CH 4

C H A P T E R
Completing the Accounting Cycle

CHAPTER OBJECTIVES
After studying this chapter, you should be able to 1 Prepare an accounting work sheet 2 Use the work sheet to complete the accounting cycle 3 Close the revenue, expense, and dividend accounts 4 Correct typical accounting errors 5 Classify assets and liabilities as current or longterm 6 Use the current and debt ratios to evaluate a businesss ability to pay its debts
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Part One The Basic Structure of Accounting
eneral Motors profits rose 1%, to US$1.75 billion in the second quarter, as continued strong sales were offset in part by development costs for new vehicles (National Post, July 19, 2000) Shareholders of companies, both public and private, eagerly await the quarterly and annual reports issued by the companies whose shares they own. Judging by the article above, shareholders do not have to wait long. General Motors reported its earnings for the second quarter of 2000 just 19 days after the end of the quarter on June 30. Why the hurry? Shareholders make decisions about whether to buy, sell, or hold stock based, in part, on the financial results of companies. Investors may also use information or opinions expressed by stock-market analysts to make investment decisions. Stock-market analysts predict what a companys results will be and then eagerly await the actual results. If the financial results are available sooner,
investors and analysts can make decisions sooner. (In the case of General Motors, analysts had predicted income in the second quarter to be lower than it actually was. General Motors stock price rose as a result.) To compete in a swiftly changing world, then, companies like General Motors must provide financial data to decision makers quickly and at low cost. Companies accomplish these goals by rapidly closing their accounts or closing their booksthe process of preparing the accounts at the end of each period for recording the transactions of the next period. Closing the books quickly is important to both internal decision makers, such as managers, and external decision makers, such as shareholders and lenders, since it allows more time for analysis and planning.
Source: Sales Surge Lifts GM Profit to $1.75B in Quarter, National Post, July 19, 2000, via National Post Online, www.nationalpost.com.
In chapter 3
we prepared the financial statements from an adjusted trial balance. That approach works well for quick decision making, but organizations of all sizes take the accounting process a step further. Whether its General Motors or Air & Sea Travel, Inc. the closing process follows the basic pattern outlined in this chapter. It marks the end of the accounting cycle for a given period. The accounting process often uses a document known as the accountants work sheet. There are many different types of work sheets in businessas many as there are needs for summary data. Work sheets are valuable because they aid decision making.
General Motors www.gm.com
The Accounting Cycle

The accounting cycle is the process by which companies produce their financial statements for a specific period of time. For a new business, the cycle begins with setting up (opening) the ledger accounts. Air & Sea Travel, Inc. began on April 1, 2002, so the first step in the cycle was to open the accounts. After a business has operated for one period, however, the account balances carry over from period to period. Therefore, the accounting cycle usually starts with the account balances at the beginning of the period. Exhibit 4-1 outlines the complete accounting cycle. The boldface items in Panel A indicate the new steps that we will be discussing in this chapter. The accounting cycle includes work performed at two different times: During the periodJournalizing transactions Posting to the ledger End of the periodAdjusting the accounts, including journalizing and posting the adjusting entries
KEY POINT
The accounting cycle is repeated each accounting period. The goal of the cycle is the financial statements.
Chapter Four Completing the Accounting Cycle
163
Closing the accounts, including journalizing and posting the closing entries Preparing the financial statements (income statement, statement of retained earnings, and balance sheet) The end-of-period work also readies the accounts for the next period. In Chapters 3 and 4, we cover the end-of-period accounting for a service business such as Air & Sea Travel, Inc. Chapter 5 then shows how a merchandising entity adjusts and closes its books. Companies prepare financial statements on a monthly or a quarterly basis, and steps 1 to 6a in Exhibit 4-1 are adequate for statement preparation. Steps 6b through 7 can be performed monthly or quarterly but are necessary only at the end of the year.
OBJECTIVE 1
Prepare an accounting work sheet
The Work Sheet

Accountants often use a work sheet, a document with many columns, to help move data from the trial balance to the financial statements. The work sheet summarizes the data for the statements. Listing all the accounts and their unadjusted balances helps identify the accounts that need adjustment. The work sheet aids the closing process by listing the ending adjusted balances of all the accounts. The work sheet is not part of the ledger or the journal, nor is it a financial statement. Therefore, it is not part of the formal accounting system. Instead, it is a summary device that exists for the accountants convenience. Exhibits 4-2 through 4-6 illustrate the development of a typical work sheet for Air & Sea Travel, Inc. The heading at the top names the business, identifies the document, and states the accounting period. A step-by-step description of its preparation follows. Steps introduced in Chapter 3 to prepare the adjusted trial balance: 1. Print the account titles and their unadjusted ending balances in the Trial Balance columns of the work sheet, and total the amounts (Exhibit 4-2). 2. Enter the adjustments in the Adjustments columns, and total the amounts (Exhibit 4-3). 3. Compute each accounts adjusted balance by combining the trial balance and adjustment figures. Enter the adjusted amounts in the Adjusted Trial Balance columns (Exhibit 4-4). New steps introduced in this chapter: 4. Extend the asset, liability, and shareholders equity amounts from the Adjusted Trial Balance to the Balance Sheet columns. Extend the revenue and expense amounts to the Income Statement columns. Total the statement columns (Exhibit 4-5). 5. Compute net income or net loss as the difference between total revenues and total expenses on the income statement. Enter net income or net loss as a balancing amount on the income statement and the balance sheet, and compute the adjusted column totals (Exhibit 4-6). Lets examine these steps in greater detail. 1. Print the account titles and their unadjusted ending balances in the Trial Balance columns of the work sheet, and total the amounts. Total debits must equal total credits as shown in Exhibit 4-2. The account titles and balances come directly from the ledger accounts before the adjusting entries are prepared. Accounts are grouped on the work sheet by category (assets, liabilities, shareholders equity, revenues, expenses) and are usually listed in the order they appear in the ledger (Cash first, Accounts Receivable second, and so on). Accounts may have zero balances (for example, Amortization Expense). All
164
Exhibit 4-1
The Accounting Cycle
PANEL A During the Period 1. Start with the account balances in the ledger at the beginning of the period. 2. Analyze and journalize transactions as they occur. 3. Post journal entries to the ledger accounts. End of the Period 4. Compute the unadjusted balance in each account at the end of the period. 5. Enter the trial balance on the work sheet, and complete the work sheet. (Optional) 6. Using the adjusted trial balance or the full work sheet as a guide, a. Prepare the financial statements. b. Journalize and post the adjusting entries. c. Journalize and post the closing entries. 7. Prepare the postclosing trial balance. This trial balance becomes step 1 for the next period.
PANEL B
Accounts Receivable Accounts Receivable Sales Revenue Accounts Receivable 2,000 250 250 2,000 250
Analyze and journalize transactions as they occur.
Post entries to the ledger accounts.
Start with the balances in the ledger at the beginning of the period.
4
Adjusting entries INCOME STATEMENT Closing entries BALANCE SHEET
Cash 24,800 Accts. Rec. 2,250
POSTCLOSING TRIAL BALANCE Cash 24,800 Accounts receivable 2,250
Compute the unadjusted balance in each account at the end of the period.
Accounts Receivable 2,000 250 2,250
Prepare the postclosing trial balance.
WORK SHEET Cash 24,800 Accounts receivable 2,250
Journalize and Prepare the post the financial adjusting entries statements. and the closing entries.
Enter the trial balance on the work sheet, and complete the work sheet. (Optional)
accounts are listed on the trial balance because they appear in the ledger. Electronically prepared work sheets list all the accounts, not just those with a balance. 2. Enter the adjusting entries in the Adjustments columns, and total the amounts. Exhibit 4-3 includes the April adjusting entries. These are the same adjustments as those we used in Chapter 3 to prepare the adjusted trial balance. We can identify the accounts that need to be adjusted by scanning the trial balance. Cash needs no adjustment because all cash transactions are recorded as they occur during the period. Consequently, Cashs balance is up to date. Accounts Receivable is listed next. Has Air & Sea Travel, Inc. earned revenue that it has not yet recorded? The answer is yes. At April 30, the business has earned $250, which must be accrued because the cash will be received during May. Air & Sea Travel, Inc. debits Accounts Receivable and credits Service Revenue on the work sheet in Exhibit 4-3. A letter is used to link the debit and the credit of each adjusting entry.
Chapter Four Completing the Accounting Cycle 165
EXHIBIT 4-2
Trial Balance
AIR & SEA TRAVEL, INC. Accounting Work Sheet For the Month Ended April 30, 2003
Trial Balance Account Title Cash Accounts receivable Supplies Prepaid rent Furniture Accumulated amortization Accounts payable Salary payable Unearned service revenue Common Stock Retained earnings Dividends Service revenue Amortization expense Rent expense Salary expense Supplies expense Utilities expense Dr. 24,800 2,250 700 3,000 16,500 13,100 450 20,000 11,250 3,200 7,000 Cr.
Adjustments Dr. Cr.
Adjusted Trial Balance Dr. Cr.
Income Statement Dr. Cr. Dr.
Balance Sheet Cr.
950 400 51,800
51,800
Net income

Print the account titles and their unadjusted ending balances in the Trial Balance columns of the work sheet, and total the amounts.
166
By moving down the trial balance, the accountant identifies the remaining accounts that need adjustment. Supplies is next. The business has used supplies during April, so it debits Supplies Expense and credits Supplies. The other adjustments are analyzed and entered on the work sheet as you learned in Chapter 3. Listing the accounts in their proper sequence aids the process of identifying accounts that need to be adjusted. But suppose that one or more accounts is omitted from the trial balance. This account can always be written below the first column totals$51,800. Assume that Supplies Expense was accidentally omitted and thus did not appear on the trial balance. When the accountant identifies the need to update the Supplies account, he or she knows that the debit in the adjusting entry is to Supplies Expense. In this case, the accountant can write Supplies Expense on the line beneath the amount totals and enter the debit adjustment$300on the Supplies Expense line. Keep in mind that the work sheet is not the finished version of the financial statements, so the order of the accounts on the work sheet is not critical. Supplies Expense can be listed in its proper sequence on the income statement. After the adjustments are entered on the work sheet, the amount columns are totalled. 3. Compute each accounts adjusted balance by combining the trial balance and adjustment figures. Enter the adjusted amounts in the Adjusted Trial Balance columns. Exhibit 4-4 shows the work sheet with the adjusted trial balance columns completed. Accountants perform this step as illustrated in Chapter 3. For example, the Cash balance is up to date, so it receives no adjustment. Accounts Receivables adjusted balance of $2,500 is computed by adding the trial balance amount of $2,250 to the $250 debit adjustment. Supplies adjusted balance of $400 is determined by subtracting the $300 credit adjustment from the unadjusted debit balance of $700. An account may receive more than one adjustment, as does Service Revenue. The column totals must maintain the equality of debits and credits. 4. Extend (that is, transfer) the asset, liability and shareholders equity amounts from the Adjusted Trial Balance to the Balance Sheet columns. Extend the revenue and expense amounts to the Income Statement columns. Total the statement columns. Every account is either a balance sheet account or an income statement account. The asset, liability, and shareholders equity accounts go to the balance sheet, and the revenues and expenses go to the income statement. Debits on the adjusted trial balance remain debits in the statement columns, and credits remain credits. Generally, each accounts adjusted balance should appear in only one statement column, as shown in Exhibit 4-5. Total the income statement columns first, as follows: Income Statement Debits (Dr.) Total expenses =
KEY POINT
Remember, from Chapter 3, how posting references help track data from the journal to the ledger. These identifiers are equally important for organizing the adjusting entries on the work sheet.
$3,875 Difference = $3,525
Credits (Cr.)
Total revenues
$7,400
Then total the balance sheet columns: Balance Sheet Debits (Dr.) Total assets
$49,400 Difference = $3,525
Credits (Cr.)
Total liabilities and shareholders equity =
$45,875
5. Compute net income or net loss as the difference between total revenues and total expenses on the income statement. Enter net income as a debit balancing amount on the income statement and as a credit amount on the balance sheet. Then compute the adjusted column totals. Exhibit 4-6 presents the completed accounting work sheet, which shows net income of $3,525, computed as follows:
EXHIBIT 4-3
Adjustments
Trial Balance Account Title Dr. Cr.
Adjustments Dr. (a) 250 (b) 300 (c) 1,000 (d) 275 Cr.
Adjusted Trial Balance Dr. Cr.
Balance Sheet Cr.
Cash 24,800 Accounts receivable 2,250 Supplies 700 Prepaid rent 3,000 Furniture 16,500 Accumulated amortization Accounts payable Salary payable Unearned service revenue (f) 150 Common Stock Retained earnings Dividends 3,200 Service revenue Amortization expense Rent expense Salary expense Supplies expense Utilities expense Net income
13,100 (e) 950 450 (f) 150 20,000 11,250 7,000 (d) 275 (c) 1,000 (e) 950 (b) 300 51,800 2,925 2,925 (a) 250 (f) 150
950 400 51,800
168 3Part OnePart One The Basic of Accounting The Basic Structure Structure of Accounting

Enter the adjusting entries in the Adjustments columns, and total the amounts.
EXHIBIT 4-4
Adjusted Trial Balance
Trial Balance Account Title Cash Accounts receivable Supplies Prepaid rent Furniture Accumulated amortization Accounts payable Salary payable Unearned service revenue Common Stock Retained earnings Dividends Service revenue Amortization expense Rent expense Salary expense Supplies expense Utilities expense Net income Dr. 24,800 2,250 700 3,000 16,500 13,100 Cr.
Adjustments Dr. (a) 250 (b) 300 (c) 1,000 (d) 275 (e) 950 Cr.
Adjusted Trial Balance Dr. 24,800 2,500 400 2,000 16,500 275 13,100 950 300 20,000 11,250 3,200 7,400 275 1,000 1,900 300 400 53,275 Cr.
Balance Sheet Cr.
450 (f) 150 20,000 11,250 3,200 7,000 (d) 275 (c) 1,000 (e) 950 (b) 300 51,800 2,925 2,925 (a) 250 (f) 150
950 400 51,800
53,275

Compute each accounts adjusted balance by combining the trial balance and adjustment figures. Enter the adjusted amounts in the Adjusted Trial Balance columns. Chapter Four Completing the Accounting Cycle 169
KEY POINT
Net income is the difference between the debit and credit Income Statement columns.
Revenue (total credits on the income statement) ..................... Expenses (total debits on the income statement) ..................... Net income......................................................................................
$7,400 3,875 $3,525
Net income of $3,525 is entered in the debit column of the income statement, to balance with the credit column of the income statement, which totals at $7,400. The net income amount is then extended to the credit column of the balance sheet because an excess of revenues over expenses increases retained earnings, and increases in retained earnings are recorded by a credit. In the closing process, net income will find its way into the Retained Earnings account, as we shall soon see. After completion, total debits equal total credits in the Income Statement columns and in the Balance Sheet columns. The balance sheet columns are totalled at $49,400. If expenses exceed revenues, the result is a net loss. In that event, Net loss is printed on the work sheet. The loss amount should be entered in the credit column of the income statement and in the debit column of the balance sheet, because an excess of expenses over revenue decreases retained earnings, and decreases in retained earnings are recorded by a debit.
Mid-Chapter Summary Problem
for Your Review
The trial balance of OMalleys Service Company Ltd. at December 31, 2003, the end of its fiscal year, is presented below:
OMALLEYS SERVICE COMPANY LTD. Trial Balance December 31, 2003 Cash ................................................................. Accounts receivable....................................... Supplies ........................................................... Furniture ......................................................... Accumulated amortizationfurniture....... Building........................................................... Accumulated amortizationbuilding......... Land ................................................................. Accounts payable........................................... Salary payable ................................................ Unearned service revenue ............................ Common stock .............................................. Retained earnings .......................................... Dividends........................................................ Service revenues............................................. Amortization expensebuilding ................ Amortization expensefurniture ............... Salary expense................................................ Supplies expense............................................ Utilities expense ............................................. Total ................................................................. $ 198,000 370,000 6,000 100,000 $ 40,000 210,000 130,000 50,000 380,000 45,000 100,000 193,000 65,000 286,000
172,000 3,000 $1,174,000
$1,174,000
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Data needed for the adjusting entries include: a. b. c. d. e. f. Supplies remaining on hand at year end, $2,000 Amortization on furniture, $20,000 Amortization on building, $10,000 Salaries owed but not yet paid, $5,000 Service revenues to be accrued, $12,000 Of the $45,000 balance of Unearned Service Revenue, $32,000 was earned during 2003.
Required Prepare the work sheet of OMalleys Service Company Ltd. for the year ended December 31, 2003. Key each adjusting entry by the letter corresponding to the data given.
Solution to Review Problem

