accounts Receiv. adj 2000 8000 3/7 5000 2000 5/3 bb 4000 7000 4/9 2/1 7000 1000 9000 7/1 6000 eb 8000 3000 11/1 eb 4000 7000 400 12/31 6600 Office Equipment 7/1 9000 eb 9000 Salaries Payable 600 adj 600 eb Equity Common Stock Retained Earnings 7000 bb 2000 bb 1000 1/2 8000 eb Dividends 12/31 400 eb 400 Service Revenue Depreciation Exp. 7000 2/1 adj 1000 2000 adj eb 1000 9000 eb Salaries Expense 5/3 2000 adj 600 eb 2600 Rent Expense adj 2000 eb 2000

bb
1/2 3/7 4/9

eb

Prepaid Rent 11/1 3000 2000 adj eb 1000

Accumulated Deprec. 1000 adj 1000 eb

This is still the beginning balance until the closing entries are made.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 54

Trial Balance

debits

credits

Since debits = credits in all journal entries, at any point in time we should be able to take the balances in all of our general ledger accounts and confirm that DEBITS = CREDITS for all accounts together.

Trial Balances are commonly prepared both before and after recording adjusting entries (and after recording “closing” entries, which will be explained later).
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 55

Adjusted Trial Balance for Patriot Company
Accounts in Ledger Dr. Cash 6600 Accounts. Receivable 4000 Prepaid Rent 1000 Office Equipment Accumulated Deprec. Unearned Serv. Revenue Salaries Payable Common Stock Retained Earnings Dividends 400 Service Revenue Depreciation Expense 1000 Salaries Expense 2600 Rent Expense 2000 Totals 26,600 Cr.

GENERAL LEDGER ("T" - Accounts)
Assets bb
1/2 3/7 4/9

eb

Cash 5000 2000 5/3 1000 9000 7/1 8000 3000 11/1 7000 400 12/31 6600

Accounts Receiv. bb 4000 7000 4/9 2/1 7000 eb 4000

9000 1000 6000 600 8000 2000 9000

Prepaid Rent 11/1 3000 2000 adj eb 1000

Office Equipment 7/1 9000 eb 9000

Accumulated Deprec. 1000 adj 1000 eb

26,600

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 56

Adjusted Trial Balance for Patriot Company
Liabilities Unearned Serv.Rev. adj 2000 8000 3/7 6000 eb

Salaries Payable 600 adj 600 eb

Accounts in Ledger Dr. Cash 6600 Accounts. Receivable 4000 Prepaid Rent 1000 Office Equipment Accumulated Deprec. Unearned Serv. Revenue Salaries Payable Common Stock Retained Earnings Dividends 400 Service Revenue Depreciation Expense 1000 Salaries Expense 2600 Rent Expense 2000 Totals 26,600

Cr.

9000 1000 6000 600 8000 2000 9000

26,600

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 57

Adjusted Trial Balance for Patriot Company
Equity Common Stock Retained Earnings 7000 bb 2000 bb 1000 1/2 8000 eb Dividends 12/31 400 Service Revenue Depreciation Exp. 7000 2/1 adj 1000 2000 adj eb 1000 9000 eb Salaries Expense 5/3 2000 adj 600 eb 2600 Rent Expense adj 2000 eb 2000

Accounts in Ledger Dr. Cash 6600 Accounts. Receivable 4000 Prepaid Rent 1000 Office Equipment Accumulated Deprec. Unearned Serv. Revenue Salaries Payable Common Stock Retained Earnings, begin. Dividends 400 Service Revenue Depreciation Expense 1000 Salaries Expense 2600 Rent Expense 2000 Totals 26,600

Cr.

