Accounting Cycle for service giving Business.pptx

Chapter 2
The Accounting Cycle
For service giving
businesses
1

• The accounting cycle is the process by which accountants
prepare financial statements for an entity for a specific
period of time.
2

1. Analyze business transactions
2. Journalize the
transactions
6. Prepare adjusted trial
balance
7. Prepare financial
statements
8. Journalize and post
closing entries
9. Prepare a post-closing
trial balance
4. Prepare a trial balance
3. Post to ledger accounts
5. Journalize and post
adjusting entries
3

Account:
• An account is an individual accounting
record of increases and decreases in a
specific asset, liability, owner’s equity
revenue or expense items.
• There are separate accounts for each
classification type such as cash, salaries
expense, accounts payable, etc.
4

CHART OF ACCOUNTS
• DEFINITION: is a list of general ledger accounts.
• Is a listing of accounts in title and numerical designation.
5

Ledger
• Definition: The complete set of accounts for a business entity.
• It is the reference book of the accounting system and is used to
summarise and classify and to prepare data for financial statements.
A group of accounts for a
business entity is called a ledger.
6

Major Account Classifications
Assets are
resources owned
by the business.
Liabilities are debts
owed to outsiders
(creditors).
Cash
Supplies
Building
Accounts
receivable
Accounts
payable
Notes payable
Wages payable
7

Liabilities are debts
owed to outsiders
(creditors).
Cash
Supplies
Building
Accounts
receivable
Accounts
payable
Notes payable
Wages payable
Assets are
resources owned
by the business.
Liabilities are often identified
on the balance sheet by titles
that include payable.
8

Owner’s
equity is the
owner’s right to
the assets of the
business.
Revenues are
increases in
owner’s equity as
a result of selling
products or
providing service.
Ayele, Capital
Fees Earned
Sales
Commission
Revenue
Expenses are the
using up of assets
or consuming of
services to
generate revenue.
Rent Expense
Salary Expense
Utilities
Expense
9

Debits Credits
Asset accounts………. Increase (+) Decrease (-)
Liability accounts…… Decrease (-) Increase (+)
Owner’s equity
(capital) accounts…. Decrease (-) Increase (+)
Rules of Debit / Credit
Statement of financial position/Balance Sheet Accounts
10

Credit for
increases
(+)
Credit for
decreases
(-)
Debit for
increases
(+)
Debit for
decreases
(-)
Expense Accounts Revenue Accounts
Rules of Debit / Credit
Statement of profit or loss and other
comprehensive income accounts
11

Increase
(Normal Balances) Decreases
Balance sheet accounts:
Asset Debit Credit
Liability Credit Debit
Owner’s Equity:
Capital Credit Debit
Drawing Debit Credit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
Normal Balances of Accounts
12

Double-Entry Accounting
“ Double-entry accounting is based on a simple
concept: each party in a business transaction
will receive something and give something in
return. In bookkeeping terms, what is received
is a debit and what is given is a credit. The T
account is a representation of a scale or
balance.”
Luca Pacioli
Developer of
Double-Entry
Accounting
Scale or Balance
Receive
DEBIT
Give
CREDIT
T account
Left Side
Receive
DEBIT
Right Side
Give
CREDIT
13

The T-Account
T-account has a title.
Cash
Left side
debit
The left side of the account is the debit side.
Right side
credit
The right side of the account is the credit side. 14

The T-Account
Cash
3,750
4,300
2,900
850
1,400
700
2,900
Typical entries
15

Cash
3,750
4,300
2,900
850
1,400
700
2,900
10,950
First, foot
the debit
side.
17

850
1,400
700
2,900
Cash
3,750
4,300
2,900
10,950
5,850
Next, foot the
credit side.
18

850
1,400
700
2,900
Cash
3,750
4,300
2,900
10,950
5,850
Subtract total credits
from total debits to
obtain the account
balance.
5,100
19