OMALLEYS SERVICE COMPANY LTD. Work Sheet For the Year Ended December 31, 2003 Adjusted Trial Balance Debit
198,000 382,000 2,000 100,000 60,000 210,000 130,000 50,000 380,000 (d) 5,000 45,000 100,000 193,000 65,000 286,000 (c) 10,000 (b) 20,000 (d) 5,000 (a) 4,000 (e) 12,000 (f) 32,000 10,000 20,000 177,000 4,000 3,000 83,000 1,221,000 1,221,000 (f) 32,000 (c) 10,000 50,000 380,000 5,000 13,000 100,000 193,000 65,000 330,000 10,000 20,000 177,000 4,000 3,000 214,000 116,000 330,000 330,000 1,007,000 891,000 116,000 330,000 65,000 140,000 50,000 380,000 5,000 13,000 100,000 193,000 210,000 140,000
Trial Balance Account Title

Cash Accounts receivable Supplies Furniture Accumulated amortization furniture Building Accumulated amortization building Land Accounts payable Salary payable Unearned service revenue Common stock Retained earnings Dividends Service revenues Amortization expensebuilding Amortization expense furniture Salary expense Supplies expense Utilities expense
Adjustments Debit Credit
Income Statement Credit
Balance Sheet Debit

198,000 382,000 2,000 100,000 60,000
Debit
198,000 370,000 6,000 100,000
Credit
Credit Debit
Credit
(e) 12,000 (a) 4,000
40,000 210,000
(b) 20,000
172,000 3,000 1,174,000 1,174,000
83,000
Net income
330,000
1,007,000 1,007,000
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Cyber Coach
Visit the Student Resources area of the Accounting Companion Website for extra practice with the new material in Chapter 4. www.pearsoned.ca/horngren
OBJECTIVE 2
Use the work sheet to complete the accounting cycle

The work sheet helps organize accounting data and compute the net income or net loss for the period. It also aids in preparing the financial statements, recording the adjusting entries, and closing the accounts.
Preparing the Financial Statements

The work sheet shows the amount of net income or net loss for the period, but it is still necessary to prepare the financial statements. (The financial statements can be prepared directly from the adjusted trial balance; see page 126. This is why completion of the work sheet is optional.) The sorting of accounts to the balance sheet and income statement eases the preparation of the statements. The work sheet also provides the data for the statement of retained earnings. Exhibit 4-7 presents the April financial statements for Air & Sea Travel, Inc. (based on the data from the work sheet in Exhibit 4-6).
Recording the Adjusting Entries

The adjusting entries are a key element of accrual-basis accounting. The work sheet helps identify the accounts that need adjustments. But, actual adjustment of the accounts requires journal entries that are posted to the ledger accounts; see Panel A of Exhibit 4-8. Panel B shows the postings to the accounts, with Adj. denoting an amount posted from an adjusting entry. Only the revenue and expense accounts are presented in the exhibit in order to focus on the closing process, which is discussed in the next section. The adjusting entries can be recorded in the journal as they are entered on the work sheet, but it is not necessary to journalize them at the same time. Most accountants prepare the financial statements immediately after completing the work sheet. They can wait to journalize and post the adjusting entries before they make the closing entries. Delaying the journalizing and posting of the adjusting entries illustrates another use of the work sheet. Many companies journalize and post the adjusting entries as in Exhibit 4-8only once annuallyat the end of the year. The need for monthly and quarterly financial statements, however, requires a tool like the work sheet. The entity can use the work sheet to aid in preparing interim statements without journalizing and posting the adjusting entries.
OBJECTIVE 3
Close the revenue, expense, and dividend accounts
Closing the Accounts

Closing the accounts refers to the step at the end of the period that prepares the accounts for recording the transactions of the next period. Closing the accounts consists of journalizing and posting the closing entries. Closing results in the balances of the revenue and expense accounts becoming zero in order to clearly measure the net income or net loss of each period separately from all other periods. Recall that the income statement reports only one periods income. For example, net income for Air Canada Corporation for the year ended December 31, 2003, relates exclusively to the twelve months ended on that date. At December 31, 2003, Air Canada accountants close the companys revenues and expense accounts for that year. Because these accounts balances relate to a particular accounting period
Air Canada www.aircanada.ca
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EXHIBIT 4-5
Income Statement and Balance Sheet
Trial Balance Account Title Cash Accounts receivable Supplies Prepaid rent Furniture Accumulated amortization Accounts payable Salary payable Unearned service revenue Common Stock Retained earnings Dividends Service revenue Amortization expense Rent expense Salary expense Supplies expense Utilities expense Net income Dr. 24,800 2,250 700 3,000 16,500 13,100 Cr.
Adjusted Trial Balance Dr. 24,800 2,500 400 2,000 16,500 275 13,100 950 300 20,000 11,250 3,200 Cr.
Balance Sheet Cr.
24,800 2,500 400 2,000 16,500 275 13,100 950 300 20,000 11,250 3,200 7,400 7,400 275 1,000 19,00 300 400 3,875
450 (f) 150 20,000 11,250 3,200 7,000 (d) 275 (c) 1,000 (e) 950 (b) 300 51,800 2,925 2,925 (a) 250 (f) 150 275 1,000 1,900 300 400 53,275
950 400 51,800
53,275
7,400
49,400
45,875

Extend the asset, liability, and shareholders equity amounts from the Adjusted Trial Balance to the Balance Sheet columns. Extend the revenue and expense amounts to the Income Statement columns. Total the statement columns. 173
EXHIBIT 4-6
Computations of Net Income
Trial Balance Account Title Cash Accounts receivable Supplies Prepaid rent Furniture Accumulated amortization Accounts payable Salary payable Unearned service revenue Common Stock Retained earnings Dividends Service revenue Amortization expense Rent expense Salary expense Supplies expense Utilities expense Dr. 24,800 2,250 700 3,000 16,500 13,100 Cr.
Adjusted Trial Balance Dr. 24,800 2,500 400 2,000 16,500 275 13,100 950 300 20,000 11,250 3,200 Cr.
Balance Sheet Cr.
24,800 2,500 400 2,000 16,500 275 13,100 950 300 20,000 11,250 3,200 7,400 7,400 275 1,000 19,00 300 400 3,875 3,525 7,400
450 (f) 150 20,000 11,250 3,200 7,000 (d) 275 (c) 1,000 (e) 950 (b) 300 51,800 2,925 2,925 (a) 250 (f) 150 275 1,000 1,900 300 400 53,275
950 400 51,800
53,275
7,400 7,400
49,400 49,400
Net income
45,875 3,525 49,400

Compute net income or net loss as the difference between total revenues and total expenses on the income statement. Enter net income or net loss as a balancing amount on the income statement and on the balance sheet, and compute the adjusted column totals.
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EXHIBIT 4-7 AIR & SEA TRAVEL, INC. Income Statement For the Month Ended April 30, 2003 Revenues: Service revenue ................................................................. Expenses: Amortization expensefurniture .................................. Rent expense...................................................................... Salary expense................................................................... Supplies expense .............................................................. Utilities expense................................................................ Total expenses................................................................ Net income ............................................................................
April Financial Statements of Air & Sea Travel, Inc.
$7,400 $ 275 1,000 1,900 300 400 3,875 $3,525
AIR & SEA TRAVEL, INC. Statement of Retained Earnings For the Month Ended April 30, 2003 Retained earnings, April 1, 2003................................................................. Add: Net income .......................................................................................... Less: Dividends............................................................................................. Retained earnings, April 30, 2003............................................................... $11,250 3,525 14,775 3,200 $11,575
AIR & SEA TRAVEL, INC. Balance Sheet April 30, 2003 Assets Cash ............................. $24,800 Accounts receivable... 2,500 Supplies....................... 400 Prepaid rent ................ 2,000 Furniture ..................... $16,500 Less: Accumulated amortization........ 275 16,225 Liabilities Accounts payable ...................... $13,100 Salary payable............................ 950 Unearned service revenue......... 300 Total liabilities ........................ 14,350 Shareholders Equity Common stock ........................... 20,000 Retained earnings...................... 11,575 Total shareholders equity .... 31,575 Total liabilities and shareholders equity.............. $45,925
Total assets ..................
$45,925
(2003 in this case) and are therefore closed at the end of the period (December 31, 2003), the revenue and expense accounts are called temporary (nominal) accounts. For example, assume Air & Sea Travel, Inc.s year end is April 30, 2003. The balance of Service Revenue at April 30, 2003, is $7,400. This balance relates exclusively to the month of April and must be zeroed out before Air & Sea Travel, Inc. starts accounting for the revenue the business will earn during the next year, beginning May 1, 2003. The Dividends accountalthough not a revenue or an expenseis also a temporary account, because it measures dividends taken during a specific period. The closing process applies only to temporary accounts. To better understand the closing process, contrast the nature of the temporary accounts with the nature of the permanent (real) accountsthe asset, liability, and shareholders equity accounts. The asset, liability, and shareholders equity accounts
EXHIBIT 4-8
Journalizing and Posting the Adjusting Entries
Panel A: Journalizing Adjusting Entries Apr. 30 30 30 30 30 30 Accounts Receivable ............................................. Service Revenue ............................................... Supplies Expense................................................... Supplies ............................................................. Rent Expense.......................................................... Prepaid Rent ..................................................... Amortization ExpenseFurniture ..................... Accumulated AmortizationFurniture ....... Salary Expense....................................................... Salary Payable................................................... Unearned Service Revenue.................................. Service Revenue ............................................... 250
Page 4
250 300 300 1,000 1,000 275 275 950 950 150 150
THINKING IT OVER
Where is each account extendedIncome Statement, debit column; Income Statement, credit column; Balance Sheet, debit column; or Balance Sheet, credit column? 1. Cash. A: Balance Sheet, debit 2. Supplies. A: Balance Sheet, debit 3. Supplies Expense. A: Income Statement, debit 4. Unearned Revenue. A: Balance Sheet, credit 5. Service Revenue. A: Income Statement, credit 6. Common Stock. A: Balance Sheet, credit
Panel B: Posting the Adjustments to the Revenue and Expense Accounts REVENUE EXPENSES Amortization Expense Furniture Adj. Bal. 275 275
Service Revenue 7,000 Adj. 250 Adj. 150 Bal. 7,400
Rent Expense Adj. 1,000 Bal. 1,000
Salary Expense 950 950 1,900 Utilities Expense Adj. Bal. 400 400
Bal. = Balance
Supplies Expense Adj. Bal. 300 300
Adj. Bal.
Adj. = Amount posted from an adjusting entry
are not closed at the end of the period because their balances are not used to measure income. Consider Cash, Accounts Receivable, Supplies, Buildings, Accounts Payable, Notes Payable, Common Stock, and Retained Earnings. These accounts do not represent business activity for a single period as do revenues and expenses, which relate exclusively to one accounting period. Instead the permanent accounts represent assets, liabilities, and shareholders equity that are on hand at a specific time. This is why their balances at the end of one accounting period carry over to become the beginning balances of the next period. For example, the Cash balance at December 31, 2002 is also the beginning balance for 2003. Closing entries transfer the revenue, expense, and dividend balances from their respective accounts to the Retained Earnings account. As you know, REVENUES EXPENSES and DIVIDENDS increase decrease shareholders equity shareholders equity
176
It is when we post the closing entries that the Retained Earnings account absorbs the impact of the balances in the temporary accounts. As an intermediate step, however, the revenues and the expenses are transferred first to an account entitled Income Summary, which collects in one place the total debits for the sum of all expenses and the total credit for the sum of all revenues of the period. The Income Summary account is like a temporary holding tank that is used only in the closing process. Then the balance of Income Summary is transferred to the Retained Earnings account. The steps in closing the accounts of a corporation like Air & Sea Travel, Inc. are as follows (the circled numbers are keyed to Exhibit 49): 1 Debit each revenue account for the amount of its credit balance. Credit Income Summary for the sum of the revenues. This entry transfers the sum of the revenues to the credit side of the Income Summary. 2 Credit each expense account for the amount of its debit balance. Debit Income Summary for the sum of the expenses. This entry transfers the sum of the expenses to the debit side of the Income Summary. It is not necessary to make a separate closing entry for each expense. In one closing entry, record one debit to Income Summary and a separate credit to each expense account. 3 To close net income, debit Income Summary for the amount of its credit balance (net income equals revenues minus expenses) and credit the Retained Earnings account. If there is a net loss, Income Summary has a debit balance. In that case, credit Income Summary for this amount and debit Retained Earnings. This entry transfers the net income or loss from Income Summary to the Retained Earnings account. 4 Credit the Dividends account for the amount of its debit balance. Debit the Retained Earnings account. This entry transfers the Dividends amount to the debit side of the Retained Earnings account. Dividends are not expenses and do not affect net income or net loss. These steps are best illustrated with an example. Suppose Air & Sea Travel, Inc. closes the books at the end of April. Exhibit 4-9 presents the complete closing process for the business. Panel A gives the closing journal entries, and Panel B shows the accounts after the closing entries have been posted. The amount in the debit side of each expense account is its adjusted balance. For example, Rent Expense has a $1,000 debit balance. Also note that Service Revenue has a credit balance of $7,400 before closing. These amounts come directly from the adjusted balances in Exhibit 4-8, Panel B. Closing entry 1 , denoted in the Service Revenue account by Clo., transfers Service Revenues balance to the Income Summary account. This entry zeroes out Service Revenue for April and places the revenue on the credit side of Income Summary. Closing entry 2 zeroes out the expenses and moves their total ($3,875) to the debit side of Income Summary. At this point, Income Summary contains the impact of Aprils revenues and expenses; hence Income Summarys balance is the months net income ($3,525). Closing entry 3 closes the Income Summary account by transferring net income to the credit side of Retained Earnings.1 The last closing entry, 4 , moves the dividends to the debit side of Retained Earnings, leaving a zero balance in the Dividends account. The closing entries set all the revenues, the expenses, and the Dividends account back to zero. Now the Retained Earnings account includes the full effects of the April revenues, expenses, and dividends. These amounts, combined with the
KEY POINT
There is no account for Net Income, which is the net result of all revenue and expense accounts. The Income Summary combines all revenue and expense amounts into one account.
THINKING IT OVER
(1) Would the Income Summary have a debit or a credit balance if the company suffers a net loss? (2) In the event of a loss, how is Income Summary closed? A: (1) Expenses would exceed revenues, and Income Summary would have a debit balance. (2) Income Summary is credited, and Retained Earnings is debited.
The Income Summary account is a convenience for combining the effects of the revenues and expenses prior to transferring their income effect to Retained Earnings. It is not necessary to use the Income Summary account in the closing process. Another way of closing the revenues and expenses makes no use of this account. In this alternative procedure, the revenues and expenses are closed directly to Retained Earnings.
177
Exhibit 4-9
Journalizing and Posting the Closing Entries
Panel A: Journalizing Closing Entries 1 Apr. 30 Service Revenue .................................... Income Summary.............................. To close the revenue account and create the Income Summary account. Income Summary .................................. Rent Expense ..................................... Salary Expense .................................. Supplies Expense .............................. Amortization Expense...................... Utilities Expense ............................... To close the expense accounts. Income Summary .................................. Retained Earnings............................. To close the Income Summary account and transfer net income to the Retained Earnings account. (Income Summary balance = $7,400 $3,875). Retained Earnings ................................. Dividends........................................... To close the Dividends account and transfer the Dividends amount to the Retained Earnings account. 7,400 7,400 Page 5
30
3,875 1,000 1,900 300 275 400 3,525 3,525
30
30
3,200 3,200
Panel B: Posting Amortization Expense Adj. Bal. 275 275 Service Revenue 7,000 250 150 7,400
Clo.
275 Clo. 2 1,000 Income Summary 1
Rent Expense Adj. Bal. 1,000 1,000 Clo. Salary Expense 950 950 1900 Clo. Supplies Expense Adj. Bal. 300 300 4 Clo. 300 3
Adj. Adj. 7,400 Bal.
Adj. Bal.
1,900
Clo. Clo.
3,875 3,525
Clo. Bal.
7,400 3,525 Bal.
Dividends 3,200 Clo. Retained Earnings 3,200
Clo.
3,200 Clo. Bal.
Utilities Expense 400 400
11,250 3,525 11,575
Bal.
Clo.
400
Clo. = Amount posted from a closing entry Bal. = Balance
Adj. = Amount posted from an adjusting entry
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beginning Retained Earnings balance, give the Retained Earnings account an ending balance of $11,575. Trace this ending Retained Earnings balance to the statement of Retained Earnings and also to the balance sheet in Exhibit 4-7. Closing a Net Loss What would the closing entries be if Air & Sea Travel, Inc. had suffered a net loss during April? Suppose April expenses totalled $7,700 and all other factors were unchanged. Only closing entries 2 and 3 would change. Closing entry 2 would transfer expenses of $7,700 to Income Summary, as follows:
Income Summary Clo. Bal. 7,700 300 Clo. 7,400
Closing entry 3 would then credit Income Summary to close its debit balance and to transfer the net loss to Retained Earnings: 3 Apr. 30 Retained Earnings............................................ Income Summary ........................................ 300 300
KEY POINT
After posting, these two accounts would appear as follows:

