Accounting for Week 4

Actuary
 Refreshment
Logan Krause started her own consulting fi rm, Krause Consulting, on May 1, 2017. The trial balance at May 31 is as
follows.
KRAUSE CONSULTING Other data:
Trial Balance 1. $900 of supplies have been used during the month.
May 31, 2017 2. Utilities expense incurred but not paid on May 31,
Account Number Debit Credit 2017, $250.
101 Cash $ 4,500 3. The insurance policy is for 2 years.
112 Accounts Receivable 6,000 4. $400 of the balance in the unearned service revenue
126 Supplies 1,900 account remains unearned at the end of the month.
130 Prepaid Insurance 3,600 5. May 31 is a Wednesday, and employees are paid on
149 Equipment 11,400 Fridays. Krause Consulting has two employees, who are
201 Accounts Payable $ 4,500 paid $920 each for a 5-day work week.
209 Unearned Service Revenue 2,000 6. The office furniture has a 5-year life with no salvage
301 Owner’s Capital 18,700 value. It is being depreciated at $190 per month for 60
400 Service Revenue 9,500 months.
726 Salaries and Wages Expense 6,400 7. Invoices representing $1,700 of services performed
729 Rent Expense 900 during the month have not been recorded as of May 31
$34,700 $34,700
Refreshment
Objectives

• Prepare a worksheet.
• Prepare closing entries and a post-closing trial balance.
• Explain the steps in the accounting cycle and how to prepare
correcting entries
• Identify the sections of a classified balance sheet
Completing the Accounting Cycle
Using A Worksheet

Worksheet
• Is a multiple-column form used in the adjustment process and in preparing
financial statements

• It is not a permanent accounting record.

• It is neither a journal nor a part of the general ledger

• Companies generally computerize worksheets using an electronic

spreadsheet program such as Excel
 Using A Worksheet

Trial Balance Adjustment Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr Dr. Cr Dr. Cr Dr. Cr Dr. Cr
 STEP 1: Prepare A Trial Balance on the Worksheet
Logan Krause
31-May-17

Trial Balance Adjustment Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr Dr. Cr Dr. Cr Dr. Cr Dr. Cr
Cash 4,500
6,000
1,900
3,600
11,400
4,500
2,000
18,700
9,500
6,400
900
Total 34,700 34,700

Include all accounts Trial balance amounts come

with balances. directly from ledger accounts.
Adjusting Journal Entries
Date Account & Explanation Debit Credit
31-May-21Supplies Expense 900
Supplies 900
31-May-21Utilities expense 250
Account Payable 250
31-May-21Insurance Expenses 150
Prepaid Insurance 150
31-May-21 Unearned Service Revenue 1600
Service Revenue 1,600
31-May-21 Salaries and Wages 1104
Account Payable 1,104
31-May-21Account Receiveable 1700
Service Revenue 1,700
 STEP 2: Enter The Adjustments in the Adjustments Columns
Trial Balance Adjustment Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr Dr. Cr Dr. Cr Dr. Cr Dr. Cr
Cash 4,500
Accounts Receivable 6,000 1700
Supplies 1,900 900
Prepaid Insurance 3,600 150
Equipment 11,400
Accounts Payable 4,500 250
1,104
Unearned Service Revenue 2,000 1,600
Owner’s Capital 18,700
Service Revenue 9,500 1,600
1,700
Salaries and Wages 6,400 1,104
Rent Expense 900
Total 34,700 34,700 4,404 5,704 - - - -

Supplies Expense 900 Enter adjustment amounts,

Utilities expense 250
Insurance Expense 150
total adjustments columns,
Depreciation Expence 190 and check for equality.
Accumulated Depreciation 190
Total 34,700 34,700 5,894 5,894 - - - -
Add additional accounts as needed.
 STEP 3: Complete the Adjusted Trial Balance Columns

