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chapter

4 Completing the
Accounting Cycle

© ERIC RISBERG/ASSOCIATED PRESS

objectives
After studying this chapter, you should be able to:
1 Describe the flow of accounting information 4 Describe the accounting cycle.
from the unadjusted trial balance into the
adjusted trial balance and financial statements.
5 Illustrate the accounting cycle for one period.
2 Prepare financial statements from adjusted
account balances.
6 Explain what is meant by the fiscal year and
3 Prepare closing entries. the natural business year.
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Electronic Arts Inc.

M
ost of us have had to file a personal tax re- for game developers, advertising ex-
turn. At the beginning of the year, you es- penditures, costs for producing and
timate your upcoming income and decide packaging games, and game revenues.
whether you need to increase your payroll At the end of the year, financial state-
tax withholdings or perhaps pay estimated taxes. ments are prepared that summarize the
During the year, you earn income and enter into tax- operating activities for the year. Electronic Arts
related transactions, such as making charitable con- publishes these statements on its Web site at
tributions. At the end of the year, your employer sends [Link] Finally, before the start
you a tax withholding information form (W-2) form, of the next year, the accounts are readied for record-
and you collect the tax records needed for complet- ing the operations of the next year.
ing your yearly tax forms. As the next year begins, As we saw in Chapter 1, the initial cycle for
you start the cycle all over again. NetSolutions began with Chris Clark’s investment in
Businesses also go through a cycle of activities. the business on November 1, 2007. The cycle contin-
For example, Electronic Arts Inc., the world’s largest ued with recording NetSolutions’ transactions for
developer and marketer of electronic game software, November and December, as we discussed and il-
begins its cycle by developing new or revised game lustrated in Chapters 1 and 2. In Chapter 3, the cycle
titles, such as Madden NFL Football®, Need for continued when the adjusting entries for the two
Speed®, Tiger Woods PGA Tour®, The Sims®, and months ending December 31, 2007, were recorded. In
The Lord of the Rings®. These games are marketed this chapter, we complete the cycle for NetSolutions
and sold throughout the year. During the year, op- by preparing financial statements and getting the
erating transactions of the business are recorded. For accounts ready for recording transactions of the next
Electronic Arts, such transactions include the salaries period.

Flow of Accounting Information

1 The end-of-period process by which accounts are adjusted and the financial statements
objective are prepared is one of the most important in accounting. Using our illustration of
Describe the flow NetSolutions from Chapters 1–3, this process is summarized in spreadsheet form in
of accounting
Exhibit 1.
information from
the unadjusted trial Exhibit 1 begins with the unadjusted trial balance as of the end of the period. The
balance into the unadjusted trial balance serves as a control to verify that the total of the debit balances
adjusted trial equals the total of the credit balances. If the trial balance totals are unequal, an error
balance and has occurred, which must be found and corrected before the end-of-period process can
financial
continue.
statements.
The adjustments that we explained and illustrated for NetSolutions in Chapter 3
are shown in the Adjustments columns of Exhibit 1. Cross-referencing (by letters) the
debit and credit of each adjustment is useful in reviewing the impact of the adjust-
ments on the unadjusted account balances. The order of the adjustments on the spread-
sheet is not important, and the adjustments are normally entered in the order in which
the data are assembled. When the titles of the accounts to be adjusted do not appear
in the unadjusted trial balance, the accounts are inserted in the Account Title column,
below the unadjusted trial balance totals. The total of the Adjustments columns is a
control to verify the mathematical accuracy of the adjustment data and adjusting en-
Many companies use Micro-
soft’s Excel® software to
tries. The total of the Debit column must equal the total of the Credit column.
prepare end-of-period spread- The adjustment data are added to or subtracted from the amounts in the Unadjusted
sheets (work sheets). Trial Balance columns to arrive at the Adjusted Trial Balance columns. In this way, the
Adjusted Trial Balance columns of Exhibit 1 illustrate the impact of the adjusting entries

145
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146 Chapter 4 Completing the Accounting Cycle

EXHIBIT 1 End-of-Period Spreadsheet (Work Sheet)

A B C D E F G H I J K
NetSolutions
End-of-Period Spreadsheet (Work Sheet)
For the Two Months Ended December 31, 2007
Unadjusted Trial Adjusted Trial
Balance Adjustments Balance Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Cash 2,065 2,065 2,065 1

2 Accounts Receivable 2,220 (d) 500 2,720 2,720 2
3 Supplies 2,000 (a) 1,240 760 760 3
4 Prepaid Insurance 2,400 (b) 200 2,200 2,200 4
5 Land 20,000 20,000 20,000 5
6 Office Equipment 1,800 1,800 1,800 6
7 Accounts Payable 900 900 900 7
8 Unearned Rent 360 (c) 120 240 240 8
9 Chris Clark, Capital 25,000 25,000 25,000 9
10 Chris Clark, Drawing 4,000 4,000 4,000 10
11 Fees Earned 16,340 (d) 500 16,840 16,840 11
12 Wages Expense 4,275 (e) 250 4,525 4,525 12
13 Rent Expense 1,600 1,600 1,600 13
14 Utilities Expense 985 985 985 14
15 Supplies Expense 800 (a) 1,240 2,040 2,040 15
16 Miscellaneous Expense 455 455 455 16
17 42,600 42,600 17
18 Insurance Expense (b) 200 200 200 18
19 Rent Revenue (c) 120 120 120 19
20 Wages Payable (e) 250 250 250 20
21 Depreciation Expense (f) 50 50 50 21
22 Accumulated Depreciation (f) 50 50 50 22
23 2,360 2,360 43,400 43,400 9,855 16,960 33,545 26,440 23
24 Net income 7,105 7,105 24
25 16,960 16,960 33,545 33,545 25

on the unadjusted accounts. The totals of the Adjusted Trial Balance columns prove the
equality of the totals of the debit and credit balances after adjustment.
Exhibit 1 also illustrates the flow of the accounts from the adjusted trial balance
into the financial statements. The revenue and expense accounts are extended to the
Income Statement columns. At the bottom of the Income Statement columns, the net
income or net loss for the period is shown. For example, Exhibit 1 shows that
NetSolutions had net income of $7,105 for the period. Likewise, the assets, liabilities,
owner’s capital, and drawing accounts are extended to the Balance Sheet columns.
Since net income increases owner’s capital, NetSolutions’ net income of $7,105 is also
shown in the Balance Sheet Cr. column. As we will describe and illustrate in the next
section, the financial statements can be prepared directly from Exhibit 1.
To summarize, Exhibit 1 illustrates the end-of-period process by which accounts
are adjusted and how the adjusted accounts flow into the financial statements. The
spreadsheet shown in Exhibit 1 is not a required part of the accounting process.
However, many accountants prepare such a spreadsheet, often called a work sheet, in
manual or electronic form, as part of their normal end-of-period process. The primary
advantage in doing so is that it allows managers and accountants to see the impact of
the adjustments on the financial statements. This is especially useful for adjustments
that depend upon estimates. We discuss such estimates and their impact on the finan-
cial statements in later chapters.1

1 The appendix to this chapter describes and illustrates how to prepare the end-of-period spreadsheet
(work sheet) shown in Exhibit 1.
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Chapter 4 Completing the Accounting Cycle 147

Example Exercise 4-1 objective 1

The balances for the accounts listed below appear in the Adjusted Trial Balance columns of the end-of-
period spreadsheet (work sheet). Indicate whether each balance should be extended to (a) an Income
Statement column or (b) a Balance Sheet column.
1. Amber Bablock, Drawing 5. Fees Earned
2. Utilities Expense 6. Accounts Payable
3. Accumulated Depreciation—Equipment 7. Rent Revenue
4. Unearned Rent 8. Supplies

Follow My Example 4-1

1. Balance Sheet column 5. Income Statement column

2. Income Statement column 6. Balance Sheet column
3. Balance Sheet column 7. Income Statement column
4. Balance Sheet column 8. Balance Sheet column

For Practice: PE 4-1A, PE 4-1B

Financial Statements
2 Using Exhibit 1, the financial statements for NetSolutions can be prepared. The income
objective statement, the statement of owner’s equity, and the balance sheet are shown in Exhibit
Prepare financial 2, on page 148. In the following paragraphs, we discuss each of these financial state-
statements from
ments and how they are prepared.
adjusted account
balances.
INCOME STATEMENT
The income statement is prepared directly from the Income Statement or Adjusted
Trial Balance columns of Exhibit 1 beginning with fees earned of $16,840. The order
of the expenses may change, however, from that listed in Exhibit 1. As we did in
Chapter 1, we list the expenses in the income statement in Exhibit 2 in order of size,
beginning with the larger items. Miscellaneous expense is the last item, regardless of
its amount.

STATEMENT OF OWNER’S EQUITY

The first item presented on the statement of owner’s equity is the balance of the
owner’s capital account at the beginning of the period. In Exhibit 1, however, the

Example Exercise 4-2 objective 2

In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for Dimple Consulting Co. for
the current year, the Debit column total is $678,450, and the Credit column total is $599,750 before the
amount for net income or net loss has been included. In preparing the income statement from the end-of-
period spreadsheet (work sheet), what is the amount of net income or net loss?

Follow My Example 4-2

A net income of $78,700 ($678,450
$599,750) would be reported. When the Debit column of
the Balance Sheet columns is more than the Credit column, net income is reported. If the Credit
column exceeds the Debit column, a net loss is reported.

For Practice: PE 4-2A, PE 4-2B

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148 Chapter 4 Completing the Accounting Cycle

EXHIBIT 2 Financial Statements Prepared from Work Sheet

NetSolutions
Income Statement
For the Two Months Ended December 31, 2007
Fees earned $16 8 4 0 00
Rent revenue 1 2 0 00
Total revenues $16 9 6 0 00
Expenses:
Wages expense $ 4 5 2 5 00
Supplies expense 2 0 4 0 00
Rent expense 1 6 0 0 00
Utilities expense 9 8 5 00
Insurance expense 2 0 0 00
Depreciation expense 5 0 00
Miscellaneous expense 4 5 5 00
Total expenses 9 8 5 5 00
Net income $ 7 1 0 5 00

NetSolutions
Statement of Owner’s Equity
For the Two Months Ended December 31, 2007
Chris Clark, capital, November 1, 2007 $ 0
Investment on November 1, 2007 $25 0 0 0 00
Net income for November and December 7 1 0 5 00
$32 1 0 5 00
Less withdrawals 4 0 0 0 00
Increase in owner’s equity 28 1 0 5 00
Chris Clark, capital, December 31, 2007 $28 1 0 5 00

NetSolutions
Balance Sheet
December 31, 2007
Assets Liabilities
Current assets: Current liabilities:
Cash $ 2 0 6 5 00 Accounts payable $ 9 0 0 00
Accounts receivable 2 7 2 0 00 Wages payable 2 5 0 00
Supplies 7 6 0 00 Unearned rent 2 4 0 00
Prepaid insurance 2 2 0 0 00 Total liabilities $ 1 3 9 0 00
Total current assets $ 7 7 4 5 00
Property, plant, and equipment:
Land $20 0 0 0 00
Office equipment $1,800
Less accum. depr. 50 1 7 5 0 00 Owner’s Equity
Total property, plant, Chris Clark, capital 28 1 0 5 00
and equipment 21 7 5 0 00 Total liabilities and
Total assets $29 4 9 5 00 owner’s equity $29 4 9 5 00
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Chapter 4 Completing the Accounting Cycle 149

Integrity, Objectivity, and Ethics in Business

THE ROUND TRIP

A common type of fraud involves artificially inflating rev- sells product to C and is paid with the money just loaned
enue. One fraudulent method of inflating revenue is called to C! This looks like a sale in the accounting records, but
“round tripping.” Under this scheme, a selling company in reality, S is shipping free product. The fraud is exposed
(S) “lends” money to a customer company (C). The money when it is determined that there was no intent to repay
is then used by C to purchase a product from S. Thus, S the original loan.

amount listed as owner’s capital is not always the account balance at the beginning of
the period. The owner may have invested additional assets in the business during the
period. Thus, for the beginning balance and any additional investments, it is necessary
to refer to the owner’s capital account in the ledger. These amounts, along with the net
income (or net loss) and the drawing account balance shown on the adjusted trial bal-
ance, are used to determine the ending owner’s capital account balance.
The basic form of the statement of owner’s equity is shown in Exhibit 2. For
NetSolutions, the amount of drawings by the owner was less than the net income. If
the owner’s withdrawals had exceeded the net income, the order of the net income and
the withdrawals would have been reversed. The difference between the two items
would then be deducted from the beginning capital account balance. Other factors,
such as additional investments or a net loss, also require some change in the form, as
shown in the following example:

Allan Johnson, capital, January 1, 2007 $39,000

Additional investment during the year 6,000
Total $45,000
Net loss for the year $ 5,600
Withdrawals 9,500
Decrease in owner’s equity 15,100
Allan Johnson, capital, December 31, 2007 $29,900

Example Exercise 4-3 objective 2

Zack Gaddis owns and operates Gaddis Employment Services. On January 1, 2007, Zack Gaddis, Capital had a
balance of $186,000. During the year, Zack invested an additional $40,000 and withdrew $25,000. For the
year ended December 31, 2007, Gaddis Employment Services reported a net income of $18,750. Prepare a
statement of owner’s equity for the year ended December 31, 2007.

Follow My Example 4-3

GADDIS EMPLOYMENT SERVICES
STATEMENT OF OWNER’S EQUITY
For the Year Ended December 31, 2007

Zack Gaddis, capital, January 1, 2007 $186,000

Additional investment during 2007 40,000
Total $226,000
Withdrawals $ 25,000
Less net income 18,750
Decrease in owner’s equity 6,250
Zack Gaddis, capital, December 31, 2007 $219,750

For Practice: PE 4-3A, PE 4-3B

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150 Chapter 4 Completing the Accounting Cycle

BALANCE SHEET
The balance sheet is prepared directly from the Balance Sheet or Adjusted Trial Balance
columns of Exhibit 1 beginning with Cash of $2,065.
The balance sheet in Exhibit 2 was expanded by adding subsections for current as-
sets; property, plant, and equipment; and current liabilities. Such a balance sheet is a
classified balance sheet. In the following paragraphs, we describe some of the sections
and subsections that may be used in a balance sheet. We will introduce additional sec-
tions in later chapters.

Assets Assets are commonly divided into classes for presentation on the
balance sheet. Two of these classes are (1) current assets and (2) property,
Two common classes of
plant, and equipment.
assets are current assets
and property, plant, and Current Assets Cash and other assets that are expected to be converted
equipment. to cash or sold or used up usually within one year or less, through the
normal operations of the business, are called current assets. In addition
to cash, the current assets usually owned by a service business are notes
receivable, accounts receivable, supplies, and other prepaid expenses.
Notes receivable are amounts that customers owe. They are written promises to
pay the amount of the note and possibly interest at an agreed rate. Accounts receiv-
able are also amounts customers owe, but they are less formal than notes and do not
provide for interest. Accounts receivable normally result from providing services or
selling merchandise on account. Notes receivable and accounts receivable are current
assets because they will usually be converted to cash within one year or less.

Property, Plant, and Equipment The property, plant, and equipment section may also
be described as fixed assets or plant assets. These assets include equipment, machin-
ery, buildings, and land. With the exception of land, as we discussed in Chapter 3, fixed
assets depreciate over a period of time. The cost, accumulated depreciation, and book
value of each major type of fixed asset are normally reported on the balance sheet or
in accompanying notes.

Liabilities Liabilities are the amounts the business owes to creditors. The
two most common classes of liabilities are (1) current liabilities and (2)
Two common classes of lia-
long-term liabilities.
bilities are current liabilities
and long-term liabilities. Current Liabilities Liabilities that will be due within a short time (usu-
ally one year or less) and that are to be paid out of current assets are called
current liabilities. The most common liabilities in this group are notes
payable and accounts payable. Other current liability accounts commonly found in the
ledger are Wages Payable, Interest Payable, Taxes Payable, and Unearned Fees.

Long-Term Liabilities Liabilities that will not be due for a long time (usually more
than one year) are called long-term liabilities. If NetSolutions had long-term liabili-
ties, they would be reported below the current liabilities. As long-term liabilities come
due and are to be paid within one year, they are classified as current liabilities. If they
are to be renewed rather than paid, they would continue to be classified as long term.
When an asset is pledged as security for a liability, the obligation may be called a mort-
gage note payable or a mortgage payable.

