Chapter 4

Adjusting Accounts and
Chapter Preparing Financial Statements:
4
Completing the Accounting
Cycle
100 Shares
Adjustments??
$1 par value
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Learning Objectives
 Explain the importance  Prepare and explain
of periodic reporting and adjusting entries
the time period principle  Explain how accounting
 Explain accrual adjustments link to
accounting and how it financial statements
makes financial  Explain and prepare an
statements more useful adjusted trial balance
 Identify the types of  Prepare financial
adjustments and their statements from an
purpose adjusted trial balance
Learning Objectives
 Prepare a worksheet
and explain its  Explain and prepare a
usefulness post-closing trial
 Define permanent balance
accounts  Identify steps in the
 Identify temporary accounting cycle
accounts that need to be
closed each period
 Describe and prepare
closing entries
The Accounting Period
Annual
1 2
Semiannual
1 2 3 4
Quarterly
1 2 3 4 5 6 7 8 9 10 11 12
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Monthly
The Accounting Period
 Calendar year- reporting period of 12 months
covering from 1 January to 31 December.
 Fiscal year- reporting period consisting of any 12
consecutive months, in which the starting month
is not necessarily beginning from 1 January. Eg. 1
April 2005 to 31 March 2006.
 When a corporation adopts a fiscal year that ends when
business activities have reached the lowest point in its
annual operating cycle, such a fiscal year is called the
natural business year.
Reporting Revenue and Expense
TWO METHODS
Cash Basis of Accounting

Accrual Basis of Accounting
Accrual Basis vs. Cash Basis
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
Insurance Expe nse 2006

Jan Feb Mar Apr
$ - $ - $ - $ -
Ma y Jun Jul Aug
$ - $ - $ - $ -
Sep Oct Nov De c
$ - $ - $ - $ 2.400
On the cash basis the entire $2,400 would be

recognized as insurance expense in 2006. No insurance
expense from this policy would be recognized in 2007 or
2008, periods covered by the policy.
Insurance Expense 2006
Jan Feb Mar Apr
$ - $ - $ - $ -
May Jun Jul Aug
On the accrual basis
$100 of insurance
$ - $ - $ - $ -
Sep Oct Nov Dec
$ - $ - $ - $ 100 expense is recognized in

Jan
Feb Mar Apr 2006, $1,200 in 2007,
$ 100
May
$ 100
Jun
$ 100
Jul
$ 100
Aug
and $1,100 in 2008. The
$ 100
Sep
$ 100
Oct
$ 100
Nov
$ 100
Dec
expense is matched with
$ 100 $ 100 $ 100 $ 100 the periods benefited by
Jan
Feb Mar Apr the insurance coverage.
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ Wild,
Larson, 100 Chiapetta,
$ 100 Ropidah,
$ 100Haslinda,
$ - Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Revenues Recognition
We have delivered the

product to our customer,
so I think we should record
the revenue earned.
Matching Concept
Note: Net income is determined by properly
matching expenses and revenues.
Now that we have

recognized the revenue,
Summary
let’s see what expenses
of Expenses we incurred to
Rent $1,000 generate that revenue.
Gasoline 500
Advertising 2,000
Salaries 3,000
Utilities 450
and . . . . ....
Rules for adjusting entries
All adjusting entries affect at least

one income statement account and
one balance sheet account
Adjusting entries
Why ?
To prepare better financial
statements
To bring an asset or liability account
balance to its proper amount (updating
the accounts at the end of accounting period)
When?
At the end of accounting period and
before preparing FS.
Adjustments – Deferrals and Accruals
What ?
Current Period Future Period
Revenues
or
expenses
Deferrals Cash Received Revenue Recorded
Cash paid expense Recorded
Accruals Revenue Recorded Cash Received
expense Recorded Cash paid
Deferrals
(SOA): a deferral is a delay of the recognition of an

expense already paid or of a revenue already received.
Expenses: supplies, prepaid insurance, prepaid interest