1. Determine whether an asset, a liability,
owner’s equity, revenue, or expense account
is affected by the transaction.
2. For each account affected by the transaction,
determine whether the account increases or
decreases.
3. Determine whether each increase or decrease
should be recorded as a debit or a credit.
System to Analyze Transactions
21

JOURNAL
Transactions are initially recorded in chronological order
in a journal before being transferred to the accounts in
the ledger.
Every company has a general journal which contains;
1. spaces for dates,
2. account titles and explanations,
3. references, and
4. two money columns.
• Entering transaction data in the journal is known as
journalizing.
23

Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 1
1
2
3
4
Nov. 1
2006
Cash 25 000 00
AYELE, Capital 25 000 00
Invested cash in NetSolutions.
(A) On November 1, Ayele deposits
Br25,000 in a bank account in the
name of Net Solutions.
24

4
5
6
7
8
9
10
5 Land 20 000 00
Cash 20 000 00
Purchased land for building
site.
(B) On November 5,
NetSolutions bought land
for Br20,000, paying cash.
25

10
11
12
13
14
15
16
10 Supplies 1 350 00
Accounts Payable 1 350 00
Purchased supplies on account.
(C) On November 10, NetSolutions
purchased supplies on account
for Br1,350.
26

(D) On November 18, NetSolutions
received fees of Br7,500 from
customers for services provided .
18 Cash 7 500 00
Fees Earned 7 500 00
Received fees from customers.
14
15
16
17
18
19
20
27

(E) Throughout the month, NetSolutions
incurred the following expenses:
wages, Br2,125; rent, Br800; utilities,
Br450; and miscellaneous, Br275 .
30 Wages Expense 2 125 00
Rent Expense 800 00
Utilities Expense 450 00
Miscellaneous Expense 275 00
Cash 3 650 00
Paid expenses.
18
19
20
21
22
23
24
28

30 Accounts Payable 950 00
Cash 950 00
Paid creditors on account.
30
31
32
33
34
35
36
(F) On November 30, NetSolutions
paid creditors on account, Br950.
29

In every entry the sum of
the debits always equal
the sum of the credits.
30

(G) On November 30, a count revealed
that Br800 of the supplies
inventory had been used.
30 Supplies Expense 800 00
Supplies 800 00
Supplies used during
November.
25
26
27
28
29
30
31
31

Post.
Ref.
JOURNAL
Page 2
1
2
3
4
Nov. 30
2006
Ayele , Drawing 2 000 00
Cash 2 000 00
Ayele withdrew cash for
personal use.
(H) On November 30, Ayele withdrew
Br2,000 in cash from Net Solutions
for personal use.
32

Post.
Ref.
JOURNAL
Page 2
1
2
3
4
Dec. 1
2006
Prepaid Insurance 2 400 00
Cash 2 400 00
Paid premium on two-year
policy.
Dec. 1 Net Solutions paid a premium of
Br2,400 for a comprehensive
insurance policy covering two years.
34

14
15
16
17
1 Rent Expense 52 800 00
Cash 11 800 00
Paid rent for December.
Dec. 1 NetSolutions paid rent for December,
Br800.
35

14
15
16
17
1 Cash 11 360 00
Unearned Rent 23 360 00
Received advanced payment
For three months’ rent of land.
Dec. 1 NetSolutions receives Br360 for three
month’s rent beginning December 1.
36

Dec. 4 NetSolutions purchased office
equipment on account from Executive
Supply Co. for Br1,800.
18
19
20
21
4 Office Equipment 18 1 800 00
Accounts Payable 21 1 800 00
Purchased office equipment on
account.
37

Dec. 6 NetSolutions paid Br180 for a
newspaper advertisement.
21
22
23
24
6 Miscellaneous Expense 59 180 00
Cash 11 180 00
Paid for newspaper ad.
38