Owner’s Equity The owner’s right to the assets of the business is presented on the bal-
ance sheet below the liabilities section. The owner’s equity is added to the total liabil-
ities, and this total must be equal to the total assets.
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Chapter 4 Completing the Accounting Cycle 151

Example Exercise 4-4 objective 2

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, 2007, balance sheet of
Hindsight Consulting.
1. Jason Corbin, Capital 5. Cash
2. Notes Receivable (due in 6 months) 6. Unearned Rent (3 months)
3. Notes Payable (due in 2009) 7. Accumulated Depreciation—Equipment
4. Land 8. Accounts Payable

Follow My Example 4-4

1. Owner’s equity 5. Current asset

2. Current asset 6. Current liability
3. Long-term liability 7. Property, plant, and equipment
4. Property, plant, and equipment 8. Current liability

For Practice: PE 4-4A, PE 4-4B

Business Connections

INTERNATIONAL DIFFERENCES
Financial statements prepared under accounting practices form of balance sheet is organized to emphasize creditor
in other countries often differ from those prepared under interpretation and analysis. For example, current assets
generally accepted accounting principles found in the and current liabilities are presented first to facilitate their
United States. This is to be expected, since cultures and interpretation and analysis by creditors. Likewise, to em-
market structures differ from country to country. phasize their importance, liabilities are reported before
To illustrate, BMW Group prepares its financial state- owner’s equity.
ments under German law and German accounting princi- Regardless of these differences, the basic principles
ples. In doing so, BMW’s balance sheet reports fixed assets underlying the accounting equation and the double-entry
first, followed by current assets. It also reports owner’s accounting system are the same in Germany and the
equity before the liabilities. In contrast, balance sheets United States. Even though differences in recording and
prepared under U.S. accounting principles report current reporting exist, the accounting equation holds true: the
assets followed by fixed assets and current liabilities fol- total assets still equal the total liabilities and owner’s
lowed by long-term liabilities and owner’s equity. The U.S. equity.

Closing Entries
3 As we discussed in Chapter 3, the adjusting entries are recorded in the journal at the
objective end of the accounting period. For NetSolutions, the adjusting entries are shown in
Prepare closing Exhibit 7 of Chapter 3.
entries.
After the adjusting entries have been posted to NetSolutions’ ledger, shown in
Exhibit 6 (on pages 155–159), the ledger is in agreement with the data reported on
the financial statements. The balances of the accounts reported on the balance sheet
are carried forward from year to year. Because they are relatively permanent, these ac-
counts are called real accounts. The balances of the accounts reported on the income
statement are not carried forward from year to year. Likewise, the balance of the
owner’s withdrawal account, which is reported on the statement of owner’s equity, is
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152 Chapter 4 Completing the Accounting Cycle

not carried forward. Because these accounts report amounts for only one
period, they are called temporary accounts or nominal accounts.
Closing entries transfer the
To report amounts for only one period, temporary accounts should
balances of temporary ac- have zero balances at the beginning of a period. How are these balances
counts to the owner’s cap- converted to zero? The revenue and expense account balances are trans-
ital account. ferred to an account called Income Summary. The balance of Income
Summary is then transferred to the owner’s capital account. The balance
of the owner’s drawing account is also transferred to the owner’s capital
account. The entries that transfer these balances are called closing entries. The trans-
fer process is called the closing process. Exhibit 3 is a diagram of this process.

EXHIBIT 3 The Closing Process

E S U M M A RY
Expenses INCOM Revenues
are transferred
are transferred to
to Income
Income Summary
Summary

Net Income or Net Loss

is transferred to Owner’s Capital

.....................................
......

......
Owner's Capital
.......... . . .........................

Drawings are transferred to Owner’s Capital

You should note that Income Summary is used only at the end of the
period. At the beginning of the closing process, Income Summary has no
The income summary balance. During the closing process, Income Summary will be debited
account does not appear and credited for various amounts. At the end of the closing process,
on the financial Income Summary will again have no balance. Because Income Summary
statements. has the effect of clearing the revenue and expense accounts of their bal-
ances, it is sometimes called a clearing account. Other titles used for this
account include Revenue and Expense Summary, Profit and Loss
Summary, and Income and Expense Summary.
It is possible to close the temporary revenue and expense accounts without using
a clearing account such as Income Summary. In this case, the balances of the revenue
and expense accounts are closed directly to the owner’s capital account. This process
is automatic in a computerized accounting system. In a manual system, the use of an
income summary account aids in detecting and correcting errors.
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Chapter 4 Completing the Accounting Cycle 153

JOURNALIZING AND POSTING CLOSING ENTRIES

Four closing entries are required at the end of an accounting period, as outlined in
Exhibit 3. The account titles and balances needed in preparing these entries may be
obtained from the end-of-period spreadsheet (work sheet), the adjusted trial bal-
ance, the income statement, the statement of owner’s equity, or the ledger.
A flowchart of the closing entries for NetSolutions is shown in Exhibit 4. The
balances in the accounts are those shown in the adjusted trial balance columns of the
end-of-period spreadsheet (work sheet) shown in Exhibit 1.

EXHIBIT 4 Flowchart of Closing Entries for NetSolutions

Owner’s Equity
Wages Expense Income Summary Fees Earned
Bal. 4,525 4,525
② 9,855 16,960
① 16,840 Bal. 16,840
7,105
Rent Expense Rent Revenue
Bal. 1,600 1,600 120 Bal. 120

Depreciation Expense
Bal. 50 50

Utilities Expense Chris Clark, Capital

Bal. 985 985 4,000 Bal. 25,000
7,105
③
1. Debit each revenue account for the amount of
Supplies Expense
its balance, and credit Income Summary for the
Bal. 2,040 2,040 total revenue.
2. Debit Income Summary for the total expenses,
Insurance Expense and credit each expense account for the amount
Bal. 200 200 of its balance.
3. Debit Income Summary for the amount of its
Miscellaneous Expense balance (net income), and credit the capital account
for the same amount. (The accounts debited and
Bal. 455 455 credited are reversed if there is a net loss.)
4. Debit the capital account for the balance of the
Chris Clark, Drawing
Bal. 4,000 4,000
④ drawing account, and credit the drawing account for
the same amount.

The closing entries for NetSolutions are shown in Exhibit 5. After the closing en-
tries have been posted to the ledger, as shown in Exhibit 6 (on pages 155–159), the bal-
ance in the capital account will agree with the amount reported on the statement of
owner’s equity and the balance sheet. In addition, the revenue, expense, and drawing
accounts will have zero balances.
After the entry to close an account has been posted, a line should be inserted in both
balance columns opposite the final entry. The next period’s transactions for the revenue,
expense, and drawing accounts will be posted directly below the closing entry.
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154 Chapter 4 Completing the Accounting Cycle

EXHIBIT 5 JOURNAL Page 6

Closing Entries for Post.

Date Description Ref. Debit Credit
NetSolutions
1 Closing Entries 1
2007
2 Dec. 31 Fees Earned 41 16 8 4 0 00 2
3 Rent Revenue 42 1 2 0 00 3
4 Income Summary 33 16 9 6 0 00 4
5 5
6 31 Income Summary 33 9 8 5 5 00 6
7 Wages Expense 51 4 5 2 5 00 7
8 Rent Expense 52 1 6 0 0 00 8
9 Depreciation Expense 53 5 0 00 9
10 Utilities Expense 54 9 8 5 00 10
11 Supplies Expense 55 2 0 4 0 00 11
12 Insurance Expense 56 2 0 0 00 12
13 Miscellaneous Expense 59 4 5 5 00 13
14 14
15 31 Income Summary 33 7 1 0 5 00 15
16 Chris Clark, Capital 31 7 1 0 5 00 16
17 17
18 31 Chris Clark, Capital 31 4 0 0 0 00 18
19 Chris Clark, Drawing 32 4 0 0 0 00 19

Example Exercise 4-5 objective 3

After the accounts have been adjusted at July 31, the end of the fiscal year, the following balances are
taken from the ledger of Cabriolet Services Co.:
Terry Lambert, Capital $615,850
Terry Lambert, Drawing 25,000
Fees Earned 380,450
Wages Expense 250,000
Rent Expense 65,000
Supplies Expense 18,250
Miscellaneous Expense 6,200
Journalize the four entries required to close the accounts.

Follow My Example 4-5

July 31 Fees Earned 380,450

Income Summary 380,450
31 Income Summary 339,450
Wages Expense 250,000
Rent Expense 65,000
Supplies Expense 18,250
Miscellaneous Expense 6,200
31 Income Summary 41,000
Terry Lambert, Capital 41,000
31 Terry Lambert, Capital 25,000
Terry Lambert, Drawing 25,000

For Practice: PE 4-5A, PE 4-5B

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Chapter 4 Completing the Accounting Cycle 155

POST-CLOSING TRIAL BALANCE

The last accounting procedure for a period is to prepare a trial balance after the clos-
ing entries have been posted. The purpose of the post-closing (after closing) trial bal-
ance is to make sure that the ledger is in balance at the beginning of the next period.
The accounts and amounts should agree exactly with the accounts and amounts listed
on the balance sheet at the end of the period. The post-closing trial balance for
NetSolutions is shown in Exhibit 7, on page 159.
Instead of preparing a formal post-closing trial balance, it is possible to list the
accounts directly from the ledger, using a computer. The computer printout, in effect,
becomes the post-closing trial balance.

EXHIBIT 6 LEDGER
ACCOUNT Cash ACCOUNT NO. 11
Ledger for
NetSolutions Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 1 1 25 0 0 0 00 25 0 0 0 00
5 1 20 0 0 0 00 5 0 0 0 00
18 1 7 5 0 0 00 12 5 0 0 00
30 1 3 6 5 0 00 8 8 5 0 00
30 1 9 5 0 00 7 9 0 0 00
30 2 2 0 0 0 00 5 9 0 0 00
Dec. 1 2 2 4 0 0 00 3 5 0 0 00
1 2 8 0 0 00 2 7 0 0 00
1 2 3 6 0 00 3 0 6 0 00
6 2 1 8 0 00 2 8 8 0 00
11 2 4 0 0 00 2 4 8 0 00
13 3 9 5 0 00 1 5 3 0 00
16 3 3 1 0 0 00 4 6 3 0 00
20 3 9 0 0 00 3 7 3 0 00
21 3 6 5 0 00 4 3 8 0 00
23 3 1 4 5 0 00 2 9 3 0 00
27 3 1 2 0 0 00 1 7 3 0 00
31 3 3 1 0 00 1 4 2 0 00
31 4 2 2 5 00 1 1 9 5 00
31 4 2 8 7 0 00 4 0 6 5 00
31 4 2 0 0 0 00 2 0 6 5 00

ACCOUNT Accounts Receivable ACCOUNT NO. 12

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 16 3 1 7 5 0 00 1 7 5 0 00
21 3 6 5 0 00 1 1 0 0 00
31 4 1 1 2 0 00 2 2 2 0 00
31 Adjusting 5 5 0 0 00 2 7 2 0 00

(continued)
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156 Chapter 4 Completing the Accounting Cycle

EXHIBIT 6 ACCOUNT Supplies ACCOUNT NO. 14

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 10 1 1 3 5 0 00 1 3 5 0 00
30 1 8 0 0 00 5 5 0 00
23 3 1 4 5 0 00 2 0 0 0 00
Dec. 31 Adjusting 5 1 2 4 0 00 7 6 0 00

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 1 2 2 4 0 0 00 2 4 0 0 00
31 Adjusting 5 2 0 0 00 2 2 0 0 00

ACCOUNT Land ACCOUNT NO. 17

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 5 1 20 0 0 0 00 20 0 0 0 00

ACCOUNT Office Equipment ACCOUNT NO. 18

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 4 2 1 8 0 0 00 1 8 0 0 00

ACCOUNT Accumulated Depreciation ACCOUNT NO. 19

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 31 Adjusting 5 5 0 00 5 0 00

ACCOUNT Accounts Payable ACCOUNT NO. 21

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 10 1 1 3 5 0 00 1 3 5 0 00
30 1 9 5 0 00 4 0 0 00
Dec. 4 2 1 8 0 0 00 2 2 0 0 00
11 2 4 0 0 00 1 8 0 0 00
20 3 9 0 0 00 9 0 0 00

(continued)
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Chapter 4 Completing the Accounting Cycle 157

EXHIBIT 6 ACCOUNT Wages Payable ACCOUNT NO. 22

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 31 Adjusting 5 2 5 0 00 2 5 0 00

ACCOUNT Unearned Rent ACCOUNT NO. 23

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 1 2 3 6 0 00 3 6 0 00
31 Adjusting 5 1 2 0 00 2 4 0 00

ACCOUNT Chris Clark, Capital ACCOUNT NO. 31

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 1 1 25 0 0 0 00 25 0 0 0 00
Dec. 31 Closing 6 7 1 0 5 00 32 1 0 5 00
31 Closing 6 4 0 0 0 00 28 1 0 5 00

ACCOUNT Chris Clark, Drawing ACCOUNT NO. 32

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 2 2 0 0 0 00 2 0 0 0 00
Dec. 31 4 2 0 0 0 00 4 0 0 0 00
31 Closing 6 4 0 0 0 00 — —

ACCOUNT Income Summary ACCOUNT NO. 33

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 31 Closing 6 16 9 6 0 00 16 9 6 0 00
31 Closing 6 9 8 5 5 00 7 1 0 5 00
31 Closing 6 7 1 0 5 00 — —

ACCOUNT Fees Earned ACCOUNT NO. 41

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 18 1 7 5 0 0 00 7 5 0 0 00
Dec. 16 3 3 1 0 0 00 10 6 0 0 00
16 3 1 7 5 0 00 12 3 5 0 00
31 4 2 8 7 0 00 15 2 2 0 00
31 4 1 1 2 0 00 16 3 4 0 00
31 Adjusting 5 5 0 0 00 16 8 4 0 00
31 Closing 6 16 8 4 0 00 — —

(continued)
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158 Chapter 4 Completing the Accounting Cycle

EXHIBIT 6 ACCOUNT Rent Revenue ACCOUNT NO. 42

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 31 Adjusting 5 1 2 0 00 1 2 0 00
31 Closing 6 1 2 0 00 — —

ACCOUNT Wages Expense ACCOUNT NO. 51

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 2 1 2 5 00 2 1 2 5 00
Dec. 13 3 9 5 0 00 3 0 7 5 00
27 3 1 2 0 0 00 4 2 7 5 00
31 Adjusting 5 2 5 0 00 4 5 2 5 00
31 Closing 6 4 5 2 5 00 — —

ACCOUNT Rent Expense ACCOUNT NO. 52

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 8 0 0 00 8 0 0 00
Dec. 1 2 8 0 0 00 1 6 0 0 00
31 Closing 6 1 6 0 0 00 — —

ACCOUNT Depreciation Expense ACCOUNT NO. 53

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 31 Adjusting 5 5 0 00 5 0 00
31 Closing 6 5 0 00 — —

ACCOUNT Utilities Expense ACCOUNT NO. 54

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 4 5 0 00 4 5 0 00
Dec. 31 3 3 1 0 00 7 6 0 00
31 4 2 2 5 00 9 8 5 00
31 Closing 6 9 8 5 00 — ––

ACCOUNT Supplies Expense ACCOUNT NO. 55

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 8 0 0 00 8 0 0 00
Dec. 31 Adjusting 5 1 2 4 0 00 2 0 4 0 00
31 Closing 6 2 0 4 0 00 — —

(continued)
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Chapter 4 Completing the Accounting Cycle 159

EXHIBIT 6 ACCOUNT Insurance Expense ACCOUNT NO. 56

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Dec. 31 Adjusting 5 2 0 0 00 2 0 0 00
31 Closing 6 2 0 0 00 — —

ACCOUNT Miscellaneous Expense ACCOUNT NO. 59

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2007
Nov. 30 1 2 7 5 00 2 7 5 00
Dec. 6 2 1 8 0 00 4 5 5 00
31 Closing 6 4 5 5 00 — —

(concluded)

EXHIBIT 7 NetSolutions
Post-Closing Trial Balance
Post-Closing December 31, 2007
Trial Balance Debit Credit
Balances Balances
Cash 2 0 6 5 00
Accounts Receivable 2 7 2 0 00
Supplies 7 6 0 00
Prepaid Insurance 2 2 0 0 00
Land 20 0 0 0 00
Office Equipment 1 8 0 0 00
Accumulated Depreciation 5 0 00
Accounts Payable 9 0 0 00
Wages Payable 2 5 0 00
Unearned Rent 2 4 0 00
Chris Clark, Capital 28 1 0 5 00
29 5 4 5 00 29 5 4 5 00

Accounting Cycle
4 The accounting process that begins with analyzing and journalizing transactions and
objective ends with preparing the accounting records for the next period’s transactions is called
Describe the the accounting cycle. The steps in the accounting cycle are as follows:
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. An optional end-of-period spreadsheet (work sheet) is prepared.
6. Adjusting entries are journalized and posted to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and posted to the ledger.
10. A post-closing trial balance is prepared.2

2 Some accountants include the journalizing and posting of “reversing entries” as the last step in the ac-
counting cycle. Because reversing entries are not required, we describe and illustrate them in Appendix B
at the end of the book.
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160 Chapter 4 Completing the Accounting Cycle

Exhibit 8 illustrates the accounting cycle in graphic form. In addition, Exhibit 8

illustrates how the accounting data beginning with the source documents for a trans-
action flow through the accounting system and into the financial statements. In the
next section, we illustrate a comprehensive example of the accounting cycle.

