Warren, Accounting, 21st Edition

Chapter 4
Completing the
Accounting Cycle
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University
Copyright 2004 South-Western, a division

of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this
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Some
Some of
of the
the action
action has
has been
been automated,
automated, so
so
click
click the
the mouse
mouse when
when you
you see
see this
this
lightning
lightning bolt
bolt in
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lower right-hand
right-hand
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screen. You
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screen.
Objectives
Objectives
1. Review the seven basic steps of the accounting
cycle.
After
After studying
studying this
this
2. Prepare a work
sheet.you
chapter,
chapter,
you should
should
3. Prepare financial be
statements
be able
able to:
to: from a work sheet.
4. Prepare adjusting and closing entries from a
work sheet.
5. Explain what is meant by the fiscal year and the
natural business year.
6. Analyze and interpret the financial solvency of a
business by computing working capital and the
current ratio.
Seven
Seven Basic
Basic Steps
Steps of
of the
the
Accounting
Accounting Cycle
Cycle
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data are
assembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.
Assets
Assets are
are commonly
commonly divided
divided into
into classes
classes
and
and that
that two
two of
of these
these classes
classes are
are current
current
assets
assets and
and property,
property, plant,
plant, and
and equipment.
equipment.
Thats
Thats correct.
correct. Cash
Cash and
and other
other
assets
assets that
that are
are expected
expected to
to be
be
converted
converted into
into cash,
cash, sold,
sold, or
or used
used
up
up usually
usually in
in less
less than
than aa year
year are
are
current
current assets.
assets.
For
For example?
example?
Well
Well besides
besides cash,
cash, theres
theres
notes
notes receivable,
receivable, accounts
accounts
receivable,
receivable, supplies,
supplies, and
and other
other
prepaid
prepaid items.
items.
There
There are
are some
some exceptions,
exceptions, but
but
thats
thats basically
basically correct.
correct. Assets
Assets such
such
So,
assets
that
have
a
life
So,
assets
that
have
a
life
as
office
equipment,
machinery,
as office equipment, machinery,
over
a
year
are
listed
under
over
a
year
are
listed
under
buildings,
and
land
would
appear
buildings, and land would appear
property,
plant,
and
property,
plant,
and
under
that
heading.
under that heading.
equipment.
equipment.
Liabilities
Liabilities due
due usually
usually within
within one
one
year
year or
or less
less and
and that
that are
are to
to be
be paid
paid
out
out of
of current
current assets
assets are
are called
called
current
current liabilities.
liabilities.
Accounts payable
Wages payable
Interest payable
Unearned fees
Liabilities
Liabilities not
not due
due for
for
more
more than
than aa year
year usually
usually
are
are long-term
long-term liabilities.
liabilities.
Mortgage note
payable
Mortgage payable
Bond payable
The
The work
work sheet
sheet isis aa useful
useful device
device
for
for understanding
understanding the
the flow
flow of
of
accounting
accounting data
data from
from the
the
unadjusted
unadjusted trial
trial balance
balance to
to the
the
financial
financial statements.
statements.
The Work Sheet

Trial Balance
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
Cr
Prepared
Prepared from
from the
the general
general ledger.
ledger.
Accounts
Accounts are
arelisted
listed in
in the
the following
following
order:
order: assets,
assets,liabilities,
liabilities, owners
owners
equity,
equity,revenues,
revenues, and
and expenses.
expenses.
The Work Sheet

Trial Balance
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
Cr
Adjustments
Adjustments are
areentered
entered here.
here. Two
Two
possibilities:
possibilities:
1.
1. Deferrals
Deferrals Existing
Existing balances
balances are
are
changed.
changed.
2.
2.Accruals
Accruals New
Newinformation
informationisis
entered.
entered.
The Work Sheet

