Professional Documents
Culture Documents
Prepare
Start post-closing
trial balance
Analyze POST
transactions
Closing
Entries
Journalize
Prepare
Post statements
Prepare Prepare
Adjusting
unadjusted POST adjusted
Entries
trial balance trial balance
3-1
During the Accounting Period
The
At the End Accounting
of the Year Processing
Close Temporary Post-Closing
Cycle
Accounts Trial Balance
C3
The Account and its Analysis
Assets
Assets Liability
Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts
2-3
The Accounting Equation
A = L + OE
+ Revenues - Expenses
+ Owner Investments - Owner Withdrawals
+ Gains - Losses
Accounting Equation for a
Corporation
A = L + SE
+ Paid-in Capital + Retained Earnings
Assets = Liabilities
Liabilities + Equity
Equity
+ – + –
Common
Common Dividends
Dividends Revenues
Revenues Expenses
Expenses
Stock
Stock
2-6
C3
Asset Accounts
Cash
Cash
Accounts
Accounts
Land
Receivable
Buildings
Buildings
Asset
Asset Notes
Receivable
Receivable
Accounts
Accounts
Prepaid
Prepaid
Equipment
Accounts
Supplies
Supplies
2-7
C3
Liability Accounts
Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable
Liability
Liability
Accounts
Accounts
Accrued Dividends
Dividends
Accrued
Liabilities Payable
Payable
Liabilities
Unearned
Unearned
Revenue
Revenue
2-8
C3
Equity Accounts
Retained
Retained
Earnings
Earnings
Common
Common Dividends
Dividends
Stock
Stock Declared
Declared
Equity
Accounts
Accounts
Revenues
Revenues Expenses
Expenses
2-9
C3
The Account and its Analysis
An
An account
account is is aa
record
record of of
increases The
The general
general
increases and and ledger
decreases
decreases in in aa ledger isis aa record
record
specific containing
containing allall
specific asset,
asset, accounts
liability,
liability, equity,
equity, accounts used used byby
revenue, the
the company.
company.
revenue, or or
expense
expense item.item.
2-10
C4
Ledger and Chart of Accounts
The ledger is a collection of all accounts for an
information system.
A company’s size and diversity of operations
affect the number of accounts needed.
T- Account
(Left side) (Right side)
Debit Credit
2-12
General Ledger
GENERAL LEDGER
Account: Acct. No. ##
Balance
Post.
Da te Item Ref. De bit Credit DR (CR)
Assets
Assets = Liabilities
Liabilities + Equity
Equity
Equity
Common
Common _ _
Stock
Stock
Dividends
Dividends
+ Revenues
Revenues Expenses
Expenses
Cash
Investment by owner for stock 30,000 Purchase of supplies 2,500
Consulting services revenues earned 4,200 Purchase of equipment 26,000
Collection of accounts receivable 1,900 Payment of rent 1,000
Payment of salary 700
Payment of accounts payable 900
Payment of cash dividend 200
Total increases 36,100 Total decreases 31,300
Balance 4,800
2-17
P1
Journalizing & Posting Transactions
Assets
Assets = Liabilities
Liabilities + Equity
Equity
T- Account
(Left side) (Right side)
Debit Credit
De c. 2 Supplie s 2,500
Ca sh 2,500
Purchased store supplies
for cash
2-19
P1
Posting Journal Entries
De c. 2 Supplie s 2,500
Ca sh 2,500
Purchased store supplies
for cash
2-20
P1
Posting Journal Entries
2-21
P1
Posting Journal Entries
De c. 2 Supplie s 2,500
Ca sh 2,500
Purc hased store supplies
for cash
2-22
P1
Posting Journal Entries
De c. 2 Supplie s 2,500
Ca sh 2,500
Purchased store supplies
for cash
2-23
P1
Posting Journal Entries
De c. 2 Supplie s 2,500
Ca sh 2,500
Purchased store supplies
for cash
2-24
A1
Analyzing Transactions
Shareholders invested $30,000 in FastForward on
Transaction:1 Dec. 1.
Analysis:
Assets = Liabilities + Equity
Cash Common
Stock
30,000 30,000
Double entry:
(1) Cash 101 30,000
Common stock 301 30,000
Posting:
Cash 101 Common Stock 301
(1) 30,000 (1) 30,000
2-25
A1
Analyzing Transactions
FastForward purchases supplies by paying $2,500
Transaction:2 cash.
