Chapter 3

SUMMARY OF ACCOUNTING
PROCESS/ The Accounting Cycle.
1. Identify steps in the accounting cycle.

2. Record transactions in journals, post to ledger accounts,

and prepare a trial balance.

3. Explain the reasons for preparing adjusting entries.

4. Prepare financial statement from the adjusted trial
balance.

5. Prepare closing entries.

6. Prepare Post- close trial balance.

07/21/21 BY Takele Fufa, Ph.D 3
 1.Scorekeeping:capturing,recording,summarizing
and reporting financial performance.
 2. Attention-directing: drawing the attention of
managers to, and assisting in the interpretation of,
business performance, particularly in terms of the
comparison between actual and planned
performance.
 3.Problem-solving: identifying the best choice
from a range of alternative actions.
07/21/21 BY Takele Fufa, Ph.D 4
1. Planning: establishing goals and strategies to
achieve those goals.
2. Decision-making: using financial information
to make decisions consistent with those goals
and strategies.
3. Control: using financial information to
maintain performance as close as possible to
plan, or using the information to modify the plan
itself.
07/21/21 BY Takele Fufa, Ph.D 5
 In order to understand the scorekeeping
process, we need to understand how
accounting captures information that is
subsequently used for planning, decision
making and control purposes.
 In this chapter we also show how the
principles underlying accounting can limit the
usefulness of accounting information as a
management tool.
07/21/21 BY Takele Fufa, Ph.D. 6
 Perspectives of business events(measured in monetary
terms and Non-financial terms). These non-financial
performance measures are important elements of
business events that are not captured by financial
transactions ( a limitation of accounting as a tool of
business decision-making.)
 The accounting system, typically computer based(except
for very small businesses), comprises asset of accounts
that summarize the transactions that have been recorded
on source documents.

07/21/21 BY Takele Fufa, Ph.D 7

1. The exclusion of the wider human, social and
environmental costs from those reported
by accounting systems;
2.The focus on line items rather than cost objects,
despite the latter having more meaning for
planning, decision-making and control; and
3. The problematic notion of defining cost as historic,
future or opportunity.

07/21/21 BY Takele Fufa, Ph.D 8

 Illustration
Transactions

9. Reversing entries 1. Journalization

8. Post-closing trail balance 2. Posting

7. Closing entries 3. Trial balance

Work
6. Financial Statements Sheet
4. Adjustments

5. Adjusted trial balance

 During the Accounting Period

Source Transaction Record in Post to

Documents Analysis Journal Ledger

At the End of the Accounting Period

Financial Adjusted Record & Post Unadjusted

Statements Trial Balance Adjusting Trial Balance
Entries

The
At the End Accounting
of the Year Processing
Close Temporary Post-Closing
07/21/21 BY Takele Fufa, Ph.D Cycle 10
Accounts Trial Balance
 Assets
Assets Liability
Liability Equity
Equity
Asset
Accounts
Accounts
Accounts = Liability
Accounts
Accounts
Accounts + Equity
Accounts
Accounts
Accounts

07/21/21 BY Takele Fufa, Ph.D 11

 A = L + OE
+ Revenues - Expenses
+ Owner Investments - Owner Withdrawals
+ Gains - Losses

07/21/21 BY Takele Fufa, Ph.D 12

 A = L + SE
+ Paid-in Capital + Retained Earnings

+ Revenues - Expenses - Dividends

+ Gains - Losses

07/21/21 BY Takele Fufa, Ph.D 13

What to Record?

An item should be recognized in the financial statements if it is an

element, is measurable,
and is relevant and a faithful representation.
An Account shows the effect of transactions on a
given asset, liability, equity, revenue, or expense
account.

Double-entry accounting system (two-sided effect).

Recording done by debiting at least one account

and crediting another.

DEBITS must equal CREDITS.

 An arrangement that shows the
Account
effect of transactions on an
account.
Debit = “Left”
Credit = “Right”

An Account can be Account Name

illustrated in a T-
Debit / Dr. Credit / Cr.
Account form.
 If Debit entries are greater than Credit entries, the account will have
a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

LO 2 Explain double-entry rules.