Trial Balance
Accounts
Dr
Cr
Adjustments
Adjusted TB
Dr
Dr
Cr
Cr
Adjustments
Adjustments are
arecombined
combined with
with
the
the trial
trial balance.
balance. Account
Account
balances
balances are
arenow
nowadjusted.
adjusted.
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Credit
900
360
25,000
16,340
42,600
Adjustments
Debit
Credit
Adjusted
Trial Balance
Debit
The
The Unadjusted
Unadjusted
Trial
Trial Balance
Balance
Credit
(a)
(a) The
The Supplies
Supplies account
account has
has aa debit
debit of
of
$2,000.
$2,000. A
Acount
count of
of supplies
supplies at
at the
the end
end of
of
the
the period
period reveals
reveals that
that $760
$760 isis on
on hand.
hand.
Therefore,
Therefore, $1,240
$1,240 in
in supplies
supplies was
was used
used
during
during the
the two-month
two-month period.
period.
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Credit
Adjustments
Debit
Credit
(a) 1,240
900
360
25,000
16,340
(a) 1,240
42,600
Adjusted
Trial Balance
Debit
Credit
(b)The
(b)The Prepaid
Prepaid Insurance
Insurance account
account has
has aa
debit
debit balance
balance of
of $2,400,
$2,400, which
which
represents
represents prepayment
prepayment of
of insurance
insurance for
for
24
24 months
months beginning
beginning December
December 1.
1.
Thus,
Thus, the
the insurance
insurance expense
expense for
for this
this
month
month isis $100
$100 ($2,400
($2,400 24).
24).
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Adjustments
Credit
Debit
Credit
(a) 1,240
(b) 100
900
360
25,000
16,340
(a) 1,240
42,600
(b) 100
Accounts are added as needed.
Adjusted
Trial Balance
Debit
Credit
(c)
(c) The
The Unearned
Unearned Rent
Rent account
account has
has aa credit
credit
balance
balance of
of $360,
$360, which
which represents
represents the
the
receipt
receipt of
of three-months
three-monthsrent
rent beginning
beginning
with
with December
December 1.
1. Thus,
Thus, the
the rent
rent revenue
revenue
for
for December
December isis $120.
$120.
FOR
REN
T
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Credit
Adjustments
Debit
Credit
(a) 1,240
(b) 100
900
360
25,000
(c)
120
16,340
(a) 1,240
42,600
(b) 100
(c) 120
Adjusted
Trial Balance
Debit
Credit
(d)
(d) Wages
Wages accrued
accrued but
but not
not paid
paid at
at
the
the end
end of
of December
December total
total $250.
$250.
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Credit
Adjustments
Debit
Credit
(a) 1,240
(b) 100
900
360
25,000
16,340
(c)
120
(d)
250
(a) 1,240
42,600
(b) 100
(c)
(d)
120
250
Adjusted
Trial Balance
Debit
Credit
(e)
(e) Fees
Fees accrued
accrued at
at the
the end
end of
of
December,
December, but
but not
not recorded,
recorded, total
total
$500.
$500.
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Adjustments
Credit
Debit
(e)
900
360
25,000
16,340
(c)
(d)
500
Credit
(a) 1,240
(b) 100
120
(e)
500
(c)
(d)
120
250
250
(a) 1,240
42,600
(b) 100
Adjusted
Trial Balance
Debit
Credit
(f)
(f) Depreciation
Depreciation of
of the
the office
office
equipment
equipment isis $50
$50 for
for December.
December.
NetSolutions
Work Sheet
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Depreciation Expense
Accum. Depreciation
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Credit
900
360
25,000
16,340
Adjustments
Debit
(e)
500
(c)
120
(d)
250
Credit
(a) 1,240
(b) 100
(e) 500
(a) 1,240
42,600
(b) 100
(f)
50
(c)
(d)
120
250
(f)
50
Adjusted
Trial Balance
Debit
Credit
NetSolutions
Work Sheet
Adjustments
To
make
more
space,
To
make
more
space, Debit
Debit
Credit
Debit
Credit
2,065 lets
lets remove
remove the
the
2,220
(e) 500
heading.
2,000
(a) 1,240
heading.
2,400
(b) 100
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Adjusted
Trial Balance
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
900
360
25,000
16,340
(c)
(d)
120
250
(e) 500
(a) 1,240
42,600
(b) 100
(f)
(c)
(d)
120
250
(f)
50
50
Credit
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Summed
Summed
and
and
ruled
ruled
Credit
900
360
25,000
16,340
Adjusted
Trial Balance
Adjustments
Debit
(e)
500
(c)
120
(d)
250
Credit
(a) 1,240
(b) 100
(e) 500
(a) 1,240
42,600
(b) 100
(f)
50
2,260
(c)
(d)
120
250
(f)
50
2,260
Debit
31
Credit
Next,
Next, the
the unadjusted
unadjusted Trial
Trial
Balance
Balance columns
columns and
and the
the
Adjustments
Adjustments columns
columns are
are
combined
combined to
to determine
determine the
the
amounts
amounts displayed
displayed in
in the
the
Adjusted
Adjusted Trial
Trial Balance.
Balance.
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Credit
900
360
25,000
16,340
Adjusted
Trial Balance
Adjustments
Debit
(e)
500
(c)
120
(d)
250
Credit
(a) 1,240
(b) 100
(e) 500
(a) 1,240
42,600
(b) 100
(f)
50
2,260
(c)
(d)
120
250
(f)
50
2,260
Debit
33
Credit
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
Debit
2,065
2,220
2,000
2,400
20,000
1,800
4,000
4,275
1,600
985
800
455
42,600
Credit
Adjustments
Debit
(e)
900
360
25,000
16,340
Adjusted
Trial Balance
(c)
(d)
500
Credit
(a) 1,240
(b) 100
250
(b) 100
(f)
2,065
2,720
760
2,300
20,000
1,800
120
(e) 500
(a) 1,240
42,600
Debit
50
2,260
(c)
(d)
120
250
(f)
50
2,260
4,000
4,525
1,600
985
2,040
455
100
50
43,400
34
Credit
900
240
25,000
16,840
120
250
50
43,400
The Work Sheet

Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
Balance Sheet
Dr
Cr
Revenue
Revenue and
and expense
expense balances
balances in
in
the
theAdjusted
AdjustedTrial
Trial Balance
Balance column
column
are
areextended
extended to
to the
the Income
Income
Statement
Statement column.
column.
The Work Sheet

Adjusted TB
Accounts
Dr
Cr
Income State.
Dr
Cr
Balance Sheet
Dr
Cr
Asset,
Asset, liability,
liability,owners
ownersequity,
equity,and
and
drawing
drawing balances
balances in
in the
theAdjusted
Adjusted
Trial
Trial Balance
Balance column
column are
areextended
extended
to
to the
the Balance
Balance Sheet
Sheet column.
column.
To
Tomake
make room
room on
on the
the slides
slides for
for
the
the Income
Income statement
statement and
and
Balance
Balance Sheet
Sheet columns,
columns, the
the Trial
Trial
Balance
Balance and
and Adjustments
Adjustments
columns
columns have
have been
been removed.
removed.
Adjusted
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
43,400
Debit
2,065
2,720
760
2,300
20,000
1,800
4,000
4,525
1,600
985
2,040
455
100
50
43,400
Income Statement
Credit
900
240
25,000
16,840
120
250
50
Debit
Credit
Balance Sheet
Debit
38
Credit
Now,
Now,lets
letsextend
extend the
the balances
balances
from
fromthe
theAdjusted
AdjustedTrial
Trial Balance
Balance
column.
column.
Adjusted
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
43,400
Debit
2,065
2,720
760
2,300
20,000
1,800
4,000
4,525
1,600
985
2,040
455
100
50
43,400
Income Statement
Credit
Debit
Credit
120
250
50
Debit
2,065
2,720
760
2,300
20,000
1,800
900
240
25,000
16,840
Balance Sheet
4,525
1,600
985
2,040
455
100
50
16,840
120
4,000
40
Credit
900
240
25,000
250
50
These
These four
four
columns
columns are
are
summed.
summed.
Adjusted
Trial Balance
Account Title
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Insurance Expense
Rent Revenue
Wages Payable
Accum. Depreciation
43,400
Debit
2,065
2,720
760
2,300
20,000
1,800
4,000
4,525
1,600
985
2,040
455
100
50
43,400
Income Statement
Credit
Debit
Credit
120
250
50
9,755
Debit
2,065
2,720
760
2,300
20,000
1,800
900
240
25,000
16,840
Balance Sheet
4,525
1,600
985
2,040
455
100
16,840
4,000
120
33,645
Credit
900
240
25,000
250
50
16,960
42
26,440
50
The
The difference
difference between
between the
the
Income
Income Statement
Statement column
column
totals
totals isis the
the net
net income
income (or
(or net
net
loss)
loss) for
for the
the period.
period.
The
The difference
difference between
between the
the
Balance
Balance Sheet
Sheet column
column totals
totals isis
also
also the
the income
income (or
(or net
net loss)
loss)
for
for the
the period.
period.
Income Statement
Balance Sheet
9,755 16,960 33,645

7,205
16,960 16,960 33,645
Net Income
26,440
7,205
33,645
Net Income
NetSolutions
Income Statement
For Two Months Ended December 31, 2005
Fees earned $16,840
Rent revenue 120
Total revenues
$16,960
Expenses:
Wages expense
$ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense
100
Depreciation expense 50
Miscellaneous expense 455
Total expenses
9,755
Net income
$ 7,205
Every amount on this income statement was taken from the