Dec. 11 NetSolutions paid creditors Br400.
24
25
26
27
11 Accounts Payable 21 400 00
Cash 11 400 00
Paid creditors on account.
39

Dec. 13 NetSolutions paid a receptionist and
part-time assistant Br950 for two
weeks’ wages.
Post.
Ref.
JOURNAL
Page 3
1
2
3
4
Dec. 13
2006
Wages Expense 51 950 00
Cash 11 950 00
Paid two week’s wages.
40

Dec. 16 NetSolutions received Br3,100 from
fees earned for the first half of
December.
5
6
7
8
16 Cash 11 3 100 00
Fees Earned 41 3 100 00
41

Dec. 16 Fees earned on account totaled
Br1,750 for the first half of
December.
9
10
11
12
16 Accounts Receivable 12 1 750 00
42

Dec. 20 NetSolutions paid Br900 to
Executive Supply Co. on the
Br1,800 debt owed from the
December 4 transaction.
13
14
15
16
20 Accounts Payable 21 900 00
Cash 11 900 00
Paid part of amount owed to
Executive Supply Co.
43

Dec. 21 NetSolutions received Br650 from
customers in payment of their
accounts.
18
19
20
21
21 Cash 11 650 00
Accounts Receivable 12 650 00
Received cash from customer
on account.
44

Dec. 23 NetSolutions paid Br1,450 for
supplies.
22
23
24
25
23 Supplies 14 1 450 00
Cash 11 1 450 00
Purchased supplies.
45

Dec. 27 NetSolutions paid the receptionist
and part-time assistant Br1,200 for
two weeks’ wages.
27
28
29
30
27 Wages Expense 51 1 200 00
Cash 11 1 200 00
Paid two weeks’ wages.
46

Dec. 31 NetSolutions received Br2,870 from
fees earned for the second half of
December.
5
6
7
8
31 Cash 11 2 870 00
47

Dec. 31 NetSolutions paid its Br310
telephone bill for the month.
31
32
33
34
31 Utilities Expense 54 310 00
Cash 11 310 00
Paid telephone bill.
48

Dec. 31 NetSolutions paid its Br225 electric
bill for the month.
Post.
Ref.
JOURNAL
Page 4
1
2
3
4
Dec. 31
2006
Utilities Expense 54 225 00
Cash 11 225 00
Paid utility bill.
49

Dec. 31 Net Solutions fees earned totalled
Br1,120 on account for the second
half of December.
9
10
11
12
31 Accounts Receivable 12 1 120 00
Recorded fees earned on
account.
50

Dec. 31 Ayelewithdrew Br2,000 for personal
use.
14
15
16
17
31 Ayele , Drawing 32 2 000 00
Cash 11 2 000 00
Ayele withdrew cash
for personal use.
51

Posting
• is a process of transferring data from journal to
the accounts in the ledger.
52

Example
POSTING A JOURNAL ENTRY
In the ledger, enter in the appropriate columns of the account(s)
debited the date, journal page, and debit amount shown in the journal
and the account number to which the journal was posted.
J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
Invested cash in business.
General Journal
101
Date Account Title and Explanation Ref Debit Credit Balance
2002
01-Sep J1 15,000 15,000
Cash
General Ledger
53

ILLUSTRATION 2-14
POSTING A JOURNAL ENTRY
In the ledger, enter in the appropriate columns of the account(s)
credited the date, journal page, and credit amount shown in the
journal and the account number to which the journal was posted.
J1
Date Account Title and Explanation Ref Debit Credit
2002
01-Sep Cash 101 15,000
M. Doucet, Capital 301 15,000
Invested cash in business.
General Journal
301
Date Account Title and Explanation Ref Debit Credit Balance
2002
1-Sep J1 15,000 15,000
M. Doucet, Capital
General Ledger
54