 If Credit entries are greater than Debit entries, the account will have
a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000
 Liabilities
Debit / Dr. Credit / Cr.
Normal
Normal Normal
Normal
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance

Assets Chapter

Equity
3-24

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter

Expense
3-23

Revenue
Chapter
3-25

Debit / Dr. Credit / Cr.

Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26
 Assets = Liabilities
Liabilities + Equity
Equity

+ – + –
Common
Common Dividends
Dividends Revenues
Revenues Expenses
Expenses
Stock
Stock

07/21/21 BY Takele Fufa, Ph.D 20

 Cash
Accounts
Land
Receivable

Buildings
Asset
Asset Notes
Receivable
Accounts
Accounts
Prepaid
Equipment
Accounts
Supplies

07/21/21 BY Takele Fufa, Ph.D 21

 Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Liability
Liability
Accounts
Accounts
Accrued Dividends
Dividends
Accrued
Liabilities Payable
Payable
Liabilities

Unearned
Unearned
Revenue
Revenue
07/21/21 BY Takele Fufa, Ph.D 22
 Retained
Retained
Earnings
Earnings
Common
Common Dividends
Dividends
Stock
Stock Declared
Declared
Equity
Accounts
Accounts
Revenues
Revenues Expenses
Expenses

07/21/21 BY Takele Fufa, Ph.D 23

 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 all
all
specific asset,
asset, accounts
liability,
liability, equity,
equity, accounts used used byby
revenue, the
the company.
company.
revenue, or or
expense
expense item.
item.

07/21/21 BY Takele Fufa, Ph.D 24

 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.

The chart of accounts is a list of all accounts and

includes an identifying number for each account.
101 Cash 319 Dividends
106 Accounts receivable 403 Consulting Revenues
126 Supplies 406 Rental revenue
128 Prepaid insurance 622 Salaries expense
167 Equipment 637 Insurance expense
201 Accounts payable 640 Rent expense
236 Unearned revenue 652 Supplies expense
307 Common stock 690 Utilities expense
318 Retained Earnings
07/21/21 BY Takele Fufa, Ph.D 25
 A T-account represents a ledger account and
is a tool used to understand the effects of
one or more transactions.

T- Account
(Left side) (Right side)
Debit Credit

07/21/21 BY Takele Fufa, Ph.D 26

 The “T” account is a shorthand format of an account
used by accountants to analyze transactions.

07/21/21 BY Takele Fufa, Ph.D 27

 ASSETS = LIABILITIES + EQUITY
DR = CR CR

Assets are on the left side of the equation;

therefore, the left, or debit side is the normal
balance side for assets.

Liabilities and equities are on the right side;

therefore, the right, or credit side is the normal
balance side for liabilities and equity.
07/21/21 BY Takele Fufa, Ph.D 28
 ASSETS = LIABILITIES + EQUITY
||
ASSETS = LIABILITIES + Common Stock – DIV + REV – EXP
DR CR CR DR CR DR

Total amount that is debited to accounts

must equal the total amount credited to
accounts for each transaction.

Sum of debit account balances in the

ledger must equal the sum of credit
account balances.
07/21/21 BY Takele Fufa, Ph.D 29
Assets
Assets = Liabilities
Liabilities + Equity
Equity

ASSETS LIABILITIES EQUITIES

Debit Credit Debit Credit Debit Credit

+ - - + - +

Whether a debit or a credit is an increase or decrease

depends on the NORMAL Balance of the account.
07/21/21 BY Takele Fufa, Ph.D 30
 Double-Entry Accounting
NORMAL Balance

Equity
Common
Common _ _
Stock
Stock
Dividends
Dividends
+ Revenues
Revenues Expenses
Expenses

Stock Dividends Revenues Expenses

Debit Credit Debit Credit Debit Credit Debit Credit

- + + - - + + -
07/21/21 BY Takele Fufa, Ph.D
 Assets
Assets = Liabilities
Liabilities + Equity
Equity
T- Account
(Left side) (Right side)
Debit Credit

Step 1: Analyze transactions Step 2: Apply double-

and source documents. entry accounting

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Post entry to ledger

07/21/21 BY Takele Fufa, Ph.D
Step 3: Record journal entry32
 
Transaction
Transaction 
Titles
Titles of
of Affected
Affected
Date
Date Accounts
Accounts

 
Dollar
Dollar amount
amount of
of debits
debits
Transaction
Transaction
explanation and
and credits
credits
explanation
07/21/21 BY Takele Fufa, Ph.D 33
T-accounts are useful illustrations, but balance
column accounts are used in practice.

