CompletingtheAccountingCycleAccounting,21stEditionWarrenReeveFess

Someoftheactionhasbeenautomated,soclickthemousewhenyouseethislightningboltinthelowerright-handcornerofthescreen.Youcanpointandclickanywhereonthescreen.1.

Reviewthesevenbasicstepsoftheaccountingcycle.2.

Prepareaworksheet.3.

Preparefinancialstatementsfromaworksheet.4.

Prepareadjustingandclosingentriesfromaworksheet.5.

Explainwhatismeantbythefiscalyearandthenaturalbusinessyear.6.

Analyzeandinterpretthefinancialsolvencyofabusinessbycomputingworkingcapitalandthecurrentratio.ObjectivesAfterstudyingthischapter,youshouldbeableto:SevenBasicStepsoftheAccountingCycle1.

Transactionsareanalyzedandrecordedinthejournal.2.

Transactionsarepostedtotheledger.3.

Atrialbalanceisprepared,adjustmentdataareassembled,andanoptionalworksheetiscompleted.4.

Financialstatementsareprepared.5.

Adjustingentriesarejournalizedandposted.6.

Closingentriesarejournalizedandposted.7.

Apost-closingtrialbalanceisprepared.Assetsarecommonlydividedintoclassesandthattwooftheseclassesarecurrentassetsandproperty,plant,andequipment.That’scorrect.Cashandotherassetsthatareexpectedtobeconvertedintocash,sold,orusedupusuallyinlessthanayeararecurrentassets.Forexample?Well…besidescash,there’snotesreceivable,accountsreceivable,supplies,andotherprepaiditems.So,assetsthathavealifeoverayeararelistedunderproperty,plant,andequipment.Therearesomeexceptions,butthat’sbasicallycorrect.Assetssuchasofficeequipment,machinery,buildings,andlandwouldappearunderthatheading.Liabilitiesdueusuallywithinoneyearorlessandthataretobepaidoutofcurrentassetsarecalledcurrentliabilities.AccountspayableWagespayableInterestpayableUnearnedfeesLiabilitiesnotdueformorethanayearusuallyarelong-termliabilities.

MortgagenotepayableMortgagepayableBondpayableTheworksheetisausefuldeviceforunderstandingtheflowofaccountingdatafromtheunadjustedtrialbalancetothefinancialstatements.TheWorkSheetTrialBalance Accounts Dr Cr Dr Cr Dr CrAdjustmentsAdjustedTBPreparedfromthegeneralledger.Accountsarelistedinthefollowingorder:assets,liabilities,owner’sequity,revenues,andexpenses.Adjustmentsareenteredhere.Twopossibilities:1.Deferrals–Existingbalancesare changed.2.Accruals–Newinformationis entered.TrialBalance Accounts Dr Cr Dr Cr Dr CrAdjustmentsAdjustedTBTheWorkSheetTheWorkSheetAdjustmentsarecombinedwiththetrialbalance.Accountbalancesarenowadjusted.TrialBalance Accounts Dr Cr Dr Cr Dr CrAdjustmentsAdjustedTB Cash 2,065 AccountsReceivable 2,220 Supplies 2,000 PrepaidInsurance 2,400 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000 FeesEarned 16,340 WagesExpense 4,275 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,2005TheUnadjustedTrialBalance12345678910111213141516171819202122(a)TheSuppliesaccounthasadebitof$2,000.Acountofsuppliesattheendoftheperiodrevealsthat$760isonhand.Therefore,$1,240insupplieswasusedduringthetwo-monthperiod. Cash 2,065 AccountsReceivable 2,220

Supplies 2,000

PrepaidInsurance 2,400 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000 FeesEarned 16,340 WagesExpense 4,275 RentExpense 1,600 UtilitiesExpense 985

SuppliesExpense 800

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,200512345678910111213141516171819202122(a)1,240(a)1,240(b) ThePrepaidInsuranceaccounthasadebitbalanceof$2,400,whichrepresentsprepaymentofinsurancefor24monthsbeginningDecember1.Thus,theinsuranceexpenseforthismonthis$100($2,400÷24). Cash 2,065 AccountsReceivable 2,220 Supplies 2,000 (a)1,240

PrepaidInsurance 2,400

Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000 FeesEarned 16,340 WagesExpense 4,275 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,200512345678910111213141516171819202122

