Chapter 2

Hope University College
Department of Accounting &

Finance
Summary of the Accounting Cycle

2.1. The Accounting Process
Accounting is a method of communicating business information. The first objectives of any
accounting system are to identify the economic events that can be expressed in financial
terms by the system. An economic event is any event that directly affects the financial
position of the company. Economic events can be classified as:
A) External events: It involves an exchange between the company & that separate economic
entity. Examples are purchasing merchandise inventory for cash borrowing cash from a
bank, & paying salaries to employees. In each instance, the company receives something
(merchandise, cash & services) in exchange for something else (cash, assumption of a
liability, & cash).
B) Internal events: directly affects the financial position of the company but do not involve
an exchange transaction with another entity. Examples are the depreciation of plant assets
& the use of supplies, the recognition of obsolescence in inventories, the transfer of
production costs from production, costs from goods in process inventory to the finished
goods inventory, & the recognition of estimated doubtful accounts expense.
The accounting process consists of three major parts:
1. The recording of transactions
2. The summarizing of information at the end of the period, &
3. The preparation of financial statements
During an accounting period business transaction & events are recorded as they occur & at the
end of the period the accounting records are summarized in order to prepare financial
statements.
The Accounting Equation
The accounting equation underlies the process used to capture the effect of economic events.
Asset = Liabilities + Owners Equity
The elements of the equation were defined in chapter 1. The accounting equation expresses the
equality between the total economic resources of an entity (its assets) the left side of the
equation & the total claims to those resources (liabilities & owners equity) the right hand side
of the equation. In other words, the resources of the enterprise are provided by creditors &
owners. Each economic event will have a dual effect because resources always must equal
claims to those resources.
Owners of a corporation are its shareholders, so owners equity for corporation arises primarily
from two sources:
1. Paid in- capital: Amount invested by shareholders in a corporation, &
2. Retained Earnings: Amounts earned by the corporation (on behalf of its shareholders).
Retained earnings equals net income less dividends (distribution to shareholders)
Financial Accounting I/Chapter One/ACCN-311

Finance
The Accounting Equation for Corporation:

Asset = Liabilities + Shareholders Equity
Where: Shareholders Equity = Paid in capital + Retained earnings
: Retained Earnings = Revenue Expense (Net Income or Net Loss) Dividend
2.2 Double Entry System
All transactions could be recorded in columnar fashion as increase or decrease to elements of
the accounting equation. This recording method is known as double entry system as it has a dual
effect that each transaction has on the accounting equation. The double entry system is used to
process transactions.
An account includes the account title, an account number, & columns or fields for increases,
decreases, the cumulative balance, & the date. An account will have debits & credits with its
effect of increase/ decreases. Accounts on the left side (debit) of the accounting equation
(Assets) are increased (+) by debit entries & decreases (-) by credits entries. Accounts on right
sides (credits) of the accounting equation (Liabilities & shareholders equity) are increased (+)
by credit entries & decreased (-) by debit entries. The debits equals the credits in every
transaction (dual effect), therefore, before/after a transaction the accounting equation is in
balance.
Assets
Liabilities
Paid in-Capital
Retained Earnings
Debit
Credit
Debit Credit
Debit Credits
Debits Credits
+
+
+
+
Revenue & Gains

Expenses & Losses
Debits
Credits
Debits Credits
+
+
2.3 Accounting Processing Cycle
The accounting cycle is a complete sequence of accounting procedure that are reported in the
same order during each accounting period as follows:
1. Obtain information about external transaction from source document
2. Analyze the transaction
3. Record the transaction in a journal
4. Post from the journal to the general ledger
5. Prepare unadjusted trail balance
6. Record adjusting entries & post the general ledger accounts
7. Prepare adjusted trail balance
8. Prepare financial statements
9. Close the temporary accounts to retained earnings (at year end only)
10. Prepare a post closing trail balance (at year end only).