07/21/21 BY Takele Fufa, Ph.D 34

P1

5 Compute the balance.

07/21/21 BY Takele Fufa, Ph.D 35

6 Enter the ledger reference.

07/21/21 BY Takele Fufa, Ph.D 36

A1

Analysis:

Double entry:
(1) Cash 101 30,000
Common stock 301 30,000
Posting:
Cash 101 Common Stock 301
(1) 30,000 (1) 30,000

07/21/21 BY Takele Fufa, Ph.D 37

A1

Analysis:

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

07/21/21 BY Takele Fufa, Ph.D 38

A1

Analysis:

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
07/21/21 BY Takele Fufa, Ph.D 39
A1

Analysis:

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
07/21/21 BY Takele Fufa, Ph.D 40
A1

Analysis:

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

07/21/21 BY Takele Fufa, Ph.D 412-41

A1

Analysis:

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
07/21/21 BY Takele Fufa, Ph.D 42
A1 After processing its remaining transactions for December,
FastForward’s Trial Balance is 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
07/21/21 BY Takele Fufa, Ph.D 43
07/21/21 BY Takele Fufa, Ph.D 44
 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
07/21/21 BY Takele Fufa, Ph.D 45
Accounts are adjusted at the end of a period to
record internal transactions and events that are
not yet recorded.

Two basic principles for recognizing Revenues

and Expenses:
1. The revenue recognition principle requires
revenue be recorded when earned, not before
and not after.
2. The matching principle requires expenses be
recorded in the same period as the revenues
earned as a result of these expenses.
07/21/21 BY Takele Fufa, Ph.D 46
Accrual basis accounting —uses the adjusting
process to recognize revenue when earned and to
match expenses with revenues. This means the
economic effects of revenues and expenses are
recorded when earned or incurred, not when cash is
received or paid. Accrual basis is consistent with
GAAP.
Cash basis accounting —revenues are recognized
when cash is received and expenses are recognized
when cash paid. Cash basis is not consistent with
GAAP.
Accrual accounting also increases the comparability
of financial statements from one period to another.
07/21/21 BY Takele Fufa, Ph.D 47
 Accrual Basis Cash Basis
Revenues are Revenues are
recognized when recognized when
earned and expenses cash is received and
are recognized when expenses recorded
incurred. when cash is paid.

Not GAAP
Accounting

07/21/21 BY Takele Fufa, Ph.D 48

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.

Adjusting accounts is a 3-step process:

(1) Determine the current account balance,
(2) Determine what the current account balance
should be, and
(3) Record adjusting entry to get from step 1
to step 2. BY Takele Fufa, Ph.D
07/21/21 49
 Framework for
Adjustments
Adjustments

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

07/21/21
*including depreciation
BY Takele Fufa, Ph.D 50
 Prepaid (Deferred) Expenses

During 2009, S Company purchased $15,500 of supplies.

S 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

07/21/21 BY Takele Fufa, Ph.D 51

 Depreciation is the process of computing expense
from allocating the cost of plant and equipment
over their expected useful lives.

Straight-Line Asset Cost - Salvage Value

Depreciation =
Expense Useful Life

07/21/21 BY Takele Fufa, Ph.D 52

 On January 1, 2009, B, Inc. purchased
equipment for $62,000 cash. The equipment
has an estimated useful life of 5 years and B
expects to sell the equipment at the end of its life
for $2,000 cash.
Let’s record depreciation expense for the year
ended December 31, 2009.
Dec. 31 Depreciation Expense 12,000
Accumulated Depreciation - Equipment 12,000
To record equipment depreciation

Accumulated
Accumulated depreciation
depreciation is
is
07/21/21 aa contra
contra
BY Takele Fufa, Ph.D asset
asset account.
account. 53
 Equipment is
shown net of
accumulated
depreciation.
This amount is
referred to as the
asset’s book
value

07/21/21 BY Takele Fufa, Ph.D 54

Cash
Cash received
received in
in
advance
advance ofof Buy your season tickets for
providing
providing all home basketball games NOW!
products
products or
or
services. “Go Big Blue”
services.