Trial Balance Adjustment Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr Dr. Cr Dr. Cr Dr. Cr Dr. Cr
Cash 4,500 4,500
Accounts Receivable 6,000 1700 7,700
Supplies 1,900 900 1,000
Prepaid Insurance 3,600 150 3,450
Equipment 11,400 11,400
Accounts Payable 4,500 250 5,854
1,104
Unearned Service Revenue 2,000 1,600 400
Owner’s Capital 18,700 18,700
Service Revenue 9,500 1,600 12,800
1,700
Salaries and Wages 6,400 1,104 7,504
Rent Expense 900 900
Total 34,700 34,700 4,404 5,704 36,454 37,754 - - - -

Supplies Expense 900 900

Utilities expense 250 250 Total the adjusted trial balance
Insurance Expense 150 150
columns and check for equality.
Depreciation Expence 190 190
Accumulated Depreciation 190 190
Total 34,700 34,700 5,894 5,894 37,754 37,754 - - - -
STEP 4: Extend Amounts to Financial Statement Columns
Trial Balance Adjustment Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr Dr. Cr Dr. Cr Dr. Cr Dr. Cr
Cash 4,500 4,500
Accounts Receivable 6,000 1700 7,700
Supplies 1,900 900 1,000
Prepaid Insurance 3,600 150 3,450
Equipment 11,400 11,400
Accounts Payable 4,500 250 5,854
1,104
Unearned Service Revenue 2,000 1,600 400
Owner’s Capital 18,700 18,700
Service Revenue 9,500 1,600 12,800 12,800
1,700
Salaries and Wages 6,400 1,104 7,504 7,504
Rent Expense 900 900 900
Total 34,700 34,700 4,404 5,704 36,454 37,754 8,404 12,800 - -
Extend all revenue and
Supplies Expense 900 900 900
Utilities expense 250 250 250
expense account
Insurance Expense 150 150 150 balances to the income
Depreciation Expence 190 190 190 statement columns.
Accumulated Depreciation 190 190 190
Total 34,700 34,700 5,894 5,894 37,944 37,944 9,894 12,990 - -
 STEP 4: Extend Amounts to Financial Statement Columns
Trial Balance Adjustment Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr Dr. Cr Dr. Cr Dr. Cr Dr. Cr
Cash 4,500 4,500 4,500
Accounts Receivable 6,000 1700 7,700 7,700
Supplies 1,900 900 1,000 1,000
Prepaid Insurance 3,600 150 3,450 3,450
Equipment 11,400 11,400 11,400
Accounts Payable 4,500 250 5,854 5,854
1,104
Unearned Service Revenue 2,000 1,600 400 400
Owner’s Capital 18,700 18,700 18,700
Service Revenue 9,500 1,600 12,800 12,800
1,700
Salaries and Wages 6,400 1,104 7,504 7,504
Rent Expense 900 900 900
Total 34,700 34,700 4,404 5,704 36,454 37,754 8,404 12,800 28,050 24,954
Extend all asset, liability, and
Supplies Expense 900 900 900 equity account balances to
Utilities expense 250 250 250
Insurance Expense 150 150 150
the statement of financial
Depreciation Expense 190 190 190 position columns.
Accumulated Depreciation 190 190 190
Total 34,700 34,700 5,894 5,894 37,944 37,944 9,894 12,800 28,050 24,954
STEP 5: Total Columns, Compute Net Income (Loss)
Trial Balance Adjustment Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr Dr. Cr Dr. Cr Dr. Cr Dr. Cr
Cash 4,500 4,500 4,500
Accounts Receivable 6,000 1700 7,700 7,700
Supplies 1,900 900 1,000 1,000
Prepaid Insurance 3,600 150 3,450 3,450
Equipment 11,400 11,400 11,400
Accounts Payable 4,500 250 5,854 5,854
1,104
Unearned Service Revenue 2,000 1,600 400 400
Owner’s Capital 18,700 Net income is 18,700 18,700
Service Revenue 9,500 extended to the
1,600 12,800 12,800
1,700
credit column of
Salaries and Wages 6,400 1,104 7,504 7,504
Rent Expense 900 the balance900 sheet 900
Total 34,700 34,700 4,404 columns.
5,704 36,454 37,754 8,404 12,800 28,050 24,954