Finance
Supporting documents: is the first record in order to prepare a business transaction. Entries in
various journals are prepared from supporting documents such as invoices, bills from suppliers,
& cash register tape. These sourced documents usually identify the date & the nature of each
transaction, the participating parties, & the monetary terms.
Journals: The information shown in the business papers is recorded in chronological order in
the appropriate journal. Business transactions could be recorded:
i.
In a single journal (general journal), &
ii.
Special journal numerous transactions of the same nature. It is used as a more efficient
means of recording & summarizing such recurring transactions. Examples: Cash receipts
journals, Cash payment journals, purchase journal, sales journals, & etc.
The journalizing process requires the analysis of business transactions & events in terms of
debit & credit to the ledger account they affect. When analyzing the effect of a transaction on
accounts, the following questions are answered:
1. What are the accounts affected?
2. What is the classification of each of these accounts?
3. How is the balance of each account affected?
Ledger: it consists of a number of accounts. Each ledger accounts represent stored information
about a particular asset, liabilities, owners equity, revenue, & expenses. In many cases greater
details desired for a particular ledger accounts & a subsidiary ledger is set up to contain the
details supporting the main or controlling account. At all times, the total of the subsidiary ledger
account balances should agree with the balance of the related controlling account in the ledger.
Each general ledger accounts can be classified as either:
A) Permanent accounts includes assets, liabilities,& shareholders equity; and
B) Temporary accounts which include changes in the retained earnings components of
shareholders equity for a corporation caused by revenue, expenses, gain, & loss
transactions.
Posting: Each account provides a summary of the effects of all events &transactions on that
individual account. This process is called posting. Posting involves transferring debits & credits
in individual journal entries to the specific accounts affected.
Trail Balance: It is simply a list of the general ledger accounts & their balances at a particular
date. At the end of each accounting period a trail balance of a ledger is prepared to determine
that the recording & posting operations have been carried out accurately. It measures the
equality of ledger balance (Debit = Credit).
Unadjusted Trail Balance: Before financial statements are prepared & before adjusting entries
are recorded (internal transaction) at the end of an accounting period, an unadjusted trail balance
usually is prepared.

Finance
Example: The following transactions occurred during September 2012 for Super Confidence
Corporation. The corporation operates a retail store that sells cloths. The following are the
external transaction for September 2012:
September 1: Two investors each invested $ 30,000 in the corporation. Each investor was issued
3,000 shares of common stock.
1: Borrowed $ 40,000 from a local bank & signed two notes. The first note for $
10,000 requires for payment of principal & 10% interest in six months. The
second note for $ 30,000 requires the payment of principal in two years. Interest
at 10% is payable each year on September 1, 2013, & September 1, 2015.
1: Paid $ 24,000 in advance for one years rent on the store building.
1: Purchased furniture & fixtures from WARYT furniture for $ 12,000 cash.
3: Purchased $ 60,000 of clothing inventory on account from the Haile Wholesale
Garment Company.
6: Purchased $ 2,000 of supplies for cash.
4-31: Sold merchandise costing $ 20,000 for $ 35,000cash.
9: Sold clothing on account to Hope University credit association for $ 3,500. The
clothing cost $ 2,000.
16: Subleased a portion of the building to a jewelry store. Received $ 1,000 in
advance for the first two months rent beginning on September 16
20: Paid Haile Wholesale Garment Company $ 25,000 on account.
20: Paid salaries to employees for the first half of the month $ 5,000.
25: Received $ 1,500 on account from Hope University credit association.
30: The Corporation paid its shareholders a cash dividend of $ 1,000.
Required:
Prepare journal entries, general ledger using T format, & unadjusted trail balance for Supper
Confidence Corporation for the month ended September 30, 2012.
2.4 Adjusting entries
The next step in the processing cycle is to record in the general journal & post to the ledger
accounts the effect of internal events on the accounting equation. These transactions do not
involve an exchange transaction with another entity. They are recorded at the end of any period
when financial statements must be prepared for external use.
These transactions commonly referred to as adjusting entries. After these entries are posted to
the ledger accounts, an adjusted trail balance is prepared. Adjusting entries are required to
implement the accrual accounting model. Adjusting entries help to ensure that all revenues
earned in a period are recognized in that period, regardless of when the cash payment is made.
Also, they enable a company to recognize all expenses incurred during a period, regardless of
when cash payment is made.

Finance
Adjusting entries are necessary for three situations:

1. Prepayments (Deferrals): occurs when the cash flow proceeds either expense or
revenue recognition. For example, a company may buy supplies in one period but use
them in a later period. The cash outflows creates an asset (supplies) which then be
expensed in a future period as the asset is used up. Similarly, a company may receive
cash from a customer in one period but provide the customer with a good or service in a
future period. For instance, magazine publishers usually receive cash in advance for
magazine subscription. The cash inflow creates a liability (unearned revenue) that is
recognized as revenue in a future period when it is earned.
A. Prepaid Expenses: are the costs of assets acquired in one period & expensed in a
future period. Prepaid expenses represent assets recorded when a cash disbursement
creates benefits beyond the current reporting period.
B. Unearned Revenue: are created when a company receives cash from a customer in
one period for goods or services that are to be provided in a future period. The cash
receipt, an external transaction, is recorded as a debit to cash & credit to a liability.
This liability reflects the companys obligation to provide goods or service in the
future.
Alternative Approach to Record Prepayments
Prepayments can also be recorded as the external transaction directly into an expense or revenue
account. Many companies prefer this approach.
For example, on September 1, 2012, Super Confidence Corporation paid $ 24,000 in cash for
one years on its building. The entry included a debit to prepaid Rent. The company could have
debited rent expense instead as follows:
Alternative Approach
2012
Sep. 1 Rent Expense
$ 24,000
Prepaid Rent
$ 24,000
The adjusting entry of then records the amount of the prepaid rent as of the end of September,
$ 22,000, & reduces rent expenses to $ 2,000, the cost of rent for the month of September.
2012
Sep. 30 Prepaid Rent
Rent Expense
$ 22,000
$ 22,000