InsuranceExpense (b)100Accountsareaddedasneeded.(b)100

(c)TheUnearnedRentaccounthasacreditbalanceof$360,whichrepresentsthereceiptofthree-months’rentbeginningwithDecember1.Thus,therentrevenueforDecemberis$120.FORRENT Cash 2,065 AccountsReceivable 2,220 Supplies 2,000 (a)1,240

PrepaidInsurance 2,400 (b)100 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900

UnearnedRent 360

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000 FeesEarned 16,340 WagesExpense 4,275 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,200512345678910111213141516171819202122

InsuranceExpense (b)100(c)120

RentRevenue (c)120(d)WagesaccruedbutnotpaidattheendofDecembertotal$250. Cash 2,065 AccountsReceivable 2,220 Supplies 2,000 (a)1,240

PrepaidInsurance 2,400 (b)100 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 (c)120

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000 FeesEarned 16,340

WagesExpense 4,275

RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,200512345678910111213141516171819202122

InsuranceExpense (b)100RentRevenue (c)120

WagesPayable (d)250(d)250(e)FeesaccruedattheendofDecember,butnotrecorded,total$500. Cash 2,065

AccountsReceivable 2,220

Supplies 2,000 (a)1,240

PrepaidInsurance 2,400 (b)100 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 (c)120

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000 FeesEarned 16,340

WagesExpense 4,275 (d)250 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,200512345678910111213141516171819202122

InsuranceExpense (b)100RentRevenue (c)120WagesPayable (d)250(e)500(e)500(f)Depreciationoftheofficeequipmentis$50forDecember. Cash 2,065 AccountsReceivable 2,220 (e)500

Supplies 2,000 (a)1,240

PrepaidInsurance 2,400 (b)100 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 (c)120

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000

FeesEarned 16,340 (e)500 WagesExpense 4,275 (d)250 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,200512345678910111213141516171819202122

InsuranceExpense (b)100RentRevenue (c)120WagesPayable (d)250DepreciationExpense (f)50Accum.Depreciation (f)50 Cash 2,065 AccountsReceivable 2,220 (e)500

Supplies 2,000 (a)1,240

PrepaidInsurance 2,400 (b)100 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 (c)120

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000

FeesEarned 16,340 (e)500 WagesExpense 4,275 (d)250 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalanceNetSolutionsWorkSheetFortheTwoMonthsEndedDecember31,200512345678910111213141516171819202122

InsuranceExpense (b)100RentRevenue (c)120WagesPayable (d)250DepreciationExpense (f)50Accum.Depreciation (f)50Tomakemorespace,let’sremovetheheading. Cash 2,065 AccountsReceivable 2,220 (e)500

Supplies 2,000 (a)1,240

PrepaidInsurance 2,400 (b)100 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 (c)120

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000

FeesEarned 16,340 (e)500 WagesExpense 4,275 (d)250 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalance12345678910111213141516171819202122232425

InsuranceExpense (b)100RentRevenue (c)120WagesPayable (d)250DepreciationExpense (f)50Accum.Depreciation (f)50

2,260 2,260Summedandruled31Next,theunadjustedTrialBalancecolumnsandtheAdjustmentscolumnsarecombinedtodeterminetheamountsdisplayedintheAdjustedTrialBalance. Cash 2,065

AccountsReceivable 2,220 (e)500

Supplies 2,000 (a)1,240

PrepaidInsurance 2,400 (b)100 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 360 (c)120

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000

FeesEarned 16,340 (e)500 WagesExpense 4,275 (d)250 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 800 (a)1,240

MiscellaneousExpense 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalance12345678910111213141516171819202122232425

InsuranceExpense (b)100 RentRevenue (c)120 WagesPayable (d)250 DepreciationExpense (f)50 Accum.Depreciation (f)50

2,260 2,260

33 Cash 2,065 2,065

AccountsReceivable 2,220 (e)500 2,720

Supplies 2,000 (a)1,240

760

PrepaidInsurance 2,400 (b)100 2,300 Land 20,000 20,000 OfficeEquipment 1,800 1,800 AccountsPayable 900 900 UnearnedRent 360 (c)120 240

ChrisClark,Capital 25,000 25,000 ChrisClark,Drawing 4,000 4,000

FeesEarned 16,340 (e)500 16,840 WagesExpense 4,275 (d)250 4,525 RentExpense 1,600 1,600 UtilitiesExpense 985 985 SuppliesExpense 800 (a)1,240