Revenue
Liability
Debit Unadjusted Credit
Adjustment Balance Adjustment

07/21/21 BY Takele Fufa, Ph.D 55

 On October 1, 2009, O University sold 1,000 season
tickets to its 20 home basketball games for $100 each.
O University makes the following entry:

Oct. 1 Cash 100,000

Unearned Revenue 100,000
Basketball revenue received in advance

Unearned Revenue
Oct.1 100,000

07/21/21 BY Takele Fufa, Ph.D 56

 On December 31, O University has played 10
of its regular home games, winning 2 and
losing 8.

Dec. 31 Unearned Revenue 50,000

Basketball Revenue 50,000
To recognize 10-games of revenue
Unearned Revenue Basketball Revenue
Dec. 31 50,000 Oct. 1 100,000 Dec. 31 50,000
Bal. 50,000

07/21/21 BY Takele Fufa, Ph.D 57

 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

07/21/21 BY Takele Fufa, Ph.D 58

B,
B, 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. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees havehave earned
earned salaries
salaries of
of $47,250
$47,250 for
for Monday
Monday
through
through Wednesday.
Wednesday.

Last pay Next pay

date date
12/26/09

12/1/09 12/31/09 Record

Record adjusting
adjusting
Year end journal
journal entry.
entry.

07/21/21 BY Takele Fufa, Ph.D 59

B,
B, 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. As
As of
of 12/31/09,
12/31/09, the
the
employees
employees havehave 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

07/21/21 BY Takele Fufa, Ph.D 60

 S
S had
had $31,200
$31,200 of
of work
work completed
completed but
but not
not yet
yet billed
billed
to
to clients.
clients. Let’s
Let’s make
make the
the adjusting
adjusting entry
entry necessary
necessary
on
on December
December 31,31, 2009,
2009, the
the end
end of
of the
the company’s
company’s
fiscal
fiscal year.
year.

Dec. 31 Accounts Receivable 31,200

Service Revenue 31,200
To accrue revenue earned
Accounts Receivable Service Revenue
Other receivables Other revenues
1,325,268 6,589,500
Dec. 31 31,200 Dec. 31 31,200
Bal. 1,356,468 Bal . 6,620,700

07/21/21 BY Takele Fufa, Ph.D 61

07/21/21 BY Takele Fufa, Ph.D 62
 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
07/21/21 BY Takele Fufa, Ph.D 63
 1. Prepare Income Statement

07/21/21 BY Takele Fufa, Ph.D 64

 2. Prepare Statement of Retained
Earnings
Note: Net Income from the Income
Statement carries to the Statement
of Retained Earnings.

07/21/21 BY Takele Fufa, Ph.D 65

 3. Prepare Balance Sheet

FastForward
Balance Sheet
December 31, 2009
Assets
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,345
Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned revenue 2,750
Total liabilities $ 9,160
Equity
Common stock 30,000
Retained earnings 3,185
Total liabilities and equity $ 42,345
07/21/21 BY Takele Fufa, Ph.D 66
 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
07/21/21 BY Takele Fufa, Ph.D 67
Temporary (nominal) accounts accumulate data related to
one accounting period. They include all income statement
accounts, the dividends account, and the Income Summary
account. These accounts are “closed” at the end of the period
to get ready for the next accounting period.

Permanent (real) accounts report activities related to one or

more future accounting periods. They carry ending balances
to the next accounting period and are not “closed.”
07/21/21 BY Takele Fufa, Ph.D 68
 Revenues Assets

Shareholders’
Liabilities
Dividends
Expenses

Equity
Temporary Permanent
Accounts Accounts

Income
The closing process applies
Summary
only to temporary accounts.

07/21/21 BY Takele Fufa, Ph.D 69

1. Close revenue accounts to Inc. Summary;
2. Close expense accounts to Inc. Summary;
3. Close the income summary to RE;
4. Close dividends account to RE.