Finance
Similarly, the September 16 cash receipt from the jewelry store representing an advance for two
months rent could have been recorded by Super Confidence Corporation as a credit to rent
revenue instead of unearned rent revenue (liabilities).
2012
Sep. 16 Cash
$ 1,000
Rent Revenue
$ 1,000
If Super Confidence Corporation records the entire $ 1,000 as rent revenue in this way, it would
then use the adjusting entry to record the amount unearned revenue as of the end of September,
$ 750, & reduce rent revenue to $ 250, the amount of revenue earned during the month of
September.
2012
Sep. 16 Rent Revenue
Unearned Rent Revenue
$ 1,000
$ 1,000
2. Accruals
Accrual occur when the cash flow comes after either expense or revenue recognition. For
example, a company often uses the services of another entity in one period & pays for them in a
subsequent period. An expense must be recognized in the period incurred & an accrued liability
recorded. Also goods & services often are provided to customers on credit. In such instance, a
revenue is recognized in the period earned & an asset, a receivable, is recorded.
Many accruals involve external transactions that automatically are recorded from a source
document.
A) Accrued Liabilities: it represents liabilities recorded when an expense has been incurred
prior to cash payment. Accrued liabilities are expenses incurred not yet paid. An
adjusting entry is required to increase salaries expense (decrease shareholders equity) &
to increase liabilities for the salaries payable. The adjusting entry for an accrued liability
always included a debit to an expense & a credit to a liability. Whenever the trail balance
reveals interest- bearing debt, & interest is not paid on the last day of the period, an
adjusting entry is required for the amount of interest that has built up (accrued) since the
last payment date or the last date interest was accrued. Interest will be calculated as
follows:
Interest = Principal X interest Rate X Time
Interest rate is always are stated as the annual rate. After the adjusting entry is recorded
& posted to the ledger account for interest expense, the interest expense account will
have a debit balance & the interest payable will have a credit balance. Failure to record
adjusting entry for an accrued liability will cause net income & shareholders equity
(retained earnings) to be overstated, & liabilities to be understated.
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Finance
B) Accrued Receivables: it involves the recognition of revenue earned before cash is

received. Accrued receivables involve situations when the revenue is earned in a period
prior to a cash receipts. The adjusting entry required to record accrued revenue is a debit
an asset, a receivable, & a credit to revenue.
The following are the entries are necessarily to properly measure operating performance &
financial position according to the accrual accounting model:
Adjusting Entries
Revenues
Expenses
Prepayments
Debit Expense
Debit
Liabilities
(Initially recorded as assets /liabilities)
Prepayments
Debit Asset
Credit
Revenue
(Initially recorded as expenses /revenues)
Accruals
Credit Liability
Credit
Revenue
3. Estimates
A third classification of adjusting entries is estimates. Accounts often must estimates of future
events to comply with the accrual accounting model. For example, the calculation of
depreciation expense requires an estimate of expected useful life of the asset being depreciated
as well as its expected residual value.
One situation involving an estimate that does not fit neatly into either the prepayment or accrual
classification is bad debt expense. An adjusting entry is required to decrease accounts receivable
& increase bad debt expense (decrease shareholders equity)
Notice that the accounts receivable account is not reduced directly. A contra account, called
allowance for uncollectible accounts, is credited. After this entry is recorded & posted to the
ledger accounts, bad debt expense will have a debit balance & the allowance for the
uncollectible account will have a credit balance.
After the adjusting entries are posted to the general ledger accounts, the next step is to prepare
an adjusted trail balance. The term adjusted refers to the fact that adjusting entries have now
been posted to the accounts.
Super Confidence Corporation