Analysis:
Assets = Liabilities + Equity
Cash Supplies Common
Stock
(2,500) 2,500
Double entry:
(2) Supplies 126 2,500
Cash 101 2,500
Posting:
Supplies 126 Cash 101
(2) 2,500 (1) 30,000 (2) 2,500
2-26
A1
Analyzing Transactions
Analysis:
Assets = Liabilities + Equity
Cash Equipment Common
Stock
(26,000) 26,000
Double entry:
(3) Equipment 167 26,000
Cash 101 26,000
Posting:
Equipment 167 Cash 101
(3) 26,000 (1) 30,000 (2) 2,500
(3) 26,000
2-27
A1
Analyzing Transactions
Trans ac t ion: 4 Fas tForward purc has es $7,100 of s upplies on c redit .
Analysis:
Assets = Liabilities + Equity
Supplies Accounts Payable Common
Stock
7,100 7,100
Double entry:
(4) Supplies 126 7,100
Accounts payable 201 7,100
Posting:
Supplies 126 Accounts Payable 201
2,500 (4) 7,100
(4) 7,100
2-28
A1
Analyzing Transactions
FastForward provides consulting services and
Transaction:5 immediately collects $4,200 cash.
Analysis:
Assets = Liabilities + Equity
Cash Revenue
4,200 4,200
Double entry:
(5) Cash 101 4,200
Consulting Revenue 403 4,200
Posting:
Consulting Revenue 403 Cash 101
(5) 4,200 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
2-29
A1
Analyzing Transactions
Transaction: 6 FastForward pays $1,000 cash for December rent.
Analysis:
Assets = Liabilities + Equity
Cash (Expense)
(1,000) (1,000)
Double entry:
(6) Rent Expense 640 1,000
Cash 101 1,000
Posting:
Rent Expense 640 Cash 101
(6) 1,000 (1) 30,000 (2) 2,500
(5) 4,200 (3) 26,000
(6) 1,000
2-30
A1 After
After processing
processing its
its remaining
remaining transactions
transactions for
for December,
December,
FastForward’s
FastForward’s Trial
Trial Balance
Balance is
is prepared.
prepared.
FastForward
Unadjusted Trial Balance
December 31, 2009
Debits Credits The trial balance lists
Cash $ 4,350
Accounts receivable -
all account balances
Supplies 9,720 in the general ledger.
Prepaid Insurance 2,400 If the books are in
Equipment 26,000
Accounts payable $ 6,200 balance, the total
Unearned consulting revenue 3,000 debits will equal the
Common stock 30,000
Dividends 200
total credits.
Consulting revenue 5,800
Rental revenue 300
Salaries expense 1,400
Rent expense 1,000
Utilities expense 230
Total $ 45,300 $ 45,300
2-31
C3 The Accounting Cycle
Prepare
Start post-closing
trial balance
Analyze POST
transactions
Closing
Entries
Journalize
Prepare
Post statements
Prepare Prepare
Adjusting
unadjusted POST adjusted
Entries
trial balance trial balance
3-32
The Adjustment Process
Accounts are adjusted at the end of a period to
record internal transactions and events that are
not yet recorded.
Not GAAP
Accounting
3-35
C1
Accrual Basis vs. Cash Basis
FastForward paid $2,400 for a 24-month insurance
Example: policy beginning December 1, 2009.
$ - $ - $ - $ -
May Jun Jul Aug
$ - $ - $ - $ -
Sep Oct Nov Dec
$ - $ - $ - $ 2,400
$
May
100 $
Jun
100 $
Jul
100 $
Aug
100
The expense is matched
$
Sep
100 $
Oct
100 $
Nov
100 $
Dec
100
with the periods benefited
Insurance Expense 2011 by the insurance coverage.
Jan Feb Mar Apr
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ -
3-37
Adjusting Accounts
An adjusting entry is recorded to bring an asset
or liability account balance to its proper amount.
The adjusting process is based on ACCRUAL
ACCOUNTING of Revenue Recognition and
Matching Principle.