Income Summary Clo. Bal. 7,700 300 Clo. Clo. 7,400 300 Clo. Retained Earnings 300 11,250
The double line in an account means that the account has a zero balance; nothing more will be posted to it in the current period. The double line is drawn immediately after the closing entry is posted. In the general ledger, the account has a zero balance.
Finally, the Dividend balance would be closed to Retained Earnings, as before. The double line in an account means that the account has a zero balance; nothing more will be posted to it in the current period. The closing process is fundamentally mechanical and is completely automated in a computerized system. Accounts are identified as either temporary or permanent. The temporary accounts are closed automatically by selecting that option from the softwares menu. Posting also occurs automatically.
Student to Student
One of the most effective pages in this chapter is Exhibit 4-1 on page 165it's a great breakdown of the accounting cycle. Panel B makes it easy to remember what the process looks like. Exhibit 4-2 is also a great learning tool. Using consecutive exhibits to display the step-by-step process is excellent.
Matt H., Kitchener
Postclosing Trial Balance

The accounting cycle ends with the postclosing trial balance (Exhibit 4-10). The postclosing trial balance is the final check on the accuracy of journalizing and posting the adjusting and closing entries. It lists the ledgers accounts and their adjusted balances after closing. This step shows where the business stands as it moves into the next accounting period. The postclosing trial balance is dated as of the end of the period for which the statements have been prepared. The postclosing trial balance resembles the balance sheet. It contains the ending balances of the permanent accountsthe balance sheet accounts: the assets, liabilities, and shareholders equity. No temporary accountsrevenues, expenses, or dividend accountsare included because their balances have been closed. The ledger is up to date and ready for the next periods transactions.
Correcting Journal Entries

In Chapter 2 we discussed errors that affect the trial balance: treating a debit as a credit and vice versa; transpositions; and slides. Here we show how to correct errors in journal entries. When a journal entry contains an error and the error is detected before posting, the entry can be corrected.
OBJECTIVE 4
Correct typical accounting errors
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EXHIBIT 4-10
Postclosing Trial Balance
AIR & SEA TRAVEL, INC. Postclosing Trial Balance April 30, 2003 Cash............................................................................................ Accounts receivable ................................................................. Supplies ..................................................................................... Prepaid rent .............................................................................. Furniture.................................................................................... Accumulated amortizationFurniture ................................ Accounts payable..................................................................... Salary payable .......................................................................... Unearned service revenue ...................................................... Common stock.......................................................................... Retained earnings .................................................................... Total ...................................................................................... $24,800 2,500 400 2,000 16,500 $ 275 13,100 950 300 20,000 11,575 $46,200
$46,200
If the error is detected after posting, the accountant makes a correcting entry. Suppose Air & Sea Travel, Inc. paid $5,000 cash for furniture and erroneously debited Supplies as follows:
WORKING IT OUT
Incorrect Entry May 13 Supplies..................................................... Cash...................................................... Bought supplies. 5,000 5,000
(1) An accounting clerk recorded the collection of a $1,000 receivable as a debit to Cash and a credit to Service Revenue for $1,000. Prepare the correcting entry. (2) If the net income before the correction was $26,000, how much is the corrected net income? A: (1) Service Rev. 1,000 Accounts Rec. 1,000 (2) $25,000 ($26,000 $1,000)
The debit to Supplies is incorrect, so it is necessary to make the following correcting entry:
Correcting Entry May 15 Furniture......................................................... Supplies..................................................... To correct May 13 entry. 5,000 5,000
The credit to Supplies in the second entry offsets the incorrect debit of the first entry. The debit to Furniture in the correcting entry places the furnitures cost in the correct account. Now both Supplies and Furniture are correct. Cash was unaffected by the error because Cash was credited correctly in the entry to purchase the furniture.
OBJECTIVE 5
Classify assets and liabilities as current or long-term
Classification of Assets and Liabilities

On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their relative liquidity. Liquidity is a measure of how quickly an item can be converted to cash. Cash is the most liquid asset. Accounts receivable is a relatively liquid asset because the business expects to collect the amount in cash in the near future. Supplies are less liquid than accounts receivable, and furniture and buildings are even less so. Users of financial statements are interested in liquidity because business difficulties often arise due to a shortage of cash. How quickly can the business convert an asset to cash and pay a debt? How soon must a liability be paid? These are questions of liquidity. Balance sheets list assets and liabilities in the order of their relative liquidity.
Assets
Current Assets Current assets are assets that are expected to be converted to cash, sold, or consumed during the next 12 months or within the businesss normal
180 Part One The Basic Structure of Accounting
operating cycle if longer than a year. The operating cycle is the time span during which (1) cash is used to acquire goods and services, and (2) those goods and services are sold to customers, who in turn pay for their purchases with cash. For most businesses, the operating cycle is a few months. A few types of business have operating cycles longer than a year. Cash, Accounts Receivable, Notes Receivable due within a year or less, and Prepaid Expenses are current assets. Merchandising entities such as The Bay and Zellers, and manufacturing entities such as Magna and Bombardier, have an additional current asset, Inventory. This account shows the cost of goods that are held for sale to customers. Long-Term Assets Long-term assets are all assets other than current assets. One category of long-term assets is capital assets. Furniture and Fixtures, Equipment, Buildings, and Land are capital assets. Of these, Air & Sea Travel, Inc. has only Furniture. Other categories of long-term assets include Investments and Other Assets (a catchall category for assets that are not classified more precisely). We discuss these categories in more detail in later chapters.
Magna www.magnaint.com Bombardier www.bombardier.com The Hudsons Bay Company www.hbc.com
Liabilities
Financial statement users (such as creditors) are interested in the due dates of an entitys liabilities. Liabilities that must be paid the soonest create the greatest strain on cash. Therefore, the balance sheet lists liabilities in the order in which they are due to be paid. Knowing how many of a businesss liabilities are current and how many are long-term helps creditors assess the likelihood of collecting from the entity. Balance sheets usually have at least two liability classifications, current liabilities and long-term liabilities. Current Liabilities Current liabilities are debts that are due to be paid within one year or one of the entitys operating cycles if the cycle is longer than a year. Accounts Payable, Notes Payable due within one year, Salaries Payable, Unearned Revenue, Goods and Services Tax Payable, and Interest Payable owed on notes payable are current liabilities. Long-Term Liabilities All liabilities that are not current are classified as long-term liabilities. Many notes payable are long-termpayable after the longer of one year or the entitys operating cycle. Some notes payable are paid in installments, with the first installment due within one year, the second installment due the second year, and so on. In this case, the first installment would be a current liability and the remainder long-term liabilities. For example, a $100,000 note payable to be paid $10,000 per year over ten years would include a current liability of $10,000 for next years payment and a long-term liability of $90,000. Thus far in this book we have presented the unclassified balance sheet of Air & Sea Travel, Inc. Our purpose was to focus on the main points of assets, liabilities, and shareholders equity without the details of current assets, current liabilities, and so on. Exhibit 4-11 presents Air & Sea Travel, Inc.s classified balance sheet. (Notice that Air & Sea Travel, Inc. has no long-term liabilities. Suppose the company had incurred a debt for its furniture and the debt would not be repaid during the coming year. This debt would have appeared as a long-term liability on the Balance Sheet.) Compare Air & Sea Travel, Inc.s classified balance sheet in Exhibit 4-11 with the unclassified balance sheet in Exhibit 4-7. The classified balance sheet reports totals for current assets and current liabilities, which do not appear on the unclassified balance sheet. Also, Air & Sea Travel, Inc. has no long-term liabilities, so there are none to report on either balance sheet. The classified balance sheet of AS Products Company Ltd. a fictitious company, is shown in Exhibit 4-12. It shows how a company with many different accounts could present its data on a classified balance sheet. Now lets examine an actual companys classified balance sheet.
Exhibit 4-11
Classified Balance Sheet of Air & Sea Travel, Inc.
AIR & SEA TRAVEL, INC. Balance Sheet April 30, 2003 Assets Current assets: Cash ......................................... $24,800 Accounts receivable .............. 2,500 Supplies................................... 400 Prepaid rent ............................ 2,000 Total current assets ............ $29,700 Capital assets: Furniture ................. $16,500 Less: Accumulated amortization ....... 275 Total capital assets 16,225 Total assets.................................. $45,925 Liabilities Current liabilities: Accounts payable ................... $13,100 Salary payable......................... 950 Unearned service revenue .... 300 Total current liabilities ....... 14,350 Shareholders Equity Common stock............................ 20,000 Retained earnings....................... 11,575 Total shareholders equity......... 31,575 Total liabilities and shareholders equity............... $45,925
S TOP & T HINK

Why is the classified balance sheet in Exhibit 4-11 more useful than an unclassified balance sheet (Exhibit 4-7) to a banker considering whether to lend $10,000 to Air & Sea Travel, Inc.? Answer: A classified balance sheet indicates which of Air & Sea Travel, Inc.s liabilities, and the dollar amounts, that the company must pay within the next year. which of Air & Sea Travel, Inc.s assets are the most liquid and thus available to pay the liabilities. which assets and liabilities (and amounts) are long-term.
An Actual Classified Balance Sheet

Exhibit 4-13 is an adapted classified balance sheet of Noranda Inc., a Canadian mining company. The statement is labelled Consolidated because it reports the accounts of Noranda and its component companies as well. Dollar amounts are reported in millions to avoid clutter. Noranda Inc.s year end is December 31, 1999. It is customary to present two or more years statements together to allow people to compare one year with the other1999 and 1998 in this case. You should be familiar with all but a few of Noranda Inc.s account titles. Titles you might not be familiar with are Deferred Credits and Minority Interest in Subsidiaries. In Noranda Inc.s case, Deferred Credits include the accrued costs of closing down mines owned by the company and the accrued costs of future pensions payable. Minority Interest in Subsidiaries includes the preferred and common shares of stock of companies held by others in which Noranda Inc. has a significant investment. Note that Noranda Inc. provides labels only for current assets and current liabilities; the remaining assets and liabilities are long-term because they are not labelled current.
Noranda Inc. www.noranda.com
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EXHIBIT 4-12 AS PRODUCTS COMPANY LTD. Balance Sheet June 30, 2004
Assets Current assets: Cash ........................................................................ Temporary investments....................................... Accounts receivable ............................................. Interest receivable................................................. Current portion of note receivable..................... Inventory ............................................................... Prepaid insurance................................................. Prepaid rent ........................................................... Supplies.................................................................. Total current assets ........................................... Capital assets: Equipment ............................................................. Less: accumulated amortization..................... Furniture and fixtures.......................................... Less: accumulated amortization..................... Buildings................................................................ Less: accumulated amortization..................... Land........................................................................ Total capital assets ............................................ Other assets: Note receivable ..................................................... Less: Current portion of note receivable ....... Total other assets .............................................. Total assets .................................................................. Liabilities Current liabilities: Accounts payable ................................................. Salaries and wages payable ................................ Interest payable..................................................... Goods and services tax payable ......................... Current portion of notes payable ....................... Current portion of mortgage payable ............... Income tax payable .............................................. Other current liabilities........................................ Total current liabilities ..................................... Long-term liabilities: Notes payable ....................................................... Less current portion of notes payable ........... Mortgage payable................................................. Less current portion of mortgage payable.... Total long-term liabilities ................................ Total liabilities ............................................................ Shareholders Equity Common stock ...................................................... Retained earnings................................................. Total shareholders equity ............................... $ 30,000 9,000 35,000 15,000 120,000 80,000 Classified Balance Sheet of AS Products Company Ltd.
$ 13,200 28,500 117,500 13,400 25,800 423,900 12,300 13,500 2,600 $650,700
21,000 20,000 40,000 35,000 116,000
50,000 25,800 24,200 $790,900
$143,500 11,200 12,300 32,300 30,000 36,100 35,000 11,800 $312,200
$170,000 30,000 110,000 36,100
140,000 73,900 213,900 526,100
150,000 114,800 264,800
Total liabilities and shareholders equity...........
$790,900
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EXHIBIT 4-13
Consolidated Balance Sheet
NORANDA INC. Consolidated Balance Sheet December 31, 1999 ($ millions) ASSETS Current assets Cash and short-term notes...................................................... Accounts receivable ................................................................. Inventories................................................................................. ................................................................................................ Capital assets ............................................................................ Investment and other assets ................................................... ................................................................................................ LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Bank advances and short-term notes .................................... Accounts and taxes payable ................................................... Debt due within one year ....................................................... ................................................................................................ Long-term debt......................................................................... Deferred credits ........................................................................ Minority interest in subsidiaries ............................................ Shareholders equity ................................................................ ................................................................................................ 1999 1998
727 1,520 1,510 3,757
$ 1,296 1,242 1,491 4,029 6,806 340 $11,175
7,234 388 $11,379
86 1,644 225 1,955 2,952 917 1,388
76 1,202 143 1,421 3,274 937 1,356
4,167 $11,379
4,187 $11,175
Formats of Balance Sheets