EXHIBIT 8 Accounting Cycle

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Chapter 4 Completing the Accounting Cycle 161

Example Exercise 4-6 objective 4

From the following list of steps in the accounting cycle, identify what two steps are missing.
a. Transactions are analyzed and recorded in the journal.
b. Transactions are posted to the ledger.
c. Adjustment data are assembled and analyzed.
d. An optional end-of-period spreadsheet (work sheet) is prepared.
e. Adjusting entries are journalized and posted to the ledger.
f. Financial statements are prepared.
g. Closing entries are journalized and posted to the ledger.
h. A post-closing trial balance is prepared.

Follow My Example 4-6

The following two steps are missing: (1) the preparation of an unadjusted trial balance and (2) the
preparation of the adjusted trial balance. The unadjusted trial balance should be prepared after step (b).
The adjusted trial balance should be prepared after step (e).

For Practice: PE 4-6A, PE 4-6B

Illustration of the Accounting Cycle

5 In this section, we will illustate the complete accounting cycle for one period. We as-
objective sume that for several years Kelly Pitney has operated a part-time consulting business
Illustrate the from her home. As of April 1, 2008, Kelly decided to move to rented quarters and
accounting to operate the business, which will be known as Kelly Consulting, on a full-time ba-
cycle for one
period. sis. Kelly Consulting entered into the following transactions during April:

Apr. 1. The following assets were received from Kelly Pitney: cash, $13,100;
accounts receivable, $3,000; supplies, $1,400; and office equipment, $12,500.
There were no liabilities received.
1. Paid three months’ rent on a lease rental contract, $4,800.
2. Paid the premiums on property and casualty insurance policies, $1,800.
4. Received cash from clients as an advance payment for services to be
provided and recorded it as unearned fees, $5,000.
5. Purchased additional office equipment on account from Office Station Co.,
$2,000.
6. Received cash from clients on account, $1,800.
10. Paid cash for a newspaper advertisement, $120.
12. Paid Office Station Co. for part of the debt incurred on April 5, $1,200.
12. Recorded services provided on account for the period April 1–12, $4,200.
14. Paid part-time receptionist for two weeks’ salary, $750.
17. Recorded cash from cash clients for fees earned during the period April 1–16,
$6,250.
18. Paid cash for supplies, $800.
20. Recorded services provided on account for the period April 13–20, $2,100.
24. Recorded cash from cash clients for fees earned for the period April 17–24,
$3,850.
26. Received cash from clients on account, $5,600.
27. Paid part-time receptionist for two weeks’ salary, $750.
29. Paid telephone bill for April, $130.
30. Paid electricity bill for April, $200.
30. Recorded cash from cash clients for fees earned for the period April 25–30,
$3,050.
30. Recorded services provided on account for the remainder of April, $1,500.
30. Kelly withdrew $6,000 for personal use.
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162 Chapter 4 Completing the Accounting Cycle

STEP 1. ANALYZING AND RECORDING

TRANSACTIONS IN THE JOURNAL
The first step in the accounting cycle is to analyze and record transactions in the jour-
nal shown in Exhibit 9. As we illustrated in Chapter 2, the double-entry accounting
system is a very powerful tool for analyzing transactions. In using this system to ana-
lyze transactions, we do the following:
1. Carefully read the description of the transaction to determine whether an asset,
liability, owner’s equity, revenue, expense, or drawing account is affected by the
transaction.
2. For each account affected by the transaction, determine whether the account in-
creases or decreases.
3. Determine whether each increase or decrease should be recorded as a debit or a
credit following the rules of debit and credit shown in Exhibit 3 of Chapter 2.
4. Record the transaction using a journal entry.

EXHIBIT 9 JOURNAL Page 1

Journal Entries Post.

Date Description Ref. Debit Credit
for April,
2008
Kelly Consulting 1 April 1 Cash 11 13 1 0 0 00 1
2 Accounts Receivable 12 3 0 0 0 00 2
3 Supplies 14 1 4 0 0 00 3
4 Office Equipment 18 12 5 0 0 00 4
5 Kelly Pitney, Capital 31 3 0 0 0 0 00 5
6 6
7 1 Prepaid Rent 15 4 8 0 0 00 7
8 Cash 11 4 8 0 0 00 8
9 9
10 2 Prepaid Insurance 16 1 8 0 0 00 10
11 Cash 11 1 8 0 0 00 11
12 12
13 4 Cash 11 5 0 0 0 00 13
14 Unearned Fees 23 5 0 0 0 00 14
15 15
16 5 Office Equipment 18 2 0 0 0 00 16
17 Accounts Payable 21 2 0 0 0 00 17
18 18
19 6 Cash 11 1 8 0 0 00 19
20 Accounts Receivable 12 1 8 0 0 00 20
21 21
22 10 Miscellaneous Expense 59 1 2 0 00 22
23 Cash 11 1 2 0 00 23
24 24
25 12 Accounts Payable 21 1 2 0 0 00 25
26 Cash 11 1 2 0 0 00 26
27 27
28 12 Accounts Receivable 12 4 2 0 0 00 28
29 Fees Earned 41 4 2 0 0 00 29
30 30
31 14 Salary Expense 51 7 5 0 00 31
32 Cash 11 7 5 0 00 32
33 33

(continued)
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Chapter 4 Completing the Accounting Cycle 163

The company’s chart of accounts is useful in determining which accounts are af-
fected by the transaction. The chart of accounts for Kelly Consulting is as follows:
11 Cash 31 Kelly Pitney, Capital
12 Accounts Receivable 32 Kelly Pitney, Drawing
14 Supplies 33 Income Summary
15 Prepaid Rent 41 Fees Earned
16 Prepaid Insurance 51 Salary Expense
18 Office Equipment 52 Rent Expense
19 Accumulated Depreciation 53 Supplies Expense
21 Accounts Payable 54 Depreciation Expense
22 Salaries Payable 55 Insurance Expense
23 Unearned Fees 59 Miscellaneous Expense
After analyzing each of Kelly Consulting’s transactions for April, the journal en-
tries are recorded as shown in Exhibit 9.

EXHIBIT 9 JOURNAL Page 2

Continued Post.
3 Date Description Ref. Debit Credit 3
2008
1 April 17 Cash 11 6 2 5 0 00 1
2 Fees Earned 41 6 2 5 0 00 2
3 3
4 18 Supplies 14 8 0 0 00 4
5 Cash 11 8 0 0 00 5
6 6
7 20 Accounts Receivable 12 2 1 0 0 00 7
8 Fees Earned 41 2 1 0 0 00 8
9 9
10 24 Cash 11 3 8 5 0 00 10
11 Fees Earned 41 3 8 5 0 00 11
12 12
13 26 Cash 11 5 6 0 0 00 13
14 Accounts Receivable 12 5 6 0 0 00 14
15 15
16 27 Salary Expense 51 7 5 0 00 16
17 Cash 11 7 5 0 00 17
18 18
19 29 Miscellaneous Expense 59 1 3 0 00 19
20 Cash 11 1 3 0 00 20
21 21
22 30 Miscellaneous Expense 59 2 0 0 00 22
23 Cash 11 2 0 0 00 23
24 24
25 30 Cash 11 3 0 5 0 00 25
26 Fees Earned 41 3 0 5 0 00 26
27 27
28 30 Accounts Receivable 12 1 5 0 0 00 28
29 Fees Earned 41 1 5 0 0 00 29
30 30
31 30 Kelly Pitney, Drawing 32 6 0 0 0 00 31
32 Cash 11 6 0 0 0 00 32
33 33
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164 Chapter 4 Completing the Accounting Cycle

STEP 2. POSTING TRANSACTIONS TO THE LEDGER

Periodically, the transactions recorded in the journal are posted to the accounts in the
ledger. As we illustrated in Chapters 2 and 3, the posting process includes recording the
date of the transaction, the debit or credit amount, and the journal reference in the ac-
count. In addition, account numbers are recorded in the Post Reference column of the
journal to indicate that the entry has been posted to the accounts in the ledger. The jour-
nal entries for Kelly Consulting have been posted to the ledger shown in Exhibit 17.

STEP 3. PREPARING AN UNADJUSTED TRIAL BALANCE

In order to determine whether any errors have been made in posting the debits and
credits to the ledger, an unadjusted trial balance should be prepared. The unadjusted
trial balance does not provide complete proof of the accuracy of the ledger. It indicates
only that the debits and the credits are equal. This proof is of value, however, because
errors often affect the equality of debits and credits. If the two totals of a trial balance
are not equal, an error has occurred that must be discovered and corrected.
The unadjusted trial balance for Kelly Consulting is shown in Exhibit 10. The unad-
justed account balances shown in Exhibit 10 were taken from Kelly Consulting’s ledger
shown in Exhibit 17, on pages 170–174, before any adjusting entries were recorded.

EXHIBIT 10 Kelly Consulting

Unadjusted Trial Balance
Unadjusted April 30, 2008
Trial Balance, Debit Credit
Kelly Consulting Balances Balances
Cash 22 1 0 0 00
Accounts Receivable 3 4 0 0 00
Supplies 2 2 0 0 00
Prepaid Rent 4 8 0 0 00
Prepaid Insurance 1 8 0 0 00
Office Equipment 14 5 0 0 00
Accumulated Depreciation
Accounts Payable 8 0 0 00
Salaries Payable
Unearned Fees 5 0 0 0 00
Kelly Pitney, Capital 30 0 0 0 00
Kelly Pitney, Drawing 6 0 0 0 00
Fees Earned 20 9 5 0 00
Salary Expense 1 5 0 0 00
Rent Expense
Supplies Expense
Depreciation Expense
Insurance Expense
Miscellaneous Expense 4 5 0 00
56 7 5 0 00 56 7 5 0 00

STEP 4. ASSEMBLING AND ANALYZING ADJUSTMENT DATA

Before the financial statements can be prepared, the accounts must be updated. The
four types of accounts that normally require adjustment include prepaid expenses,
unearned revenue, accrued revenue, and accrued expenses. In addition, depreciation
expense must be recorded for fixed assets other than land. The following data have
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Chapter 4 Completing the Accounting Cycle 165

been assembled on April 30, 2008, for analysis of possible adjustments for Kelly
Consulting:
a. Insurance expired during April is $300.
b. Supplies on hand on April 30 are $1,350.
c. Depreciation of office equipment for April is $330.
d. Accrued receptionist salary on April 30 is $120.
e. Rent expired during April is $1,600.
f. Unearned fees on April 30 are $2,500.

STEP 5. PREPARING AN OPTIONAL END-OF-PERIOD

SPREADSHEET (WORK SHEET)
Although an end-of-period spreadsheet (work sheet) is not required, it is useful in
showing the flow of accounting information from the unadjusted trial balance to the
adjusted trial balance and financial statements. In addition, an end-of-period spread-
sheet (work sheet) is useful in analyzing the impact of proposed adjustments on the fi-
nancial statements. The end-of-period spreadsheet (work sheet) for Kelly Consulting
is shown in Exhibit 11.

EXHIBIT 11 End-of-Period Spreadsheet (Work Sheet)

A B C D E F G H I J K
Kelly Consulting
End-of-Period Spreadsheet (Work Sheet)
For the Month Ended April 30, 2008
Unadjusted Trial Adjusted Trial
Balance Adjustments Balance Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Cash 22,100 22,100 22,100 1

2 Accounts Receivable 3,400 3,400 3,400 2
3 Supplies 2,200 (b) 850 1,350 1,350 3
4 Prepaid Rent 4,800 (e) 1,600 3,200 3,200 4
5 Prepaid Insurance 1,800 (a) 300 1,500 1,500 5
6 Office Equipment 14,500 14,500 14,500 6
7 Accum. Depreciation (c) 330 330 330 7
8 Accounts Payable 800 800 800 8
9 Salaries Payable (d) 120 120 120 9
10 Unearned Fees 5,000 (f) 2,500 2,500 2,500 10
11 Kelly Pitney, Capital 30,000 30,000 30,000 11
12 Kelly Pitney, Drawing 6,000 6,000 6,000 12
13 Fees Earned 20,950 (f) 2,500 23,450 23,450 13
14 Salary Expense 1,500 (d) 120 1,620 1,620 14
15 Rent Expense (e) 1,600 1,600 1,600 15
16 Supplies Expense (b) 850 850 850 16
17 Depreciation Expense (c) 330 330 330 17
18 Insurance Expense (a) 300 300 300 18
19 Miscellaneous Expense 450 450 450 19
20 56,750 56,750 5,700 5,700 57,200 57,200 5,150 23,450 52,050 33,750 20
21 Net income 18,300 18,300 21
22 23,450 23,450 52,050 52,050 22

STEP 6. JOURNALIZNG AND POSTING ADJUSTING ENTRIES

Based upon the adjustment data shown in step 4, adjusting entries for Kelly Consulting
are prepared. Each adjusting entry affects at least one income statement account and
one balance sheet account. Explanations for each adjustment including any computations
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166 Chapter 4 Completing the Accounting Cycle

are normally included with each adjusting entry. The adjusting entries for Kelly
Consulting are shown in Exhibit 12.
Each of the adjusting entries shown in Exhibit 12 is posted to Kelly Consulting’s
ledger shown in Exhibit 17. The adjusting entries are identified in the ledger as
“Adjusting Entry.”

EXHIBIT 12 JOURNAL Page 3

Adjusting Entries, Post.
Kelly Consulting Date Ref. Debit Credit
Adjusting Entries
2008
1 Apr. 30 Insurance Expense 55 3 0 0 00 1
2 Prepaid Insurance 16 3 0 0 00 2
3 Expired Insurance. 3
4 4
5 30 Supplies Expense 53 8 5 0 00 5
6 Supplies 14 8 5 0 00 6
7 Supplies used ($2,200 – $1,350). 7
8 8
9 30 Depreciation Expense 54 3 3 0 00 9
10 Accumulated Depreciation 19 3 3 0 00 10
11 Depreciation of office equipment. 11
12 12
13 30 Salary Expense 51 1 2 0 00 13
14 Salaries Payable 22 1 2 0 00 14
15 Accrued salary. 15
16 16
17 30 Rent Expense 52 1 6 0 0 00 17
18 Prepaid Rent 15 1 6 0 0 00 18
19 Rent expired during April. 19
20 20
21 30 Unearned Fees 23 2 5 0 0 00 21
22 Fees Earned 41 2 5 0 0 00 22
23 Fees earned ($5,000 – $2,500). 23

STEP 7. PREPARING AN ADJUSTED TRIAL BALANCE

After the adjustments have been journalized and posted, an adjusted trial balance is
prepared to verify the equality of the total of the debit and credit balances. This is the
last step before preparing the financial statements, and any errors arising from post-
ing the adjusting entries must be found and corrected. The adjusted trial balance for
Kelly Consulting as of April 30, 2008, is shown in Exhibit 13.

STEP 8. PREPARING THE FINANCIAL STATEMENTS

The most important outcome of the accounting cycle is the financial statements. The
income statement is prepared first, followed by the statement of owner’s equity and
then the balance sheet. The statements can be prepared directly from the adjusted trial
balance, the end-of-period spreadsheet, or the ledger. The net income or net loss shown
on the income statement is reported on the statement of owner’s equity along with any
additional investments by the owner and any withdrawals. The ending owner’s capi-
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Chapter 4 Completing the Accounting Cycle 167

EXHIBIT 13 Kelly Consulting

Adjusted Trial Balance
Adjusted Trial Balance, April 30, 2008
Kelly Consulting Debit Credit
Balances Balances
Cash 22 1 0 0 00
Accounts Receivable 3 4 0 0 00
Supplies 1 3 5 0 00
Prepaid Rent 3 2 0 0 00
Prepaid Insurance 1 5 0 0 00
Office Equipment 14 5 0 0 00
Accumulated Depreciation 3 3 0 00
Accounts Payable 8 0 0 00
Salaries Payable 1 2 0 00
Unearned Fees 2 5 0 0 00
Kelly Pitney, Capital 30 0 0 0 00
Kelly Pitney, Drawing 6 0 0 0 00
Fees Earned 23 4 5 0 00
Salary Expense 1 6 2 0 00
Rent Expense 1 6 0 0 00
Supplies Expense 8 5 0 00
Depreciation Expense 3 3 0 00
Insurance Expense 3 0 0 00
Miscellaneous Expense 4 5 0 00
57 2 0 0 00 57 2 0 0 00

tal is reported on the balance sheet and is added with total liabilities to equal total
assets.
The financial statements for Kelly Consulting are shown in Exhibit 14. Kelly
Consulting earned net income of $18,300 for April. As of April 30, 2008, Kelly
Consulting has total assets of $45,720, total liabilities of $3,420, and total owner’s eq-
uity of $42,300.