Revenues: unearned rent, unearned retainer fee received
by an attorney.
Types of Deferrals
Prepaid Expenses
ASSETS Expenses paid in cash and
recorded as assets before
they are used or consumed
Prepayments
Unearned Revenues
Cash received and recorded as
liabilities before revenue
LIABILITIES
is earned
16
© The McGraw-Hill Companies, Inc., 2007
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
Accruals
(SOA): an expense that has not been paid or a revenue

that has not been received.
Expenses: accrued wages, accrued interest on notes

payable, accrued taxes.
Revenues: fees for services provided to a customer,
accrued interest on notes receivable, accrued rent
Types of Accruals
Accrued Revenues
REVENUES Revenues earned but not yet
received in cash or recorded
Accruals
Accrued Expenses
Expenses incurred but not yet
EXPENSES paid in cash or recorded
18
Example Exercise Accounts Requiring Adjustment
Indicate with a Yes or No whether or not each of the

following accounts normally requires an adjusting
entry:
a. Cash a. No
b. Prepaid Rent b. Yes
c. Wages Expense c. Yes
d. Land d. No
e. Accounts Receivable e. Yes
f. Unearned Rent f. Yes
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Adjusting Prepaid (Deferred) Expenses
Here is the check
for my first
Resources paid 6 months’ rent.
for prior to
receiving the
actual benefits.
Asset Expense
Unadjusted Credit Debit
Balance Adjustment Adjustment
Prepaid Insurance
On 1 December 2006, Scott Company paid $12,000 to cover
insurance policy for December 2006 through May 2007.
Scott recorded the expenditure as Prepaid Insurance on 1
December. What adjustment is required?
Dec. 31 Insurance Expense 2,000

Prepaid Insurance 2,000
To record first month's expired insurance
Prepaid Insurance 637 Insurance Expense 128

Dec. 1 12,000 Dec. 31 2,000 Dec. 31 2,000
Bal. 10,000
What is the effect of omitting adjusting entries?
insurance expense and net income (IS)
prepaid insurance and owner’s equity (BS)
Adjusting for Depreciation
• Fixed assets, or plant assets, are physical resources

that are owned and used by a business and are
permanent or have a long life.
• As time passes, a fixed asset loses its ability to
provide useful services. This decrease in usefulness is
called depreciation.
• All fixed assets, except land, lose their usefulness
and, thus, are said to depreciate.
• As a fixed asset depreciates, a portion of its cost
should be recorded as an expense. This periodic
expense is called depreciation expense.
part.
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
On 1 January 2006, Barton, Inc. purchased equipment
for $62,000 cash. The equipment has an estimated
useful life of 5 years and Barton expects to sell the
equipment at the end of its life for $2,000 cash.
Let’s record depreciation expense for the year ended
31 December 2006.
2006 $62,000 - $2,000

Depreciation = = $12,000
Expense 5
On 1 January 2006, Barton, Inc. purchased equipment
for $62,000 cash. The equipment has an estimated
useful life of 5 years and Barton expects to sell the
equipment at the end of its life for $2,000 cash.
Let’s record depreciation expense for the year ended
31 December 2006.
Dec. 31 Depreciation Expense 12,000
Accumulated Depreciation - Equipment 12,000
To record equipment depreciation
Accumulated depreciation is
a contra asset account.
Dec. 31 Depreciation Expense 12,000
Accumulated Depreciation - Equipment 12,000
To record equipment depreciation
Equipment Depreciation Expense

1/1 62,000 31/12 12,000
Accumulated Depreciation
31/12 12,000
Equipment is
$
shown net of
accumulated
depreciation.
• The fixed asset account is not decreased (credited)
when making the related adjusting entry. This is
because both the original cost of a fixed asset and the
depreciation recorded since its purchase are reported
on the statement of financial position. Instead, an
account entitled Accumulated Depreciation is
increased (credited).
• Accumulated depreciation accounts are called contra

accounts, or contra asset accounts.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
What is the effect of omitting the adjusting entry?
Depreciation expense and net income (IS)
Office equipment and owner’s capital (BS)
Adjusting Unearned (Deferred) Revenues
Cash received in
advance of
Buy your season tickets for
providing all home basketball games NOW!
products or
services. “Go Big Blue”
Liability Revenue
Debit Unadjusted Credit
Adjustment Balance Adjustment
On 1 October 2006, Ox University sold 1,000 season
tickets to its 20 home basketball games for $100
each. Ox 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
On 31 December, Ox 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 recognized 10-game basketball revenue
Unearned Revenue Basketball Revenue