Supplies Expense 900

(Net loss900would 900
Utilities expense 250 be extended
250 to 250
Insurance Expense 150 the debit150 150
Depreciation Expense 190 190 190
Accumulated Depreciation column.)
190 190 190
Total 34,700 34,700 5,894 5,894 37,944 37,944 9,894 12,800 28,050 25,144

Net Income The difference between the totals of the two income 2,906 2,906
Total statement columns determines net income or net loss 12,800 12,800 28,050 28,050
Preparing Financial Statements from a
Worksheet
Logan Krause
Income Statement
31-May-17
Revenue
Service Revenue 12,800
Expenses
Salaries and Wages 7,504
Rent Expense 900
Supplies Expense 900
Insurance Expenses 150
Utilities expense 190
Depreciation Expense 250
Total Expenses 9,894

Net Income 2,906

Preparing Financial Statements from a
Worksheet
Balance Sheet
31-May-17
Assets
Cash 4,500
Accounts Receivable 7,700
Supplies 1,000
Prepaid Insurance 3,450
Equipment 11,400
Total Asset 28,050
Accumulated Depreciation 190
Total Asset minus Accumulate depreciation 27,860
Liabilities
Accounts Payable 5,854
Unearned Service Revenue 400
Total Liabilities 6,254
Owner's Equity
Net Income 2,906
Owner’s Capital 18,700

Total liabilities and owner’s equity 27,860

Preparing Financial Statements from a
Worksheet
 Preparing Adjusting Entries from a Worksheet

• The adjusting entries are prepared from the adjustments columns of the
worksheet.

• Journalizing and posting of adjusting entries follows the preparation of financial

statements when a worksheet is used.
Preparing Adjusting Entries from a Worksheet
Adjusting Journal Entries
Date Account & Explanation Ref Debit Credit
31-May Accounts Receivable 1,700
Service Revenue 1,700

31-May Supplies Expense 900

Supplies 900

31-May Unearned Service Revenue 1,600

Service Revenue 1,600

31-May Salaries and Wages 1,104

Accounts Payable 1,104

31-May Utilities expense 250

Accounts Payable 250

31-May Insurance Expenses 150

Prepaid Insurance 150

31-May Depreciation Expense 190

Accumulated Depreciation 190
 Prepare closing entries and a post-closing trial balance

• At the end of the accounting period, the company makes the accounts ready for the next period. This
is called closing the books.
• In closing the books, the company distinguishes between temporary and permanent accounts
Closing the Books

• Closing entries formally recognize, in the general ledger, the transfer of

o net income (or net loss) and
o dividends
to Retained Earnings.

• Closing entries are only at the end of the annual accounting period.
• Closing entries also produce a zero balance in each temporary account.
 Closing the Books

Dividends are closed directly to Retained

Earnings and not to Income Summary
because Dividends are not an expense.
 Closing the Books

Closing Entries
Date Account & Explanation Debit Credit A couple of cautions in preparing closing entries :

5/31/2017 Service Revenue 12,800 1. Do not close Owner’s Drawings through the
Income Summary 12,800 Income Summary account.
(To close revenue account)
2. Owner’s Drawings is not an expense, and it is not a
5/31/2017 Income Summary 9,894 factor in determining net income.
Salaries and Wages 7,504
Rent Expense 900
Supplies Expense 900
Insurance Expenses 150
Utilities expense 250
Depreciation Expense 190
(To close expense accounts)