Paid
Paid (or
(or received) cash before
received) cash before Paid
Paid (or
(or received) cash after
received) cash after
expense
expense (or(or revenue)
revenue) recognized
recognized expense
expense (or(or revenue)
revenue) recognized
recognized
Prepaid
Prepaid Unearned
Unearned Accrued
Accrued Accrued
Accrued
(Deferred)
(Deferred) (Deferred)
(Deferred) expenses
expenses revenues
revenues
expenses*
expenses* revenues
revenues
*including depreciation
3-39
Prepaid (Deferred) Expenses
P1
Supplies
During 2009, Scott Company purchased $15,500
of supplies. Scott recorded the expenditures as
Supplies. On December 31, a count of the
supplies indicated $2,655 on hand.
What adjustment is required?
Dec. 31 Supplies Expense 12,845
Supplies 12,845
To record supplies used during 2009
Supplies 126 Supplies Expense 652
Bought 15,500 Dec. 31 12,845 Dec. 31 12,845
Bal. 2,655
3-40
P1
Accrued Expenses
We’re about one-half
done with this job and
Costs
Costs incurred
incurred in
in aa want to be paid for
period
period that
that are
are our work!
both
both unpaid
unpaid and
and
unrecorded.
unrecorded.
Expense Liability
Debit Credit
Adjustment Adjustment
3-41
P1
Accrued Expenses
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. AsAs of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
3-42
P1
Accrued Expenses
Barton,
Barton, Inc.
Inc. pays
pays its
its employees
employees every
every Friday.
Friday. Year-end,
Year-end,
12/31/09,
12/31/09, falls
falls on
on aa Wednesday.
Wednesday. AsAs of
of 12/31/09,
12/31/09, the
the
employees
employees have
have earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.
Dec. 31 Salaries Expense 47,250
Salaries Payable 47,250
To accrue 3-days' salary
Salaries Expense Salaries Payable
Other salaries Dec. 31 47,250
657,500
Dec. 31 47,250
Bal. 704,750
3-43
Fast Forw ard Co
Adjusted Trial Bala nce
December 31, 2009
Dr. Cr.
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accum. depr. - Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned revenue 2,750
Common Stock 30,000
Retained Earnings -
Dividends 600
Consulting revenue 7,850
Rental revenue 300
Depr. expense 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
3-44
C3 The Accounting Cycle
Prepare
Start post-closing
trial balance
Analyze POST
transactions
Closing
Entries
Journalize
Prepare
Post statements
Prepare Prepare
Adjusting
unadjusted POST adjusted
Entries
trial balance trial balance
3-45
P3
1. Prepare Income Statement
Adjusted
Trial Balance
December 31, 2009
Dr. Cr. FastForward
Cash $ 3,950 Income Statement
Accounts receivable 1,800
For the Month Ended December 31, 2009
Supplies 8,670
Prepaid insurance 2,300 Revenues:
Equipment 26,000 Consulting revenue $ 7,850
Accum. depr. - Equip. $ 375
Accounts payable 6,200 Rental revenue 300
Salaries payable 210 Operating expenses:
Unearned revenue 2,750
Common Stock 30,000
Depr. expense - Equip. $ 375
Retained Earnings - Salaries expense 1,610
Dividends 600 Insurance expense 100
Consulting revenue 7,850
Rental revenue 300 Rent expense 1,000
Depr. expense 375 Supplies expense 1,050
Salaries expense 1,610
Insurance expense 100
Utilities expense 230
Rent expense 1,000 Total expenses 4,365
Supplies expense 1,050
Net income $ 3,785
Utilities expense 230
Totals $ 47,685 $ 47,685
3-46
P3 2. Prepare Statement of Retained
Earnings
Note: Net Income from the Income
Statement carries to the Statement
of Retained Earnings.
FastForward
Income Statement
For the Month Ended December 31, 2009
Revenues: FastForward
Consulting revenue $ 7,850 Statement of Retained Earnings
Rental revenue 300
Total Revenues 8,150
For the Month Ended December 31, 2009
Operating expenses:
Depr. expense - Equip. $ 375 Retained earnings, 12/1/09 $ -0-
Salaries expense 1,610
Insurance expense 100 Add: Net income 3,785
Rent expense 1,000 Less: Dividends 600
Supplies expense 1,050
Utilities expense 230
Retained earnings 12/31/09 $ 3,185
Total expenses 4,365
Net income $ 3,785
3-47
P3
3. Prepare Balance Sheet
FastForward
Adjusted
Balance Sheet
Trial Balance
Dr. Cr.