EXHIBIT 14 Kelly Consulting

Income Statement
Financial Statements, For the Month Ended April 30, 2008
Kelly Consulting
Fees earned $23 4 5 0 00
Expenses:
Salary expense $1 6 2 0 00
Rent expense 1 6 0 0 00
Supplies expense 8 5 0 00
Depreciation expense 3 3 0 00
Insurance expense 3 0 0 00
Miscellaneous expense 4 5 0 00
Total expenses 5 1 5 0 00
Net income $18 3 0 0 00

(continued)
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168 Chapter 4 Completing the Accounting Cycle

EXHIBIT 14 Kelly Consulting

Statement of Owner’s Equity
For the Month Ended April 30, 2008
Kelly Pitney, capital, April 1, 2008 $ 0
Investment during the month $30 0 0 0 00
Net income for the month 18 3 0 0 00
$48 3 0 0 00
Less withdrawals 6 0 0 0 00
Increase in owner’s equity 42 3 0 0 00
Kelly Pitney, capital, April 30, 2008 $42 3 0 0 00

Kelly Consulting
Balance Sheet
April 30, 2008
Assets Liabilities
Current assets: Current liabilities:
Cash $22 1 0 0 00 Accounts payable $ 8 0 0 00
Accounts receivable 3 4 0 0 00 Salaries payable 1 2 0 00
Supplies 1 3 5 0 00 Unearned fees 2 5 0 0 00
Prepaid rent 3 2 0 0 00 Total liabilities $ 3 4 2 0 00
Prepaid insurance 1 5 0 0 00
Total current assets $31 5 5 0 00
Property, plant, and equipment:
Office equipment $14 5 0 0 00
Less accumulated depr. 3 3 0 00 Owner’s Equity
Total property, plant, Kelly Pitney, capital 42 3 0 0 00
and equipment 14 1 7 0 00 Total liabilities and
Total assets $45 7 2 0 00 owner’s equity $45 7 2 0 00

STEP 9. JOURNALIZING AND POSTING CLOSING ENTRIES

As described earlier in this chapter, four closing entries are required at the end of an
accounting period to ready the accounts for the next period. The first closing entry
transfers the revenue account balances to Income Summary. The second closing entry
transfers the expense account balances to Income Summary. The third entry transfers
the balance of Income Summary to the owner’s capital account. Finally, the fourth en-
try transfers any balance in the owner’s drawing account to the owner’s capital ac-
count. The four closing entries for Kelly Consulting are shown in Exhibit 15.
After the closing entries have been posted to the ledger, the balance in owner’s
capital account will agree with the amount reported on the statement of owner’s
equity and the balance sheet. For Kelly Consulting, the ending balance of the Kelly
Pitney, Capital is $42,300, as shown in Exhibit 17. In addition, as shown in Exhibit 17,
after the closing entries are posted, all the revenue, expense, and drawing accounts
have zero balances. The closing entries are identified in the ledger as “Closing.”

STEP 10. PREPARING A POST-CLOSING TRIAL BALANCE

The last step in the accounting cycle is to prepare a post-closing trial balance. The pur-
pose of the post-closing trial balance is to make sure that the ledger is in balance at the
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Chapter 4 Completing the Accounting Cycle 169

EXHIBIT 15 JOURNAL Page 4

Closing Entries, Post.

Date Description Ref. Debit Credit
Kelly Consulting
Closing Entries
2008
1 Apr. 30 Fees Earned 41 23 4 5 0 00 1
2 Income Summary 33 23 4 5 0 00 2
3 3
4 30 Income Summary 33 5 1 5 0 00 4
5 Salary Expense 51 1 6 2 0 00 5
6 Rent Expense 52 1 6 0 0 00 6
7 Supplies Expense 53 8 5 0 00 7
8 Depreciation Expense 54 3 3 0 00 8
9 Insurance Expense 55 3 0 0 00 9
10 Miscellaneous Expense 59 4 5 0 00 10
11 11
12 30 Income Summary 33 18 3 0 0 00 12
13 Kelly Pitney, Capital 31 18 3 0 0 00 13
14 14
15 30 Kelly Pitney, Capital 31 6 0 0 0 00 15
16 Kelly Pitney, Drawing 32 6 0 0 0 00 16

beginning of the next period. The accounts and amounts in the post-closing trial bal-
ance should agree exactly with the accounts and amounts listed on the balance sheet
at the end of the period.
The post-closing trial balance for Kelly Consulting is shown in Exhibit 16. The bal-
ances shown in the post-closing trial balance are taken from the ending balances in the
ledger shown in Exhibit 17. These balances agree with the amounts shown on Kelly
Consulting’s balance sheet in Exhibit 14.

EXHIBIT 16 Kelly Consulting

Post-Closing Trial Balance
Post-Closing April 30, 2008
Trial Balance, Debit Credit
Kelly Consulting Balances Balances
Cash 22 1 0 0 00
Accounts Receivable 3 4 0 0 00
Supplies 1 3 5 0 00
Prepaid Rent 3 2 0 0 00
Prepaid Insurance 1 5 0 0 00
Office Equipment 14 5 0 0 00
Accumulated Depreciation 3 3 0 00
Accounts Payable 8 0 0 00
Salaries Payable 1 2 0 00
Unearned Fees 2 5 0 0 00
Kelly Pitney, Capital 42 3 0 0 00
46 0 5 0 00 46 0 5 0 00
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170 Chapter 4 Completing the Accounting Cycle

EXHIBIT 17 LEDGER
ACCOUNT Cash ACCOUNT NO. 11
Ledger,
Kelly Consulting Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 1 1 13 1 0 0 00 13 1 0 0 00
1 1 4 8 0 0 00 8 3 0 0 00
2 1 1 8 0 0 00 6 5 0 0 00
4 1 5 0 0 0 00 11 5 0 0 00
6 1 1 8 0 0 00 13 3 0 0 00
10 1 1 2 0 00 13 1 8 0 00
12 1 1 2 0 0 00 11 9 8 0 00
14 1 7 5 0 00 11 2 3 0 00
17 2 6 2 5 0 00 17 4 8 0 00
18 2 8 0 0 00 16 6 8 0 00
24 2 3 8 5 0 00 20 5 3 0 00
26 2 5 6 0 0 00 26 1 3 0 00
27 2 7 5 0 00 25 3 8 0 00
29 2 1 3 0 00 25 2 5 0 00
30 2 2 0 0 00 25 0 5 0 00
30 2 3 0 5 0 00 28 1 0 0 00
30 2 6 0 0 0 00 22 1 0 0 00

ACCOUNT Accounts Receivable ACCOUNT NO. 12

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 1 1 3 0 0 0 00 3 0 0 0 00
6 1 1 8 0 0 00 1 2 0 0 00
12 1 4 2 0 0 00 5 4 0 0 00
20 2 2 1 0 0 00 7 5 0 0 00
26 2 5 6 0 0 00 1 9 0 0 00
30 2 1 5 0 0 00 3 4 0 0 00

ACCOUNT Supplies ACCOUNT NO. 14

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 1 1 1 4 0 0 00 1 4 0 0 00
18 2 8 0 0 00 2 2 0 0 00
30 Adjusting 3 8 5 0 00 1 3 5 0 00

(continued)
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Chapter 4 Completing the Accounting Cycle 171

EXHIBIT 17 ACCOUNT Prepaid Rent ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 1 1 4 8 0 0 00 4 8 0 0 00
30 Adjusting 3 1 6 0 0 00 3 2 0 0 00

ACCOUNT Prepaid Insurance ACCOUNT NO. 16

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 2 1 1 8 0 0 00 1 8 0 0 00
30 Adjusting 3 3 0 0 00 1 5 0 0 00

ACCOUNT Office Equipment ACCOUNT NO. 18

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 1 1 12 5 0 0 00 12 5 0 0 00
5 1 2 0 0 0 00 14 5 0 0 00

ACCOUNT Accumulated Depreciation ACCOUNT NO. 19

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 Adjusting 3 3 3 0 00 3 3 0 00

ACCOUNT Accounts Payable ACCOUNT NO. 21

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 5 1 2 0 0 0 00 2 0 0 0 00
12 1 1 2 0 0 00 8 0 0 00

(continued)
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172 Chapter 4 Completing the Accounting Cycle

EXHIBIT 17 ACCOUNT Salaries Payable ACCOUNT NO. 22

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 Adjusting 3 1 2 0 00 1 2 0 00

ACCOUNT Unearned Fees ACCOUNT NO. 23

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 4 1 5 0 0 0 00 5 0 0 0 00
30 Adjusting 3 2 5 0 0 00 2 5 0 0 00

ACCOUNT Kelly Pitney, Capital ACCOUNT NO. 31

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 1 1 30 0 0 0 00 30 0 0 0 00
30 Closing 4 18 3 0 0 00 48 3 0 0 00
30 Closing 4 6 0 0 0 00 42 3 0 0 00

ACCOUNT Kelly Pitney, Drawing ACCOUNT NO. 32

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 2 6 0 0 0 00 6 0 0 0 00
30 Closing 4 6 0 0 0 00 — —

ACCOUNT Income Summary ACCOUNT NO. 33

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 Closing 4 23 4 5 0 00 23 4 5 0 00
30 Closing 4 5 1 5 0 00 18 3 0 0 00
30 Closing 4 18 3 0 0 00 — —

(continued)
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Chapter 4 Completing the Accounting Cycle 173

EXHIBIT 17 ACCOUNT Fees Earned ACCOUNT NO. 41

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 12 1 4 2 0 0 00 4 2 0 0 00
17 2 6 2 5 0 00 10 4 5 0 00
20 2 2 1 0 0 00 12 5 5 0 00
24 2 3 8 5 0 00 16 4 0 0 00
30 2 3 0 5 0 00 19 4 5 0 00
30 2 1 5 0 0 00 20 9 5 0 00
30 Adjusting 3 2 5 0 0 00 23 4 5 0 00
30 Closing 4 23 4 5 0 00 — —

ACCOUNT Salary Expense ACCOUNT NO. 51

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 14 1 7 5 0 00 7 5 0 00
27 2 7 5 0 00 1 5 0 0 00
30 Adjusting 3 1 2 0 00 1 6 2 0 00
30 Closing 4 1 6 2 0 00 — —

ACCOUNT Rent Expense ACCOUNT NO. 52

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 Adjusting 3 1 6 0 0 00 1 6 0 0 00
30 Closing 4 1 6 0 0 00 — —

ACCOUNT Supplies Expense ACCOUNT NO. 53

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 Adjusting 3 8 5 0 00 8 5 0 00
30 Closing 4 8 5 0 00 — —

ACCOUNT Depreciation Expense ACCOUNT NO. 54

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 Adjusting 3 3 3 0 00 3 3 0 00
30 Closing 4 3 3 0 00 — —

(continued)
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174 Chapter 4 Completing the Accounting Cycle

EXHIBIT 17 ACCOUNT Insurance Expense ACCOUNT NO. 55

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 30 Adjusting 3 3 0 0 00 3 0 0 00
30 Closing 4 3 0 0 00 — —

ACCOUNT Miscellaneous Expense ACCOUNT NO. 59

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2008
Apr. 10 1 1 2 0 00 1 2 0 00
29 2 1 3 0 00 2 5 0 00
30 2 2 0 0 00 4 5 0 00
30 Closing 4 4 5 0 00 — —

(concluded)

Fiscal Year
6 The annual accounting period adopted by a business is known as its fiscal year. Fiscal
objective years begin with the first day of the month selected and end on the last day of the
Explain what is following twelfth month. The period most commonly used is the calendar year. Other
meant by the fiscal
periods are not unusual, especially for businesses organized as corporations. For ex-
year and the
natural business ample, a corporation may adopt a fiscal year that ends when business activities have
year. reached the lowest point in its annual operating cycle. Such a fiscal year is called the
natural business year. At the low point in its operating cycle, a business has more time
to analyze the results of operations and to prepare financial statements.
Because companies with fiscal years often have highly
Percentage of Companies
seasonal operations, investors and others should be careful in
with Fiscal Years Ending in:
interpreting partial-year reports for such companies. That is,
January 5% July 2% you should expect the results of operations for these compa-
February 1 August 2 nies to vary significantly throughout the fiscal year.
March 3 September 7 The financial history of a business may be shown by a se-
April 2 October 3
ries of balance sheets and income statements for several fiscal
May 3 November 2
years. If the life of a business is expressed by a line moving
June 7 December 63
from left to right, the series of balance sheets and income
Source: Accounting Trends & Techniques, 59th edition, 2005 (New statements may be graphed as follows:
York: American Institute of Certified Public Accountants).

Financial History of a Business

Income Income Income

Statement Statement Statement
.31 .31 .31
Dec Dec Dec
for the
6
for the
7 for the
8
year ended
Dec. 31, 2006
200 year ended
Dec. 31, 2007
200 year ended
Dec. 31, 2008
200

Balance Sheet Balance Sheet Balance Sheet

Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2008
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Chapter 4 Completing the Accounting Cycle 175

You may think of the income statements, balance sheets, and financial history of a
business as similar to the record of a college football team. The final score of each foot-
ball game is similar to the net income reported on the income statement of a business.
The team’s season record after each game is similar to the balance sheet. At the end of
the season, the final record of the team measures its success or failure. Likewise, at the
end of a life of a business, its final balance sheet is a measure of its financial success or
failure.

Appendix

End-of-Period Spreadsheet (Work Sheet)

Accountants often use working papers for collecting and summarizing data they need
for preparing various analyses and reports. Such working papers are useful tools, but
they are not considered a part of the formal accounting records. This is in contrast to
the chart of accounts, the journal, and the ledger, which are essential parts of the ac-
counting system. Working papers are usually prepared by using a spreadsheet pro-
gram on a computer.
The end-of-period spreadsheet (work sheet) shown in Exhibit 1 is a working pa-
per that accountants can use to summarize adjusting entries and the account balances
for the financial statements. In small companies with few accounts and adjustments,
an end-of-period spreadsheet (work sheet) may not be necessary. For example, the
financial statements for NetSolutions can be prepared directly from the adjusted trial
balance in Exhibit 1. However, many accountants prefer to use an end-of-period
spreadsheet (work sheet) as an aid to analyzing adjustment data and preparing the
financial statements. We use Exhibits 18 through 21 on page 176B to describe and il-
lustrate how to prepare this type of end-of-period spreadsheet (work sheet).

UNADJUSTED TRIAL BALANCE COLUMNS

To begin the spreadsheet (work sheet), enter at the top the name of the business, the
type of working paper, and the period of time, as shown in Exhibit 18. Next, enter the
unadjusted trial balance directly on the spreadsheet. The spreadsheet in Exhibit 18
shows the unadjusted trial balance for NetSolutions at December 31, 2007.

ADJUSTMENTS COLUMNS
The adjustments that we explained and illustrated for NetSolutions in Chapter 3 are
entered in the Adjustments columns, as shown in Exhibit 19. Cross-referencing (by
letters) the debit and credit of each adjustment is useful in reviewing the spreadsheet
(work sheet). It is also helpful for identifying the adjusting entries that need to be
recorded in the journal.
The order in which the adjustments are entered on the spreadsheet (work sheet) is
not important. Most accountants enter the adjustments in the order in which the data
are assembled. If the titles of some of the accounts to be adjusted do not appear in the
trial balance, they should be entered in the Account Title column, below the trial bal-
ance totals, as needed.
To review, the entries in the Adjustments columns of the work sheet are:
(a) Supplies. The supplies account has a debit balance of $2,000. The cost of the supplies
on hand at the end of the period is $760. Therefore, the supplies expense for Decem-
ber is the difference between the two amounts, or $1,240. The adjustment is entered
as (1) $1,240 in the Adjustments Debit column on the same line as Supplies Expense
and (2) $1,240 in the Adjustments Credit column on the same line as Supplies.
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176 Chapter 4 Completing the Accounting Cycle

(b) Prepaid Insurance. The prepaid insurance account has a debit balance of $2,400,
which represents the prepayment of insurance for 12 months beginning December
1. Thus, the insurance expense for December is $200 ($2,400/12). The adjustment
is entered as (1) $200 in the Adjustments Debit column on the same line as Insur-
ance Expense and (2) $200 in the Adjustments Credit column on the same line as
Prepaid Insurance.
(c) Unearned Rent. The unearned rent account has a credit balance of $360, which
represents the receipt of three months’ rent, beginning with December. Thus, the
rent revenue for December is $120. The adjustment is entered as (1) $120 in the Ad-
justments Debit column on the same line as Unearned Rent and (2) $120 in the
Adjustments Credit column on the same line as Rent Revenue.
(d) Accrued Fees. Fees accrued at the end of December but not recorded total $500.
This amount is an increase in an asset and an increase in revenue. The adjustment
is entered as (1) $500 in the Adjustments Debit column on the same line as Ac-
counts Receivable and (2) $500 in the Adjustments Credit column on the same line
as Fees Earned.
(e) Wages. Wages accrued but not paid at the end of December total $250. This amount
is an increase in expenses and an increase in liabilities. The adjustment is entered
as (1) $250 in the Adjustments Debit column on the same line as Wages Expense
and (2) $250 in the Adjustments Credit column on the same line as Wages Payable.
(f) Depreciation. Depreciation of the office equipment is $50 for December. The ad-
justment is entered as (1) $50 in the Adjustments Debit column on the same line
as Depreciation Expense and (2) $50 in the Adjustments Credit column on the same
line as Accumulated Depreciation.
Total the Adjustments columns to verify the mathematical accuracy of the adjust-
ment data. The total of the Debit column must equal the total of the Credit column.