THE TRIAL BALANCE
A trial balance is a list of accounts and their balances at a
given time.
The primary purpose of a trial balance is to prove the
mathematical equality of debits and credits after posting.
A trial balance also discover errors in journalizing and
posting.
The procedures for preparing a trial balance consist of
1. listing the account titles and their balances,
2. totaling the debit and credit columns, and
3. proving the equality of the two columns.
56

NetSolutions
Trial Balance
December 31, 2006
Cash 2 065 00
Supplies 2 000 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Ayele, Capital 25 000 00
Ayele, Drawing 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Supplies Expense 800 00
42 600 00 42 600 00
57

1. Failure to record a transaction or to post a
transaction.
2. Recording the same erroneous amount for
both the debit and the credit parts of a
transaction.
3. Recording the same transaction more than
once.
4. Posting a part of a transaction correctly as a
debit or credit but to the wrong account.
Errors that will not cause the
trial balance to be unequal:
59

Error Correction Procedure
1. Journal entry is incorrect Draw a line through the error
but posted correctly. and insert correct title or
amount.
Correction
of Errors
60

1. Journal entry is incorrect Draw a line through the error
but not posted. and insert correct title or
amount.
2. Journal entry is correct Draw a line through the
but posted incorrectly. posted error and post
correctly.
Correction
of Errors
61

3. Journal entry is incorrect Journalize and post a
and posted incorrectly. correcting entry.
Correction
of Errors
62

What would be the necessary
correcting entry?
Journal – As recorded and posted
Correcting Errors – An Example
On May 5, a purchase of office equipment on
account was incorrectly journalized and posted
as shown.
May 5 Supplies 12,500
Accounts Payable 12,500
63

as shown.
May 5 Office Equipment 12,500
64

May 5 Office Equipment 12,500
Supplies 12,500
as shown.
65

Learning Objectives
The Matching Concept and the Adjusting Process
1. The Matching Concept
2. Nature of the Adjusting Process
3. Recording Adjusting Entries
4. Summary of Adjustment Process
C3
66

TWO METHODS
Reporting Revenue and Expense
Cash Basis of Accounting
Accrual Basis of Accounting
67

Cash Basis of Accounting
 Revenue reported when cash is received
 Expense reported when cash is paid
 Does not properly match revenues and expenses
68

Accrual Basis of Accounting
 Revenue reported when earned
 Expense reported when incurred
 Properly matches revenues and expenses in
determining net income
 Requires adjusting entries at end of period
69

NetSolutions
Unadjusted Trial Balance
December 31, 2006
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 AYELE, Capital 25,000
32 AYELE, Drawing 4,000
41 Fees Earned 16,340
51 Wages Expense 4,275
52 Rent Expense 1,600
54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
42,600 42,600
70

Adjustments – deferrals and accruals
• Deferrals are created by recording a transaction
in a way that delays or defers the recognition of
an expense or a revenue
Deferred expenses
Deferred revenues
• Accruals are created by an unrecorded expense
that has been incurred or an unrecorded
revenue that has been earned
Accrued expenses
Accrued revenues
71

Completing the Accounting
Cycle
72

Basic Steps of the Accounting
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.
73

The work sheet is a useful
device for understanding the flow
of accounting data from the
unadjusted trial balance to the
financial statements.
74

WORK SHEET
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Balance Sheet
Trial Balance Adjustments Adjusted Trial Balance Income Statement
1. Prepare trial
balance on the
worksheet.
2. Enter
adjustment
data.
3. Enter
adjusted
balances
4. Extend adjusted balance to
appropriate columns.
5. Calculate income/loss and
complete the worksheet.
75

The Work Sheet
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Prepared from the general ledger.
Accounts are listed in the following
order: assets, liabilities, owner’s
equity, revenues, and expenses.
76

Adjustments are entered here. Two
possibilities:
1. Deferrals – Existing balances are
changed.
2. Accruals – New information is
entered.
Trial Balance
The Work Sheet
77

The Work Sheet
Adjustments are combined with
the trial balance. Account
balances are now adjusted.
Trial Balance
78