Canada Business Corporations Act www.cbsc.org/fedbis
The balance sheets of AS Products Company Ltd. shown in Exhibit 4-12 and of Noranda Inc. shown in Exhibit 4-13 list the assets at the top, with the liabilities and shareholders equity below. This is the report format. The balance sheet of Air & Sea Travel, Inc. presented in Exhibit 4-7 lists the assets at the left, with the liabilities and the shareholders equity at the right. That is the account format. Either format is acceptable. The report format is more extensively used by Canadian companies.
OBJECTIVE 6
Use the current and debt ratios to evaluate a businesss ability to pay its debts
Accounting Ratios
The purpose of accounting is to provide information for decision making. Chief users of accounting information include managers, investors, and creditors. A creditor considering lending money must predict whether the borrower can repay the loan. If the borrower already has a large amount of debt, the probability of repayment is lower than if the borrower has a small amount of liabilities. To assess financial position, decision makers use ratios computed from a companys financial statements.
Current Ratio
One of the most common ratios is the current ratio, which is the ratio of an entitys current assets to its current liabilities:
184
Current Ratio
Total current assets Total current liabilities
THINKING IT OVER
The current ratio measures the ability to pay current liabilities with current assets. A company prefers a high current ratio, which means the business has sufficient current assets to pay current liabilities when they come due, plus a cushion of additional current assets. An increasing current ratio from period to period generally indicates improvement in financial position. A rule of thumb: A strong current ratio would be in the range of 2.00; it would indicate that the company has approximately $2.00 in current assets for every $1.00 in current liabilities. A company with a current ratio of 2.00 would probably have little trouble paying its current liabilities. Most successful businesses operate with current ratios between 1.30 and 2.00. A current ratio of 1.00 is considered quite low. Lenders and investors would view a company with a current ratio of 1.50 to 2.00 as substantially less risky. Such a company could probably borrow money on better terms and also attract more investors.
A company has current assets of $100,000 and current liabilities of $50,000. How will the payment of a $10,000 account payable affect the current ratio? A: The payment of an account payable would cause both cash and accounts payable to decrease and thus would increase the current ratio from 2.00 to 2.25. In other words, payment of the liability would make the company look better.
REAL WORLD EXAMPLE
Debt Ratio
A second aid to decision making is the debt ratio, which is the ratio of total liabilities to total assets: Total liabilities Debt ratio = Total assets The debt ratio indicates the proportion of a companys assets that are financed with debt. This ratio measures a companys ability to pay both current and long-term debtstotal liabilities. A low debt ratio is safer than a high debt ratio. Why? Because a company with a small amount of liabilities has low required payments. Such a company is unlikely to get into financial difficulty. By contrast, a company with a high debt ratio may have trouble paying its liabilities, especially when sales are low and cash is scarce. When a company fails to pay its debts on a timely basis, the creditors can take the business away from its owners. The largest retail bankruptcy in history, Federated Department Stores (owned at the time by the Canadian company Campeau Corporation) was due largely to high debt during a retail-industry recession. Campeau was unable to weather the downturn and had to declare bankruptcy. Managing Both the Current Ratio and the Debt Ratio In general, a high current ratio is preferred over a low current ratio. Increases in the current ratio indicate improving financial position. By contrast, a low debt ratio is preferred over a high debt ratio. Improvement is indicated by a decrease in the debt ratio. A rule of thumb: A debt ratio below 0.60, or 60%, is considered safe for most businesses. A debt ratio above 0.80, or 80%, borders on high risk. Most companies have debt ratios in the range of 0.60 to 0.80. Financial ratios are an important aid to decision makers. However, it is unwise to place too much confidence in a single ratio or group of ratios. For example, a company may have a high current ratio, which indicates financial strength. It may also have a high debt ratio, which suggests weakness. Which ratio gives the more reliable signal about the company? Experienced managers, lenders and investors evaluate a company by examining a large number of ratios over several years to spot trends and turning points. These people also consider other facts, such as the companys cash position and its trend in net income. No single ratio gives the whole picture about a company. As you progress through the study of accounting, we will introduce key ratios used for decision making. Chapter 18 then summarizes all the ratios discussed in this book and provides a good overview of ratios used in decision making.
Schneider Corporation has a current ratio of 1.38 (1.38 = $123,642,000/$89,542,000). While the ratio is at the lower end of the range discussed in the text, it is positive, and Schneider has operated successfully with a similar ratio for a number of years.
REAL WORLD EXAMPLE
Schneider Corporation has a debt ratio of 0.64 (0.64 = $206,479,000/$321,675,000). This ratio is virtually unchanged from previous years.
Schneider Corporation www.schneider.ca
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Decision How (where) to summarize the effects of all the companys transactions and adjustments throughout the period? Guideline Accountants work sheet with columns for: Trial balance Adjustments Adjusted trial balance Income statement Balance sheet Closing entries for the temporary accounts: Revenues Income statement accounts Expenses Dividends
What is the last major step in the accounting cycle?
Why close revenues, expenses, and dividends?
Because the temporary accounts have balances that relate only to one accounting period (fiscal year) and do not carry over to the next accounting period (fiscal year). Permanent (balance sheet) accounts: Assets Liabilities Shareholders Equity The balances of these accounts do carry over to the next accounting period. Current (within one year or the companys operating cycle if longer than a year) or Long-term (not current) There are many ways, such as the companys net income or net loss on the income statement. Another way to evaluate a company is based on the companys financial ratios. Two key ratios: Current ratio = Total current assets Total current liabilities
Which accounts do not get closed?
How do businesses classify their assets and liabilities for reporting on the balance sheet?
How do decision makers evaluate a company?
The current ratio measures the companys ability to pay its current liabilities with its current assets. Debt ratio = Total liabilities Total assets
The debt ratio shows the proportion of the entitys assets that are financed with debt. The debt ratio measures the entitys overall ability to pay its liabilities.
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Accounting Around the Globe

A Forced Debt Ratio for South Koreas Companies
Samsung. Daewoo. Hyundai. Just five years ago, these companies were the economic engines driving South Koreas economy. Today they are deeply in debt. When the Asian currency crisis began in 1997 investors moved their investments else, where and South Korean companies had to borrow money to continue to grow. The bigger the company, the more debt they had to take on. Since most large South Korean companies are chaebol, or family-controlled companies, it became risky for lenders to loan such large amounts to these companies. According to the reformist government of President Kim Dae Jung, the only way for the chaebol to keep the levels of debt reasonable and thus, to move toward financial stability, is to meet a strict debt ratio target of 200%. This means forcing chaebol to loosen their strict family control, and sell off assets and whole subsidiaries to generate cash and reduce their debts. For instance, car-making giant Daewoo was struggling to meet payments on $47 billion in debtequivalent to the entire national debt of Poland or Malaysiaso the government guided a plan to dismember the company and sell off the pieces. This kind of drastic action has created many critics of the governments reform plan. Some say that the measures companies must take to meet the 200% debt ratio targetwithdrawing cash deposits and selling off assetsmay cause a loss of liquidity and trigger financial crises. Other critics fault the plan for trying to use a one-size-fits-all debt-ratio target, regardless of the economic conditions faced by each of the chaebol. For instance, carmakers like Hyundai, which make huge purchases of plant and equipment, will have naturally high debt ratios. So, while President Kims reform plan may save some companies from bankruptcy, it may weaken otherwise sound firms.
Based on: Howard W. French, Dismantling of Yesterdays Economic Engines, New York Times, September 3, 1999, p. C1. Jane L. Lee, Korea Moves Anew to Reform Top 5 Chaebols; This Time, Control by Families Could Diminish, Wall Street Journal, August 26, 1999, p. A13. Anonymous, Government Under Fire for Strict Debt Ratio Target, Business Korea, December 1999, pp. 1819.
Summary Problem
for Your Review
Refer to the data in the Mid-Chapter Summary Problem for Your Review, presented on pages 170171. Required 1. Journalize and post the adjusting entries. (Before posting to the accounts, enter into each account its balance as shown in the trial balance. For example, enter the $370,000 balance in the Accounts Receivable account before posting its adjusting entry.) Key adjusting entries by letter, as shown in the work sheet solution to the mid-chapter review problem. You can take the adjusting entries straight from the work sheet on p. 171. Explanations are not required. Find the ending balances of the permanent accounts.
187
2. Journalize and post the closing entries. (Each account should carry its balance as shown in the adjusted trial balance.) Provide explanations. To distinguish closing entries from adjusting entries, key the closing entries by number. Draw the arrows to illustrate the flow of data, as shown in Exhibit 4-9, page 178. Indicate the balance of the retained earnings account after the closing entries are posted. 3. Prepare the income statement for the year ended December 31, 2003. 4. Prepare the statement of retained earnings for the year ended December 31, 2003. Draw the arrow that links the income statement to the statement of retained earnings, if both statements are on the same page. Otherwise, explain how they are linked. 5. Prepare the classified balance sheet at December 31, 2003. Use the report format. All liabilities are current. Draw the arrow that links the statement of retained earnings to the balance sheet, if both statements are on the same page. Otherwise, explain how they are linked.
Solution to Review Problem

Requirement 1
a. Dec. 31 b. Dec. 31 c. Dec. 31 d. Dec. 31 e. Dec. 31 f. Dec. 31 Supplies Expense ........................................................... Supplies...................................................................... Amortization ExpenseFurniture.............................. Accumulated AmortizationFurniture................ Amortization ExpenseBuilding ............................... Accumulated AmortizationBuilding ................. Salary Expense ............................................................... Salary Payable ........................................................... Accounts Receivable ..................................................... Service Revenue........................................................ Unearned Service Revenue .......................................... Service Revenue........................................................ Supplies Bal. 6,000 (a) 2,000 4,000 4,000 4,000 20,000 20,000 10,000 10,000 5,000 5,000 12,000 12,000 32,000 32,000
Accounts Receivable 370,000 (e) 12,000 Bal. 382,000 Accumulated Amortization Building 130,000 (c) 10,000 Bal.140,000
Accumulated Amortization Furniture 40,000 (b) 20,000 Bal. 60,000 Unearned Service Revenue 5,000 5,000 (f) 32,000 45,000 Bal. 13,000
Salary Payable (d) Bal.
Service Revenue 286,000 (e) 12,000 (f) 32,000 Bal.330,000 Salary ExpenseExpense 172,000 (d) 5,000 Bal. 177,000 Amortization Expense
Amortization Expense building (c) Bal. 10,000 10,000 (b) Bal.
Amortization Expense furniture 20,000 20,000
Supplies Expense (a) 4,000 Bal. 4,000
Requirement 2
a. Dec. 31 Service Revenue................................................. Income Summary ......................................... To close the revenue account and create the Income Summary account. Income Summary .............................................. Salary Expense .............................................. Supplies Expense.......................................... Amortization ExpenseFurniture ............ Amortization ExpenseBuilding.............. Utilities Expense ........................................... To close the expense accounts. Income Summary .............................................. Retained Earnings ....................................... To close the Income Summary account. (Income Summary balance = $330,000 $224,000). Retained Earnings ........................................... Dividends...................................................... To close the Dividends account and transfer the Retained Earnings amount to the Capital account. 330,000 330,000
b. Dec. 31
214,000 177,000 4,000 20,000 10,000 3,000 116,000 116,000
c. Dec. 31
d. Dec. 31
65,000 65,000
Amortization Expense Building Service Revenue (c) 10,000 Bal. 10,000 (2) 10,000 286,000 (e) 12,000 (f) 32,000 330,000 Bal. 330,000
Amortization Expense Furniture and Fixtures (b) Bal. 20,000 20,000 (2) Salary Expense 172,000 5,000 177,000 (2) Income Summary 20,000
(1)
(2) (3)
214,000 (1) 330,000 116,000 Bal. 116,000
Dividends
(d) Bal.
177,000
Bal.
65,000 (4)
65,000
Supplies Expense (a) Bal. 4,000 4,000 (2) Utilities Expense 3,000 3,000 (2) Retained Earnings 4,000
(4)
65,000
193,000 (3) 116,000 Bal. 244,000
Bal.
3,000
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Requirement 3
OMALLEYS SERVICE COMPANY LTD. Income Statement For the Year Ended December 31, 2003 Revenues: Service revenue..................................................................... Expenses: Amortization expensebuilding....................................... Amortization expensefurniture...................................... Salary expense....................................................................... Supplies expense .................................................................. Utilities expense.................................................................... Total expenses.................................................................. Net Income.................................................................................. $330,000 $ 10,000 20,000 177,000 4,000 3,000 214,000 $116,000
Requirement 4
OMALLEYS SERVICE COMPANY LTD. Statement of Retained Earnings For the Year Ended December 31, 2003 Retained earnings, January 1, 2003 ..................................................................... Add: Net income.................................................................................................... Less: Dividends ...................................................................................................... Retained earnings, December 31, 2003 ............................................................... $193,000 116,000 309,000 65,000 $244,000
Requirement 5
OMALLEYS SERVICE COMPANY LTD. Balance Sheet December 31, 2003 Assets Current assets: Cash ......................................................................................... Accounts receivable............................................................... Supplies ................................................................................... Total current assets ........................................................... Capital assets: Furniture ................................................................................ Less: Accumulated amortization.................................... Building................................................................................... Less: Accumulated amortization.................................... Land ......................................................................................... Total capital assets Total assets .............................................................................. Liabilities Current liabilities: Accounts payable................................................................... Unearned service revenue .................................................... Salary payable ........................................................................ Total current liabilities ..................................................... Shareholders Equity Common stock............................................................................. Retained earnings........................................................................ Total shareholders equity ............................................... Total liabilities and shareholders equity ...........................
$198,000 382,000 2,000 582,000 $100,000 60,000 210,000 140,000
40,000 70,000 50,000 160,000 $742,000
$380,000 13,000 5,000 398,000 $100,000 244,000 344,000 $742,000
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Cyber Coach
Visit the Student Resources area of the Accounting Companion Website for extra practice with the new material in Chapter 4. www.pearsoned.ca/horngren
Summary
1. Prepare an accounting work sheet. The accounting cycle is the process by which accountants produce the financial statements for a specific period of time. The cycle starts with the beginning account balances. During the period, the business journalizes transactions and posts them to the ledger accounts. At the end of the period, the trial balance is prepared, and the accounts are adjusted in order to measure the periods net income or net loss. Completion of the accounting cycle is aided by use of a work sheet. This multicolumned document summarizes the effects of all the periods activity. 2. Use the work sheet to complete the accounting cycle. The work sheet is neither a journal nor a ledger but merely a convenient device for completing the accounting cycle. It has columns for the trial balance, the adjustments, the adjusted trial balance, the income statement, and the balance sheet. It aids the adjusting process, and it is the place where the periods net income or net loss is first computed. The work sheet also provides the data for the financial statements and the closing entries. It is not, however, a necessity. The accounting cycle can be completed from the less elaborate adjusted trial balance. 3. Close the revenue, expense, and dividend accounts. Revenues, expenses, and dividends represent increases and decreases in the retained earnings account for a specific period. At the end of the period, their balances are closed out to zero, and, for this reason, they are called temporary accounts. Assets, liabilities, and shareholders equity accounts are not closed because they are the permanent accounts. Their balances at the end of one period become the beginning balances of the next period. The final accuracy check of the period is the postclosing trial balance. 4. Correct typical accounting errors. Accountants correct errors by making correcting journal entries. 5. Classify assets and liabilities as current or long-term. The balance sheet reports current and long-term assets and current and long-term liabilities. It can be presented in report format or account format. 6. Use the current and debt ratios to evaluate a businesss ability to pay its debts. Two decision-making aids are the current ratio (total current assets divided by total current liabilities) and the debt ratio (total liabilities divided by total assets).
Self-Study Questions
Test your understanding of the chapter by marking the correct answer to each of the following questions: 1. The focal point of the accounting cycle is the (p. 163) a. Financial statements c. Adjusted trial balance b. Trial balance d. Work sheet 2. Arrange the following accounting cycle steps in their proper order (p. 165) a. Complete the work sheet b. Journalize and post adjusting entries c. Prepare the postclosing trial balance d. Journalize and post cash transactions e. Prepare the financial statements f. Journalize and post closing entries 3. The work sheet is a (p. 164) a. Journal c. Financial statement b. Ledger d. Convenient device for completing the accounting cycle 4. The usefulness of the work sheet is (pp. 164165) a. Identifying the accounts that need to be adjusted b. Summarizing the effects of all the transactions of the period c. Aiding the preparation of the financial statements d. All of the above 5. Which of the following accounts is not closed? (pp. 172179) a. Supplies Expense c. Interest Revenue b. Prepaid Insurance d. Dividends 6. The closing entry for Salary Expense, with a balance of $322,000, is (pp. 172179) a. Salary Expense 322,000 Income Summary 322,000 b. Salary Expense 322,000 Salary Payable 322,000 c. Income Summary 322,000 Salary Expense 322,000 d. Salary Payable 322,000 Salary Expense 322,000
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7. The purpose of the postclosing trial balance is to (p. 179) a. Provide the account balances for preparation of the balance sheet b. Ensure that the ledger is in balance for the start of the next period c. Aid the journalizing and posting of the closing entries d. Ensure that the ledger is in balance for completion of the work sheet 8. A payment on account was recorded by debiting Supplies and crediting Cash. This entry was posted. The correcting entry is (pp. 179180) a. Accounts Payable X Supplies X b. Supplies X Accounts Payable X c. Cash X Accounts Payable X d. Cash X Supplies X
9. The classification of assets and liabilities as current or long-term depends on (p. 180) a. Their order of listing in the ledger b. Whether they appear on the balance sheet or the income statement c. The relative liquidity of the item d. The format of the balance sheetaccount format or report format 10. Suppose in 2003, Air & Sea Travel, Inc. debited Amortization Expense for the cost of a computer used in the business. For 2003, this error (pp. 179180) a. Overstated net income b. Understated net income c. Either a or b, depending on the circumstances d. Had no effect on net income Answers to the Self-Study Questions follow the Similar Accounting Terms.
Accounting Vocabulary
Accounting cycle (p. 163) Capital asset (p. 181) Closing entries (p. 176) Closing the accounts (p. 172) Current asset (p. 180) Current liability (p. 181) Current ratio (p. 184) Debt ratio (p. 185) Income Summary (p. 177) Liquidity (p. 180) Long-term asset (p. 181) Long-term liability (p. 181) Nominal account (p. 175) Operating cycle (p. 181) Permanent account (p. 175) Postclosing trial balance (p. 179) Real account (p. 175) Reversing entry (p. 218) Temporary account (p. 175) Work sheet (p. 164)
Similar Accounting Terms