9000 1000 6000 600 8000 2000 9000

26,600

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 58

Adjusted Trial Balance for Patriot Company
This is the Trial Balance based on the balances of each Ledger account (T-acct) after the adjusting entries have been journalized and posted. Accounts in Ledger Dr. Cr. Cash 6600 Accounts. Receivable 4000 Prepaid Rent 1000 Office Equipment 9000 Accumulated Depreciation 1000 Unearned Service Revenue 6000 Salaries Payable 600 Common Stock 8000 Retained Earnings 2000 Dividends 400 Service Revenue 9000 Depreciation Expense 1000 Salaries Expense 2600 Rent Expense 2000 Totals 26,600 26,600
© The McGraw-Hill Companies, Inc., 2003

debits

=

credits

McGraw-Hill/Irwin

4- 59

LEDGER ACCOUNT BALANCES after the adjusting entries, but before the closing entries, are the dollar amounts that go on the financial statements.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 60

The goal of the whole process:
q

Financial Statements that reflect the true financial condition and transactions of the company
s s

catin i mun on com mati r info rs e o us t
McGraw-Hill/Irwin

g

s

s

Balance Sheet Income Statement Statement of Changes in Stockholders’ Equity Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2003

4- 61

Closing Entries
q

q

All temporary “nominal” accounts (income statement accounts and dividends) are closed at the end of the accounting period, after the financial statements are prepared. Their balances are brought to ZERO, and the offsetting entry is made to the retained earnings account.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 62

Closing Entries

q

q

Balance Sheet
(Retained Earnings part of equity)
McGraw-Hill/Irwin

Income Statement
(revenues and expenses)

q

Since revenue and expense accounts keep track of transactions for a period of time, we need them to be zero at the end of an accounting period. To do this, we close them to retained earnings. This effectively kicks them from the income statement to the balance © The sheet.McGraw-Hill Companies, Inc., 2003

4- 63

Journal Entries to Close Revenue and Expense Accounts: Closing Entries
q

q

q

Like all entries, closing entries are Journalized and then Posted. Revenue accounts have credit balances, so we must DEBIT them to close them (to get a zero balance). What should we credit?

Retained Earnings

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 64

Closing continued...
q

Because expense accounts have debit balances, to close expense accounts we credit the expense account and debit the Retained Earnings account.

We are emptying the revenue and expense accounts... Their balances must be “zero” after closing.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 65

Only the temporary equity accounts below will be closed.
GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Unearned Serv.Rev. Cash Accounts Receiv. 5000 2000 5/3 bb 4000 7000 4/9 adj 2000 8000 3/7 2/1 7000 1000 9000 7/1 6000 eb 8000 3000 11/1 eb 4000 7000 400 12/31 6600 Office Equipment 7/1 9000 eb 9000 Salaries Payable 600 adj 600 eb Equity Common Stock Retained Earnings 7000 bb 2000 bb 1000 1/2 8000 eb Dividends 12/31 400 eb 400 Service Revenue Depreciation Exp. 7000 2/1 adj 1000 2000 adj eb 1000 9000 eb Salaries Expense 5/3 2000 adj 600 eb 2600 Rent Expense adj 2000 eb 2000

bb
1/2 3/7 4/9

eb

Prepaid Rent 11/1 3000 2000 adj eb 1000

Accumulated Deprec. 1000 adj 1000 eb

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 66

Journalize and Post the Closing Entries
GENERAL JOURNAL
Date

Account Titles Closing Entries

Debit

Credit

31 Service Revenue Retained Earnings
to close all revenue accounts

9000 9000

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb 1/2 1000 9000 7/1 2/1 7000 6000 eb 1000 1/2 9000 cl 3/7 8000 3000 11/1 eb 4000 8000 eb 4/9 7000 400 12/31 eb 6600 Salaries Payable Dividends 12/31 400 600 adj Prepaid Rent Office Equipment 600 eb eb 400 11/1 3000 2000 adj 7/1 9000 eb 1000 Service Revenue Depreciation Exp. 7000 2/1 adj 1000 Accumulated Deprec. 1000 adj 2000 adj eb 1000 cl 9000 9000 eb 0

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 67
Date Account Titles Debit Credit

31

Retained Earnings Depreciation Expense Salaries Expense Rent Expense to close all expense accounts