ADJUSTED TRIAL BALANCE COLUMNS

The adjustment data are added to or subtracted from the amounts in the Unadjusted
Trial Balance columns. The adjusted amounts are then extended to (placed in) the
Adjusted Trial Balance columns, as shown in Exhibit 19. For example, the cash amount
of $2,065 is extended to the Adjusted Trial Balance Debit column, since no adjustments
affected Cash. Accounts Receivable has an initial balance of $2,220 and a debit adjust-
ment (increase) of $500. The amount entered in the Adjusted Trial Balance Debit col-
umn is the debit balance of $2,720. The same procedure continues until all account
balances are extended to the Adjusted Trial Balance columns. Total the columns of the
Adjusted Trial Balance to verify the equality of debits and credits.

INCOME STATEMENT AND BALANCE SHEET COLUMNS

The spreadsheet (work sheet) is completed by extending the adjusted trial balance
amounts to the Income Statement and Balance Sheet columns. The amounts for rev-
enues and expenses are extended to the Income Statement columns. The amounts for
assets, liabilities, owner’s capital, and drawing are extended to the Balance Sheet
columns.3
In the NetSolutions spreadsheet (work sheet), the first account listed is Cash, and
the balance appearing in the Adjusted Trial Balance Debit column is $2,065. Cash is
an asset, is listed on the balance sheet, and has a debit balance. Therefore, $2,065 is
extended to the Balance Sheet Debit column. The Fees Earned balance of $16,840 is
extended to the Income Statement Credit column. The same procedure continues
until all account balances have been extended to the proper columns, as shown in
Exhibit 20.

3 The balances of the capital and drawing accounts are also extended to the Balance Sheet columns be-
cause this spreadsheet (work sheet) does not provide for separate Statement of Owner’s Equity columns.
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Chapter 4 Completing the Accounting Cycle 177

A B C D E F G H I J K
Harbor Realty
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended July 31, 2008

Unadjusted Trial Adjusted Trial

Balance Adjustments Balance Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
1 Cash 3,425 3,425 3,425 1
2 Accounts Receivable 7,000 (e) 1,000 8,000 8,000 2
3 Supplies 1,270 (a) 890 380 380 3
4 Prepaid Insurance 620 (b) 315 305 305 4
5 Office Equipment 51,650 51,650 51,650 5
6 Accum. Depreciation 9,700 (c) 4,950 14,650 14,650 6
7 Accounts Payable 925 925 925 7
8 Unearned Fees 1,250 (f) 500 750 750 8
9 T. Roderick, Capital 29,000 29,000 29,000 9
10 T. Roderick, Drawing 5,200 5,200 5,200 10
11 Fees Earned 59,125 (e) 1,000 60,625 60,625 11
12 (f) 500 12
13 Wages Expense 22,415 (d) 440 22,855 22,855 13
14 Rent Expense 4,200 4,200 4,200 14
15 Utilities Expense 2,715 2,715 2,715 15
16 Miscellaneous Expense 1,505 1,505 1,505 16
17 100,000 100,000 17
18 Supplies Expense (a) 890 890 890 18
19 Insurance Expense (b) 315 315 315 19
20 Depreciation Expense (c) 4,950 4,950 4,950 20
21 Wages Payable (d) 440 440 440 21
22 8,095 8,095 106,390 106,390 37,430 60,625 68,960 45,765 22
23 Net income 23,195 23,195 23
24 60,625 60,625 68,960 68,960 24

Instructions
1. Prepare an income statement, a statement of owner’s equity (no additional invest-
ments were made during the year), and a balance sheet.
2. On the basis of the data in the end-of-period spreadsheet (work sheet), journalize
the closing entries.

Solution
1.
Harbor Realty
Income Statement
For the Year Ended July 31, 2008

Fees earned $60 6 2 5 00

Expenses:
Wages expense $22 8 5 5 00
Depreciation expense 4 9 5 0 00
Rent expense 4 2 0 0 00
Utilities expense 2 7 1 5 00
Supplies expense 8 9 0 00
Insurance expense 3 1 5 00
Miscellaneous expense 1 5 0 5 00
Total expenses 37 4 3 0 00
Net income $23 1 9 5 00

(continued)
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178 Chapter 4 Completing the Accounting Cycle

Harbor Realty
Statement of Owner’s Equity
For the Year Ended July 31, 2008

T. Roderick, capital, August 1, 2007 $29 0 0 0 00

Net income for the year $23 1 9 5 00
Less withdrawals 5 2 0 0 00
Increase in owner’s equity 17 9 9 5 00
T. Roderick, capital, July 31, 2008 $46 9 9 5 00

Harbor Realty
Balance Sheet
July 31, 2008
Assets Liabilities
Current assets: Current liabilities:
Cash $ 3 4 2 5 00 Accounts payable $ 9 2 5 00
Accounts receivable 8 0 0 0 00 Unearned fees 7 5 0 00
Supplies 3 8 0 00 Wages payable 4 4 0 00
Prepaid insurance 3 0 5 00 Total liabilities $ 2 1 1 5 00
Total current assets $12 1 1 0 00
Property, plant, and equipment:
Office equipment $51 6 5 0 00
Less accumulated depr. 14 6 5 0 00 Owner’s Equity
Total property, plant, T. Roderick, capital 46 9 9 5 00
and equipment 37 0 0 0 00 Total liabilities and
Total assets $49 1 1 0 00 owner’s equity $49 1 1 0 00

2.
JOURNAL Page
Post.
Date Description Ref. Debit Credit
1 Closing Entries 1
2008
2 July 31 Fees Earned 60 6 2 5 00 2
3 Income Summary 60 6 2 5 00 3
4 4
5 31 Income Summary 37 4 3 0 00 5
6 Wages Expense 22 8 5 5 00 6
7 Rent Expense 4 2 0 0 00 7
8 Utilities Expense 2 7 1 5 00 8
9 Miscellaneous Expense 1 5 0 5 00 9
10 Supplies Expense 8 9 0 00 10
11 Insurance Expense 3 1 5 00 11
12 Depreciation Expense 4 9 5 0 00 12
13 13
14 31 Income Summary 23 1 9 5 00 14
15 T. Roderick, Capital 23 1 9 5 00 15
16 16
17 31 T. Roderick, Capital 5 2 0 0 00 17
18 T. Roderick, Drawing 5 2 0 0 00 18
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Chapter 4 Completing the Accounting Cycle 179

Self-Examination Questions (Answers at End of Chapter)

1. Which of the following accounts in the Adjusted Trial C. Debit the income summary account, credit the
Balance columns of the end-of-period spreadsheet drawing account.
(work sheet) would be extended to the Balance Sheet D. Debit the drawing account, credit the owner’s cap-
columns? ital account.
A. Utilities Expense C. M. E. Jones, Drawing
4. Which of the following accounts would not be closed
B. Rent Revenue D. Miscellaneous Expense
to the income summary account at the end of a period?
2. Which of the following accounts would be classified A. Fees Earned
as a current asset on the balance sheet? B. Wages Expense
A. Office Equipment C. Rent Expense
B. Land D. Accumulated Depreciation
C. Accumulated Depreciation
5. Which of the following accounts would not be included
D. Accounts Receivable
in a post-closing trial balance?
3. Which of the following entries closes the owner’s A. Cash
drawing account at the end of the period? B. Fees Earned
A. Debit the drawing account, credit the income sum- C. Accumulated Depreciation
mary account. D. J. C. Smith, Capital
B. Debit the owner’s capital account, credit the draw-
ing account.

Eye Openers
1. Why do some accountants prepare an end-of-period spreadsheet (work sheet)?
2. Is the end-of-period spreadsheet (work sheet) a substitute for the financial statements?
Discuss.
3. In the Income Statement columns of the end-of-period spreadsheet (work sheet) for
Allen Consulting Co. for the current year, the Debit column total is $262,250 and the
Credit column total is $323,500 before the amount for net income or net loss has been
included. In preparing the income statement from the end-of-period spreadsheet (work
sheet), what is the amount of net income or net loss?
4. Describe the nature of the assets that compose the following sections of a balance sheet:
(a) current assets, (b) property, plant, and equipment.
5. What is the difference between a current liability and a long-term liability?
6. What types of accounts are referred to as temporary accounts?
7. Why are closing entries required at the end of an accounting period?
8. What is the difference between adjusting entries and closing entries?
9. Describe the four entries that close the temporary accounts.
10. What is the purpose of the post-closing trial balance?
11. (a) What is the most important output of the accounting cycle? (b) Do all companies
have an accounting cycle? Explain.
12. What is the natural business year?
13. Why might a department store select a fiscal year ending January 31, rather than a fis-
cal year ending December 31?
14. The fiscal years for several well-known companies are as follows:

Company Fiscal Year Ending Company Fiscal Year Ending

Kmart January 30 Toys “R” Us, Inc. February 3

JCPenney January 26 Federated Department February 3
Stores, Inc.
Target Corp. January 28 The Limited, Inc. February 2

What general characteristic shared by these companies explains why they do not have
fiscal years ending December 31?
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180 Chapter 4 Completing the Accounting Cycle

Practice Exercises
PE 4-1A The balances for the accounts listed below appear in the Adjusted Trial Balance columns of
Flow of accounts into the end-of-period spreadsheet (work sheet). Indicate whether each balance should be ex-
financial statements tended to (a) an Income Statement column or (b) a Balance Sheet column.
obj. 1
1. Supplies Expense 5. Wages Payable
2. Unearned Service Revenue 6. Office Equipment
3. Accounts Payable 7. Depreciation Expense—Equipment
4. Rent Revenue 8. Brandi Gowdy, Capital

PE 4-1B The balances for the accounts listed below appear in the Adjusted Trial Balance columns of
Flow of accounts into the end-of-period spreadsheet (work sheet). Indicate whether each balance should be ex-
financial statements tended to (a) an Income Statement column or (b) a Balance Sheet column.
obj. 1
1. Cash 5. Commissions Earned
2. Insurance Expense 6. Accumulated Depreciation—Equipment
3. Prepaid Rent 7. Christina Egan, Drawing
4. Supplies 8. Wages Expense

PE 4-2A In the Balance Sheet columns of the end-of-period spreadsheet (work sheet) for FreeLance
Determining net income Consulting Co. for the current year, the Debit column total is $247,690 and the Credit column
from the end-of- total is $278,100 before the amount for net income or net loss has been included. In preparing
period spreadsheet the income statement from the end-of-period spreadsheet (work sheet), what is the amount
(work sheet)
of net income or net loss?
obj. 2

PE 4-2B In the Income Statement columns of the end-of-period spreadsheet (work sheet) for Irwin
Determining net income Consulting Co. for the current year, the Debit column total is $436,700 and the Credit column
from the end-of- total is $523,550 before the amount for net income or net loss has been included. In preparing
period spreadsheet the income statement from the end-of-period spreadsheet (work sheet), what is the amount
(work sheet)
of net income or net loss?
obj. 2

PE 4-3A Jody Padget owns and operates Padget Advertising Services. On January 1, 2007, Jody Pad-
Statement of owner’s get, Capital had a balance of $550,600. During the year, Jody invested an additional $50,000
equity and withdrew $40,000. For the year ended December 31, 2007, Padget Advertising Services
obj. 2 reported a net income of $68,150. Prepare a statement of owner’s equity for the year ended
December 31, 2007.

PE 4-3B Ali Khalid owns and operates AAA Delivery Services. On January 1, 2007, Ali Khalid, Cap-
Statement of owner’s ital had a balance of $854,450. During the year, Ali made no additional investments and
equity withdrew $38,400. For the year ended December 31, 2007, AAA Delivery Services reported
obj. 2 a net loss of $11,875. Prepare a statement of owner’s equity for the year ended December
31, 2007.

PE 4-4A The following accounts appear in an adjusted trial balance of Ramrod Consulting. Indicate
Reporting accounts on whether each account would be reported in the (a) current asset; (b) property, plant, and
classified balance sheet equipment; (c) current liability; (d) long-term liability; or (e) owner’s equity section of the
obj. 2 December 31, 2007, balance sheet of Ramrod Consulting.
1. Taxes Payable 5. Prepaid Rent
2. Building 6. Salaries Payable
3. Supplies 7. Unearned Service Fees
4. Mortgage Payable (due in 2011) 8. Cecily Renick, Capital
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Chapter 4 Completing the Accounting Cycle 181

PE 4-4B The following accounts appear in an adjusted trial balance of Fastback Consulting. Indicate
Reporting accounts on whether each account would be reported in the (a) current asset; (b) property, plant, and
classified balance sheet equipment; (c) current liability; (d) long-term liability; or (e) owner’s equity section of the
obj. 2 December 31, 2007, balance sheet of Fastback Consulting.

1. Accounts Payable 5. Note Payable (due in 2014)

2. Accounts Receivable 6. Cash
3. Glen Moore, Capital 7. Supplies
4. Wages Payable 8. Accumulated Depreciation—Building

PE 4-5A After the accounts have been adjusted at October 31, the end of the fiscal year, the follow-
Closing entries with net ing balances were taken from the ledger of Velocity Delivery Services Co.:
loss
obj. 3 Lisa Jordon, Capital $318,500
Lisa Jordon, Drawing 36,000
Fees Earned 475,150
Wages Expense 390,000
Rent Expense 85,000
Supplies Expense 38,350
Miscellaneous Expense 12,675

Journalize the four entries required to close the accounts.

PE 4-5B After the accounts have been adjusted at April 30, the end of the fiscal year, the following
Closing entries with net balances were taken from the ledger of Magnolia Landscaping Co.:
income
obj. 3 Jayme Carmichael, Capital $528,900
Jayme Carmichael, Drawing 60,000
Fees Earned 690,500
Wages Expense 410,000
Rent Expense 75,000
Supplies Expense 48,650
Miscellaneous Expense 19,700

Journalize the four entries required to close the accounts.

PE 4-6A From the following list of steps in the accounting cycle, identify what two steps are missing.
Missing steps in the
accounting cycle a. Transactions are analyzed and recorded in the journal.
obj. 4 b. An unadjusted trial balance is prepared.
c. Adjustment data are assembled and analyzed.
d. An optional end-of-period spreadsheet (work sheet) is prepared.
e. Adjusting entries are journalized and posted to the ledger.
f. An adjusted trial balance is prepared.
g. Closing entries are journalized and posted to the ledger.
h. A post-closing trial balance is prepared.

PE 4-6B From the following list of steps in the accounting cycle, identify what two steps are missing.
Missing steps in the
accounting cycle a. Transactions are analyzed and recorded in the journal.
obj. 4 b. Transactions are posted to the ledger.
c. An unadjusted trial balance is prepared.
d. An optional end-of-period spreadsheet (work sheet) is prepared.
e. Adjusting entries are journalized and posted to the ledger.
f. An adjusted trial balance is prepared.
g. Financial statements are prepared.
h. A post-closing trial balance is prepared.
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182 Chapter 4 Completing the Accounting Cycle

Exercises
EX 4-1 The balances for the accounts listed below appear in the Adjusted Trial Balance columns of
Extending account the end-of-period spreadsheet (work sheet). Indicate whether each balance should be ex-
balances in an end-of- tended to (a) an Income Statement column or (b) a Balance Sheet column.
period spreadsheet
(work sheet) 1. Accounts Payable 6. Supplies
objs. 1, 2 2. Accounts Receivable 7. Unearned Fees
3. Beth Posey, Capital 8. Utilities Expense
4. Beth Posey, Drawing 9. Wages Expense
5. Fees Earned 10. Wages Payable

EX 4-2 Balances for each of the following accounts appear in an adjusted trial balance. Identify each
Classifying accounts as (a) asset, (b) liability, (c) revenue, or (d) expense.
objs. 1, 2 1. Accounts Receivable 7. Rent Revenue
2. Fees Earned 8. Salary Expense
3. Insurance Expense 9. Salary Payable
4. Land 10. Supplies
5. Prepaid Advertising 11. Supplies Expense
6. Prepaid Insurance 12. Unearned Rent

EX 4-3 Sandy Bottom Consulting is a consulting firm owned and operated by Dee Schofield. The
Financial statements end-of-period spreadsheet (work sheet) shown below was prepared for the year ended
from the end-of-period August 31, 2008.
spreadsheet (work sheet)
objs. 1, 2
A B C D E F G H I J K
Sandy Bottom Consulting
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended August 31, 2008
Unadjusted Trial Adjusted Trial
Balance Adjustments Balance Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Cash 10,000 10,000 10,000 1

2 Accounts Receivable 12,500 12,500 12,500 2
3 Supplies 2,200 (a) 1,750 450 450 3
4 Office Equipment 14,500 14,500 14,500 4
5 Accumulated Depreciation 2,500 (b) 1,200 3,700 3,700 5
6 Accounts Payable 6,100 6,100 6,100 6
7 Salaries Payable (c) 800 800 800 7
8 Dee Schofield, Capital 19,400 19,400 19,400 8
9 Dee Schofield, Drawing 2,700 2,700 2,700 9
10 Fees Earned 32,000 32,000 32,000 10
11 Salary Expense 16,250 (c) 800 17,050 17,050 11
12 Supplies Expense (a) 1,750 1,750 1,750 12
13 Depreciation Expense (b) 1,200 1,200 1,200 13
14 Miscellaneous Expense 1,850 1,850 1,850 14
15 60,000 60,000 3,750 3,750 62,000 62,000 21,850 32,000 40,150 30,000 15
16 Net income 10,150 10,150 16
17 32,000 32,000 40,150 40,150 17

Based upon the preceding spreadsheet, prepare an income statement, statement of owner’s
equity, and balance sheet for Sandy Bottom Consulting.