Capital assets Current ratio Permanent account Temporary account Fixed assets; Plant and equipment; Property, plant, and equipment; Plant assets Working capital ratio Real account Nominal account
Answers to Self-Study Questions

1. a 2. d, a, e, b, f, c 3. d 4. d 5. b 6. c 7. b 8. a 9. c 10. b
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Assignment Material
Questions
1. Identify the steps in the accounting cycle; distinguish those that occur during the period from those that are performed at the end of the period. 2. Why is the work sheet a valuable accounting tool? 3. Name two advantages the work sheet has over the adjusted trial balance. 4. Why must the adjusting entries be journalized and posted if they have already been entered on the work sheet? 5. Why should the adjusting entries be journalized and posted before the closing entries are made? 6. Which types of accounts are closed? 7. What purpose is served by closing the accounts? 8. State how the work sheet helps with recording the closing entries. 9. Distinguish between permanent accounts and temporary accounts; indicate which type is closed at the end of the period. Give five examples of each type of account. 10. Is Income Summary a permanent account or a temporary account? When and how is it used? 11. Give the closing entries for the following accounts (balances in parentheses): Service Revenue ($4,700), Salary Expense ($1,100), Income Summary (credit balance of $2,000), Dividends ($2,300). 12. Why are assets classified as current or long-term? On what basis are they classified? Where do the classified amounts appear? 13. Indicate which of the following accounts are current assets and which are long-term assets: Prepaid Rent, Building, Furniture, Accounts Receivable, Merchandise Inventory, Cash, Note Receivable (due within one year), Note Receivable (due in four years). 14. In what order are assets and liabilities listed on the balance sheet? 15. Name an outside party that is interested in whether a liability is current or long-term. Why would this party be interested in this information? 16. A friend tells you that the difference between a current liability and a long-term liability is that they are payable to different types of creditors. Is your friend correct? Include in your answer the definitions of these two categories of liabilities. 17. Show how to compute the current ratio and the debt ratio. Indicate what ability each ratio measures, and state whether a high value or a low value is safer for each. 18. Capp Company Ltd. purchased supplies of $120 on account. The accountant debited Inventory and credited Accounts Payable for $120. A week later, after this entry has been posted to the ledger, the accountant discovers the error. How should he correct the error?
Exercises
Exercise 4-1 Preparing a work sheet (Obj. 1)
The trial balance of Psutka Testing Services Inc. appears on the following page. Additional information at September 30, 2004: a. Accrued service revenue, $210. b. Amortization, $40. c. Accrued salary expense, $500. d. Prepaid rent expired, $600. e. Supplies used, $1,650.
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PSUTKA TESTING SERVICES INC. Trial Balance September 30, 2004 Cash....................................................................... Accounts receivable ............................................ Prepaid rent.......................................................... Supplies ................................................................ Equipment............................................................ Accumulated amortizationequipment......... Accounts payable ................................................ Salary payable...................................................... Common stock..................................................... Retained earnings................................................ Dividends ............................................................. Testing revenue.................................................... Amortization expenseequipment ................. Rent expense ........................................................ Salary expense ..................................................... Supplies expense ................................................. Utilities expense .................................................. Total....................................................................... $ 3,560 3,440 1,200 3,390 32,600 $ 2,840 1,600 20,000 16,030 3,000 9,300
1,800 780 $49,770
$49,770
Required Complete Psutka Testing Services Inc. work sheet for September 2004.
Exercise 4-2 Journalizing adjusting and closing entries (Obj. 2)

Journalize the adjusting and closing entries for the company in Exercise 4-1.
Exercise 4-3 Posting adjusting and closing entries (Obj. 2)

Set up T-accounts for those accounts affected by the adjusting and closing entries in Exercise 4-1. Post the adjusting and closing entries to the accounts, denoting adjustment amounts by Adj., closing amounts by Clo., and balances by Bal. Double underline the accounts with zero balances after you close them and show the ending balance in each account.
Exercise 4-4 Preparing a postclosing trial balance (Obj. 2)

Prepare the postclosing trial balance for the company in Exercise 4-1.
Exercise 4-5 Identifying and journalizing closing entries (Obj. 3)

Bombardier Inc., the transporation, motorized consumer products, aerospace, and financial and real estate services company, reported the following items adapted from a recent financial report (amounts in millions):
Cash and term deposits ........... Revenues.................................... Accounts payable ..................... Accounts receivable ................. $ 896 7,976 2,125 358 Amortization expense ................. Other assets................................... Interest expense............................ Long-term liabilities .................... $ 166 230 160 1,355
Prepare Bombardier Inc.s closing entries for the above accounts.

From the following selected accounts that Tri-County Printers Ltd. reported in its June 30, 2003, annual financial statements, prepare the companys closing entries.
Common stock .......................... $ 25,000 Printing revenue ....................... 168,200 Unearned revenues .................. 2,700 Salary expense........................... 25,000 Accumulated amortization ..... 70,000 Supplies expense ...................... 3,400 Interest revenue ........................ 1,400 Retained earnings..................... 66,200
Interest expense............................ Accounts receivable ..................... Salary payable .............................. Amortization expense ................. Rent expense ................................. Dividends...................................... Supplies .........................................
$ 4,400 28,000 1,700 20,400 11,800 60,000 2,800

The accountant for Mendez Environmental Consulting Ltd. has posted adjusting entries (a) through (e) to the accounts at December 31, 2004. All the revenue, expense, and shareholders equity accounts of the entity are listed here in T-account form.
Accounts Receivable (a) 13,000 1,750 Supplies 2,000 (b) 1,000 (c) Common Stock Salary Payable (e) 350 Retained Earnings 26,200 Consulting Revenue (a) Amortization Expense Furniture (c) 550 (e) 55,500 1,750 Amortization Expense Building (d) 3,000 Supplies Expense (b) 1,000 50,000 Accumulated Amortization Furniture 3,000 550
Accumulated Amortization Building (d) Dividends 30,700 16,500 3,000
Salary Expense 13,000 350
Required 1. Journalize Mendez Environmental Consulting Ltd.s closing entries at December 31, 2004. 2. Determine Mendez Environmental Consulting Ltd.s ending retained earnings at December 31, 2004.
Exercise 4-8 Preparing a statement of retained earnings (Obj. 3)

From the following accounts of Eastern Logistics Inc., prepare the entitys statement of retained earnings for the year ended December 31, 2004.
Retained Earnings Dec. 31 16,000 Jan. 1 18,000 Dec. 31 21,500 Mar. 31 Jun. 30 Sept. 30 Dec. 31 Dividends 4,500 3,500 4,500 3,500 Dec. 31 16,000
Income Summary Dec. 31 Dec. 31 42,500 21,500 Dec. 31 64,000
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Exercise 4-9 Identifying and recording adjusting and closing entries (Obj. 2, 3)
The trial balance and income statement amounts from the March work sheet of Domm Systems Ltd. follow:
Account Title Cash .................................................................... Supplies .............................................................. Prepaid rent ....................................................... Office equipment .............................................. Accumulated amortization office equipment ......................................... Accounts payable.............................................. Salary payable ................................................... Unearned systems revenue ............................. Common stock................................................... Retained earnings ............................................. Dividends........................................................... Systems revenue................................................ Amortization expense office equipment ......................................... Rent expense...................................................... Salary expense ................................................... Supplies expense............................................... Utilities expense ................................................ Net income......................................................... Trial Balance $ 6,200 4,800 2,200 100,200 $ 12,400 9,200 8,800 35,000 36,600 2,000 23,400 600 2,800 $ 7,600 800 1,600 $13,400 12,600 $26,000 $26,000 Income Statement
2,400 6,000 1,600 $125,400
$125,400
$26,000 $26,000
Required Journalize the adjusting and closing entries of Domm Systems Ltd. at March 31.
Exercise 4-10 Making correcting entries (Obj. 4)

1. Suppose Air & Sea Travel, Inc. paid an account payable of $600 and erroneously debited Supplies. Make the journal entry to correct this error. 2. Suppose Air & Sea Travel, Inc. made the following adjusting entry to record amortization at April 30:
Amortization ExpenseFurniture...... Furniture ........................................... 550 550
Make the journal entry to correct this error. 3. Suppose, in closing the books, Air & Sea Travel, Inc. made this closing entry:
Income Summary................................... 14,800 Service Revenue ............................... 14,800
Make the journal entry to correct this error.
Exercise 4-11 Preparing a classified balance sheet (Obj. 5, 6)

Refer to Exercise 4-9. Required 1. After solving Exercise 4-9, use the data in that exercise to prepare Domm Systems Ltd.s classified balance sheet at March 31, 2004. Use the report format. 2. Compute Domm Systems Ltd.s current ratio and debt ratio at March 31, 2004. One year ago, the current ratio was 1.20 and the debt ratio was 0.30. Indicate whether Domm Systems Ltd.s ability to pay its debts has improved or deteriorated during the current year.
Exercise 4-12 Correcting accounting errors (Obj. 4)

Prepare a correcting entry for each of the following accounting errors: a. Debited Supplies and credited Accounts Payable for a $1,500 purchase of office equipment on account. b. Accrued interest revenue of $500 by a debit to Accounts Receivable and a credit to Interest Revenue. c. Adjusted prepaid rent by debiting Prepaid Rent and crediting Rent Expense for $1,000. This adjusting entry should have debited Rent Expense and credited Prepaid Rent for $1,000. d. Debited Salary Expense and credited Accounts Payable to accrue salary expense of $2,000. e. Recorded the earning of $1,300 service revenue collected in advance by debiting Accounts Receivable and crediting Service Revenue.
Exercise 4-13 Classifying assets and liabilities as current or long-term (Obj. 5)