2,040 MiscellaneousExpense 455 455 42,600 42,600

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceAdjustmentsTrialBalance12345678910111213141516171819202122232425

InsuranceExpense (b)100 100RentRevenue (c)120 120WagesPayable (d)250 250DepreciationExpense (f)50 50Accum.Depreciation (f)50 50

2,260 2,260 43,400 43,40034RevenueandexpensebalancesintheAdjustedTrialBalancecolumnareextendedtotheIncomeStatementcolumn.AdjustedTB Accounts Dr Cr Dr Cr Dr CrIncomeState.BalanceSheetTheWorkSheetAsset,liability,owner’sequity,anddrawingbalancesintheAdjustedTrialBalancecolumnareextendedtotheBalanceSheetcolumn.AdjustedTB Accounts Dr Cr Dr Cr Dr CrIncomeState.BalanceSheetTheWorkSheetTomakeroomontheslidesfortheIncomestatementandBalanceSheetcolumns,theTrialBalanceandAdjustmentscolumnshavebeenremoved. Cash 2,065

AccountsReceivable 2,720 Supplies 760 PrepaidInsurance 2,300 Land 20,000 OfficeEquipment 1,800 AccountsPayable 900 UnearnedRent 240

ChrisClark,Capital 25,000 ChrisClark,Drawing 4,000

FeesEarned 16,840 WagesExpense 4,525 RentExpense 1,600 UtilitiesExpense 985 SuppliesExpense 2,040 MiscellaneousExpense 455

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceIncomeStatementBalanceSheet12345678910111213141516171819202122232425

InsuranceExpense 100 RentRevenue 120 WagesPayable 250 DepreciationExpense 50Accum.Depreciation 50

43,400 43,40038Now,let’sextendthebalancesfromtheAdjustedTrialBalancecolumn. Cash 2,065 2,065

AccountsReceivable 2,720 2,720 Supplies 760 760 PrepaidInsurance 2,300 2,300 Land 20,000 20,000 OfficeEquipment 1,800 1,800 AccountsPayable 900 900 UnearnedRent 240 240

ChrisClark,Capital 25,000 25,000 ChrisClark,Drawing 4,000 4,000

FeesEarned 16,840 16,840

WagesExpense 4,525 4,525 RentExpense 1,600 1,600

UtilitiesExpense 985 985

SuppliesExpense 2,040 2,040 MiscellaneousExpense 455 455

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceIncomeStatementBalanceSheet12345678910111213141516171819202122232425

InsuranceExpense 100 100

RentRevenue 120 120

WagesPayable 250 250DepreciationExpense 50 50Accum.Depreciation 50

50 43,400 43,40040Thesefourcolumnsaresummed. Cash 2,065 2,065 AccountsReceivable 2,720 2,720 Supplies 760 760 PrepaidInsurance 2,300 2,300 Land 20,000 20,000 OfficeEquipment 1,800 1,800 AccountsPayable 900 900 UnearnedRent 240 240 ChrisClark,Capital 25,000 25,000 ChrisClark,Drawing 4,000 4,000 FeesEarned 16,840 16,840 WagesExpense 4,525 4,525 RentExpense 1,600 1,600 UtilitiesExpense 985 985 SuppliesExpense 2,040 2,040 MiscellaneousExpense 455 455

AccountTitle Debit Credit Debit Credit Debit Credit

Adjusted

TrialBalanceIncomeStatementBalanceSheet12345678910111213141516171819202122232425

InsuranceExpense 100 100 RentRevenue 120 120 WagesPayable 250 250DepreciationExpense 50 50Accum.Depreciation 50 50

43,400 43,400 9,755 16,960 33,645 26,44042ThedifferencebetweentheIncomeStatementcolumntotalsisthenetincome(ornetloss)fortheperiod.ThedifferencebetweentheBalanceSheetcolumntotalsisalsotheincome(ornetloss)fortheperiod. 9,755 16,960 33,645 26,440 7,205 7,205 16,960 16,960 33,645 33,645IncomeStatementBalanceSheetNetIncomeNetIncomeNetSolutions

IncomeStatement

ForTwoMonthsEndedDecember31,2005Feesearned $16,840Rentrevenue 120

Totalrevenues $16,960Expenses: Wagesexpense $4,525 Suppliesexpense 2,040 Rentexpense 1,600 Utilitiesexpense 985 Insuranceexpense 100 Depreciationexpense 50 Miscellaneousexpense 455 Totalexpenses 9,755Netincome $7,205EveryamountonthisincomestatementwastakenfromtheIncomeStatementcolumnoftheworksheet.NetSolutions