December 31, 2009
Cash $ 3,950 Assets
Accounts receivable 1,800 Cash $ 3,950
Supplies 8,670
Accounts receivable 1,800
Prepaid insurance 2,300
Supplies 8,670
Equipment 26,000
Accum. depr. - Equip. $ 375 Prepaid insurance 2,300
Accounts payable 6,200 Equipment 26,000
Salaries payable 210 Less: accum. depr. (375) 25,625
Unearned revenue 2,750FastForward Total assets $ 42,345
Chuck Taylor, Capital 30,000
Statement of Retained Earnings Liabilities
Chuck Taylor, Withd'l. 600
ConsultiFor
ng revenuethe Month 7,850 Ended December 31, 2009 Accounts payable $ 6,200
Rental revenue 300 Salaries payable 210
Retained
Depr. expense earnings,
375 12/1/09 $ -0- Unearned revenue 2,750
Salaries
Add: expense Net income
1,610 3,785 Total liabilities $ 9,160
Insurance expense 100
Less: Dividends
Rent expense 1,000
600 Equity
Retained
Suppli es expense earnings 12/31/09
1,050 $ 3,185 Common stock 30,000
Utilities expense 230 Retained earnings 3,185
Totals $ 47,685 $ 47,685 Total liabilities and equity $ 42,345
3-48
C3 The Accounting Cycle
Prepare
Start post-closing
trial balance
Analyze POST
transactions
Closing
Entries
Journalize
Prepare
Post statements
Prepare Prepare
Adjusting
unadjusted POST adjusted
Entries
trial balance trial balance
3-49
C3 The Closing Process: Temporary and
Permanent Accounts
Shareholders’
Liabilities
Dividends
Expenses
Equity
Temporary Permanent
Accounts Accounts
Income
The closing process applies
Summary
only to temporary accounts.
P4
Recording Closing Entries
3-52
P4
Recording Closing Entries
$ 7,000
3-53
P4
Recording Closing Entries
Close revenues
with a debit to the
Income Summary revenue account
$ 25,000 and a credit to
Income Summary.
Consulting Revenues 25,000
Income Summary 25,000
3-54
P4
Recording Closing Entries
Close expense
accounts with a
credit to expenses
Income Summary and a debit to
$ 18,100 $ 25,000 Income Summary.
Income Summary
Determine the
$ 18,100 $ 25,000 balance in the
$ 6,900 Income Summary
account.
3-56
P4 Recording Closing Entries
Income Summary 6,900
Salaries Expenses
Retained Earnings 6,900
$ 18,100 $ 18,100
Close the Income
Summary to
Retained Earnings.
Income Summary Retained Earnings
3-57
P4
Recording Closing Entries
3-58
P4
Recording Closing Entries
3-60
Fast Forw ard Co
Post-closing Trial Balance
December 31, 2009
Dr. Cr.
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accum. depr. - Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned revenue 2,750
Common Stock 30,000
Retained Earnings 3,185
Totals $ 42,720 $ 42,720
3-61
Let's prepare
the Closing Entries
for Dress Right Corporation
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2013
Account Title Debits Credits
Cash $ 68,500
Accounts receivable 2,000
Supplies 1,200
Prepaid rent 22,000
Inventory 38,000
Furniture and fixtures 12,000
Accumulated depr.-furniture & fixtures 200
Accounts payable 35,000
Note payable 40,000
Unearned rent revenue 750
Salaries payable 5,500
Interest payable 333
Common stock 60,000
Retained earnings 1,000
Sales revenue 38,500
Rent revenue 250
Cost of goods sold 22,000
Salaries expense 10,500
Supplies expense 800
Rent expense 2,000
Depreciation expense 200
Interest expense 333
Totals $ 180,533 $ 180,533
.
CLOSING ENTRIES
Using the adjusted trial balance of 7/31, we can prepare the following closing entries:
Additional Consideration
An alternative method of recording a cash dividend is to debit a temporary
account called dividends, rather than debiting retained earnings.
Analyze POST
transactions
Closing
Entries
Journalize
Prepare
Post statements
Prepare Prepare
Adjusting
unadjusted POST adjusted
Entries
trial balance trial balance
3-67