5600 1000 2600 2000

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb 1/2 1000 9000 7/1 2/1 7000 6000 eb 1000 1/2 cl 5600 9000 cl 3/7 8000 3000 11/1 eb 4000 8000 eb 4/9 7000 400 12/31 eb 6600 Salaries Payable Dividends 12/31 400 600 adj Prepaid Rent Office Equipment 600 eb eb 400 11/1 3000 2000 adj 7/1 9000 eb 1000 Service Revenue Depreciation Exp. 7000 2/1 adj 1000 Accumulated Deprec. 1000 adj 2000 adj eb 1000 1000 cl cl 9000 9000 eb 0 0 Salaries Expense Rent Expense 5/3 2000 adj 2000 adj 600 eb 2000 2000 cl eb 2600 2600 cl 0 0

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 68

One more account to close:
Dividends Dividends Dividends
Balance before closing

Retained Earnings Beginning balance Expenses Dividends Ending balance Revenues

The DIVIDENDS (to stockholders) account is closed by crediting it (since it has a debit balance) and making an offsetting debit to RETAINED EARNINGS.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 69

One more account to close:
Dividends (Distributions) Bal. 400 Bal. Retained Earnings 2000 Beg. (exp) 5600 9000 (rev.)

The DIVIDENDS (to stockholders) account is closed with a credit (since it has a debit balance) and an offsetting debit to RETAINED EARNINGS.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 70

One more account to close:
Dividends (Distributions) Bal. 400 Bal. 400 (to close) Retained Earnings 2000 Beg. (exp) 5600 9000 (rev.) (div.) 400

end 0 5000 The DIVIDENDS (to stockholders) account is End Bal. closed with a credit (since it has a debit balance) and an offsetting debit to RETAINED EARNINGS.

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 71

One more account to close:
Dividends (Distributions) Bal. 400 Bal. 400 (to close) Retained Earnings 2000 Beg. (exp) 5600 9000 (rev.) (div.) 400

end 0 5000 The DIVIDENDS (to stockholders) account is End Bal. closed with a credit (since it has a debit balance) and an offsetting debit to RETAINED EARNINGS.

Do NOT close the Retained Earnings account. Its $5,000 ending balance becomes the beginning balance of the next period.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 72
GENERAL JOURNAL

Date 31

Account Titles Retained Earnings Dividends to close the Dividends account

Debit 400

Credit 400

GENERAL LEDGER ("T" - Accounts)
Assets = Liabilities + Equity Unearned Serv.Rev. Cash Accounts Receiv. Common Stock Retained Earnings adj 2000 8000 3/7 bb 5000 2000 5/3 bb 4000 7000 4/9 7000 bb 2000 bb 1/2 1000 9000 7/1 2/1 7000 6000 eb 1000 1/2 cl 5600 9000 cl 3/7 8000 3000 11/1 eb 4000 8000 eb cl 400 4/9 7000 400 12/31 5000 eb eb 6600 Salaries Payable Dividends 12/31 400 600 adj Prepaid Rent Office Equipment 600 eb eb 400 400 cl 11/1 3000 2000 adj 7/1 9000 0 eb 1000 Service Revenue Depreciation Exp. 7000 2/1 adj 1000 Accumulated Deprec. 1000 adj 2000 adj eb 1000 1000 cl cl 9000 9000 eb 0 0 Salaries Expense Rent Expense 5/3 2000 adj 2000 adj 600 eb 2000 2000 cl eb 2600 2600 cl 0 0

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 73

Summary of Closing Entries in the Journal
GENERAL JOURNAL
Date

Account Titles Closing Entries

Debit

Credit

Dec. 31 Service Revenue Retained Earnings
to close all revenue accounts

9000 9000

31 Retained Earnings Depreciation Expense Salaries Expense Rent Expense
to close all expense accounts

5600 1000 2600 2000

31 Retained Earnings Dividends
to close the Dividends account

400 400

McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2003

4- 74

The post-closing trial balance
q

q

A trial balance written after closing the books is called a post-closing or afterclosing trial balance. What accounts will have non-zero balances on this trial balance?