StatementofOwner’sEquity

FortheTwoMonthsEndedDecember31,2005ChrisClark,Capital,November1,2005 $0InvestmentonNovember1,2005 $25,000NetincomeforNovemberandDecember 7,205 $32,205Lesswithdrawals 4,000Increaseinowner’sequity 28,205ChrisClark,Capital,December31,2005 $28,205Eitherfromtheincomestatementortheworksheet.FromtheBalanceSheetdebitcolumnoftheworksheet.NetSolutions

BalanceSheet

December31,2005AssetsLiabilitiesCurrentassets: Currentliabilities: Cash $2,065 Accountspayable $900 Accountsreceivable 2,720 Wagespayable 250 Supplies 760 Unearnedrent 240 Prepaidinsurance 2,300 Totalliabilities $1,390 Totalcurrentassets $7,845Property,plant,andequipment: Land $20,000 Officeequip. $1,800 Lessaccum.depreciation 50

1,750

Owner’sEquity Totalproperty,plant ChrisClark,Capital 28,205andequipment 21,750 Totalliabilitiesand Totalassets $29,595 owner’sequity $29,595FromtheStatementofOwner’sEquityAdjustingandClosingEntriesAdjustingentriesarerecordedinthejournalattheendoftheaccountingperiod.AdjustingandClosingEntriesIfaworksheethasbeenprepared,thedatafortheseentriesareintheAdjustmentscolumns.OWNER’SCAPITALTheClosingProcessIncomeSummary1RevenuesaretransferredtoIncomeSummary2ExpensesaretransferredtoIncomeSummary3NetIncomeorNetLossistransferredtoOwner’sCapital4DrawingsaretransferredtoOwner’sCapitalOWNER’SCAPITALIncomeSummary1RevenuesaretransferredtoIncomeSummary2ExpensesaretransferredtoIncomeSummary3NetIncomeorNetLossistransferredtoOwner’sCapital4DrawingsaretransferredtoOwner’sCapitalTheIncomeSummaryaccountdoesnotappearonthefinancialstatements.AdjustingandClosingEntriesWagesExpenseBal. 4,525RentExpenseBal. 1,600DepreciationExpenseBal. 50UtilitiesExpenseBal. 985SuppliesExpenseBal. 2,040InsuranceExpenseBal. 100MiscellaneousExpenseBal. 455FeesEarnedBal. 16,840RentRevenueBal. 120ChrisClark,CapitalBal. 25,000ChrisClark,DrawingBal. 4,000IncomeSummaryNote:Thebalancesshownareadjustedbalancesbeforeclosing.Thefollowingsequencedemonstratestheclosingprocess.TheClosingProcessWagesExpenseBal. 4,525RentExpenseBal. 1,600DepreciationExpenseBal. 50UtilitiesExpenseBal. 985SuppliesExpenseBal. 2,040InsuranceExpenseBal. 100MiscellaneousExpenseBal. 455FeesEarnedBal. 16,840RentRevenueBal. 120ChrisClark,CapitalBal. 25,000ChrisClark,DrawingBal. 4,000IncomeSummaryDebiteachrevenueaccountfortheamountofitsbalance,andcreditIncomeSummaryforthetotalrevenue.16,84012016,960TheClosingProcessStep1WagesExpenseBal. 4,525RentExpenseBal. 1,600DepreciationExpenseBal. 50UtilitiesExpenseBal. 985SuppliesExpenseBal. 2,040InsuranceExpenseBal. 100MiscellaneousExpenseBal. 455ChrisClark,CapitalBal. 25,000ChrisClark,DrawingBal. 4,000IncomeSummaryDebitIncomeSummaryforthetotalexpensesandcrediteachexpenseaccountforitsbalance.FeesEarnedBal. 16,840RentRevenueBal. 12016,84012016,9609,7754551002,040985501,6004,525TheClosingProcessStep2WagesExpenseBal. 4,525RentExpenseBal. 1,600DepreciationExpenseBal. 50UtilitiesExpenseBal. 985SuppliesExpenseBal. 2,040InsuranceExpenseBal. 100MiscellaneousExpenseBal. 455ChrisClark,CapitalBal. 25,000Ch