Dec. 31 50,000 Oct. 1 100,000 Dec. 31 50,000
Bal. 50,000
Basketball revenue and net income (IS)
Unearned revenue and owner’s equity (BS)
Adjusting for Accrued Expenses
Costs incurred in a We’re about one-half
done with this job and
period that are
want to be paid for
both unpaid and our work!
unrecorded.
Expense Liability
Debit Credit
Adjustment Adjustment
Barton, Inc. pays its employees every Friday. Year-
end, 31/12/06, falls on a Wednesday. As of 31/12/06, the
employees have earned salaries of $47,250 for Monday
through Wednesday of the week ended 2/01/07.
Last pay Next pay

date date
26/12/06 2/01/07
1/12/06 31/12/06 Record adjusting

Year end journal entry.
Barton, Inc. pays its employees every Friday. Year-
end, 31/12/06, falls on a Wednesday. As of 31/12/06, the
employees have earned salaries of $47,250 for Monday
through Wednesday of the week ended 2/01/07.
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
Salary expense and net income (IS)
Salary payable and owner’s equity (BS)
Adjusting Accrued Revenues
Revenues earned Yes, I’ve completed your
in a period that tax return, but have not had
time to bill you yet.
are both
unrecorded and
not yet received.
Asset Revenue
Debit Credit
Adjustment Adjustment
Adjusting for Accrued Revenues
Smith & Jones, CPAs, had $31,200 of work
completed but not yet billed to clients. Let’s make
the adjusting entry necessary on 31 December 2006,
the end of the company’s fiscal 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
Fees earned and net income (IS)
Accounts receivable and owner’s equity (BS)
Links to Financial Statements
Summary of Adjustments and Financial Statement Links
Before Adjustment
Income
Balance Statement
Type Sheet Account Account Adjusting Entry
Prepaid Asset Expense Dr. Expense
Expenses Overstated Understated Cr. Asset
Unearned Liability Revenue Dr. Liability
Revenues Overstated Understated Cr. Revenue
Accrued Liability Expense Dr. Expense
Expenses Understated Understated Cr. Liability
Accrued Asset Revenue Dr. Asset
Revenues Understated Understated Cr. Revenue
Example Exercise Type of Adjustment
Classify the following items as (1) prepaid expense, (2)

unearned revenue, (3) accrued expense, or (4) accrued
revenue:
1. Wages owed but not yet paid.
Accrued expense
2. Supplies on hand.
Prepaid expense
3. Fees received but not yet earned.
Unearned revenue
4. Fees earned but not yet received.
Accrued revenue
part.
Example Exercise Effect of Omitting Adjustments
For the year ending December 31, 2016, Mann Medical

Co. mistakenly omitted adjusting entries for (1)
RM8,600 of unearned revenue that was earned, (2)
earned revenue of RM12,500 that was not billed, and
(3) accrued wages of RM2,900. Indicate the combined
effect of the errors on (a) revenues, (b) expenses, and
(c) net income for the year ended December 31, 2016.
part.
FASTFORWARD
TRIAL BALANCE
31 DECEMBER 2006
First, the
$
initial
unadjusted
amounts are
added to the
worksheet.
$ $
FASTFORWARD
TRIAL BALANCE
31 DECEMBER 2006
Next,
FastForward’s
$
$ adjustments
$ are added.
$ $ $ $
FASTFORWARD
Finally, the totals TRIAL BALANCE
are determined. 31 DECEMBER 2006
$ $
$
$
$
$
$ $ $ $ $ $
The Adjusted Trial Balance
 An Adjusted Trial Balance is prepared after all