5/31/2017 Income Summary 2,906

Owner’s Capital 2,906
Closing the Books
Preparing a Post-Closing Trial Balance

• The post-closing trial balance lists permanent accounts and their

balances after the journalizing and posting of closing entries.
• The purpose of the post-closing trial balance is to prove the equality of
the permanent account balances carried forward into the next
accounting period.
• Since all temporary accounts will have zero balances, the post-closing
trial balance will contain only permanent—balance sheet—accounts.
Preparing a Post-Closing Trial Balance
Post-Closing Trial Balance
Debit Credit
Cash 4,500
Accounts Receivable 7,700
Supplies 1,000
Prepaid Insurance 3,450
Equipment 11,400
Accumulated Depreciation 190

Accounts Payable 5,854

Unearned Service Revenue 400
Owner’s Capital 21,606
28,050 28,050
 Summary of the Accounting Cycle
1. Analyze business transactions
9. Prepare a post-closing trial
balance
8. Journalize and post closing
entries
7. Prepare financial statements
6. Prepare an adjusted trial
balance
There are also two optional steps in
the accounting cycle :
2. Journalize the transactions
1. Use a worksheet in preparing
adjusting entries
3. Post to ledger accounts
2. Reversing Entries—An Optional
Step (will explain later)
4. Prepare a trial balance
5. Journalize and post adjusting
entries
Correcting Entries—An Avoidable Step

Correcting entries

Are unnecessary if the records are error-free.

Are made whenever an error is discovered.

May involve any combination of accounts in need of correction

Instead of preparing a correcting entry, it is possible to reverse the incorrect

entry and then prepare the correct entry.
 Correcting Entries—An Avoidable Step
Illustration (Case 1): On May 10, Mercato Co. journalized and posted a $50 cash collection on
account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The
company discovered the error on May 20, when the customer paid the remaining balance in
full.

Incorrect entry Cash 50

Service revenue 50
Cash 50
Correct entry
Accounts receivable 50

Correcting entry Service revenue 50

Accounts receivable 50
 Correcting Entries—An Avoidable Step

Illustration (Case 2): On May 18, Mercato purchased on account office equipment costing $450. The
transaction was journalized and posted as a debit to Delivery Equipment $45 and a credit to Accounts
Payable $45. The error was discovered on June 3.

Incorrect entry Delivery equipment 45

Accounts payable 45

Office equipment 450

Correct entry
Accounts payable 450

Correcting entry Office equipment 450

Delivery equipment 45
Accounts payable 405
The Classified Statement of Financial Position

Presents a snapshot at a point in time.

To improve understanding, companies group similar assets and similar liabilities
together.

Standard Classifications
Assets Equity and Liabilities
Intangible assets Equity
Property, plant, and equipment Non-current liabilities
Long-term investments Current liabilities
Current assets
The Classified Statement of Financial Position
Classified balance sheets
 The Classified Statement of Financial Position
Current Asset
• Current assets are assets that a company expects to convert to cash or use up within one year or its
operating cycle, whichever is longer
• For most businesses, the cutoff for classification as current assets is one year from the balance
sheet date.
• For example, accounts receivable are current assets because the company will collect them and
convert them to cash within one year.
• Supplies is a current asset because the company expects to use them up in operations within one
year.
• Common types of current assets are
1. cash,
2. investments (such as Deposit),
3. receivables (notes receivable, accounts receivable, and interest receivable),
4. inventories, and
5. prepaid expenses (supplies and insurance).
 The Classified Statement of Financial Position
Current Asset
 The Classified Statement of Financial Position
Long Term Asset
Long-term investments are generally
1. investments in stocks and bonds of other companies that are normally held for many years,
2. long-term assets such as land or buildings that a company is not currently using in its operating
activities, and
3. long-term notes receivable
The Classified Statement of Financial Position

Intangible Assets
Assets that do not have physical substance.
 The Classified Statement of Financial Position

Property, Plant, and Equipment

Long useful lives.
Currently used in operations.
Depreciation - allocating the cost of assets to a number of years.
Accumulated depreciation - total amount of depreciation expensed thus far in
the asset’s life.
The Classified Statement of Financial Position

Property, Plant, and Equipment

(in billions)