Income Statement column of the work sheet.
NetSolutions
Statement of Owners Equity
Chris Clark, Capital, November 1, 2005
$
0
Investment on November 1, 2005 $25,000
Net income for November and December
7,205
$32,205
Less withdrawals
4,000
Increase in owners equity
28,205
Chris Clark, Capital, December 31, 2005Either
$28,205
From
the
from
From
thethe
Either
from
the
Balance
Sheet
income
Balance
Sheet
income
debit
column
of
statement
or
debit
column
of
statement
or the
the
the
work
sheet.
thework
worksheet.
sheet.
work
sheet.
NetSolutions
Balance Sheet
December 31, 2005
Assets
Liabilities
Assets
Liabilities
Current
Current
Currentassets:
assets:
Currentliabilities:
liabilities:
Cash
$$ 2,065
Accounts
Cash
2,065
Accountspayable
payable
Accounts
2,720
Wages
Accountsreceivable
receivable
2,720
Wagespayable
payable
Supplies
760
Unearned
Supplies
760
Unearnedrent
rent
Prepaid
2,300
Total
Prepaidinsurance
insurance
2,300
Totalliabilities
liabilities
$$ 1,390
1,390
Total
Totalcurrent
currentassets
assets $$ 7,845
7,845
Property,
Property,plant,
plant,and
and
equipment:
equipment:
Land
$20,000
Land
$20,000
Office
Officeequip.
equip. $1,800
$1,800
Less
Lessaccum.
accum.
depreciation
50
Owners
depreciation
50 1,750
1,750
OwnersEquity
Equity
Total
Chris
Totalproperty,
property,plant
plant
ChrisClark,
Clark,Capital
Capital
28,205
28,205
and
21,750
andequipment
equipment
21,750 Total
Totalliabilities
liabilitiesand
and
$900
$900
From
the
From
the
250
250
240
Statement
240
Statement
of
of Owners
Owners
Equity
Equity
Adjusting
Adjusting and
and Closing
Closing Entries
Entries
Adjusting
Adjusting entries
entries are
are recorded
recorded
in
in the
the journal
journal at
at the
the end
end of
ofthe
the
accounting
accounting period.
period.
Adjusting
Adjusting and
and Closing
Closing Entries
Entries
IfIfaa work
work sheet
sheethas
has been
been
prepared,
prepared, the
the data
data for
for
these
these entries
entriesare
arein
in the
the
Adjustments
Adjustments columns.
columns.
The
The Closing
Closing Process
Process
Income Summary
Expenses are
transferred to
Income Summary
Revenues are
transferred to
Income Summary
Net Income or Net Loss is

transferred to Owners Capital
OWNERS CAPITAL
Drawings are transferred to

Owners Capital
Adjusting
Adjusting and
and Closing
Closing Entries
Entries
Income Summary
Expenses are
transferred to
Income Summary
Revenues are
transferred to
Income Summary
The
Net Income
Income
Net Loss is
The
IncomeorSummary
Summary
transferred
to Owners
account
does
appear
on
account
does not
not
appearCapital
on
the
the financial
financial statements.
statements.
OWNERS CAPITAL
Drawings are transferred to

Owners Capital
The
The Closing
Closing Process
Process
Fees Earned
Wages Expense
Bal.
Income Summary
4,525
Rent Expense
Bal.
Rent Revenue
1,600
Bal.
Bal.
50
Utilities Expense
Bal.
985

Bal. 25,000
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Bal.
455
Bal. 16,840

Bal.
4,000
120
Note: The
balances shown
are adjusted
balances before
closing. The
following
sequence
demonstrates the
closing process.
The
The Closing
Closing Process
Process
Fees Earned
Wages Expense
Bal.
Income Summary
4,525
16,960
Rent Expense
Bal.
1,600
16,840 Bal. 16,840

Rent Revenue
120 Bal.
120
Bal.
50
Utilities Expense
Bal.
985

Bal. 25,000
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Bal.
455

Bal.
4,000
Step 1
Debit each revenue
account for the
amount of its
balance, and credit
Income Summary
for the total
revenue.
The
The Closing
Closing Process
Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
Rent Expense
Bal.
1,600
16,960
1,600
16,840 Bal. 16,840