Worksheet
For the month ended September 30, 2012
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Finance
Unadjusted
Adjusting
Trail Balance
Entries
Debit
Credit Debit
Credit
Cash
$68,500
Account Receivable
2,000
Supplies
2,000
2) 800
Prepaid Rent
24,000
1) 2,000
Inventory
38,000
Furniture & Fixture
12,000
Notes Payable
$40,000
Account Payable
35,000
Unearned Rent Revenue
1,000 4) $ 250
Common Stock
60,000
Retained Earnings
1,000
Sales Revenue
38,500
Cost of Goods Sold
22,000
Salaries Expenses
5,000
5) 5,500
Totals
$174,500 $174,500
Rent Expense
1) 2,000
Supplies Expense
2) 800
Depreciation Expense
3) 200
3) 200
Accumulated Depreciation
Rent Revenue
4) 250
Salaries Payable
5) 5,500
Interest Expense
6) 333
Interest Payable
6) 333
Bad debt Expense
8) 500
Account Title
Allowance for Uncollectible

Account
Totals
Net Income
Totals
$9,583
8) 500
$9,583
Income
Adjusted Trail Balance
Statement
Debit
Credit
Debit
Credit
$68,500
2,000
1,200
22,000
38,000
12,000
$40,000
35,000
750
60,000
1,000
38,500
$38,500
22,000
$22,000
10,500
10,500
2,000
800
200
Balance
Sheet
Debit
$68,500
2,000
1,200
22,000
38,000
12,000
1,000
2,000
800
200
200
250
5,500
250
333
333
500
333
500
500
$181,033 $181,033 $36,333 $38,750 $144,70
2,417
$38,750 $38,750 $144,70
After the worksheet is completed, the financial statement can be prepared directly from column
8 to 11.
Preparing the Financial Statements

The purpose of each of the above steps in the process cycle to this point is to provide
information which help for the preparation of financial statements. It summarizes the operating
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Finance
results of the company & in financial condition. The adjusted trail balance contains the
necessary information. After all, the financial statements are the primarily means of
communicating financial information to external. Financial statement includes income
statement, balance sheet, & cash flows statement.
The Income Statement
The purpose of income statement is to summarize the profit generating activities a company that
occurred during a particular period of time. Its a change statement in that it reports a change in
shareholders equity (retained Earnings) that occurred during the period as result of revenues,
expenses, gains, & losses.
The components of the income statement usually are classified, that is, grouped according to the
common characteristics. A common classification scheme is to separate operating items from
non-operating items. Operating items include revenues & expenses directly related to the
principal revenue generating activity of the company. Non-operating items include gains &
losses & revenue & expenses from peripheral activities.
The Statement of Shareholders equity
The Statement of Shareholders equity is also a change statement. It discloses the source of the
in the various permanent shareholders equity accounts that occurred during the period. The
individual profit generating transactions caused retained earnings to change are summarized in
the income statements. Therefore, the statement of shareholders equity only shows the net
effect of these transactions on retained earnings.
The Balance Sheet
The purpose of the balance sheet is to present the financial position of the company on a
particular date. The income statement , which is a change statement reporting events that
occurred during a period of time, the balance sheet is statement that present s an organized list
of assets, liabilities, & shareholders equity at a point in time. Balance sheet includes the
classification of current assets & current liabilities. Current assets are those assets that are cash,
will be converted into cash, or will be used up within one year or the operating cycle, whichever
is longer. Current liabilities are those liabilities that will be satisfied within one year or the
operating cycle, whichever is longer. For a manufacturing company, the operating cycle refers
to the period of time necessary to convert cash to raw materials to a finished product, the
finished product to receivables, & then finally receivables back to cash. For most companies
this period is one year. All liabilities not classified as current are listed as long term.
Shareholders equity lists the paid in capital portion of equity common stock & retained
earnings. Net income in the income statement becomes the major components of retained
earnings. Retained earnings increase will increase in net income & decrease in dividend.
The Statement of Cash Flows
The Statement of Cash Flows also is a change statement, disclosing the events that caused cash
to change during the period. The statement classifies all transactions affecting cash into one of
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the three categories: (1) operating activities: are inflows & outflows of cash related to
transactions into the determination of net income, (2) investing activities: involve the
acquisition & sale of (A) long term assets used in the business & (B) non-operating investment
assets, & (3) financing activities: involve cash inflows & outflows from transactions with a
creditors & owners.
Correcting entries: are not considered adjusting entries because their function is not correct
error or omission or commission. When an error is made one accounting period but discovered
in a subsequent period, the effect or the error on the net income or the earlier periods is closed
to the retained earnings ledger accounts. When an error is discovered in the period in which the
error occurs, before the accounting records are closed, revenue & expenses accounts may
require correction & the retained account generally is not affected.
2.5 Closing entries &relate ledger accounts
When the periodic inventory system is used, the journal entry to establish the cost of goods sold
& the ending inventory balance for the accounting period may be viewed as an adjusting entry;
however, because there may be little need for a ledge account for the cost of goods sold, the
adjusting & closing entries for inventories may be combined. This procedure is accomplished
by closing the beginning inventory, ending inventory, purchases, & all related ledger accounts to
the income summary account. At this point, the balance in the income summary account
represents the cost of goods sold for the period.
At the end of any interim period, the accounting process cycle is now complete. An interim
reporting period is any period when financial statements are produced other than at the end of
the fiscal year. There are two ledger accounts or the closing process serves a dual purpose:
A. Permanent (Real) accounts: Which has beginning & ending balance Asset, Liability, &
Capital
B. Temporary (Nominal) accounts: Accounts which is used to summarize the operating
result of the company. Accounts do not have beginning & ending balance. To makes its
balance zero, the balance transferred to permanent accounts. To close nominal accounts
use income summary or manufacturing summery.
The first closing entry transfer the revenue account balances to income summary. Because
revenue accounts have credit balances, they are debited to bring them zero. After this entry is
posted to the accounts, all revenue accounts have a zero balance.
The second closing entry transfers the expense account balances to income summary. As
expense accounts have debit balances, they are credited to bring them zero. After this entry is
posted to the account, the expense accounts have zero balance & the income summary account
has a credit balance equal to net income for the period.
After these two entries posted to the accounts, the temporary accounts have a zero balances &
retained earnings have increased by the amount of the net income.
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After the closing entries are posted to the ledger accounts, a post-closing trail balance is
prepared. The purpose of this trial balance is to verify that the closing entries were prepared &
posted correctly & that the accounts are now ready for next years transactions.
Assume the following for year 4: January 1 inventory, $ 80,000; purchases $ 275,000; Fright-in
$ 40,000; Purchases return & allowances $ 2,500; December 31 inventory, including applicable
fright in $ 60,000. Show the closing entries.
Closing entries for inventories & purchases
Year 4
Dec. 31 Inventory
Purchases Returns & Allowances
Income Summary
Inventory (January 1)
Purchases
Fright-In
(To record beginning & ending inventories &
net purchases for the period)
$ 10,000
2,500
332,500
$ 80,000
275,000
40,000
Some merchandising enterprises prefer to use a separate ledger account, Cost of goods sold, to
summarize the merchandising accounts when the periodic inventory system is used. The journal
entry (which may be viewed as adjusting entry) reflecting cost of goods sold in a separate ledger
account as follows:
Alternative: Record cost of goods sold in ledger account
Inventory (December 31, Year 4)
$ 60,000
Purchases returns & allowances
2,500
Cost of Goods Sold
332,500
Inventory (January 1, year 4
$ 80,000
Purchases
275,000
Fright-In
40,000
(To record ending inventory &
Cost of goods sold for the period)
When the perpetual inventory system is used, cost of goods sold is debited & inventory is
credited during an accounting period as sales are made. An adjusting entry may be required if
the carrying amount of inventory differs from the amount determined by physical count. At the
end of the period, cost of goods sold is closed to Income Summary, along with all other revenue
& expense accounts.
Closing the Income Summary