Cash 2,065
Accounts Receivable 2,220
Supplies 2,000
Prepaid Insurance 2,400
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
AYELE, Capital 25,000
AYELE, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800
Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2006
The Unadjusted
Trial Balance
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
79

(a) The Supplies account has a debit balance
of Br2,000. A count of supplies at the end
of the period reveals that Br760 is on hand.
Therefore, Br1,240 in supplies was used
during the two-month period.
80

Cash 2,065
Supplies 2,000
Land 20,000
Unearned Rent 360
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Supplies Expense 800
42,600 42,600
Adjusted
NetSolutions
Work Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
(a) 1,240
(a) 1,240
81

(b)The Prepaid Insurance account has a
debit balance of Br2,400, which
represents prepayment of insurance for
24 months beginning December 1.
Thus, the insurance expense for this
month is Br100 (Br2,400 ÷ 24).
82

Cash 2,065
Supplies 2,000 (a) 1,240
Land 20,000
Unearned Rent 360
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Supplies Expense 800 (a) 1,240
42,600 42,600
Adjusted
NetSolutions
Work Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Insurance Expense (b) 100
Accounts are added as needed.
(b) 100
83

(c) The Unearned Rent account has a credit
balance of Br360, which represents the
receipt of three-months’ rent beginning
with December 1. Thus, the rent revenue
for December is Br120.
FOR
RENT
84

Cash 2,065
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) 100
Land 20,000
Unearned Rent 360
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
42,600 42,600
Adjusted
NetSolutions
Work Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
(c) 120
Rent Revenue (c) 120
85

(d) Wages accrued but not paid at
the end of December total Br250.
86

Cash 2,065
Supplies 2,000 (a) 1,240
Land 20,000
Unearned Rent 360 (c) 120
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
42,600 42,600
Adjusted
NetSolutions
Work Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Wages Payable (d) 250
(d) 250
87

(e) Fees accrued at the end of
December, but not recorded, total
Br500.
88

Cash 2,065
Supplies 2,000 (a) 1,240
Land 20,000
Fees Earned 16,340
Wages Expense 4,275 (d) 250
Rent Expense 1,600
42,600 42,600
Adjusted
NetSolutions
Work Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
(e) 500
(e) 500
89

(f) Depreciation of the office
equipment is Br50 for December.
90

Cash 2,065
Accounts Receivable 2,220 (e) 500
Supplies 2,000 (a) 1,240
Land 20,000
Fees Earned 16,340 (e) 500
Rent Expense 1,600
42,600 42,600
Adjusted
NetSolutions
Work Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Depreciation Expense (f) 50
Accum. Depreciation (f) 50
91

Cash 2,065
Supplies 2,000 (a) 1,240
Land 20,000
Rent Expense 1,600
42,600 42,600
Adjusted
NetSolutions
Work Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
To make more space,
let’s remove the
heading.
92

Cash 2,065
Supplies 2,000 (a) 1,240
Land 20,000
Rent Expense 1,600
42,600 42,600
Adjusted
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
2,260 2,260
Summed
and
ruled
31
93

Next, the unadjusted Trial
Balance columns and the
Adjustments columns are
combined to determine the
amounts displayed in the
Adjusted Trial Balance.
94

Cash 2,065
Supplies 2,000 (a) 1,240
Land 20,000
Rent Expense 1,600
42,600 42,600
Adjusted
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
2,260 2,260
33
95

Cash 2,065 2,065
Accounts Receivable 2,220 (e) 500 2,720
Supplies 2,000 (a) 1,240 760
Prepaid Insurance 2,400 (b) 100 2,300
Land 20,000 20,000
Office Equipment 1,800 1,800
Unearned Rent 360 (c) 120 240
AYELE, Capital 25,000 25,000
AYELE, Drawing 4,000 4,000
Fees Earned 16,340 (e) 500 16,840
Wages Expense 4,275 (d) 250 4,525
Rent Expense 1,600 1,600
Supplies Expense 800 (a) 1,240 2,040
42,600 42,600
Adjusted
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
Insurance Expense (b) 100 100
Rent Revenue (c) 120 120
Wages Payable (d) 250 250
Depreciation Expense (f) 50 50
Accum. Depreciation (f) 50 50
2,260 2,260 43,400 43,400
34
96