Rent Revenue
120 Bal.
120
Bal.
50
50
Utilities Expense
Bal.
985
985

Bal. 25,000
Supplies Expense
2,040
Bal. 2,040
Insurance Expense
Bal.
100
100
Bal.
455
455

Bal.
4,000
Step 2
Debit Income
Summary for the
total expenses and
credit each expense
account for its
balance.
The
The Closing
Closing Process
Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
7,205
Rent Expense
Bal.
1,600
1,600
16,960
16,840 Bal. 16,840

Rent Revenue
120 Bal.
120
Bal.
50
50
Utilities Expense
Bal.
985
985

Bal. 25,000
7,205
Supplies Expense
2,040
Bal. 2,040
Insurance Expense
Bal.
100
100
Bal.
455
455

Bal.
4,000
Step 3
Debit Income
Summary for the
amount of its
balance (in this
case, the net
income) and credit
the capital account.
The
The Closing
Closing Process
Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
7,205
Rent Expense
Bal.
1,600
1,600
16,960
16,840 Bal. 16,840

Rent Revenue
120 Bal.
120
Bal.
50
50
Utilities Expense
Bal.
985
985

4,000 Bal. 25,000
7,205
Supplies Expense
2,040
Bal. 2,040
Insurance Expense
Bal.
100
100
Bal.
455
455

Bal.
4,000
4,000
Step 4
Debit the capital
account for the
balance of the
drawing account,
and credit drawing
for the same
amount.
Review
Review of
of the
the Closing
Closing Process
Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
4,525
9,775
7,205
Rent Expense
Bal.
1,600
1,600
1,600
16,960
16,960
16,480 Bal. 16,840

16,840
Rent Revenue
120 Bal.
120
120
Bal.
50
50
50
Utilities Expense
Bal.
985
985
985

4,000 Bal. 25,000
4,000
7,205
7,205
Supplies Expense
2,040
Bal. 2,040
2,040
Close Revenues
Close Expenses
Close Income Summary
Insurance Expense
Bal.
100
100
100
Bal.
455
455
445
Close Drawing
Bal.
4,000
4,000
After
After the
the closing
closing entries
entries
are
are posted,
posted, all
all of
of the
the
temporary
temporary accounts
accounts have
have
zero
zero balances.
balances.
Post-closing Trial
Trial Balance
Balance
Post-closing
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash
2 065 00
Accounts Receivable
2 720 00
Supplies
760 00
Prepaid Insurance
2 300 00
Land
20 000 00
Office Equipment
1 800 00
Accumulated Depreciation
50 00
Accounts Payable
900 00
Wages Payable
250 00
Unearned Rent
240 00
28 205 00
29 645 00 29 645 00
Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
Working
Current
Current
=
Capital
Assets
Liabilities
Working
$7,845 $1,390
=
Capital
Working
$6,455
=
Capital
Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
Current
Ratio
Current
Ratio
Current
Ratio
Current
Current
= Assets Liabilities
= $7,845
=
5.6
$1,390
Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
This
This ratio
ratio implies
implies that
that
NetSolutions
NetSolutions isis able
able to
to pay
pay its
its
current
current liabilities.
liabilities.
Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
Current
ratio
Current
Current
= Assets Liabilities
Current
$7,845 $1,390
=
ratio
Current
5.6
=
ratio
Financial
Financial Analysis
Analysis for
for
NetSolutions
NetSolutions
NetSolutions
NetSolutions can
can use
use the
the current
current ratio
ratio to
to
make
make comparisons
comparisons across
across companies
companies and
and
with
with industry
industry averages.
averages.
Chapter 4
The
The End
End

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Chapter 4

PowerPoint Presentation by Douglas Cloud

Copyright 2004 South-Western, a division

The Work Sheet

The Work Sheet

The Work Sheet

Accounts are added as needed.

The Work Sheet

The Work Sheet

9,755 16,960 33,645

Every amount on this income statement was taken from the

Net Income or Net Loss is

Drawings are transferred to

Drawings are transferred to

Chris Clark, Capital

Chris Clark, Drawing

16,840 Bal. 16,840

Chris Clark, Capital

Chris Clark, Drawing

16,840 Bal. 16,840

Chris Clark, Capital

Chris Clark, Drawing

16,840 Bal. 16,840

Chris Clark, Capital

Chris Clark, Drawing

16,840 Bal. 16,840

Chris Clark, Capital

Chris Clark, Drawing

16,480 Bal. 16,840

Chris Clark, Capital

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