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After all revenues & expenses (including the cost of goods sold) have been closed, the balance
of the Income Summary ledger account indicates the net income or net loss for the year. A credit
balance in the income summary account indicates a profitable year & an increase in owners
equity; a debit balance indicates a net loss & a decrease in owners equity. The income summary
account is closed by transferring its balance to the Retained Earnings account.
Reversing entry
Accountants sometimes use reversing entries at the beginning of a period. These optional entries
remove the effect of some of the adjusting entries made at the end of the previous reporting
period for the sole purpose of simplifying journal entries during the new period. If the
accountant doe use the reversing entries, these entries are recorded in the general journal &
posted to the general ledger accounts on the first day of the new period.
Reversing entries are used most often with accruals. It is the direct inverse of adjusted entry but
not all adjusted entries need to be reversed it is used.
Correcting entries
Correcting entries are not considered adjusting entries because their function is not correct error
or omission or commission. When an error is made one accounting period but discovered in a
subsequent period, the effect or the error on the net income or the earlier periods is closed to the
retained earnings ledger accounts. When an error is discovered in the period in which the error
occurs, before the accounting records are closed, revenue & expenses accounts may require
correction & the retained account generally is not affected.
Assume that the following two errors were made in Year 1 & were discovered at the end of the
accounting period when the worksheet for the year ended December 31, year 1, was being
prepared:
1. A purchase of merchandise for $ 500 cash was erroneously recorded by a debit of $ 50 to
supplies expense ledger account & a credit of $ 50 to cash.
2. An acquisition of equipment for cash of $ 4,000 on April 1, Year 1, was recorded as a
purchase of merchandise. The equipment had an economic life of 10 year with no
residual value, & was depreciated by the straight line method for nine month in year 1.
An analysis of the two errors to determine the appropriate correcting entries are as follows:
Incorrect journal entry as recorded
1. Supplies Exp. $ 50
Cash
2. Purchases
$ 4,000
Cash
Correct journal entry that should

have been made
1. Purchases
$ 4,000
$ 50
Cash
$ 4,000
2. Equipment $ 4,000
$ 4,000
Dep. Expense 4,000
Cash
$ 4,000
Accumulated Dep. 4,000
Required correcting entry