EX 4-4 Rectifier Consulting is a consulting firm owned and operated by Adam Beauchamp. The
Financial statements following end-of-period spreadsheet (work sheet) was prepared for the year ended June
from the end-of-period 30, 2008.
spreadsheet (work sheet)
objs. 1, 2
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Chapter 4 Completing the Accounting Cycle 183

A B C D E F G H I J K
Rectifier Consulting
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended June 30, 2008
Unadjusted Trial Adjusted Trial
Balance Adjustments Balance Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Cash 8,000 8,000 8,000 1

2 Accounts Receivable 15,500 15,500 15,500 2
3 Supplies 2,500 (a) 1,850 650 650 3
4 Office Equipment 24,500 24,500 24,500 4
5 Accumulated Depreciation 4,500 (b) 900 5,400 5,400 5
6 Accounts Payable 3,300 3,300 3,300 6
7 Salaries Payable (c) 400 400 400 7
8 Adam Beauchamp, Capital 25,200 25,200 25,200 8
9 Adam Beauchamp, Drawing 2,000 2,000 2,000 9
10 Fees Earned 51,750 51,750 51,750 10
11 Salary Expense 30,750 (c) 400 31,150 31,150 11
12 Supplies Expense (a) 1,850 1,850 1,850 12
13 Depreciation Expense (b) 900 900 900 13
14 Miscellaneous Expense 1,500 1,500 1,500 14
15 84,750 84,750 3,150 3,150 86,050 86,050 35,400 51,750 50,650 34,300 15
16 Net income 16,350 16,350 16
17 51,750 51,750 50,650 50,650 17

Based upon the preceding spreadsheet, prepare an income statement, statement of owner’s
equity, and balance sheet for Rectifier Consulting.

EX 4-5 The following account balances were taken from the adjusted trial balance for Admiral
Income statement Messenger Service, a delivery service firm, for the current fiscal year ended April 30,
obj. 2 2008:
Net income, $184,500 Depreciation Expense $ 5,000 Rent Expense $ 43,400
Fees Earned 375,500 Salaries Expense 125,600
Insurance Expense 1,500 Supplies Expense 2,750
Miscellaneous Expense 1,250 Utilities Expense 11,500

Prepare an income statement.

EX 4-6 The following revenue and expense account balances were taken from the ledger of Cup-
Income statement; net cake Services Co. after the accounts had been adjusted on October 31, 2008, the end of the
loss current fiscal year:
obj. 2
Depreciation Expense $10,000 Service Revenue $163,375
Net loss, $23,300 Insurance Expense 6,000 Supplies Expense 2,875
Miscellaneous Expense 4,750 Utilities Expense 18,750
Rent Expense 51,500 Wages Expense 92,800

Prepare an income statement.

EX 4-7 FedEx Corporation had the following revenue and expense account balances (in millions)
Income statement at its fiscal year-end of May 31, 2005:
obj. 2 Depreciation $1,462 Purchased Transportation $ 2,935
Fuel 2,317 Rentals and Landing Fees 2,314
Maintenance and Repairs 1,680 Revenues 29,363
Other Expenses 4,379 Salaries and Employee Benefits 11,963
Internet Project Provision for Income Taxes 864

a. Net income: $1,449 a. Prepare an income statement.

b. Compare your income statement with the related income statement that is
available at the FedEx Corporation Web site, which is linked to the text’s Web site at
[Link]/accounting/warren. What similarities and differences do you
see?
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184 Chapter 4 Completing the Accounting Cycle

EX 4-8 Icon Systems Co. offers its services to residents in the Pasadena area. Selected accounts
Statement of owner’s from the ledger of Icon Systems Co. for the current fiscal year ended August 31, 2008, are
equity as follows:
obj. 2
Josh Winfrey, Capital Josh Winfrey, Drawing
Josh Winfrey, capital,
Aug. 31 16,000 Sept. 1 (2007) 573,750 Nov. 30 4,000 Aug. 31 16,000
Aug. 31, 2008: $652,750
Aug. 31 95,000 Feb. 28 4,000
May 31 4,000
Aug. 31 4,000

Income Summary
Aug. 31 380,000 Aug. 31 475,000
31 95,000

Prepare a statement of owner’s equity for the year.

EX 4-9 Selected accounts from the ledger of Aspen Sports for the current fiscal year ended June 30,
Statement of owner’s 2008, are as follows:
equity; net loss
Tammy Eddy, Capital Tammy Eddy, Drawing
obj. 2
June 30 30,000 July 1 (2007) 190,800 Sept. 30 7,500 June 30 30,000
Tammy Eddy, capital,
30 32,550 Dec. 31 7,500
June 30, 2008: $128,250
May 31 7,500
June 30 7,500

Income Summary
June 30 348,150 June 30 315,600
30 32,550

Prepare a statement of owner’s equity for the year.

EX 4-10 Identify each of the following as (a) a current asset or (b) property, plant, and equipment:
Classifying assets
1. Accounts receivable 4. Equipment
obj. 2 2. Building 5. Prepaid insurance
3. Cash 6. Supplies

EX 4-11 At the balance sheet date, a business owes a mortgage note payable of $750,000, the terms
Balance sheet of which provide for monthly payments of $15,000.
classification Explain how the liability should be classified on the balance sheet.
obj. 2

EX 4-12 Healthy & Trim Co. offers personal weight reduction consulting services to individuals.
Balance sheet After all the accounts have been closed on November 30, 2008, the end of the current fis-
obj. 2 cal year, the balances of selected accounts from the ledger of Healthy & Trim Co. are as
follows:
Total assets: $375,000
Accounts Payable $ 17,250 Equipment $350,000
Accounts Receivable 41,560 Prepaid Insurance 9,600
Accumulated Depreciation— Prepaid Rent 6,000
Equipment 51,950 Salaries Payable 6,750
Cash ?00 Supplies 1,040
Cindy DeLoach, Capital 346,000 Unearned Fees 5,000

Prepare a classified balance sheet that includes the correct balance for Cash.

EX 4-13 List the errors you find in the following balance sheet. Prepare a corrected balance sheet.
Balance sheet
obj. 2
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Chapter 4 Completing the Accounting Cycle 185

Corrected balance Eucalyptus Services Co.

sheet, total assets: Balance Sheet
$180,000 For the Year Ended July 31, 2008

Assets Liabilities
Current assets: Current liabilities:
Cash $ 5,280 Accounts receivable $ 13,750
Accounts payable 6,790 Accum. depr.—building 86,700
Supplies 1,650 Accum. depr.—equipment 18,480
Prepaid insurance 4,800 Net income 25,000
Land 60,000 Total liabilities $143,930
Total current assets $ 78,520
Property, plant, and
equipment: Owner’s Equity
Building $156,700 Wages payable $ 1,340
Equipment 43,000 Sydney Kitchel, capital 171,870
Total property, plant, Total owner’s equity 173,210
and equipmet 238,620 Total liabilities and
Total assets $317,140 owner’s equity $317,140

EX 4-14 From the following list, identify the accounts that should be closed to Income Summary at
Identifying accounts to the end of the fiscal year:
be closed
a. Accounts Receivable g. Keri Upshaw, Drawing
obj. 3
b. Accumulated Depreciation— h. Land
Equipment i. Supplies
c. Depreciation Expense—Equipment j. Supplies Expense
d. Equipment k. Wages Expense
e. Fees Earned l. Wages Payable
f. Keri Upshaw, Capital

EX 4-15 Prior to its closing, Income Summary had total debits of $279,615 and total credits of
Closing entries $392,750.
obj. 3 Briefly explain the purpose served by the income summary account and the nature
of the entries that resulted in the $279,615 and the $392,750.

EX 4-16 After all revenue and expense accounts have been closed at the end of the fiscal year, Income
Closing entries with Summary has a debit of $218,380 and a credit of $375,000. At the same date, Rachel Bray, Cap-
net income ital has a credit balance of $479,100, and Rachel Bray, Drawing has a balance of $18,000. (a)
obj. 3 Journalize the entries required to complete the closing of the accounts. (b) Determine the
amount of Rachel Bray, Capital at the end of the period.

EX 4-17 Firefly Services Co. offers its services to individuals desiring to improve their personal im-
Closing entries with net ages. After the accounts have been adjusted at October 31, the end of the fiscal year, the
loss following balances were taken from the ledger of Firefly Services Co.
obj. 3
Natalie Wilson, Capital $554,500 Rent Expense $65,000
Natalie Wilson, Drawing 20,000 Supplies Expense 3,150
Fees Earned 293,300 Miscellaneous Expense 7,100
Wages Expense 250,000

Journalize the four entries required to close the accounts.

EX 4-18 Which of the following accounts will usually appear in the post-closing trial balance?
Identifying permanent
accounts a. Accounts Payable g. Salaries Expense
b. Accumulated Depreciation h. Salaries Payable
obj. 3
c. Cash i. Stephanie Hamm, Capital
d. Depreciation Expense j. Stephanie Hamm, Drawing
e. Fees Earned k. Supplies
f. Office Equipment
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186 Chapter 4 Completing the Accounting Cycle

EX 4-19 An accountant prepared the following post-closing trial balance:

Post-closing trial balance
Honest Sam’s Repair Co.
obj. 3
Post-Closing Trial Balance
Correct column totals, July 31, 2008
$150,505
Debit Credit
Balances Balances
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,915
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,620
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,770
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,200
Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,970
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,750
Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,780
Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,560
Samantha Marcus, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,445
206,260 94,750

Prepare a corrected post-closing trial balance. Assume that all accounts have normal bal-
ances and that the amounts shown are correct.

EX 4-20 Rearrange the following steps in the accounting cycle in proper sequence:
Steps in the accounting
cycle a. An adjusted trial balance is prepared.
obj. 4 b. Financial statements are prepared.
c. A post-closing trial balance is prepared.
d. Transactions are analyzed and recorded in the journal.
e. An optional end-of-period spreadsheet (work sheet) is prepared.
f. Adjustment data are asssembled and analyzed.
g. Transactions are posted to the ledger.
h. Closing entries are journalized and posted to the ledger.
i. An unadjusted trial balance is prepared.
j. Adjusting entries are journalized and posted to the ledger.

EX 4-21 The steps performed in completing an end-of-period spreadsheet (work sheet) are listed be-
Appendix: Steps in low in random order.
completing an end-of-
period spreadsheet a. Extend the adjusted trial balance amounts to the Income Statement columns and the Bal-
(work sheet) ance Sheet columns.
b. Enter the adjusting entries into the spreadsheet (work sheet), based upon the adjustment
data.
c. Add the Debit and Credit columns of the Unadjusted Trial Balance columns of the spread-
sheet (work sheet) to verify that the totals are equal.
d. Enter the amount of net income or net loss for the period in the proper Income State-
ment column and Balance Sheet column.
e. Add the Debit and Credit columns of the Balance Sheet and Income Statement columns
of the spreadsheet (work sheet) to verify that the totals are equal.
f. Enter the unadjusted account balances from the general ledger into the Unadjusted Trial
Balance columns of the spreadsheet (work sheet).
g. Add or deduct adjusting entry data to trial balance amounts, and extend amounts to the
Adjusted Trial Balance columns.
h. Add the Debit and Credit columns of the Adjustments columns of the spreadsheet (work
sheet) to verify that the totals are equal.
i. Add the Debit and Credit columns of the Balance Sheet and Income Statement columns
of the spreadsheet (work sheet) to determine the amount of net income or net loss for
the period.
j. Add the Debit and Credit columns of the Adjusted Trial Balance columns of the spread-
sheet (work sheet) to verify that the totals are equal.
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Chapter 4 Completing the Accounting Cycle 187

Indicate the order in which the preceding steps would be performed in preparing and com-
pleting a spreadsheet (work sheet).

EX 4-22 Dakota Services Co. offers cleaning services to business clients. The trial balance for Dakota
Appendix: Adjustment Services Co. has been prepared on the end-of-period spreadsheet (work sheet) for the year
data on an end-of-period ended July 31, 2008, shown below.
spreadsheet (work sheet)
Dakota Services Co.
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended July 31, 2008
Total debits of Unadjusted Adjusted
Adjustments column: $15 Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.

Cash 4
Accounts Receivable 25
Supplies 4
Prepaid Insurance 6
Land 25
Equipment 16
Accum. Depr.—Equipment 1
Accounts Payable 13
Wages Payable 0
Christina Keene, Capital 56
Christina Keene, Drawing 4
Fees Earned 30
Wages Expense 8
Rent Expense 4
Insurance Expense 0
Utilities Expense 3
Depreciation Expense 0
Supplies Expense 0
Miscellaneous Expense 1
100 100

The data for year-end adjustments are as follows:

a. Fees earned, but not yet billed, $5.
b. Supplies on hand, $1.
c. Insurance premiums expired, $4.
d. Depreciation expense, $2.
e. Wages accrued, but not paid, $1.
Enter the adjustment data, and place the balances in the Adjusted Trial Balance columns.

EX 4-23 Dakota Services Co. offers cleaning services to business clients. Complete the following end-
Appendix: Completing of-period spreadsheet (work sheet) for Dakota Services Co.
an end-of-period
spreadsheet (work sheet)

Net income: $9

(continued)
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188 Chapter 4 Completing the Accounting Cycle

Dakota Services Co.

End-of-Period Spreadsheet (Work Sheet)
For the Year Ended July 31, 2008

Adjusted Income
Trial Balance Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.

Cash 4
Accounts Receivable 30
Supplies 1
Prepaid Insurance 2
Land 25
Equipment 16
Accum. Depr.—Equipment 3
Accounts Payable 13
Wages Payable 1
Christina Keene, Capital 56
Christina Keene, Drawing 4
Fees Earned 35
Wages Expense 9
Rent Expense 4
Insurance Expense 4
Utilities Expense 3
Depreciation Expense 2
Supplies Expense 3
Miscellaneous Expense 1
108 108
Net income (loss)

EX 4-24 Based upon the data in Exercise 4-23, prepare an income statement, statement of owner’s
Appendix: Financial equity, and balance sheet for Dakota Services Co.
statements from an
end-of-period
spreadsheet (work sheet)

Christina Keene,
capital, July 31, 2008: $61

EX 4-25 Based upon the data in Exercise 4-22, prepare the adjusting entries for Dakota Services Co.
Appendix: Adjusting
entries from an end-of-
period spreadsheet
(work sheet)

EX 4-26 Based upon the data in Exercise 4-23, prepare the closing entries for Dakota Services Co.
Appendix: Closing
entries from an end-of-
period spreadsheet
(work sheet)

Problems Series A
PR 4-1A Blink-On Company maintains and repairs warning lights, such as those found on
Financial statements and radio towers and lighthouses. Blink-On Company prepared the end-of-period spreadsheet
closing entries (work sheet) at the top of the following page at March 31, 2008, the end of the current fis-
objs. 1, 2, 3 cal year:
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Chapter 4 Completing the Accounting Cycle 189

A B C D E F G H I J K
Blink-On Company
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended March 31, 2008
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Cash 6,300 6,300 6,300 1

2 Accounts Receivable 18,900 (a) 3,500 22,400 22,400 2
3 Prepaid Insurance 4,200 (b) 2,800 1,400 1,400 3
4 Supplies 2,730 (c) 1,600 1,130 1,130 4
5 Land 98,000 98,000 98,000 5
6 Building 140,000 140,000 140,000 6
7 Acc. Depr.—Building 100,300 (d) 1,400 101,700 101,700 7
8 Equipment 100,500 100,500 100,500 8
9 Acc. Depr.—Equipment 85,100 (e) 3,200 88,300 88,300 9
10 Accounts Payable 5,700 5,700 5,700 10
11 Unearned Rent 2,100 (g) 1,200 900 900 11
12 Amanda Ayers, Capital 78,100 78,100 78,100 12
13 Amanda Ayers, Drawing 5,600 5,600 5,600 13
14 Fees Revenue 253,700 (a) 3,500 257,200 257,200 14
15 Salaries & Wages Expense 102,500 (f) 1,800 104,300 104,300 15
16 Advertising Expense 21,700 21,700 21,700 16
17 Utilities Expense 11,400 11,400 11,400 17
18 Repairs Expense 8,850 8,850 8,850 18
19 Misc. Expense 4,320 4,320 4,320 19
20 525,000 525,000 20
21 Insurance Expense (b) 2,800 2,800 2,800 21
22 Supplies Expense (c) 1,600 1,600 1,600 22
23 Depr. Exp.—Building (d) 1,400 1,400 1,400 23
24 Depr. Exp.—Equipment (e) 3,200 3,200 3,200 24
25 Salaries & Wages Payable (f) 1,800 1,800 1,800 25
26 Rent Revenue (g) 1,200 1,200 1,200 26
27 15,500 15,500 534,900 534,900 159,570 258,400 375,330 276,500 27
28 Net income 98,830 98,830 28
29 258,400 258,400 375,330 375,330 29

Instructions
1. Prepare an income statement for the year ended March 31.
2. Prepare a statement of owner’s equity for the year ended March 31. No additional in-
1. Net income: $98,830 vestments were made during the year.
3. Prepare a balance sheet as of March 31.
4. Based upon the end-of-period spreadsheet (work sheet), journalize the closing entries.
5. Prepare a post-closing trial balance.