THE

END

Assets Liabilities Permanent Stockholders’ Equity accts. (Common Stock & Ret. Earn.) There will be NO balances in Revenue, Expense or Dividend accounts on this Trial Balance. So, they may be omitted from this Trial Balance.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 75

Post-Closing Trial Balance for Patriot Company
This is the Trial Balance based on the balances of each Ledger account (T-acct) after the closing entries have been journalized and posted. Accounts in Ledger Dr. Cr. Cash 6600 Accounts. Receivable 4000 Prepaid Rent 1000 Office Equipment 9000 Accumulated Deprec. 1000 Unearned Service Revenue 6000 Salaries Payable 600 Common Stock 8000 Retained Earnings (end) 5000 Dividends 0 Totals 20,600 20,600 Service Revenue 0 Because the Revenue, Expense, and Depreciation Expense 0 Dividend accounts have zero balances they Salaries Expense 0 may Expense Rent be left off the Post-closing Trial 0 Totals 20,600 20,600 Balance.
© The McGraw-Hill Companies, Inc., 2003

debits

=

credits

McGraw-Hill/Irwin

4- 76

Post-Closing Trial Balance for Patriot Company
Notice that Retained Earnings account now has the ending balance in it. The effect of the income statement accounts and dividends account are now included in Retained Earnings. Accounts in Ledger Dr. Cr. Cash 6600 Accounts. Receivable 4000 Prepaid Rent 1000 Office Equipment 9000 Accumulated Deprec. 1000 Unearned Service Revenue 6000 Salaries Payable 600 Common Stock 8000 Retained Earnings (end) 5000 Totals 20,600 20,600

debits

=

credits
© The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin

4- 77

Chapter 4

The End
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

4- 78

Post-Closing Trial Balance for Patriot Company
Notice that Retained Earnings account now has the ending balance in it. The effect of the income statement accounts and dividends account are now included in Retained Earnings. Accounts in Ledger Dr. Cr. Cash 6600 Accounts. Receivable 4000 Prepaid Rent 1000 Office Equipment 9000 Accumulated Deprec. 1000 Unearned Service Revenue 6000 Salaries Payable 600 Common Stock 8000 Retained Earnings (end) 5000 Dividends 0 Service Revenue 0 Depreciation Expense 0 Salaries Expense 0 Rent Expense 0 Totals 20,600 20,600
© The McGraw-Hill Companies, Inc., 2003

debits

=

credits

McGraw-Hill/Irwin

4- 79

Summary and Ending Balances (excluding Dividends paid)

Patriot Company
Acc't. Cash + BB 1 2 3 4 8,000 7,000 (7,000) 9,000 3,000 5,000 1,000 7,000
= = = = = = =

BALANCE SHEET (and Accounting Equation) ASSETS LIABILITIES + STK. EQUITY = PrePaid Office Accum. Salary Unearn Com. Ret. + Rent + Equip.

INCOME STATEMENT Net Rev.

CASHFLOW STATEMENT
OA,IA,FA $ amt

Rec. 4,000

- Deprec.

= Pay. + =

Rev.

+ Stk. + Earn. 7,000 1,000 7,000 2,000

- Exp. = Inc.

5,000 bal. 1,000 FA 7,000 7,000 8,000 OA 7,000 OA

8,000 (2,000) 2,000 (2,000)

5 (2,000) 6 (9,000) 7 (3,000) 8 9 10 11 12 EB (400) 6,600 + 4,000 + 1,000 + 9,000 (2,000)

(2,000) OA (9,000) I A (3,000) OA

(2,000)

2,000 (1,000) (2,000)

2,000 1,000 2,000 600 9,000

2,000 (1,000) (2,000) (600) (400) FA 6,600 bal.

1,000 =
=

=

600 600 +

(600) (400) 6,000 + 8,000 + 5,000

-

-

= 1,000 =

- 5,600 = 3,400

Subtract the contra-asset, Accum. Dep.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->