Purchase
$ 500
Supplies Exp.
$ 50
Cash
450
Equipment
$ 4,000
Dep. Expense
300
Purchase
$ 4,000
Accumulated Dep.
300
2.6 Worksheet for manufacturing enterprise

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Finance
A worksheet is used to organize the accounting information needed to prepare adjusting &
closing entries & the financial statements. It is an informal tool only & is not part of the
accounting system. A worksheet for a manufacturing enterprise is similar to those used for a
merchandising enterprise. The addition of the pair of columns summarize the manufacturing
operation is the major difference. These columns allow for one or more step in the classification
of the data.
Step 1: the account titles as they appear in the general ledger are entered in column one & the
unadjusted account balance in column 2 & 3.
Step 2: To determine end of period adjusting entries & enter them in column 4 & 5.
Step 3: The effect of the adjusting entries are added or deducted from the account balances
listed in the unadjusted trail balance columns & copied across to column 6 & 7, entitled
adjusted Trial balance.
Step 4: The balances in the temporary retained earnings accounts, revenues, & expenses, are
transferred to column 8 & 9, entitled Income Statement. The difference between the
total debits & credits in these columns is equal to net income or net loss.
Step 5: The balances in the permanent accounts are transferred to columns 10 & 11 entitled
Balance Sheet. To keep the balance sheet equal net income will be recorded to the
credit side of the balance sheet or if it is net loss record it on the debit side of the
balance sheet.
Example:
Based on the following data prepare a worksheet for Cole Manufacturing Company for the year
ended December 31, year 4:
a) Doubtful accounts expense for year 4 is estimated to be $ 3,000.
b) A three year insurance policy was acquired on July 1, year 3, at a cost of $ 1,800. The
insurance expense is allocated to other factory costs & other general expenses in a 4:1 ratio.
c) The wage accrued since the last pay period is direct labor, $ 1,800 & indirect labor, $ 950.
The officers, office staff are paid on the last day of each month.
d) Interest of $ 1,125 has accrued on notes payable.
e) Depreciation expense for the plant asset is computed by the straight- line method based on
the following information:
Asset
Estimated
Economic Life
Building
40 Years
Machinery & Equipment 10
Furniture & Fixtures
20
Estimated
Residual Value
Cost Allocation
Factory
General
$ 0
0
2,000
80 %
100
10
20 %
0
90
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f) The power bill for December has not been received as December 31, year 4. Based on
past experience the cost applicable to December is estimated to be $ 1,450. All heat, light,
& power costs relate to the factory.
g) An inventory of factory supplies on December 31, year 4, indicates that supplies costing
$ 850 are on hand.
h) The income taxes expense for year 4 is estimated at $ 3,500.
i) Inventories on December 31, year 4, are as follows:
Finished Goods
$ 41,500
Goods in Process
$ 26,350
Raw material
$ 12,650
The Following is the unadjusted trail balance for the year ended December 31, year 4:
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Unadjusted trail
Account Title
Cash
Account Receivable
Allowance for doubtful accounts
Inventories:
Finishes Goods
Goods in Process
Raw Material
Unexpired insurance
Land
Building
Accumulated Depreciation of building
Machinery & Equipment
Accumulated Depreciation of Mach. &
Equip
Accumulated Depreciation Of fur. &
fixture
Note Payable
Account Payables
Common Stock $ 10 par
Paid in capital
Retained Earnings
Dividends
Sales
Sales return & Allowance
Raw material purchases
Purchase return & allowance
Fright in
Direct labor cost
Indirect labor cost
Heat, light, & power
Other factory costs
Advertising costs
Sales salaries expenses
Delivery Expense
Administrative salaries expenses
Office salaries expense
Telephone & telegraph expense
Other general expense
Interest Expense
Totals
Balance
Debit
$32,000
70,000
Credit
$1,200
48,000
21,000
16,000
1,500
72,000
150,000
45,000
130,000
52,000
10,000
3,000
75,000
41,300
100,000
100,000
88,875
6,000
633,600
3,600
125,000
4,000
3,500
192,500
72,600
12,300
15,000
35,000
42,000
8,000
50,000
20,000
1,800
2,800
3,375
$1,143,975
$1,143,9
75
15