PR 4-2A The Nevus Company is an investigative services firm that is owned and operated by Stacey
Financial statements and Vargas. On April 30, 2008, the end of the current fiscal year, the accountant for The Nevus
closing entries Company prepared an end-of-period spreadsheet (work sheet), a part of which is shown at
objs. 2, 3 the top of the following page.
Instructions
1. Prepare an income statement, statement of owner’s equity (no additional investments
were made during the year), and a balance sheet.
1. Stacey Vargas, 2. Journalize the entries that were required to close the accounts at April 30.
capital, April 30: 3. If Stacey Vargas, Capital decreased $35,000 after the closing entries were posted, and the
$152,800 withdrawals remained the same, what was the amount of net income or net loss?

(continued)
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190 Chapter 4 Completing the Accounting Cycle

A H I J K
The Nevus Company
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended April 30, 2008
Income Statement Balance Sheet
1 Cash 9,000 1
2 Accounts Receivable 37,200 2
3 Supplies 3,500 3
4 Prepaid Insurance 4,800 4
5 Equipment 169,500 5
6 Accumulated Depreciation—Equipment 55,200 6
7 Accounts Payable 10,500 7
8 Salaries Payable 2,500 8
9 Unearned Rent 3,000 9
10 Stacey Vargas, Capital 142,800 10
11 Stacey Vargas, Drawing 16,000 11
12 Service Fees 363,000 12
13 Rent Revenue 7,000 13
14 Salary Expense 270,000 14
15 Rent Expense 37,000 15
16 Supplies Expense 8,000 16
17 Depreciation Expense—Equipment 7,000 17
18 Utilities Expense 6,400 18
19 Repairs Expense 6,200 19
20 Insurance Expense 4,800 20
21 Miscellaneous Expense 4,600 21
22 344,000 370,000 240,000 214,000 22
23 Net income 26,000 26,000 23
24 370,000 370,000 240,000 240,000 24

PR 4-3A The unadjusted trial balance of Iguana Laundromat at June 30, 2008, the end of the current
T accounts, adjusting fiscal year, is shown below.
entries, financial
statements, and closing
Iguana Laundromat
entries; optional end-of-
period spreadsheet Unadjusted Trial Balance
(work sheet) June 30, 2008

objs. 2, 3 Debit Credit

Balances Balances
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500
Laundry Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,450
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
2. Net income: $13,650 Laundry Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,000
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,200
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900
Scott Mathis, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,800
Scott Mathis, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200
Laundry Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,100
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,650
Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,200
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
250,000 250,000

The data needed to determine year-end adjustments are as follows:

a. Laundry supplies on hand at June 30 are $1,500.
b. Insurance premiums expired during the year are $3,200.
c. Depreciation of equipment during the year is $6,000.
d. Wages accrued but not paid at June 30 are $750.
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Chapter 4 Completing the Accounting Cycle 191

Instructions
1. For each account listed in the unadjusted trial balance, enter the balance in a T account.
Identify the balance as “June 30 Bal.” In addition, add T accounts for Wages Payable, De-
preciation Expense, Laundry Supplies Expense, Insurance Expense, and Income Summary.
2. Optional: Enter the unadjusted trial balance on an end-of-period spreadsheet (work
sheet) and complete the spreadsheet. Add the accounts listed in part (1) as needed.
3. Journalize and post the adjusting entries. Identify the adjustments by “Adj.” and the new
balances as “Adj. Bal.”
4. Prepare an adjusted trial balance.
5. Prepare an income statement, a statement of owner’s equity (no additional investments
were made during the year), and a balance sheet.
6. Journalize and post the closing entries. Identify the closing entries by “Clos.”
7. Prepare a post-closing trial balance.

PR 4-4A If the working papers correlating with this textbook are not used, omit Problem 4-4A.
Ledger accounts,
adjusting entries, The ledger and trial balance of Wainscot Services Co. as of March 31, 2008, the end of the
financial statements, and first month of its current fiscal year, are presented in the working papers.
closing entries; Data needed to determine the necessary adjusting entries are as follows:
optional end-of-period
spreadsheet (work sheet) a. Service revenue accrued at March 31 is $1,750.
objs. 2, 3 b. Supplies on hand at March 31 are $400.
c. Insurance premiums expired during March are $250.
4. Net income: $24,593
d. Depreciation of the building during March is $400.
e. Depreciation of equipment during March is $200.
f. Unearned rent at March 31 is $1,000.
g. Wages accrued at March 31 are $500.
Instructions
1. Optional: Complete the end-of-period spreadsheet (work sheet) using the adjustment
data shown above.
2. Journalize and post the adjusting entries, inserting balances in the accounts affected.
3. Prepare an adjusted trial balance.
4. Prepare an income statement, a statement of owner’s equity, and a balance sheet.
5. Journalize and post the closing entries. Indicate closed accounts by inserting a line in both Bal-
ance columns opposite the closing entry. Insert the new balance of the capital account.
6. Prepare a post-closing trial balance.

PR 4-5A The unadjusted trial balance of Quick Repairs at October 31, 2008, the end of the current
Ledger accounts, year, is shown below.
adjusting entries,
financial statements, Quick Repairs
and closing entries; Unadjusted Trial Balance
optional spreadsheet October 31, 2008
(work sheet)
Debit Credit
objs. 2, 3 Balances Balances
11 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950
13 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,295
14 Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,735
16 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,650
5. Net income: $41,705 17 Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . . . . . 21,209
18 Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,300
19 Accumulated Depreciation—Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400
21 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,015
31 Rhonda Salter, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,426
32 Rhonda Salter, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
41 Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,950
51 Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,925
53 Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600
55 Truck Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,350
59 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,195
200,000 200,000
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192 Chapter 4 Completing the Accounting Cycle

The data needed to determine year-end adjustments are as follows:

a. Supplies on hand at October 31 are $7,120.
b. Insurance premiums expired during year are $2,000.
c. Depreciation of equipment during year is $4,200.
d. Depreciation of trucks during year is $2,200.
e. Wages accrued but not paid at October 31 are $600.

Instructions
1. For each account listed in the trial balance, enter the balance in the appropriate Balance
column of a four-column account and place a check mark ( ) in the Posting Reference
column.
2. Optional: Enter the unadjusted trial balance on an end-of-period spreadsheet (work
sheet) and complete the spreadsheet. Add the accounts listed in part (3) as needed.
3. Journalize and post the adjusting entries, inserting balances in the accounts affected. The
following additional accounts from Quick Repair’s chart of accounts should be used:
Wages Payable, 22; Supplies Expense, 52; Depreciation Expense—Equipment, 54; De-
preciation Expense—Trucks, 56; Insurance Expense, 57.
4. Prepare an adjusted trial balance.
5. Prepare an income statement, a statement of owner’s equity (no additional investments
were made during the year), and a balance sheet.
6. Journalize and post the closing entries. (Income Summary is account #33 in the chart of
accounts.) Indicate closed accounts by inserting a line in both Balance columns opposite
the closing entry.
7. Prepare a post-closing trial balance.

PR 4-6A For the past several years, Dawn Lytle has operated a part-time consulting business from her
Complete accounting home. As of October 1, 2008, Dawn decided to move to rented quarters and to operate the
cycle business, which was to be known as Sky’s-The-Limit Consulting, on a full-time basis. Sky’s-
objs. 4, 5, 6 The-Limit Consulting entered into the following transactions during October:
8. Net income: $17,250 Oct. 1. The following assets were received from Dawn Lytle: cash, $12,950; accounts re-
ceivable, $2,800; supplies, $1,500; and office equipment, $18,750. There were no
liabilities received.
1. Paid three months’ rent on a lease rental contract, $3,600.
2. Paid the premiums on property and casualty insurance policies, $2,400.
4. Received cash from clients as an advance payment for services to be provided
and recorded it as unearned fees, $4,150.
5. Purchased additional office equipment on account from Office Station Co.,
$2,500.
6. Received cash from clients on account, $1,900.
10. Paid cash for a newspaper advertisement, $325.
12. Paid Office Station Co. for part of the debt incurred on October 5, $1,250.
12. Recorded services provided on account for the period October 1–12, $3,750.
14. Paid part-time receptionist for two weeks’ salary, $750.
17. Recorded cash from cash clients for fees earned during the period October 1–17,
$6,250.
18. Paid cash for supplies, $600.
20. Recorded services provided on account for the period October 13–20, $2,100.
24. Recorded cash from cash clients for fees earned for the period October 17–24,
$3,850.
26. Received cash from clients on account, $4,450.
27. Paid part-time receptionist for two weeks’ salary, $750.
29. Paid telephone bill for October, $250.
31. Paid electricity bill for October, $300.
31. Recorded cash from cash clients for fees earned for the period October 25–31,
$2,975.
31. Recorded services provided on account for the remainder of October, $1,500.
31. Dawn withdrew $5,000 for personal use.
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Chapter 4 Completing the Accounting Cycle 193

Instructions
1. Journalize each transaction in a two-column journal, referring to the following chart of
accounts in selecting the accounts to be debited and credited. (Do not insert the account
numbers in the journal at this time.)

11 Cash 31 Dawn Lytle, Capital

12 Accounts Receivable 32 Dawn Lytle, Drawing
14 Supplies 41 Fees Earned
15 Prepaid Rent 51 Salary Expense
16 Prepaid Insurance 52 Rent Expense
18 Office Equipment 53 Supplies Expense
19 Accumulated Depreciation 54 Depreciation Expense
21 Accounts Payable 55 Insurance Expense
22 Salaries Payable 59 Miscellaneous Expense
23 Unearned Fees

2. Post the journal to a ledger of four-column accounts.

3. Prepare an unadjusted trial balance.
4. At the end of October, the following adjustment data were assembled. Analyze and use
these data to complete parts (5) and (6).
a. Insurance expired during October is $200.
b. Supplies on hand on October 31 are $875.
c. Depreciation of office equipment for October is $675.
d. Accrued receptionist salary on October 31 is $150.
e. Rent expired during October is $1,550.
f. Unearned fees on October 31 are $1,150.
5. Optional: Enter the unadjusted trial balance on an end-of-period spreadsheet (work
sheet) and complete the spreadsheet.
6. Journalize and post the adjusting entries.
7. Prepare an adjusted trial balance.
8. Prepare an income statement, a statement of owner’s equity, and a balance sheet.
9. Prepare and post the closing entries. (Income Summary is account #33 in the chart of
accounts.) Indicate closed accounts by inserting a line in both the Balance columns op-
posite the closing entry.
10. Prepare a post-closing trial balance.

Problems Series B
PR 4-1B Last-Chance Company offers legal consulting advice to prison inmates. Last-Chance Com-
Financial statements and pany prepared the end-of-period spreadsheet (work sheet) at the top of the following page
closing entries at November 30, 2008, the end of the current fiscal year.
objs. 1, 2, 3
Instructions
1. Prepare an income statement for the year ended November 30.
2. Prepare a statement of owner’s equity for the year ended November 30. No additional
investments were made during the year.
1. Net loss: $10,900
3. Prepare a balance sheet as of November 30.
4. On the basis of the end-of-period spreadsheet (work sheet), journalize the closing
entries.
5. Prepare a post-closing trial balance.
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194 Chapter 4 Completing the Accounting Cycle

A B C D E F G H I J K
Last-Chance Company
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended November 30, 2008
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance Income Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Cash 4,800 4,800 4,800 1

2 Accounts Receivable 15,750 (a) 4,200 19,950 19,950 2
3 Prepaid Insurance 2,700 (b) 1,450 1,250 1,250 3
4 Supplies 2,025 (c) 1,525 500 500 4
5 Land 75,000 75,000 75,000 5
6 Building 205,000 205,000 205,000 6
7 Acc. Depr.—Building 76,000 (d) 2,000 78,000 78,000 7
8 Equipment 139,000 139,000 139,000 8
9 Acc. Depr.—Equipment 54,450 (e) 5,200 59,650 59,650 9
10 Accounts Payable 9,750 9,750 9,750 10
11 Unearned Rent 4,500 (g) 2,000 2,500 2,500 11
12 Corey Evans, Capital 318,800 318,800 318,800 12
13 Corey Evans, Drawing 15,000 15,000 15,000 13
14 Fees Revenue 286,500 (a) 4,200 290,700 290,700 14
15 Salaries & Wages Expense 144,300 (f) 2,700 147,000 147,000 15
16 Advertising Expense 94,800 94,800 94,800 16
17 Utilities Expense 27,000 27,000 27,000 17
18 Travel Expense 18,750 18,750 18,750 18
19 Misc. Expense 5,875 5,875 5,875 19
20 750,000 750,000 20
21 Insurance Expense (b) 1,450 1,450 1,450 21
22 Supplies Expense (c) 1,525 1,525 1,525 22
23 Depr. Exp.—Building (d) 2,000 2,000 2,000 23
24 Depr. Exp.—Equipment (e) 5,200 5,200 5,200 24
25 Sal. & Wages Payable (f) 2,700 2,700 2,700 25
26 Rent Revenue (g) 2,000 2,000 2,000 26
27 19,075 19,075 764,100 764,100 303,600 292,700 460,500 471,400 27
28 Net loss 10,900 10,900 28
29 303,600 303,600 471,400 471,400 29

PR 4-2B The Ultra Services Company is a financial planning services firm owned and operated by
Financial statements and Chad Tillman. As of July 31, 2008, the end of the current fiscal year, the accountant for The
closing entries Ultra Services Company prepared an end-of-period spreadsheet (work sheet), part of which
objs. 2, 3 is shown at the top of the next page.

Instructions
1. Prepare an income statement, a statement of owner’s equity (no additional investments
1. Chad Tillman, were made during the year), and a balance sheet.
capital, July 31: $492,000 2. Journalize the entries that were required to close the accounts at July 31.
3. If the balance of Chad Tillman, Capital decreased $40,000 after the closing entries were
posted, and the withdrawals remained the same, what was the amount of net income or
net loss?
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Chapter 4 Completing the Accounting Cycle 195

A H I J K
The Ultra Services Company
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended July 31, 2008
Income Statement Balance Sheet
1 Cash 13,950 1
2 Accounts Receivable 41,880 2
3 Supplies 8,400 3
4 Prepaid Insurance 7,500 4
5 Land 180,000 5
6 Buildings 360,000 6
7 Accumulated Depreciation—Buildings 217,200 7
8 Equipment 258,270 8
9 Accumulated Depreciation—Equipment 122,700 9
10 Accounts Payable 33,300 10
11 Salaries Payable 3,300 11
12 Unearned Rent 1,500 12
13 Chad Tillman, Capital 340,500 13
14 Chad Tillman, Drawing 30,000 14
15 Service Fees 525,000 15
16 Rent Revenue 4,500 16
17 Salary Expense 219,000 17
18 Depreciation Expense—Equipment 28,500 18
19 Rent Expense 25,500 19
20 Supplies Expense 22,950 20
21 Utilities Expense 15,900 21
22 Depreciation Expense—Buildings 15,600 22
23 Repairs Expense 12,450 23
24 Insurance Expense 3,000 24
25 Miscellaneous Expense 5,100 25
26 348,000 529,500 900,000 718,500 26
27 Net income 181,500 181,500 27
28 529,500 529,500 900,000 900,000 28

PR 4-3B The unadjusted trial balance of Best Laundry at March 31, 2008, the end of the current fis-
T accounts, adjusting cal year, is shown below.
entries, financial
statements, and closing
Best Laundry
entries; optional end-of-
period spreadsheet Unadjusted Trial Balance
(work sheet). March 31, 2008

objs. 2, 3 Debit Credit

Balances Balances
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450
Laundry Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,750
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400
2. Net income: $12,300 Laundry Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,500
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,500
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,100
Ryan Boyle, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,900
Ryan Boyle, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Laundry Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,500
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,750
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,800
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350
125,000 125,000
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196 Chapter 4 Completing the Accounting Cycle

The data needed to determine year-end adjustments are as follows:

a. Laundry supplies on hand at March 31 are $950.
b. Insurance premiums expired during the year are $2,000.
c. Depreciation of equipment during the year is $2,900.
d. Wages accrued but not paid at March 31 are $600.

Instructions
1. For each account listed in the unadjusted trial balance, enter the balance in a T account.
Identify the balance as “Mar. 31 Bal.” In addition, add T accounts for Wages Payable,
Depreciation Expense, Laundry Supplies Expense, Insurance Expense, and Income Sum-
mary.
2. Optional: Enter the unadjusted trial balance on an end-of-period spreadsheet (work
sheet) and complete the spreadsheet. Add the accounts listed in Part (1) as needed.
3. Journalize and post the adjusting entries. Identify the adjustments by “Adj.” and the new
balances as “Adj. Bal.”
4. Prepare an adjusted trial balance.
5. Prepare an income statement, a statement of owner’s equity (no additional investments
were made during the year), and a balance sheet.
6. Journalize and post the closing entries. Identify the closing entries by “Clos.”
7. Prepare a post-closing trial balance.