Effect of Omitting Adjusting Entry on the
Balance Sheet and Income Statement
• Deferred expenses;
Expenses Understated and Net Income Overstated
Assets Overstated and Owner’s Equity Overstated
• Deferred revenues;
Revenues Understated and Net Income Understated
Liabilities Overstated and Owner’s Equity Understated
• Accrued expenses;
Expenses Understated and Net Income Overstated
Liabilities Understated and Owner’s Equity Overstated
• Accrued revenues;
Revenues Understated and Net Income Understated
Assets Understated and Owner’s Equity Understated
97

Revenue and expense balances in
the Adjusted Trial Balance column
are extended to the Income
Statement column.
Adjusted TB
Income State. Balance Sheet
The Work Sheet
98

Asset, liability, owner’s equity, and
drawing balances in the Adjusted
Trial Balance column are extended
to the Balance Sheet column.
Adjusted TB
Income State. Balance Sheet
The Work Sheet
99

To make room on the slides for
the Income statement and
Balance Sheet columns, the Trial
Balance and Adjustments
columns have been removed.
100

Cash 2,065
Supplies 760
Land 20,000
Unearned Rent 240
Fees Earned 16,840
Wages Expense 4,525
Rent Expense 1,600
Supplies Expense 2,040
Adjusted
Trial Balance Income Statement Balance Sheet
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
Insurance Expense 100
Rent Revenue 120
Wages Payable 250
Depreciation Expense 50
Accum. Depreciation 50
43,400 43,400
38
101

Now, let’s extend the balances
from the Adjusted Trial Balance
column.
102

Cash 2,065 2,065
Accounts Receivable 2,720 2,720
Supplies 760 760
Prepaid Insurance 2,300 2,300
Land 20,000 20,000
Fees Earned 16,840 16,840
Wages Expense 4,525 4,525
Supplies Expense 2,040 2,040
Adjusted
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
Insurance Expense 100 100
Rent Revenue 120 120
Wages Payable 250 250
Depreciation Expense 50 50
Accum. Depreciation 50 50
43,400 43,400
40
103

These four
columns are
summed.
104

Cash 2,065 2,065
Accounts Receivable 2,720 2,720
Supplies 760 760
Prepaid Insurance 2,300 2,300
Land 20,000 20,000
Fees Earned 16,840 16,840
Wages Expense 4,525 4,525
Supplies Expense 2,040 2,040
Adjusted
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
Insurance Expense 100 100
Rent Revenue 120 120
Depreciation Expense 50 50
Accum. Depreciation 50 50
43,400 43,400 9,755 16,960 33,645 26,440
42
105

The difference between the
Income Statement column
totals is the net income (or net
loss) for the period.
106

The difference between the
Balance Sheet column totals is
also the income (or net loss)
for the period.
107

9,755 16,960 33,645 26,440
7,205 7,205
16,960 16,960 33,645 33,645
Income Statement Balance Sheet
Net Income Net Income
108

NetSolutions
Income Statement
For Two Months Ended December 31, 2006
Fees earned Br16,840
Rent revenue 120
Total revenues Br16,960
Expenses:
Wages expense Br 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 Br 7,205
Every amount on this income statement was taken from the
Income Statement column of the work sheet. 109

NetSolutions
Statement of Changes in Equity
AYELE’s Investment on November 1, 2006 Br25,000
Net income for November and December 7,205
Less withdrawals 4,000
Increase in owner’s equity 3,205
AYELE, Capital, December 31, 2006 Br 28,205
Either
from
the
income
statement
or
the
work
sheet.
110