Finance
Cole Manufacturing Company
Worksheet
For the year ended December 31, year 4
Cash
Account Receivable
Allowance for
doubtful accounts
Unadjusted
Trail Balance
Adjustments
Manufacturing
Income Statement
Retained
Earnings
Statement
Debit
Debit
Debit
Debit
Debit
Credit
Credit
Credit
Credit
Bala
Credit
Deb
$32
$32,000
70,000
70,0
a) $
3,000
$1,200
Inventories:
Finishes Goods
48,000
$48,000
Goods in Process
21,000
$21,00
0
Raw Material
16,000
16,000
unexpired insurance
Land
Building
Accumulated
Depreciation of
building
Machinery &
Equipment
Accumulated
Depreciation of
Mach. & Equip
Accumulated
Depreciation Of fur.
& fixture
1,500
12,6
150,000
45,000
e) 3,750
130
130,000
e)
13,000
52,000
10,000
10,0
3,000
41,300
100,000
Paid in capital
100,000
Retained Earnings
Direct labor cost
12,650
72,0
150
Account Payables
Common Stock $ 10
par
Fright in
26,3
b) 600
75,000
Sales
Sales return &
Allowance
Raw material
purchases
Purchase return &
allowance
41,5
$26,35
0
72,000
Note Payable
Dividends
$41,50
0
e) 400
f) 1,450
$88,87
5
88,875
6,000
$6,000
633,60
0
633,600
3,600
3,600
125,00
0
125,000
4,000
4,000
3,500
192,500
3,500
194,30
0
c)
1,800
Indirect labor cost
72,600
12,300
C) 950
f)
1,450
Other factory costs
15,000
b) 480
Advertising costs
35,000
73,550
13,750
g) 850
14,630
35,000
16
Sales salaries
expenses
Delivery Expense
Administrative
salaries expenses
Office salaries
expense
Telephone &
telegraph expense
Other general
expense
Interest Expense
Totals
Doubtful Accounts
expense

Finance
42,000
42,000
8,000
8,000
50,000
50,000
20,000
20,000
1,800
1,800
2,800
3,375
$1,143,9
75
b) 120
d)
1,125
4,500
$1,143,9
75
a)
3,000
Wages payable
Interest payable
Depreciation of
Building-Factory
Depreciation of
Building-General
Depreciation of
Mach. & Equip.
Factory
Depreciation of
furn. & fixtureFactory
Depreciation of
furn. & fixtureGeneral
Inventory of
factory supplies
Income taxes
expenses
Income Taxes
Payable
Cost of finished
goods
manufactured
2,920
3,000
c) 2,750
d) 1,125
e)
3,000
3,000
e) 750
750
e)
13,000
13,000
e) 40
40
e) 360
360
g) 850
h)
3,500
850
3,500
h) 3,500
434,77
0
Net Income
Retained earnings
(Dec. 31, year 4)
Totals
434,770
16,900
$30,42
5
$30,425
$477,7
70
$477,7
70
$675,10
0
16,900
$675,1
00
99,775
$105,7
75
17
$105,7
75
$546
50

Finance
Closing entries for manufacturing company

Year 4
Dec. 31 Raw Material Inventory, December 31, Year 4
Goods in process Inventory, December 31, Year 4
Purchases return & allowance
Cost of Finished Goods Manufactured
Raw Material Inventory, January 1, year 4
Goods in Process Inventory, January 1, Year 4
Fright In
Direct Labor Costs
Indirect Labor Costs
Other Factory Costs
Depreciation of Building
Depreciation of Machinery & Equipment
Depreciation of Furniture & Fixture
(To record cost of finished goods manufactured &
Ending inventories of raw material & goods in process)
31 Finished goods inventory, December 31, year 4
Cost of goods sold
Cost of goods manufactured
Finished goods inventory, January1, year 4
(To record ending finished goods inventory & cost of
Goods sold)
Dec. 31 Sales
Cost of goods sold
Sales return & allowance
Advertising Expense
Sales Salaries Expense
Delivery Expense
Administrative Salaries Expense
Office Salaries Expense
Telephone & telegraph Expense
Other General Expense
$ 12,650
26,350
4,000
434,770
$ 16,000
21,000
125,000
3,500
194,300
73,550
13,750
14,630
3,000
13,000
$ 41,500
441,270
$ 434,770
48,000
$ 633,600
$ 441,270
3,600
35,000
42,000
8,000
50,000
20,000
1,800
2,920
18