Merit Corporation had sales of $1,700 million during 2003, and total assets of $400 million at December 31, 2003, the end of the companys fiscal year. Merit Corporations financial statements reported the following (all amounts in millions):
Sales revenue..................................... Inventory ........................................... Long-term debt ................................. Receivables (short-term).................. Interest expense ................................ Equipment ......................................... $1,200 150 1 9 1 200 Prepaid expenses .............................. Land and buildings .......................... Accounts payable ............................. Operating expenses.......................... Accumulated amortization ............. Accrued liabilities (such as Salary payable) .............. $15 80 85 500 75 30
While some of these account titles may be new to you, they are similar to those you have seen already. Required 1. Identify the assets (including contra assets) and liabilities. 2. Classify each asset and each liability as current or long-term.
Serial Exercise
This exercise continues the Anya Perreault Architects Ltd. situation begun in Exercise 2-15 of Chapter 2 and extended to Exercise 3-17 of Chapter 3.
Exercise 4-14 Closing the books, preparing a classified balance sheet, and evaluating a
business (Obj. 3, 5, 6)
Refer to Exercise 3-17 of Chapter 3. Start from the posted T-accounts and the adjusted trial balance on the next page that Anya Perreault Architects Ltd. prepared at December 31. Required 1. Journalize and post the closing entries at December 31, 2002. Denote each closing amount as Clo. and an account balance as Bal. 2. Prepare a classified balance sheet at December 31, 2002. 3. Compute the current ratio and the debt ratio of Anya Perreault Architects Ltd. and evaluate these ratio values as indicative of a strong or weak financial position. 4. If your instructor assigns it, complete the accounting work sheet at December 31, 2002.
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ANYA PERREAULT ARCHITECTS LTD. Adjusted Trial Balance December 31, 2002 Cash .................................................................... Accounts receivable ......................................... Supplies.............................................................. Computer equipment ...................................... Accumulated amortization computer equipment.................................... Office furniture ................................................. Accumulated amortization office furniture .............................................. Accounts payable ............................................. Salary payable................................................... Unearned service revenue............................... Common stock .................................................. Dividends .......................................................... Design Service revenue ................................... Amortization expenseequipment............... Amortization expensefurniture.................. Rent expense ..................................................... Salary expense................................................... Supplies expense .............................................. Utilities expense................................................ Total .................................................................... $11,200 1,700 100 3,000 $ 5,600 60 5,600 700 800 14,000 1,600 3,700 50 60 500 700 200 200 $24,910 50
$24,910
Challenge Exercise
Exercise 4-15 Computing financial statement amounts (Obj. 2, 5)
The unadjusted accounts balance of Chan Consulting Ltd. follow:
Cash ................................................ $ 3,800 Unearned consulting revenue...... Accounts receivable....................... 14,400 Common stock ............................... Supplies ........................................... 2,200 Retained earnings .......................... Prepaid Insurance .......................... 4,400 Dividends........................................ Furniture ......................................... 16,800 Consulting revenue ....................... Amortization expense Accumulated amortization building ................................ furniture................................ 2,600 Building........................................... 115,600 Amortization expense furniture................................ Accumulated amortization building ................................ 29,800 Insurance expense.......................... Land ...................................102,400 Accounts Salary expense................................ payable ............................................ 12,200 Supplies expense............................ Utilities expense ............................. Salary payable ................................ $10,600 30,000 150,400 92,400 187,200
65,400 5,400
Adjusting data at the end of the year included the following: a. Unearned consulting revenue that has been earned, $7,200. b. Accrued consulting revenue, $3,400. c. Supplies used in operations, $1,200. d. Accrued salary expense, $2,800. e. Insurance expense, $3,600. f. Amortization expensefurniture, $1,600; building, $4,200. Stephanie Chan, the sole shareholder of Chan Consulting Ltd. has received an offer to sell her company. She needs to know the following information as soon as possible: 1. Net income for the year covered by these data.
2. Total assets. 3. Total liabilities. 4. Total retained earnings. 5. Proof that total assets equal total liabilities plus total shareholders equity after all items are updated. Required Without opening any accounts, making any journal entries, or using a work sheet, provide Stephanie Chan with the requested information. Show all computations.
Ethical Issue
Cash & Carry Carpets Ltd. wishes to expand its business and has borrowed $100,000 from The Toronto-Dominion Bank. As a condition for making this loan, the bank required Cash & Carry Carpets Ltd. to maintain a current ratio of at least 1.50 and a debt ratio of no more than 0.50, and to submit annual financial statements to the bank. Business during the third year has been good but not great. Expansion costs have brought the current ratio down to 1.40 and the debt ratio up to 0.51 at December 15. The managers of Cash & Carry Carpets Ltd. are considering the implication of reporting this current ratio to The Toronto-Dominion Bank. One course of action that the managers are considering is to record in December of the third year some revenue on account that Cash & Carry Carpets Ltd. will earn in January of next year. The contract for this job has been signed, and Cash & Carry Carpets Ltd. will deliver the carpet during January. Required 1. Journalize the revenue transaction using your own numbers, and indicate how recording this revenue in December would affect the current ratio and the debt ratio. 2. State whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation. 3. Propose an ethical course of action for Cash & Carry Carpets Ltd.
Problems (Group A)
Problem 4-1A Preparing a work sheet (Obj. 1)
The trial balance of Kenora Construction Ltd. at July 31, 2004, appears on page 200. Additional data at July 31, 2004: a. Amortization: equipment, $680; building, $740. b. Accrued wage expense, $480. c. A count of supplies showed that unused supplies amounted to $29,480. d. During July, $1,000 of prepaid insurance coverage expired. e. Accrued interest expense, $360. f. Of the $21,120 balance of Unearned Construction Revenue, $9,940 was earned during July. g. Accrued advertising expense, $200. (Credit Accounts Payable.) h. Accrued construction revenue, $2,200. Required Complete Kenora Construction Ltd.s work sheet for July.
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KENORA CONSTRUCTION LTD. Trial Balance July 31, 2004 Cash .................................................................... Accounts receivable ......................................... Supplies.............................................................. Prepaid insurance............................................. Equipment ......................................................... Accumulated amortizationequipment........ Building ............................................................. Accumulated amortizationbuilding .......... Land.................................................................... Accounts payable ............................................. Interest payable................................................. Wages payable .................................................. Unearned construction revenue ..................... Note payable, long-term.................................. Common stock .................................................. Retained earnings............................................. Dividends .......................................................... Construction revenue....................................... Advertising expense ........................................ Amortization expensebuilding................... Amortization expenseequipment............... Insurance expense ............................................ Interest expense ................................................ Supplies expense .............................................. Utilities expense................................................ Wages expense .................................................. Total .................................................................... $ 42,400 75,640 35,320 4,600 65,380 $ 52,480 85,780 21,000 56,600 45,380
21,120 44,800 85,000 73,260 8,400 40,380 680
2,220 6,400 $383,420
$383,420
Problem 4-2A Preparing financial statements from an adjusted trial balance; journalizing
adjusting and closing entries; evaluating a business (Obj. 2, 5, 6)
The adjusted trial balance of Full Spectrum Design Ltd. at June 30, 2004, the end of the companys fiscal year, appears on the following page. Adjusting data at June 30, 2004, which have been incorporated into the trial balance figures on page 201, consist of: a. Amortization for the year: equipment, $4,380; building, $2,382. b. Supplies used during the year, $2,148. c. During the year, $1,860 of prepaid insurance coverage expired. d. Accrued interest expense, $414. e. Accrued design revenue, $564. f. Of the balance of Unearned Design Revenue at the beginning of the year, $4,674 was earned during the year. g. Accrued wage expense, $462. Required 1. Journalize the adjusting entries that would lead to the adjusted trial balance shown here. Also journalize the closing entries. 2. Prepare Full Spectrum Design Ltd.s income statement and statement of retained earnings for the year ended June 30, 2004, and the classified balance sheet on that date. Use the account format for the balance sheet.
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3. Compute Full Spectrum Design Ltd.s current ratio and debt ratio at June 30, 2004. One year ago, the current ratio stood at 1.01, and the debt ratio was 0.71. Did Full Spectrum Design Ltd.s ability to pay debts improve or deteriorate during the year?
FULL SPECTRUM DESIGN LTD. Adjusted Trial Balance June 30, 2004 Cash....................................................................... Accounts receivable ............................................ Supplies ................................................................ Prepaid insurance ............................................... Equipment............................................................ Accumulated amortizationequipment......... Building ................................................................ Accumulated amortizationbuilding............. Land ...................................................................... Accounts payable ................................................ Interest payable ................................................... Wages payable ..................................................... Unearned design revenue.................................. Note payable, long-term .................................... Common stock..................................................... Retained earnings................................................ Dividends ............................................................. Design revenue.................................................... Amortization expensebuilding ..................... Amortization expenseequipment ................. Insurance expense............................................... Interest expense ................................................... Supplies expense ................................................. Utilities expense .................................................. Wages expense..................................................... Total....................................................................... $ 11,610 15,882 18,774 1,920 33,480 $ 68,940 10,110 18,000 23,040 894 462 1,380 58,200 20,000 21,034 27,180 83,916 2,382 4,380 1,860 6,906 2,148 2,580 12,882 $228,924 9,888
$228,924
Problem 4-3A Taking the accounting cycle through the closing entries (Obj. 2, 3)
The unadjusted T-accounts of Wong Software Solutions Inc. at December 31, 2004, and the related year-end adjustment data appear on the next page. Adjustment data at December 31, 2004, include: a. Of the $10,000 balance of Unearned Service Revenue at the beginning of the year, all of it was earned during the year. b. Supplies still unused at year end, $2,000. c. Amortization for the year, $18,000. d. Accrued salary expense, $2,000. e. Accrued service revenue, $4,000. Required 1. Write the trial balance on a work sheet, and complete the work sheet. Key each adjusting entry by the letter corresponding to the data given. 2. Prepare the income statement, the statement of retained earnings, and the classified balance sheet in account format. 3. Journalize the adjusting and closing entries. 4. Did Wong Software Solutions Inc. have a profitable year or a bad year during 2004? Give the reason for your answer.
Cash Bal. 10,000 Equipment Bal. 198,000 Salary Payable Bal.
Accounts Receivable 72,000 Bal.
Supplies 18,000 Accounts Payable Bal. 12,000
Accumulated AmortizationEquipment Bal. 72,000
Unearned Service Revenue Bal. 10,000
Note Payable, Long-Term Bal. 120,000 Dividends Bal. 124,000 Insurance Expense Bal. 14,000 Salary Expense Bal. 106,000
Common Stock Bal. 25,000
Retained Earnings Bal. 47,000
Service Revenue Bal. 298,000 Interest Expense Bal. 12,000 Supplies Expense
Amortization ExpenseEquipment
Rent Expense Bal. 30,000
Problem 4-4A Completing the accounting cycle (Obj. 2, 3)

This problem should be used only in conjunction with Problem 4-3A. It completes the accounting cycle by posting to T-accounts and preparing the postclosing trial balance. Required 1. Using the Problem 4-3A data, post the adjusting and closing entries to the T-accounts, denoting adjusting amounts by Adj., closing amounts by Clo., and account balances by Bal., as shown in Exhibit 4-9. Double underline all accounts with a zero ending balance. 2. Prepare the postclosing trial balance.
Problem 4-5A Completing the accounting cycle (Obj. 2, 3, 5)