NetSolutions
Statement of financial Position
December 31, 2006
Assets Liabilities
Current assets: Current liabilities:
Cash Br 2,065 Accounts payable Br900
Accounts receivable 2,720 Wages payable 250
Supplies 760 Unearned rent 240
Prepaid insurance 2,300 Total liabilities Br 1,390
Total current assets Br 7,845
Property, plant, and
equipment:
Land Br20,000
Office equip. Br1,800
Less accum.
depreciation 50 1,750 Owner’s Equity
Total property, plant AYELE, Capital 28,205
and equipment 21,750 Total liabilities and
Total assets Br29,595 owner’s equity Br29,595
From the
Statement
of Owner’s
Equity
111

Adjusting and Closing Entries
Adjusting entries are recorded
in the journal at the end of the
accounting period.
112

If a work sheet has been
prepared, the data for
these entries are in the
Adjustments columns.
113

OWNER’S CAPITAL
The Closing Process
Income Summary
1
Revenues are
transferred to
Income Summary
2
Expenses are
transferred to
Income Summary
3 Net Income or Net Loss is
transferred to Owner’s Capital
4
Drawings are transferred to
Owner’s Capital
114

OWNER’S CAPITAL
Income Summary
1
Revenues are
transferred to
Income Summary
2
Expenses are
transferred to
Income Summary
3 Net Income or Net Loss is
transferred to Owner’s Capital
4
Drawings are transferred to
Owner’s Capital
The Income Summary
account does not appear on
the financial statements.
115

Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
AYELE, Capital
Bal. 25,000
AYELE, Drawing
Bal. 4,000
Income Summary
Note: The
balances shown
are adjusted
balances before
closing. The
following
sequence
demonstrates the
closing process.
The Closing Process
116

Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
AYELE, Capital
Bal. 25,000
AYELE, Drawing
Bal. 4,000
Income Summary
Debit each revenue
account for the
amount of its
balance, and credit
Income Summary
for the total
revenue.
16,840
120
16,960
The Closing Process
117

Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Bal. 455
AYELE, Capital
Bal. 25,000
AYELE, Drawing
Bal. 4,000
Income Summary
Debit Income
Summary for the
total expenses and
credit each expense
account for its
balance.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,960
9,775
455
100
2,040
985
50
1,600
4,525
The Closing Process
118

Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Bal. 455
AYELE, Capital
Bal. 25,000
AYELE, Drawing
Bal. 4,000
Income Summary
Debit Income
Summary for the
amount of its
balance (in this
case, the net
income) and credit
the capital account.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,960
9,775
455
100
2,040
985
50
1,600
4,525
7,205
7,205
The Closing Process
119

Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Bal. 455
AYELE, Capital
Bal. 25,000
AYELE, Drawing
Bal. 4,000
Income Summary
Debit the capital
account for the
balance of the
drawing account,
and credit drawing
for the same
amount.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,960
9,775
455
100
2,040
985
50
1,600
4,525
7,205
7,205
4,000
4,000
The Closing Process
120

Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Bal. 455
AYELE, Capital
Bal. 25,000
AYELE, Drawing
Bal. 4,000
Income Summary
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,480
120
16,960
9,775
445
100
2,040
985
50
1,600
4,525
7,205
7,205
4,000
4,000
Close Revenues
Close Expenses
Close Income Summary
Close Drawing
16,840
120
16,960
4,525
1,600
50
985
2,040
100
455
9,775
7,205
7,205
4,000
4,000
Review of the Closing Process
121

After the closing entries
are posted, all of the
temporary accounts have
zero balances.
122

Post-closing Trial Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2006
Cash 2 065 00
Supplies 760 00
Land 20 000 00
Office Equipment 1 800 00
Accumulated Depreciation 50 00
AYELE, Capital 28 205 00
29 645 00 29 645 00
123

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