Finance
Interest Expense
Doubtful Expense Account
Depreciation of Building
Depreciation of Furniture & Fixture
Income Taxes Expenses
Income Summery
(To close revenue & expense accounts)
31 Income summary
Retained Earnings
(To close Income Summery Accounts)
4,500
3,000
750
360
3,500
16,900
$ 16,900
31 Retained Earnings
Dividend
(To close Dividend Accounts)
$ 16,900
$ 6,000
$ 6,000
2.7 Statement of cost of Finished Goods (Cost of goods manufactured)

The cost of goods completed during an accounting period is summarized in a statement of cost
of finished goods manufactured.
Cole Manufacturing Company
Statement of Cost of Goods Manufactured
For the year ended December 31, Year 4
Goods in Process Inventory, January 1, Year 4
$ 21,000
Raw Material Used:
Raw Material Inventory, January 1, Year 4
$ 16,000
Raw Material Purchases (Net)
124,500
Cost of Raw Material Available for use
$ 140,500
Less: Raw Material Inventory, December 31, Year 4 12,650
Cost of raw material used
$ 127,850
Direct Labor Costs
194,300
Factory Overhead Costs
117,970
Total Manufacturing Costs
440,120
Total cost of goods in process during year 4
$ 461,120
Less: Goods in Process during year 4
26,350
Cost of Finished Goods Manufactured
$ 434,770
Uses & Limitations of Accounting Information
The ultimate objective of accounting is the use of accounting information, through analysis &
interpretation, as a basis for business decisions. Information derived from accounting records
serves business executives in controlling current operations & in planning future business
19

Finance
activities. Financial statements afford outsiders a means of analyzing the financial position &
results of operations of business enterprises in which they have an interest. The financial
statements essentially reflect past business transactions & events. The past is often the key to
the future, however, & for this reason accounting information is highly valued by decision
makers, both inside & outside the enterprise.
Exercise
The Alpha & Omega Wholesale Company began operation on October 1, 2012. The following
transactions took place during the month of October:
1. Owners invested $ 50,000 cash in the corporation in exchange for 5,000 shares of
common stock.
5. Equipment is purchased for $ 20,000 cash.
8. On the first day of the month, $ 6,000 rent on a building is paid for the month of October
& November.
9. Merchandise Inventory costing $ 38,000 is purchased on account. The company uses the
perpetual inventory system.
10. $ 30,000 is borrowed from a local bank, & a note payable is signed.
12. Credit sales for the month are $ 40,000. The cost of merchandise sold is $ 22,000.
18.
$ 15,000 is collected on account from customers.
20. $ 20,000 is paid on account to suppliers of merchandise.
21.
Salaries of $ 7,000 are paid to employees.
27.
A bill of $ 2,000 is received from a local utility company for the month of October.
29. $ 20,000 cash was loaned to another company, evidenced by a note receivable.
31.
The corporation paid its shareholders a cash dividend of $ 1,000.
Additional information:
1. The company anticipates that of the $ 25,000 in account receivable from customers,
$ 2,500 will not collected.
2. The note payable requires the entire $ 30,000 in principal plus interest at 10% to be paid
on September 30, 2013. The date of the loan is October 1, 2012.
3. Depreciation on the equipment is $ 500.
4. The note receivable is dated October 16, 2012. The note requires the entire $ 20,000 in
principal plus interest at 12% to be repaid in four months (the loan was outstanding one
half month during October).
5. The prepaid rent of $ 60,000 represents rent for the month of October & November.
Required:
1) Prepare a journal entry,
2) Prepare unadjusted trail balance,
3) Prepare any necessary adjusting entries,
4) Prepare adjusted trail balance, &
20

Finance
5) Determine the net effect on income (overstated or understated) if the adjusting entry are
not made.
6) Prepare the financial statements.
7) Prepare the closing entries.
8) Prepare the post-closing trail balance
21

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Hope University College

Department of Accounting &

Summary of the Accounting Cycle

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

The Accounting Equation for Corporation:

Revenue & Gains

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Adjusting entries are necessary for three situations:

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

B) Accrued Receivables: it involves the recognition of revenue earned before cash is

Super Confidence Corporation

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Allowance for Uncollectible

Preparing the Financial Statements

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Closing the Income Summary

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Correct journal entry that should

Required correcting entry

2.6 Worksheet for manufacturing enterprise

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Financial Accounting I/Chapter One/ACCN-311

Hope University College

Department of Accounting &

Direct labor cost

Indirect labor cost

Heat, light, & power

Other factory costs

Financial Accounting I/Chapter One/ACCN-311