07/21/21 BY Takele Fufa, Ph.D 70

 Salaries Expenses Consulting Revenues
$ 18,100 $ 25,000 $ 25,000

Close revenu
with a debit to t
revenue accou
Income Summary
and a credit
$ 25,000 Income Summar

Consulting Revenues 25,000

Income Summary 25,000

07/21/21 BY Takele Fufa, Ph.D 71

 Salaries Expenses Consulting Revenues
$ 18,100 $ 18,100 $ 25,000 $ 25,000

Close expense
accounts with a
credit to expenses
Income Summary and a debit to
$ 18,100 $ 25,000 Income Summary.

Income Summary 18,000

Salaries Expenses 18,000
07/21/21 BY Takele Fufa, Ph.D 72
 Salaries Expenses Consulting Revenues
$ 18,100 $ 18,100 $ 25,000 $ 25,000

Income Summary
Determine the
$ 18,100 $ 25,000 balance in the
$ 6,900 Income Summary
account.

07/21/21 BY Takele Fufa, Ph.D 73

 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

$ 18,100 $ 25,000 $ 7,000

$ 6,900
$ 6,900 $ 6,900

07/21/21 BY Takele Fufa, Ph.D 74

 The dividends account is closed to
Retained Earnings.

Dividends Retained Earnings

$ 2,000 $ 2,000 $ 2,000 $ 7,000
6,900

07/21/21 BY Takele Fufa, Ph.D 75

 The dividends account is closed to
Retained Earnings.

Dividends Retained Earnings

$ 2,000 $ 2,000 $ 2,000 $ 7,000
6,900
$ 11,900
Determine the ending
balance in Retained
Earnings.
07/21/21 BY Takele Fufa, Ph.D 76
  Trial Balance prepared after the closing
entries have been posted.
 The purpose is to insure that all nominal
or temporary accounts have been
closed.
 The only accounts on this trial balance
should be assets,
liabilities, and equity accounts.

07/21/21 BY Takele Fufa, Ph.D 77

07/21/21 BY Takele Fufa, Ph.D 78
 DRESS RIGHT CLOTHING CORPORATION
Adjuste d Tria l Ba lance
July 31, 2013
Account Title Debits Cre dits
Ca sh $ 68,500
Accounts re ceivable 2,000
Supplie s 1,200
Pre pa id re nt 22,000
Inventory 38,000
Furniture and fix ture s 12,000
Accumulated depr.-furniture & fix ture s 200
Accounts paya ble 35,000
Note pa ya ble 40,000
Unea rne d rent reve nue 750
Sa laries paya ble 5,500
Inte re st pa ya ble 333
Common stock 60,000
Re taine d e arnings 1,000
Sa les reve nue 38,500
Re nt reve nue 250
Cost of goods sold 22,000
Sa laries e xpe nse 10,500
Supplie s e xpe nse 800
Re nt ex pense 2,000
De pre cia tion e xpense 200
Inte re st ex pe nse 333
Tota ls $ 180,533 $ 180,533

07/21/21 BY Takele Fufa, Ph.D 79

.
CLOSING ENTRIES
Using the adjusted trial balance of 7/31, we can prepare the following closing entries:

1. To close the revenue accounts to income summary:

2. To close the expense accounts to income summary:

3. To close the income summary account to retained earnings:

07/21/21 BY Takele Fufa, Ph.D 80

 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.

If this approach is used, an additional closing entry is required to close

the dividend account to retained earnings, as follows:

4. To close dividends to retained earnings

***This is NOT the case with Dress Right Corporation

07/21/21 BY Takele Fufa, Ph.D 81

 DRESS RIGHT CLOTHING CORPORATION
Post-Closing Trial Balance
July 31, 2013
Account Title Debits Credits
Cash 68,500 Lists permanent
Accounts receivable 2,000 accounts and their
Supplies 1,200 balances.
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 Total debits equal
Common stock 60,000 total credits.
Retained earnings 1,917
Totals 143,700 143,700

07/21/21 BY Takele Fufa, Ph.D 82

 END

07/21/21 BY Takele Fufa, Ph.D 83