The trial balance of Baines Insurance Agency Ltd. at August 31, 2004, appears on page 203. The data needed for the month-end adjustments follow. Adjustment data: a. Commission revenue received in advance that had not been earned at August 31, $10,125. b. Rent still prepaid at August 31, $1,575. c. Supplies used during the month, $510. d. Amortization on furniture for the month, $555. e. Amortization on building for the month, $195. f. Accrued salary expense at August 31, $690.
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BAINES INSURANCE AGENCY LTD. Trial Balance August 31, 2004 Account Number 110 120 130 140 150 151 170 171 180 210 220 230 300 310 330 400 510 520 530 540 550 560 570
Account Title Cash............................................................................... Accounts receivable .................................................... Prepaid rent ................................................................. Supplies ........................................................................ Furniture....................................................................... Accumulated amortizationfurniture .................... Building ........................................................................ Accumulated amortizationbuilding..................... Land .............................................................................. Accounts payable ........................................................ Salary payable.............................................................. Unearned commission revenue ................................ Common stock............................................................. Retained earnings........................................................ Dividends ..................................................................... Commission revenue .................................................. Advertising expense ................................................... Amortization expensebuilding ............................. Amortization expensefurniture ............................ Rent expense ................................................................ Salary expense ............................................................. Supplies expense ......................................................... Utilities expense .......................................................... Total...............................................................................
Debit $ 35,700 23,340 1,935 1,350 23,025
Credit
$ 19,200 112,350 42,900 22,500 6,360 13,350 60,000 47,880 7,200 40,950 975
1,650 615 $230,640
$230,640
Required 1. Open the accounts listed in the trial balance and insert their August 31 unadjusted balances. Also open the Income Summary account, number 340. Date the balances of the following accounts as of August 1: Prepaid Rent, Supplies, Furniture, Accumulated AmortizationFurniture, Building, Accumulated AmortizationBuilding, Unearned Commission Revenue, and Retained Earnings. 2. Write the trial balance on a work sheet and complete the work sheet of Baines Insurance Agency Ltd. for the month ended August 31, 2004. 3. Using the completed work sheet, prepare the income statement, the statement of retained earnings, and the classified balance sheet in report format. 4. Using the work sheet data, journalize and post the adjusting and closing entries. Use dates and posting references. Use page 7 as the number of the journal page. 5. Prepare a postclosing trial balance.
Problem 4-6A Preparing a classified balance sheet in report format; evaluating a business
(Obj. 5, 6)
The accounts of Mogan Travel Ltd. at December 31, 2004, are listed in alphabetical order on the following page. Required 1. All adjustments have been journalized and posted, but the closing entries have not yet been made. Prepare the companys classified balance sheet in report format at December 31, 2004. Use captions for total assets, total liabilities, and shareholders equity.
2. Compute Mogan Travel Ltd.s current ratio and debt ratio at December 31, 2004. At December 31, 2003, the current ratio was 1.52 and the debt ratio was 0.37. Did Mogan Travel Ltd.s ability to pay debts improve or deteriorate during 2004?
Accounts payable ................... Accounts receivable ............... Accumulated amortization building .......................... Accumulated amortization ... furniture ......................... Advertising expense .............. Amortization expense............ Building ................................... Cash.......................................... Commission revenue ............. Common stock........................ Dividends ................................ Furniture.................................. Insurance expense .................. ............................................. $10,200 13,200 75,600 23,200 4,400 2,600 208,800 13,000 187,000 20,000 94,800 45,400 1,600 Interest payable.......................... Interest receivable...................... Land............................................. Note payable, long-term........... Note receivable, long-term....... Other assets ................................ Other current liabilities............. Prepaid insurance...................... Prepaid rent ................................ Retained earnings ...................... Salary expense............................ Salary payable ............................ Supplies....................................... Supplies expense ....................... Unearned commission revenue.................................... $ 1,200 400 40,000 55,600 8,000 7,200 9,400 2,200 13,200 119,600 49,200 7,800 5,000 11,400 10,800
Problem 4-7A Analyzing and journalizing corrections, adjustments, and closing entries
(Obj. 3, 4)
Link Bank to Chapter 2 (Accounting Errors). Accountants for Taurus Catering Service Ltd. encountered the following situations while adjusting and closing the books at December 31. Consider each situation independently. a. The company bookkeeper made the following entry to record a $3,000 credit purchase of office equipment:
Nov. 12 Office Supplies ............................................................. Accounts Payable.................................................... 3,000 3,000
Prepare the correcting entry, dated December 31. b. A $1,500 credit to Cash was posted as a debit. (1) At what stage of the accounting cycle will this error be detected? (2) Describe the technique for identifying the amount of the error. c. The $59,000 balance of Equipment was entered as $5,900 on the trial balance. (1) What is the name of this type of error? (2) Assume this is the only error in the trial balance. Which will be greater, the total debits or the total credits, and by how much? (3) How can this type of error be identified? d. The accountant failed to make the following adjusting entries at December 31: (1) Accrued property tax expense, $400. (2) Supplies expense, $2,180. (3) Accrued interest revenue on a note receivable, $1,300. (4) Amortization of equipment, $8,000. (5) Earned service revenue that had been collected in advance, $10,200. Compute the overall net income effect of these omissions. e. Record each of the adjusting entries identified in item d. f. The revenue and expense accounts, after the adjusting entries had been posted, were Service Revenue, $38,400; Interest Revenue, $1,000; Salary Expense, $8,460; Rent Expense, $2,550; and Amortization Expense, $2,775. Two balances prior to closing were Retained Earnings, $24,300, and Dividends, $15,000. Journalize the closing entries.
Problem 4-8A Preparing a work sheet, journalizing the adjustments, closing the accounts
(Obj. 1, 3)
Master Fleet Services Ltd. performs overhauls and repairs to trucks on the road and at the customers location. The companys trial balance for the year ended March 31, 2003 is shown below.
MASTER FLEET SERVICES LTD. Trial Balance March 31, 2003 Cash....................................................................... Accounts receivable ........................................... Repair supplies .................................................... Prepaid insurance ............................................... Equipment............................................................ Accumulated amortizationequipment......... Building ................................................................ Accumulated amortizationbuilding............. Land ...................................................................... Accounts payable ................................................ Unearned repair revenues ................................. Employee withholdings payable ...................... Notes payable, long-term................................... Mortgage payable ............................................... Common stock..................................................... Retained earnings................................................ Dividends ............................................................. Repair fees earned............................................... Travel expenses.................................................... Utilities expense .................................................. Wages expense..................................................... Total....................................................................... $ 5,100 31,800 13,350 5,850 105,000 $ 42,000 141,000 28,200 97,500 10,800 2,250 3,000 12,000 90,000 75,000 68,550 13,500 141,450 11,400 1,650 47,100 $473,250
$473,250
Additional information: a. On March 31, supplies costing $1,950 were still on hand. b. An examination of the insurance policies showed $3,150 of insurance coverage had expired during the year ended March 31, 2003. c. An examination of the equipment and the building showed the following:
Equipment Estimated useful life Estimated value at the end of the useful life 5 years $0 Building 10 years $0
Amortization is calculated on a straight-line basis over the assets life. d. The company had performed $1,200 of services for a client who had paid $2,250 in advance. e. Accrued interest on the mortgage at March 31, $900. f. Accrued wages at March 31, $1,350. Required 1. 2. 3. 4. Complete a work sheet for the year ended March 31, 2003. Journalize the adjusting required on March 31, 2003. Journalize the closing entries that would be required on March 31, 2003. Prepare a postclosing trial balance for March 31, 2003.
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Problem 4-9A Preparing a work sheet, closing the accounts, classifying the assets and liabilities, evaluating the current and debt ratios (Obj. 1, 3, 4, 6)
Kim Woeller, the accountant for Gallagher Logistics Ltd. had prepared the work sheet shown on the next page on a computer spreadsheet but has lost much of the data. The only particular item Woeller can recall is that there was an adjustment made to correct an error where $800 of supplies, purchased on credit, had been incorrectly recorded as $8,000 of equipment. Required: 1. 2. 3. 4. Complete the work sheet by filling in the missing data. Journalize the closing entries that would be required on December 31, 2004. Prepare the companys classified balance sheet at December 31, 2004. Compute Gallagher Logistics Ltd.s current ratio and debt ratio for December 31, 2004. On December 31, 2003, the current ratio was 2.14 and the debt ratio was 0.47. Comment on the changes in the ratios.
Problems (Group B)
Problem 4-1B Preparing a work sheet (Obj. 1)
The trial balance of Mandy White Productions Ltd. at May 31, 2003, follows:
MANDY WHITE PRODUCTIONS LTD. Trial Balance May 31, 2003 Cash.......................................................................................... Notes receivable ..................................................................... Interest receivable .................................................................. Supplies ................................................................................... Prepaid insurance .................................................................. Furniture.................................................................................. Accumulated amortizationfurniture............................... Building ................................................................................... Accumulated amortizationbuilding................................ Land ......................................................................................... Accounts payable................................................................... Interest payable ...................................................................... Salary payable ........................................................................ Unearned production services revenue.............................. Note payable, long-term ....................................................... Common stock........................................................................ Retained earnings .................................................................. Dividends................................................................................ Production services revenue ................................................ Interest revenue...................................................................... Advertising expense .............................................................. Amortization expensebuilding ........................................ Amortization expensefurniture ....................................... Insurance expense.................................................................. Interest expense...................................................................... Salary expense ........................................................................ Supplies expense .................................................................... Utilities expense ..................................................................... Total.......................................................................................... $ 17,340 20,260 1,120 3,580 54,820 $ 107,800 69,120 37,400 29,460 2,960
17,600 37,400 30,000 38,580 7,600 33,940 2,120
4,340 2,260 $259,060
$259,060
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GALLAGHER LOGISTICS LTD. Accounting Work Sheet For the Year Ended December 31, 2004 Trial Balance Debit Credit Debit Credit Debit Credit Debit Credit Adjustments Adjusted Trial Balance Income Statement Balance Sheet Debit 22,000 27,600 (b) 1,600 3,200 47,000 4,800 120,000 8,000 60,000 60,000 (e) 4,000 120,000 7,200 Credit
Account Title 22,000 27,200 3,800 4,000 55,000
(f) 1,200 (g) 1,000 100,000 40,000 42,000 12,000 12,000 168,000
10,000 6,000 2,400 7,000 100,000 40,000 42,000 12,000 166,600 8,800 6,000 (b) 1,600 1,000 67,000 386,800 386,800 (d) 2,400 1,000 68,200
Cash Accounts receivable Supplies Prepaid insurance Equipment Accumulated amortizationequipment Building Accumulated amortizationbuilding Land Accounts payable Interest payable Wages payable Unearned revenues Mortgage payable Common stock Retained earnings Dividends Consulting fees earned Insurance expense Interest expense Supplies expense Utilities expense Wages expense 1,600 2,400
Amortization expenseequipment Amortization expensebuilding Totals
Additional data at May 31, 2003: a. Amortization: furniture, $960; building, $920. b. Accrued salary expense, $1,200. c. A count of supplies showed that unused supplies amounted to $820. d. During May, $780 of prepaid insurance coverage expired. e. Accrued interest expense, $440. f. Of the $17,600 balance of Unearned Revenue, $8,800 was earned during May. g. Accrued advertising expense, $120. (Credit Accounts Payable.) h. Accrued interest revenue, $340. Required Complete Mandy White Productions Ltd.s work sheet for May.
Problem 4-2B Preparing financial statements from an adjusted trial balance; journalizing
adjusting and closing entries; evaluating a business (Obj. 2, 5, 6)
The adjusted trial balance of Vernon Golf School Inc. at April 30, 2004, the end of the companys fiscal year, follows:
VERNON GOLF SCHOOL INC. Adjusted Trial Balance April 30, 2004 Cash ................................................................ Accounts receivable...................................... Supplies.......................................................... Prepaid insurance ......................................... Equipment ..................................................... Accumulated amortizationequipment .. Building.......................................................... Accumulated amortizationbuilding ...... Land................................................................ Accounts payable ......................................... Interest payable............................................. Wages payable............................................... Unearned teaching revenue ........................ Note payable, long-term.............................. Common stock .............................................. Retained earnings ......................................... Dividends ...................................................... Teaching revenue .......................................... Amortization expensebuilding............... Amortization expenseequipment........... Insurance expense ........................................ Interest expense ............................................ Supplies expense .......................................... Utilities expense............................................ Wages expense .............................................. Total ................................................................ $ 2,740 87,480 7,380 4,580 127,860 $ 56,860 148,660 36,520 40,000 39,100 4,560 1,660 7,320 139,800 70,000 58,400 55,000 197,100 7,420 13,800 10,740 16,340 13,760 9,940 65,620 $611,320
$611,320
Adjusting data at April 30, 2004, which have all been incorporated into the adjusted trial balance figures above, consist of: a. Of the balance of Unearned Teaching Revenue at the beginning of the year, $8,360 was earned during the year.
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b. Supplies used during the year, $11,760. c. During the year, $10,740 of prepaid insurance coverage expired. d. Accrued interest expense, $2,560. e. Accrued teaching revenue, $4,400. f. Amortization for the year: equipment, $13,800; building, $7,420. g. Accrued wages expense, $1,660. Required 1. Journalize the adjusting entries that would lead to the adjusted trial balance shown here. Also journalize the closing entries. 2. Prepare Vernon Golf School Inc.s income statement and statement of retained earnings for the year ended April 30, 2004, and the classified balance sheet on that date. Use the account format for the balance sheet. 3. Compute Vernon Golf School Inc.s current ratio and debt ratio at April 30, 2004. One year ago, the current ratio stood at 1.21, and the debt ratio was 0.82. Did Vernon Golf School Inc.s ability to pay debts improve or deteriorate during 2004?
Problem 4-3B Taking the accounting cycle through the closing entries (Obj. 2, 3)
The unadjusted T-accounts of Ainsworth Media Ltd. at December 31, 2003, and the related year-end adjustment data follow:
Cash Bal. 58,000 Bal. Accounts Receivable 88,000 Bal. Supplies 12,000
Equipment Bal. 114,000 Salary Payable
Accumulated Amortization Equipment Bal. 24,000
Accounts Payable Bal. 32,000
Unearned Service Revenue Bal. 4,000
Note Payable, Long-Term Bal. Dividends Bal. 108,000 Insurance Expense Bal. 20,000 Supplies Expense 80,000
Common Stock Bal. 30,000
Retained Earnings Bal. 52,000
Service Revenue Bal. 260,000 Interest Expense Bal. 10,000
Amortization Expense
Salary Expense Bal. 72,000
Adjustment data at December 31, 2003, include: a. Amortization for the year, $10,000. b. Supplies still unused at the year end, $4,000. c. Accrued service revenue, $8,000. d. Of the $4,000 balance of Unearned Service Revenue at the beginning of the year, the entire amount was earned during the year. e. Accrued salary expense, $8,000.
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Required 1. Write the trial balance on a work sheet and complete the work sheet. Key each adjusting entry by the letter corresponding to the data given. 2. Prepare the income statement, the statement of retained earnings, and the classified balance sheet in account format. 3. Journalize the adjusting and closing entries. 4. Did Ainsworth Media Ltd. have a profitable year or a bad year during 2003? Give the reason for your answer.
Problem 4-4B Completing the accounting cycle (Obj. 2, 3)

This problem should be used only in conjunction with Problem 4-3B. It completes the accounting cycle by posting to T-accounts and preparing the postclosing trial balance. Required 1. Using the Problem 4-3B data, post the adjusting and closing entries to the T-accounts, denoting adjusting amounts by Adj., closing amounts by Clo., and account balances by Bal., as shown in Exhibit 4-9. Double underline all accounts with a zero ending balance. 2. Prepare the postclosing trial balance.
Problem 4-5B Completing the accounting cycle (Obj. 2, 3, 5)

The trial balance of Environmental Protection Services Ltd. at October 31, 2004, and the data needed for the month-end adjustments are as follows:
ENVIRONMENTAL PROTECTION SERVICES LTD. Trial Balance October 31, 2004 Account Number 110 120 130 140 150 151 160 161 180 210 220 230 300 310 330 400 510 520 530 540 550 560 Account Title Cash ............................................................................. Accounts receivable................................................... Prepaid rent ................................................................ Supplies ....................................................................... Furniture ..................................................................... Accumulated amortizationfurniture................... Building....................................................................... Accumulated amortizationbuilding ................... Land ............................................................................. Accounts payable....................................................... Salary payable ............................................................ Unearned consulting revenue.................................. Common stock ........................................................... Retained earnings ...................................................... Dividends.................................................................... Consulting revenue ................................................... Amortization expensebuilding ............................ Amortization expensefurniture ........................... Rent expense............................................................... Salary expense............................................................ Supplies expense........................................................ Utilities expense ......................................................... Total ............................................................................. $ Debit 7,350 22,965 3,300 1,260 40,245 $ 102,450 18,150 27,000 10,935 7,950 75,000 78,735 5,850 18,840 5,100 Credit
2,760 1,530 $214,710
$214,710
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The data needed for the month-end adjustments are as follows: a. Unearned consulting revenue that still had not been earned at October 31, $7,350. b. Rent still prepaid at October 31, $3,000. c. Supplies used during the month, $1,155. d. Amortization on furniture for the month, $375. e. Amortization on building for the month, $870. f. Accrued salary expense at October 31, $465. Required 1. Open ledgers for the accounts listed in the trial balance, inserting their October 31 unadjusted balances. Also open the Income Summary ledger account, number 340. Date the balances of the following accounts October 1: Prepaid Rent, Supplies, Building, Accumulated AmortizationBuilding, Furniture, Accumulated AmortizationFurniture, Unearned Consulting Revenue, and Common Stock, and Retained Earnings. 2. Write the trial balance on a work sheet and complete the work sheet of Environmental Protection Services Ltd. for the month ended October 31, 2004. 3. Using the completed work sheet, prepare the income statement, the statement of retained earnings, and the classified balance sheet in report format. 4. Using the work sheet data, journalize and post the adjusting and closing entries. Use dates and posting references. Use 12 as the number of the journal page. 5. Prepare a postclosing trial balance.
Problem 4-6B Preparing a classified balance sheet in report format; evaluating a business
(Obj. 5, 6)
The accounts of Leaf Financial Services Inc. at March 31, 2003, are listed in alphabetical order.
Accounts payable .................. Accounts receivable .............. Accumulated amortization building ......................... Accumulated amortization furniture ........................ Advertising expense ............. Amortization expense........... Building .................................. Cash......................................... Common stock ....................... Dividends ............................... Furniture................................. Insurance expense ................. Interest payable ..................... $7,350 5,750 23,650 3,850 450 950 25,350 1,700 10,000 15,600 21,600 300 150 Interest receivable .................... Land ........................................... Note payable, long-term ......... Note receivable, long-term ..... Other assets ............................... Other current liabilities ........... Prepaid insurance..................... Prepaid rent............................... Retained earnings..................... Salary expense .......................... Salary payable........................... Service revenue......................... Supplies ..................................... Supplies expense ...................... Unearned service revenue ...... $ 450 5,000 1,600 3,450 1,150 550 300 2,350 15,350 8,900 1,200 35,550 1,900 2,300 850
Required 1. All adjustments have been journalized and posted, but the closing entries have not yet been made. Prepare the companys classified balance sheet in report format at March 31, 2003. Use captions for total assets, total liabilities and shareholders equity. 2. Compute Leaf Financial Services Inc.s current ratio and debt ratio at March 31, 2003. At March 31, 2002, the current ratio was 1.28, and the debt ratio was 0.32. Did Leaf Financial Services Inc.s ability to pay debts improve or deteriorate during 2003?
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Problem 4-7B Analyzing and journalizing corrections, adjustments, and closing entries
(Obj. 3, 4)
Link Back to Chapter 2 (Accounting Errors). The auditors of Smirnov Printing Ltd. encountered the following situations while adjusting and closing the books at February 28. Consider each situation independently. a. The company bookkeeper made the following entry to record a $310 credit purchase of supplies:
Feb. 26 Equipment ........................................................................ Accounts Payable ....................................................... 310 310
Prepare the correcting entry, dated February 28. b. A $450 debit to Accounts Receivable was posted as $540. (1) At what stage of the accounting cycle will this error be detected? (2) Describe the technique for identifying the amount of the error. c. The $1,620 balance of Utilities Expense was entered as $16,200 on the trial balance. (1) What is the name of this type of error? (2) Assume this is the only error in the trial balance. Which will be greater, the total debits or the total credits, and by how much? (3) How can this type of error be identified? d. The accountant failed to make the following adjusting entries at February 28: (1) Accrued service revenue, $1,800. (2) Insurance expense, $720. (3) Accrued interest expense on a note payable, $1,040. (4) Amortization of equipment, $7,400. (5) Earned service revenue that had been collected in advance, $5,400. Compute the overall net income effect of these omissions. e. Record each of the adjusting entries identified in item d. f. The revenue and expense accounts after the adjusting entries had been posted were Service Revenue, $154,995; Wage Expense, $53,325; Amortization Expense, $9,270; and Insurance Expense, $960. Two balances prior to closing were Retained Earnings, $112,725, and Dividends, $66,000. Journalize the closing entries.
Problem 4-8B Preparing a work sheet, journalizing adjusting entries, closing the accounts
(Obj. 1, 3)
Alexander Brothers Marina Inc. performs overhauls and repairs to boats and motors at the marina and at the customers location. The companys trial balance for the year ended June 30, 2004, appears on page 213. Additional information: a. On June 30, repair supplies costing $4,400 were still on hand. b. An examination of the insurance policies showed $5,800 of insurance coverage had expired in the year ended June 30, 2004. c. An examination of the equipment and the building showed the following:
Equipment Estimated useful life Estimated value at the end of the useful life 5 years $0 Building 10 years $0
Amortization is calculated on a straight-line basis over the assets life.