PR 4-4B If the working papers correlating with this textbook are not used, omit Problem 4-4B.
Ledger accounts,
adjusting entries, The ledger and trial balance of Wainscot Services Co. as of March 31, 2008, the end of the
financial statements,
and closing entries;
first month of its current fiscal year, are presented in the working papers.
optional end-of-period Data needed to determine the necessary adjusting entries are as follows:
spreadsheet (work sheet) a. Service revenue accrued at March 31 is $2,000.
objs. 2, 3 b. Supplies on hand at March 31 are $400.
4. Net income: $23,818 c. Insurance premiums expired during March are $150.
d. Depreciation of the building during March is $625.
e. Depreciation of equipment during March is $200.
f. Unearned rent at March 31 is $1,800.
g. Wages accrued but not paid at March 31 are $600.

Instructions
1. Optional: Complete the end-of-period spreadsheet (work sheet) using the adjustment
data shown above.
2. Journalize and post the adjusting entries, inserting balances in the accounts affected.
3. Prepare an adjusted trial balance.
4. Prepare an income statement, a statement of owner’s equity, and a balance sheet.
5. Journalize and post the closing entries. Indicate closed accounts by inserting a line in
both Balance columns opposite the closing entry. Insert the new balance of the capital
account.
6. Prepare a post-closing trial balance.

PR 4-5B The unadjusted trial balance of Reliable Repairs at December 31, 2008, the end of the cur-
Ledger accounts, rent year, is shown at the top of the next page. The data needed to determine year-end
adjusting entries, adjustments are as follows:
financial statements,
and closing entries; a. Supplies on hand at December 31 are $6,500.
optional end-of-period b. Insurance premiums expired during the year are $2,500.
spreadsheet (work sheet). c. Depreciation of equipment during the year is $4,800.
objs. 2, 3 d. Depreciation of trucks during the year is $3,500.
e. Wages accrued but not paid at December 31 are $1,000.

5. Net income: $30,175

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Chapter 4 Completing the Accounting Cycle 197

Reliable Repairs
Unadjusted Trial Balance
December 31, 2008
Debit Credit
Balances Balances
11 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,825
13 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,820
14 Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
16 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,200
17 Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . . . . . 12,050
18 Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
19 Accumulated Depreciation—Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,100
21 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,015
31 Lee Mendoza, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,885
32 Lee Mendoza, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
41 Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,950
51 Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,010
53 Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,100
55 Truck Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,350
59 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,195
175,000 175,000

Instructions
1. For each account listed in the unadjusted trial balance, enter the balance in the appro-
priate Balance column of a four-column account and place a check mark ( ) in the Post-
ing Reference column.
2. Optional: Enter the unadjusted trial balance on an end-of-period spreadsheet (work
sheet) and complete the spreadsheet. Add the accounts listed in part (3) as needed.
3. Journalize and post the adjusting entries, inserting balances in the accounts affected. The
following additional accounts from Reliable’s chart of accounts should be used: Wages
Payable, 22; Supplies Expense, 52; Depreciation Expense—Equipment, 54; Depreciation Ex-
pense—Trucks, 56; Insurance Expense, 57.
4. Prepare an adjusted trial balance.
5. Prepare an income statement, a statement of owner’s equity (no additional investments
were made during the year), and a balance sheet.
6. Journalize and post the closing entries. (Income Summary is account #33 in the chart of
accounts.) Indicate closed accounts by inserting a line in both Balance columns opposite
the closing entry.
7. Prepare a post-closing trial balance.

PR 4-6B For the past several years, Derrick Epstein has operated a part-time consulting business
Complete accounting from his home. As of June 1, 2008, Derrick decided to move to rented quarters and to op-
cycle erate the business, which was to be known as Luminary Consulting, on a full-time basis.
objs. 4, 5, 6 Luminary Consulting entered into the following transactions during June:
8. Net income: $10,980 June 1. The following assets were received from Derrick Epstein: cash, $26,200; accounts
receivable, $6,000; supplies, $2,800; and office equipment, $25,000. There were no
liabilities received.
1. Paid three months’ rent on a lease rental contract, $5,250.
2. Paid the premiums on property and casualty insurance policies, $2,100.
4. Received cash from clients as an advance payment for services to be provided
and recorded it as unearned fees, $2,700.
5. Purchased additional office equipment on account from Office Station Co., $5,000.
6. Received cash from clients on account, $3,000.
10. Paid cash for a newspaper advertisement, $200.
12. Paid Office Station Co. for part of the debt incurred on June 5, $1,000.
12. Recorded services provided on account for the period June 1–12, $5,100.
14. Paid part-time receptionist for two weeks’ salary, $800.
17. Recorded cash from cash clients for fees earned during the period June 1–16,
$3,500.
(continued)
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198 Chapter 4 Completing the Accounting Cycle

June 18. Paid cash for supplies, $750.

20. Recorded services provided on account for the period June 13–20, $1,100.
24. Recorded cash from cash clients for fees earned for the period June 17–24, $4,150.
26. Received cash from clients on account, $4,900.
27. Paid part-time receptionist for two weeks’ salary, $800.
29. Paid telephone bill for June, $150.
30. Paid electricity bill for June, $400.
30. Recorded cash from cash clients for fees earned for the period June 25–30, $1,500.
30. Recorded services provided on account for the remainder of June, $1,000.
30. Derrick withdrew $8,000 for personal use.

Instructions
1. Journalize each transaction in a two-column journal, referring to the following chart of
accounts in selecting the accounts to be debited and credited. (Do not insert the account
numbers in the journal at this time.)
11 Cash 31 Derrick Epstein, Capital
12 Accounts Receivable 32 Derrick Epstein, Drawing
14 Supplies 41 Fees Earned
15 Prepaid Rent 51 Salary Expense
16 Prepaid Insurance 52 Rent Expense
18 Office Equipment 53 Supplies Expense
19 Accumulated Depreciation 54 Depreciation Expense
21 Accounts Payable 55 Insurance Expense
22 Salaries Payable 59 Miscellaneous Expense
23 Unearned Fees
2. Post the journal to a ledger of four-column accounts.
3. Prepare an unadjusted trial balance.
4. At the end of June, the following adjustment data were assembled. Analyze and use
these data to complete parts (5) and (6).
a. Insurance expired during June is $175.
b. Supplies on hand on June 30 are $2,000.
c. Depreciation of office equipment for June is $500.
d. Accrued receptionist salary on June 30 is $120.
e. Rent expired during June is $1,500.
f. Unearned fees on June 30 are $1,875.
5. Optional: Enter the unadjusted trial balance on an end-of-period spreadsheet (work
sheet) and complete the spreadsheet.
6. Journalize and post the adjusting entries.
7. Prepare an adjusted trial balance.
8. Prepare an income statement, a statement of owner’s equity, and a balance sheet.
9. Prepare and post the closing entries. (Income Summary is account #33 in the chart of
accounts.) Indicate closed accounts by inserting a line in both the Balance columns op-
posite the closing entry.
10. Prepare a post-closing trial balance.

Continuing Problem
The unadjusted trial balance of Dancin Music as of May 31, 2008, along with the adjust-
ment data for the two months ended May 31, 2008, are shown in Chapter 3.
Based upon the adjustment data, the adjusted trial balance shown at the top of the fol-
lowing page was prepared.
Instructions
1. Optional. Using the data from Chapter 3, prepare an end-of-period spreadsheet (work sheet).
2. Prepare an income statement, a statement of owner’s equity, and a balance sheet. (Note:
Kris Payne made investments in Dancin Music on April 1 and May 1, 2008.)
2. Net income: $4,925
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Chapter 4 Completing the Accounting Cycle 199

Dancin Music
Adjusted Trial Balance
May 31, 2008
Debit Credit
Balances Balances
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,085
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,250
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080
Office Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated Depreciation—Office Equipment . . . . . . . . . . . . . . . . . . . . . . . . 100
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,750
Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Unearned Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400
Kris Payne, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Kris Payne, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300
Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,550
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600
Office Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600
Equipment Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300
Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910
Music Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,565
Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,730
Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 940
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
39,500 39,500

3. Journalize and post the closing entries. The income summary account is #33 in the ledger
of Dancin Music. Indicate closed accounts by inserting a line in both Balance columns
opposite the closing entry.
4. Prepare a post-closing trial balance.

Comprehensive Problem 1
8. Net income, $22,160 Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2008. The ac-
counting cycle for Kelly Consulting for April, including financial statements, was illustrated
on pages 161–174. During May, Kelly Consulting entered into the following transactions:

May 3. Received cash from clients as an advance payment for services to be provided
and recorded it as unearned fees, $1,550.
5. Received cash from clients on account, $1,750.
9. Paid cash for a newspaper advertisement, $100.
13. Paid Office Station Co. for part of the debt incurred on April 5, $400.
15. Recorded services provided on account for the period May 1–15, $5,100.
16. Paid part-time receptionist for two weeks’ salary including the amount owed on
April 30, $750.
17. Recorded cash from cash clients for fees earned during the period May 1–16,
$7,380.
20. Purchased supplies on account, $500.
21. Recorded services provided on account for the period May 16–20, $2,900.
25. Recorded cash from cash clients for fees earned for the period May 17–23, $4,200.
27. Received cash from clients on account, $6,600.
28. Paid part-time receptionist for two weeks’ salary, $750.
30. Paid telephone bill for May, $150.
31. Paid electricity bill for May, $225.
31. Recorded cash from cash clients for fees earned for the period May 26–31, $2,875.
31. Recorded services provided on account for the remainder of May, $2,200.
31. Kelly withdrew $7,500 for personal use.
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200 Chapter 4 Completing the Accounting Cycle

Instructions
1. The chart of accounts for Kelly Consulting is shown on page 163, and the post-closing
trial balance as of April 30, 2008, is shown on page 169. For each account in the post-
closing trial balance, enter the balance in the appropriate Balance column of a four-
column account. Date the balances May 1, 2008, and place a check mark ( ) in the Post
Reference column. Journalize each of the May transactions in a two-column journal
using Kelly Consulting’s chart of accounts. (Do not insert the account numbers in the
journal at this time.)
2. Post the journal to a ledger of four-column accounts.
3. Prepare an unadjusted trial balance.
4. At the end of May, the following adjustment data were assembled. Analyze and use
these data to complete parts (5) and (6).
a. Insurance expired during May is $300.
b. Supplies on hand on May 31 are $950.
c. Depreciation of office equipment for May is $330.
d. Accrued receptionist salary on May 31 is $260.
e. Rent expired during May is $1,600.
f. Unearned fees on May 31 are $1,300.
5. Optional: Enter the unadjusted trial balance on an end-of-period spreadsheet (work
sheet) and complete the spreadsheet.
6. Journalize and post the adjusting entries.
7. Prepare an adjusted trial balance.
8. Prepare an income statement, a statement of owner’s equity, and a balance sheet.
9. Prepare and post the closing entries. (Income Summary is account #33 in the chart of
accounts.) Indicate closed accounts by inserting a line in both the Balance columns op-
posite the closing entry.
10. Prepare a post-closing trial balance.

Special Activities
SA 4-1 Fantasy Graphics is a graphics arts design consulting firm. Terri Bierman, its treasurer and
Ethics and professional vice president of finance, has prepared a classified balance sheet as of January 31, 2008, the
conduct in business end of its fiscal year. This balance sheet will be submitted with Fantasy Graphics’ loan ap-
plication to Booneville Trust & Savings Bank.
In the Current Assets section of the balance sheet, Terri reported a $100,000 receivable
from Kent Miles, the president of Fantasy Graphics, as a trade account receivable. Kent bor-
rowed the money from Fantasy Graphics in November 2006 for a down payment on a new
home. He has orally assured Terri that he will pay off the account receivable within the
next year. Terri reported the $100,000 in the same manner on the preceding year’s balance
sheet.
Evaluate whether it is acceptable for Terri Bierman to prepare the January 31, 2008,
balance sheet in the manner indicated above.

SA 4-2 The following is an excerpt from a telephone conversation between Jan Young, president of
Financial statements Cupboard Supplies Co., and Steve Nisbet, owner of Nisbet Employment Co.
Jan: Steve, you’re going to have to do a better job of finding me a new computer pro-
grammer. That last guy was great at programming, but he didn’t have any common
sense.
Steve: What do you mean? The guy had a master’s degree with straight A’s.
Jan: Yes, well, last month he developed a new financial reporting system. He said we
could do away with manually preparing an end-of-period spreadsheet (work sheet)
and financial statements. The computer would automatically generate our financial
statements with “a push of a button.”
Steve: So what’s the big deal? Sounds to me like it would save you time and effort.
Jan: Right! The balance sheet showed a minus for supplies!
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Chapter 4 Completing the Accounting Cycle 201

Steve: Minus supplies? How can that be?

Jan: That’s what I asked.
Steve: So, what did he say?
Jan: Well, after he checked the program, he said that it must be right. The minuses were
greater than the pluses. . . .
Steve: Didn’t he know that Supplies can’t have a credit balance—it must have a debit bal-
ance?
Jan: He asked me what a debit and credit were.
Steve: I see your point.
1. Comment on (a) the desirability of computerizing Cupboard Supplies Co.’s fi-
nancial reporting system, (b) the elimination of the end-of-period spreadsheet (work
sheet) in a computerized accounting system, and (c) the computer programmer’s lack of
accounting knowledge.
2. Explain to the programmer why Supplies could not have a credit balance.

SA 4-3 Assume that you recently accepted a position with the First Security Bank as an assistant loan
Financial statements officer. As one of your first duties, you have been assigned the responsibility of evaluating a
loan request for $80,000 from [Link], a small proprietorship. In support of the
loan application, Marion Zastrow, owner, submitted a “Statement of Accounts” (trial balance)
for the first year of operations ended December 31, 2008.
[Link]
Statement of Accounts
December 31, 2008

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,050
Billings Due from Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,070
Supplies (chemicals, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,470
Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,370
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,090
Amounts Owed to Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,850
Investment in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,500
Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,650
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,050
Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,330
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470
100,000 100,000

1. Explain to Marion Zastrow why a set of financial statements (income statement,

statement of owner’s equity, and balance sheet) would be useful to you in evaluating the
loan request.
2. In discussing the “Statement of Accounts” with Marion Zastrow, you discovered that the
accounts had not been adjusted at December 31. Analyze the “Statement of Accounts”
and indicate possible adjusting entries that might be necessary before an accurate set of
financial statements could be prepared.
3. Assuming that an accurate set of financial statements will be submitted by Mar-
ion Zastrow in a few days, what other considerations or information would you require
before making a decision on the loan request?

SA 4-4 In groups of three or four, compare the balance sheets of two different companies, and pre-
Compare balance sheets sent to the class a summary of the similarities and differences of the two companies. You
Group Project may obtain the balance sheets you need from one of the following sources:
1. Your school or local library.
Internet Project
2. The investor relations department of each company.
3. The company’s Web site on the Internet.
4. EDGAR (Electronic Data Gathering, Analysis, and Retrieval), the electronic archives of
financial statements filed with the Securities and Exchange Commission.
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202 Chapter 4 Completing the Accounting Cycle

SEC documents can be retrieved using the EdgarScan™ service from Pricewaterhouse-
Coopers at [Link] To obtain annual report information, key in a
company name in the appropriate space. EdgarScan will list the reports available to you for
the company you’ve selected. Select the most recent annual report filing, identified as a 10-K
or 10-K405. EdgarScan provides an outline of the report, including the separate financial state-
ments, which can also be selected in an Excel® spreadsheet.

Answers to Self-Examination Questions

1. C The drawing account, M. E. Jones, Drawing (an- 3. B The entry to close the owner’s drawing account is
swer C), would be extended to the Balance Sheet to debit the owner’s capital account and credit the
columns of the work sheet. Utilities Expense (answer drawing account (answer B).
A), Rent Revenue (answer B), and Miscellaneous Ex- 4. D Since all revenue and expense accounts are closed
pense (answer D) would all be extended to the Income at the end of the period, Fees Earned (answer A),
Statement columns of the work sheet. Wages Expense (answer B), and Rent Expense (answer
2. D Cash or other assets that are expected to be con- C) would all be closed to Income Summary. Accumu-
verted to cash or sold or used up within one year or less, lated Depreciation (answer D) is a contra asset account
through the normal operations of the business, are clas- that is not closed.
sified as current assets on the balance sheet. Accounts 5. B Since the post-closing trial balance includes only
Receivable (answer D) is a current asset, since it will balance sheet accounts (all of the revenue, expense,
normally be converted to cash within one year. Office and drawing accounts are closed), Cash (answer A),
Equipment (answer A), Land (answer B), and Accumu- Accumulated Depreciation (answer C), and J. C.
lated Depreciation (answer C) are all reported in the Smith, Capital (answer D) would appear on the post-
property, plant, and equipment section of the balance closing trial balance. Fees Earned (answer B) is a tem-
sheet. porary account that is closed prior to preparing the
post-closing trial balance.