adjusting entries have been journalized and posted.
 Its purpose is to prove the equality of the total debit

and credit balances in the ledger after all adjustments
have been made.
 Financial statements can be prepared directly from

the adjusted trial balance.
49
Preparing Financial Statements
Let’s use FastForward’s adjusted trial balance to
prepare the company’s financial statements.
Prepare the Income
Statement.
Prepare the Statement of
Changes in Owner’s Equity.
Note: Net Income from the Income
Statement carries to the Statement of
Changes in Owner’s Equity.
FASTFORWARD
BALANCE SHEET
31 DECEMBER 2006
Non-current assets
Equipment $26,000
Acc dep - Eqpmt (375) $25,625
Current Assets
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Total assets $42.345
Equity
C.Taylor, Capital $33,185
Current liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned consulting revenue 2,750
Total equity and liabilities $42.345
Prepare the Balance Sheet.
The Closing Entries
Why?
 Reset temporary accounts to zero and get
ready for a new accounting period.
 Helps summarize a period’s revenues and

expenses in the Income Summary account.
When?
 Done after financial statements are prepared.
Permanent Accounts
• Accounts that are relatively permanent from year to

year are called permanent accounts or real
accounts.
• The balances of these accounts are carried forward
from year to year.
• This includes accounts reported on the Statement of
Financial Position.
Temporary Accounts
• Accounts that report amounts for only one period are

called temporary accounts or nominal accounts.
• Temporary accounts are not carried forward because
they relate to only one period.
• This includes all accounts reported on the Statement
of Profit or Loss and Other Comprehensive Income as
well as the owner’s drawing account, which is
reported on the Statement of Changes in Equity.
Temporary and Permanent Accounts
Revenues Assets
Withdrawals
Liabilities
Expenses
Owner’s
Capital
Temporary Permanent
Accounts Accounts
Income
Summary The closing process
applies only to
temporary accounts.
Recording Closing Entries
 Close Revenue accounts to
Income Summary.
Let’s see how the
closing process
 Close Expense accounts to works and what are
Income Summary. closing entries!
The balance in income summary will equal net income

(loss)
credit balance=net income
debit balance=net loss
 Close Income Summary account

to Owner’s Capital.
 Close Withdrawals to Owner’s

Capital.
Closing Process
Expense Accounts Revenue Accounts
10,000 25,000
10,000 25,000
Income Summary
Owner's Capital Withdrawals Account

30,000 5,000
30,000 Balances before closing. 5,000
Closing Process
10,000 Close Revenue 25,000 25,000
accounts to Income
Summary.
10,000 -
Income Summary
25,000
Owner's Capital 25,000 Withdrawals Account

30,000 5,000
30,000 5,000
Closing Process
10,000 10,000 Close Expense 25,000 25,000
accounts to Income
Summary.
- -
Income Summary
10,000 25,000
Owner's Capital 15,000 Withdrawals Account

30,000 5,000
The balance in Income

30,000 Summary equals profit 5,000
for the period
Closing Process
10,000 10,000 Close Income 25,000 25,000
Summary to
Owner’s Capital.
- -
Income Summary
10,000 25,000
15,000
Owner's Capital - Withdrawals Account

30,000 5,000
15,000
45,000 5,000
Closing Process
10,000 10,000 25,000 25,000
- -
Income Summary
10,000 25,000
15,000
- Withdrawals Account
Owner's Capital
5,000 30,000 5,000 5,000
15,000 Close Withdrawals
account to Owner’s 5,000
-
45,000
40,000
Capital.
Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.
Close Revenue
accounts to
Income Summary.
 Close Revenue Accounts to Income
Summary
Dec. 31 Consulting revenue 7,850

Rental revenue 300
Income summary 8,150
Now, let’s look at the ledger accounts after

posting this closing entry.
 Close Revenue Accounts to Income
Summary
Consulting Revenue
7,850 7,850
-
Income Summary
7,850
300
Rental Revenue
300 300
Close Expense
accounts to
Income Summary.
 Close Expense Accounts to Income
Summary
Dec. 31 Income summary 4,365

Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Close
CloseExpense
ExpenseAccounts
AccountstotoIncome
Income
Summary Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-
Salaries Expense Supplies Expense Income Summary

4,365 7,850
1,610 1,610 1,050 1,050 300
- - 3,785
Insurance Expense Utilities Expense Profit for

100 100 230 230 the period
- -
Close Income
Summary to
Owner’s Capital.
 Close Income Summary to Owner’s
Capital
Dec. 31 Income summary 3,785

C. Taylor, Capital 3,785

Close
CloseIncome
IncomeSummary
SummarytotoOwner’s
Owner’s
Capital Capital
C. Taylor, Capital Income Summary

30,000 4,365 7,850
3,785 3,785 300
-
33,785
Close
Withdrawals to
Owner’s Capital.
Capital
Dec. 31 C. Taylor, Capital 600

C. Taylor, Withdrawals 600

Capital
C. Taylor,
Withdrawals C. Taylor, Capital
600 600 600 30,000
3,785
- 33,185
Post-Closing Trial Balance
Let’s look at
 List of permanent FastForward’s
accounts and their post-closing trial
balances after posting balance.
closing entries.
 Total debits and

credits must be equal.
Post-Closing Trial Balance
Assets
Liabilities
Owner’s
Equity
Let’s discuss
the
components
of a classified
balance
sheet.
Classified Balance Sheet
Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current Assets Current Liabilities
Noncurrent Assets Noncurrent Liabilities
Long-Term Investments Equity
Fixed Assets
Intangible Assets
Current items are those expected to come due (both

collected and owed) within NO longer of one year or
the company’s normal operating cycle.
SNOWBOARDING COMPONENTS
BALANCE SHEET
AS AT 31 JANUARY 2006
Non-current assets
Store equipment $33,200
Less accumulated depreciation 8,000 $25,200
Buildings 170,000
Less accumulated depreciation 45,000 125,000
Land 73,200
$ 223.400
Current assets are expected
Long-term investments
Notes receivable 1.500
to be
sold, collected, or used within
Investments in stocks and bonds
18.000 one
Land held for future expansion
48.000
year or the company’s operating
Total investments 67.500
Intangible assets 10.000
cycle.
Total non-current assets $ 300.900
Current Assets
Cash $6,500
Short-term investments 2,100
Merchandise inventory 27,500
Prepaid expenses 2,400
$42,900
BALANCE SHEET
31 JANUARY 2006
Non-current assets
Buildings 170,000
Land 73,200
$223,400
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Long-term investments are
Total assets $300.900
expected
Current Assets to be held for the longer
of
Cash
one year
Short-term investments
or the operating
6.500
2.100
cycle.
Merchandise inventory 27,500
BALANCE SHEET
31 JANUARY 2006
Non-current assets
Buildings 170,000
Land 73,200
$223,400
Fixed assets (Plant assets1.500
Notes receivable
or PPE)
are tangible long-lived assets
Investments in stocks and bonds
18.000 used
Land held for future expansion
48.000
to produce or sell products and
Total investments 67.500
services. $300,900
Current assets
Cash $6,500
Short-term investments 2,100
BALANCE SHEET
31 JANUARY 2006
Non-current assets
Buildings 170,000
Land 73,200
$223,400
Notes receivable $1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
$67,500
Intangible assets are long-term $300.900
resources used to produce or sell

Current Assets
products and services and
Cash 6.500
that
lack physical form.
BALANCE SHEET
Current liabilities
Accounts payable $ 15.300
Wages payable 3.200
Notes payable 3.000
Current portion of long-term liabilities 7.500
Total current liabilities $29,000
Current liabilities are obligations due

within NO longer of one year or the
company’s operating cycle.
BALANCE SHEET
Equity and liabilities

T.Hawk, Capital $164,800
Non-current liabilities
Notes payable (net of current portion) $150,000
Current liabilities
Long-term liabilities are obligations

due within the longer of one year or
the company’s operating cycle.
BALANCE SHEET
Equity and liabilities

T.Hawk, Capital $164,800
Non-current liabilities
Notes payable (net of current portion) $150,000
Current liabilities
Equity is the owner’s claim on the

assets.
Example Exercise Classified Statement of Financial
Position
The following accounts appear in an adjusted trial balance of Hindsight

Consulting. Indicate whether each account would be reported in the (a)
current asset; (b) property, plant, and equipment; (c) current liability; (d)
long-term liability; or (e) owner’s equity section of the December 31, 2017,
Statement of Financial Position of Hindsight Consulting.
1. En. Tan, Capital 1. Owner’s equity

2. Notes Receivable (due in six 2. Current asset
months)
3. Notes Payable (due in 10 years) 3. Long-term liability
4. Land 4. Property, plant, and equipment
5. Cash 5. Current asset
6. Unearned Rent (three months) 6. Current liability
7. Accumulated Depreciation— 7. Property, plant, and equipment
Equipment 8. Current liability
8. Accounts Payable
part.
89
Accounting Cycle
1. Transactions are analyzed and recorded in the journal
2. Transactions are posted to the ledger
3. An unadjusted trial balance is prepared
4. Adjustment data are assembled and analyzed
5. Adjusting entries are journalized and posted to the ledger
6. An adjusted trial balance is prepared
7. Financial statements are prepared
8. Closing entries are journalized and posted to the ledger
9. A post- closing trial balance is prepared.
End of Chapter 4

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Chapter 4

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Adjusting Accounts and

Chapter Preparing Financial Statements:

Cash Basis of Accounting

Insurance Expe nse 2006

On the cash basis the entire $2,400 would be

$ - $ - $ - $ 100 expense is recognized in

We have delivered the

Now that we have

All adjusting entries affect at least

Cash paid expense Recorded

Accruals Revenue Recorded Cash Received

expense Recorded Cash paid

(SOA): a deferral is a delay of the recognition of an

Expenses: supplies, prepaid insurance, prepaid interest

(SOA): an expense that has not been paid or a revenue

Expenses: accrued wages, accrued interest on notes

Indicate with a Yes or No whether or not each of the

Dec. 31 Insurance Expense 2,000

Prepaid Insurance 637 Insurance Expense 128

insurance expense and net income (IS)

prepaid insurance and owner’s equity (BS)

• Fixed assets, or plant assets, are physical resources

Straight-Line Asset Cost - Salvage Value

2006 $62,000 - $2,000

Equipment Depreciation Expense

• Accumulated depreciation accounts are called contra

Depreciation expense and net income (IS)

Office equipment and owner’s capital (BS)

Unearned Revenue Basketball Revenue

Basketball revenue and net income (IS)

Unearned revenue and owner’s equity (BS)

Last pay Next pay

1/12/06 31/12/06 Record adjusting

Dec. 31 Salaries Expense 47,250

Salary expense and net income (IS)

Salary payable and owner’s equity (BS)

Fees earned and net income (IS)

Accounts receivable and owner’s equity (BS)

Classify the following items as (1) prepaid expense, (2)

For the year ending December 31, 2016, Mann Medical

 An Adjusted Trial Balance is prepared after all

 Its purpose is to prove the equality of the total debit

 Financial statements can be prepared directly from

Prepare the Balance Sheet.

 Helps summarize a period’s revenues and

• Accounts that are relatively permanent from year to

• Accounts that report amounts for only one period are

The balance in income summary will equal net income

 Close Income Summary account

 Close Withdrawals to Owner’s

Owner's Capital Withdrawals Account

30,000 Balances before closing. 5,000

Owner's Capital 25,000 Withdrawals Account

Owner's Capital 15,000 Withdrawals Account

The balance in Income

Owner's Capital - Withdrawals Account

Dec. 31 Consulting revenue 7,850

Now, let’s look at the ledger accounts after

Dec. 31 Income summary 4,365

Now, let’s look at the ledger accounts after

Salaries Expense Supplies Expense Income Summary

Insurance Expense Utilities Expense Profit for

Dec. 31 Income summary 3,785

Now, let’s look at the ledger accounts after