d. The company had performed $2,000 of services for a client who had paid $4,000 in advance. e. Accrued interest on the mortgage at June 30, $1,600. f. Accrued wages at June 30, $2,400.
ALEXANDER BROTHERS MARINA INC. Trial Balance June 30, 2004 Cash .................................................................... Accounts receivable ......................................... Repair supplies ................................................. Prepaid insurance ............................................. Equipment ......................................................... Accumulated amortizationequipment ...... Building.............................................................. Accumulated amortizationbuilding .......... Land.................................................................... Accounts payable.............................................. Unearned repair revenues ............................... Property taxes payable..................................... Notes payable, long-term ................................ Mortgage payable ............................................. Common stock .................................................. Retained earnings ............................................. Dividends........................................................... Repair fees earned ............................................ Travel expenses ................................................. Utilities expense................................................ Wages expense .................................................. Total .................................................................... $ 4,600 24,400 39,600 9,400 120,000 $ 48,000 176,000 35,200 110,000 13,000 4,000 2,000 18,000 120,000 45,000 70,200 94,000 345,000 31,600 1,600 89,200 $700,400
$700,400
Required 1. 2. 3. 4. Complete a work sheet for the year ended June 30, 2004. Journalize the adjusting required on June 30, 2004. Journalize the closing entries that would be required on June 30, 2004. Prepare a postclosing trial balance for June 30, 2004.
Problem 4-9B Preparing a work sheet, closing the accounts, classifying the assets and liabilities, evaluating the current and debt ratios (Obj. 1, 3, 4, 6)
Erin Klump, the accountant for Forsey Design Ltd. had prepared the work sheet shown on the next page on a computer spreadsheet but has lost much of the data. The only particular item the accountant can recall is that there was an adjustment made to correct an error made where $300 of supplies, purchased on credit, had been incorrectly recorded as $3,000 of equipment. Required 1. 2. 3. 4. Complete the work sheet by filling in the missing data. Journalize the closing entries that would be required on December 31, 2003. Prepare the companys classified balance sheet as of December 31, 2003. Compute Forsey Design Ltd.s current ratio and debt ratio for December 31, 2003. On December 31, 2002, the current ratio was 2.25 and the debt ratio was 0.41. Comment on the changes in the ratios.
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FORSEY DESIGN LTD. Accounting Work Sheet For the Year Ended December 31, 2003 Trial Balance Debit Credit Debit Credit Debit Credit Debit Adjustments Adjusted Trial Balance Credit Income Statement Balance Sheet Debit 1,000 11,400 (b) 350 700 11,500 1,500 43,000 12,300 12,000 (f) 200 (g) 200 20,000 10,000 19,500 9,000 47,550 47,800 9,000 8,000 450 1,000 1,350 20,000 10,000 19,500 9,000 12,000 (e) 1,150 43,000 2,250 Credit
Account Title 1,000 11,350 700 800 13,000
Cash Accounts receivable Supplies Prepaid insurance Equipment Accumulated amortizationequipment Building Accumulated amortizationbuilding Land Accounts payable Wages payable Interest payable Unearned revenues Mortgage payable Common stock Retained earnings Dividends Design fees earned Insurance expense Interest expense Utilities expense Wages expense 1,100 1,000 350 28,350 121,650 121,650 (b) 350 (d) 750 350 750 350 28,550
Supplies expense Amortization expenseequipment Amortization expensebuilding Totals
Challenge Problems
Problem 4-1C Closing the revenue and expense accounts (Obj. 3)
Small businesses used to use a simplified journal called a synoptic journal to account for their businesses. The synoptic journal usually had columns for cash, accounts receivable, other assets, accounts payable, revenues, expenses, and so on. It required double-entry bookkeeping and the columns were usually totalled every month. None of the accounts in the synoptic journal were ever closed; each year flowed into the next year. The column totals for revenues and expenses grew ever larger. Required 1. Explain why the synoptic journal was used by small businesses. What was the advantage it provided? 2. What do you think was the principal disadvantage of the synoptic journal? Why is it a disadvantage?
Problem 4-2C Understanding the current ratio (Obj. 6)

It is July 15, 2004. A friend, who works in the office of a local company that has four fast-food restaurants, has come to you with a question. He knows you are studying accounting and asks if you could help him sort something out. He acknowledges that although he has worked for the company for three years as a general clerk, he really does not understand the accounting work he is doing. The company has a large bank loan and, as your friend understands it, the company has agreed with the bank to maintain a current ratio (he thinks that is what it is called) of 1.8 to 1 (1.8:1). The companys year end is June 30. The owner came to him on July 7, 2004, and asked him to issue a batch of cheques to suppliers but to date them June 30. Your friend recognizes that the cheques will have an effect on the June 30, 2004, financial statements but doesnt think the effect will be too serious. Required Explain to your friend what the effect of paying invoices after June 30 but dating the cheques prior to June 30 has on the current ratio. Provide an example to illustrate your explanation.
Extending Your Knowledge

Decision Problems
1. Completing the accounting cycle to develop the information for a bank loan (Obj. 4, 6)
One year ago, your friend Michel Cote founded Computer Solutions Inc. The business has prospered. Cote, who remembers that you took an accounting course while in college, comes to you for advice. He wishes to know how much net income his business earned during the past year. He also wants to know what the entitys total assets, liabilities, and shareholders equity are. The accounting records consist of the T-accounts of the companys ledger, which were prepared by the bookkeeper who moved to another city. The ledger at December 31 of the current year appears as follows:
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Cash Dec. 31 11,660
Accounts Receivable Dec. 31 24,720 Jan. 2
Prepaid Rent 5,600
Supplies Jan. 2 5,200 Accounts Payable Dec. 31 37,080 Common Stock Jan. 2 50,000 Jan. 2
Computer Equipment 87,200
Accumulated Amortization Computer Equipment
Unearned Service Revenue Dec. 31 Dividends Dec. 31 86,840 8,260
Salary Payable
Service Revenue Dec. 31 161,480
Amortization Expense Computer Equipment
Rent Expense
Salary Expense Dec. 31 34,000
Supplies Expense Dec. 31
Utilities Expense 1,600
Cote indicates the year-end customers owe the company $3,200 accrued service revenue, which he expects to collect early next year. These revenues have not been recorded. During the year the company collected $8,260 service revenue in advance from customers, but the company earned only $1,200 of that amount. Rent expense for the year was $4,800, and the company used up $4,200 in supplies. Cote estimates that amortization on the equipment was $11,800 for the year. At December 31, Computer Solutions Inc. owed an employee $2,400 accrued salary. To get a loan to expand the business, Cote must show the bank that Computer Solutions Inc., total shareholders equity has increased over the past year. Has it? You and Cote agree that you will meet again in one week. You perform the analysis and prepare the financial statements to answer his questions.
2. Finding an error in the work sheets
(Obj. 1, 4)
You are preparing the financial statements for the year ended October 31, 2003, for Argus Publishing Company Ltd., a weekly newspaper. You began with the trial balance of the ledger, which balanced, and then made the required adjusting entries. To save time, you omitted preparing an adjusted trial balance. After making the adjustments on the work sheet, you extended the balances from the trial balance, adjusted for the adjusting entries, and computed amounts for the income statement and balance sheet columns. a. When you added the debits and credits on the income statement columns, you found that the credits exceeded the debits by $20,000. According to your finding, did Argus Publishing Company Ltd. have a profit or a loss? b. You took the balancing amount from the income statement columns to the debit column of the balance sheet and found that the total debits exceeded the total credits in the balance sheet. The difference between the total debits and the total credits on the balance sheet is $40,000, which is two times the amount of the difference you calculated for the income statement columns. What is the cause of this difference? (Except for these errors, everything else is correct.)
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Financial Statement Problem

Using an actual balance sheet (Obj. 6)
This problem, based on Intrawest Corporations balance sheet in Appendix A, will familiarize you with some of the assets and liabilities of this actual company. Answer these questions, using Intrawests balance sheet: a. Which balance sheet format does Intrawest use? b. What currency does Intrawest use to report financial results in its financial statements? c. Name the companys largest current asset and largest current liability at June 30, 2000. d. How much were total current assets and total current liabilities at June 30, 1999? Which had changed by the greater percentage during the year ended June 30, 2000: total current assets or total current liabilities? What were the percent changes? e. Compute Intrawest Corporations current ratio at June 30, 2000, and June 30, 1999. Also compute the debt ratios at these dates. Did the ratio values improve or deteriorate during 2000? f. What is the cost of the companys capital assets at June 30, 2000? What is the book value of these assets? To answer this question, refer to the Properties note.
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Appendix
Reversing Entries: An Optional Step
Reversing entries are special types of entries that ease the burden of accounting after adjusting and closing entries have been made at the end of a period. Reversing entries are used most often in conjunction with accrual-type adjustments such as an accrued salary expense and accrued service revenue. Reversing entries are not used for adjustments to record amortization and prepayments. GAAP do not require reversing entries. They are used only for convenience and to save time. Accounting for Accrued Expenses To see how reversing entries work, return to Air & Sea Travel, Inc.s unadjusted trial balance at April 30, 2003 (Exhibit 4-2, page 165). Salary Expense has a debit balance of $950 from salaries paid during April. At April 30, the company owes employees an additional $950 for the last part of the month. Assume for this illustration that on May 5, the next payroll date, Air & Sea Travel, Inc. will pay $950 of accrued salary plus $100 in salary that the employee has earned in the first few days of May. Air & Sea Travel, Inc.s next payroll payment will be $1,050 ($950 + $100). But Air & Sea Travel, Inc. must include the $950 in salary expense for April. To do so, Air & Sea Travel, Inc. makes the following adjusting entry on April 30:
Adjusting Entries Salary Expense .................................................................... Salary Payable ...............................................................
April 30
950 950
After posting, the Salary Payable and Salary Expense accounts appear as follows:2
Salary Payable Apr. 30 Adj.2 950 Apr. 30 Bal. 950 Salary Expense Paid during April CP 950 Apr. 30 Adj. 950 Apr. 30 Bal. 1,900
After the adjusting entry, The April income statement reports salary expense of $1,900. The April 30 balance sheet reports salary payable of $950. The $1,900 debit balance of Salary Expense is eliminated by this closing entry at April 30, 2003, as follows:
April 30 Closing Entries Income Summary ............................................................... Salary Expense ............................................................. 1,900 1,900
Entry explanations used throughout this discussion are Adj. = Adjusting entry CP = Cash payment entryincludes a credit to Cash Bal. = Balance CR = Cash receipt entryincludes a debit to Cash Clo. = Closing entry Rev. = Reversing entry
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After posting, Salary Expense has a zero balance as follows:

Salary Expense Paid during April CP 950 Apr. 30 Adj. 950 Apr. 30 Bal. 1,900
Student to Student
I found reversing entries difficult. I found the Working It Out feature on this page helpful when used with Taccounts. It helped me visualize the process.
Apr. 30 Clo. 1,900
Duane B., St. John's
Accounting without a Reversing Entry On May 5, the next payday, Air & Sea Travel, Inc. pays the payroll of $1,050 and makes this journal entry: May 5 Salary Payable ........................................................... Salary Expense .......................................................... Cash ........................................................................ 950 100 1,050
This method of recording the cash payment is correct. However, it wastes time because the companys accountant must refer to the adjusting entries of April 30. Otherwise, Air & Sea Travel, Inc. does not know the amount of the debit to Salary Payable (in this example, $950). Searching the preceding periods adjusting entries takes time and, in business, time is money. To save time, accountants use reversing entries. Making a Reversing Entry A reversing entry switches the debit and the credit of a previous adjusting entry. A reversing entry, then, is the exact opposite of a prior adjusting entry. The reversing entry is dated the first day of the period following the adjusting entry. To illustrate reversing entries recall that on April 30, 2003, Air & Sea Travel, Inc. made the following adjusting entry to accrue Salary Payable:
WORKING IT OUT
Apr. 30
Adjusting Entries Salary Expense .................................................................... Salary Payable ................................................................
950 950
A company pays its employees $1,500 every Friday, the end of a 5day workweek. What journal entry is made each Friday? Salary Expense Cash 1,500 1,500
The reversing entry simply reverses the position of the debit and the credit: May 1 Reversing Entries Salary Payable...................................................................... Salary Expense ............................................................... 950 950
If December 31 falls on a Tuesday, what would be the adjusting entry? Salary Expense Salary Payable 600 600
Observe that the reversing entry is dated the first day of the new period. It is the exact opposite of the April 30 adjusting entry. Ordinarily, the accountant who makes the adjusting entry also prepares the reversing entry at the same time. Air & Sea Travel, Inc. dates the reversing entry as of the first day of the next period so that it affects only the new period. Note how the accounts appear after the company posts the reversing entry:
Salary Payable May 1 Rev. 950 Apr. 30 Bal. 950
What would be the reversing entry on January 1? Salary Payable Salary Expense 600 600
What would be the entry to record the payroll the next Friday? Salary Expense Cash 1,500 1,500
Zero balance Salary Expense Apr. 30 Bal. 1,900 Apr. 30 Clo. 1,900
Zero balance May 1 Rev.
950
The arrow shows the transfer of the $950 credit balance from Salary Payable to Salary Expense. This credit balance in Salary Expense does not mean that the entity has negative salary expense, as you might think. Instead, the odd credit balance is merely a temporary result of the reversing entry. The credit balance is eliminated on May 5 when the $1,050 cash payment for salaries is debited to Salary Expense in the customary manner:
May 5 Salary Expense ................................................................... Cash ................................................................................ 1,050 1,050
Then this cash payment entry is posted as follows:

Salary Expense May 5 CP May 5 Bal. 1,050 May 1 Rev. 100 950
Now Salary Expense has its correct debit balance of $100, which is the amount of salary expense incurred thus far in May. The $1,050 cash payment also pays the liability for Salary Payable so that Salary Payable has a zero balance, which is correct. Accounting for Accrued Revenues While most reversing entries are made to accrue expenses, reversing entries may be made to accrue revenues. For example, if Air and Sea Travel, Inc. had completed some consulting work for a client, an entry would be made to debit Fees Receivable and credit Fee Revenue at April 30, 2003. Fee Revenue would be closed to the Income Summary in the usual way. A reversing entry on May 1, 2003, would reduce the Fee Receivable and temporarily create a debit balance in the Fee Revenue account. When the payment is received, the accountant would debit Cash and credit Fee Revenue.
Appendix Problem
Problem 4A-1 Using reversing entries
Refer to the data in Problem 4-5A, pages 202203. Required 1. Open ledger accounts for Salary Payable and Salary Expense. Insert their unadjusted balances at August 31, 2004. 2. Journalize adjusting entry f and the closing entry for Salary Expense at August 31. Post to the accounts. 3. On September 5, Baines Insurance Agency Ltd. paid the next payroll amount of $870. Journalize this cash payment, and post to the accounts. Show the balance in each account. 4. Repeat Requirements 1 through 3 using a reversing entry. Compare the balances of Salary Payable and Salary Expense computed by using a reversing entry with those balances computed without using a reversing entry (as appear in your answer to Requirement 3).
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C H A P T E R

Completing the Accounting Cycle

Part One The Basic Structure of Accounting

General Motors www.gm.com

The Accounting Cycle

Chapter Four Completing the Accounting Cycle

The Work Sheet

Part One The Basic Structure of Accounting

Analyze and journalize transactions as they occur.

Post entries to the ledger accounts.

POSTCLOSING TRIAL BALANCE Cash 24,800 Accounts receivable 2,250

Accounts Receivable 2,000 250 2,250

Prepare the postclosing trial balance.

WORK SHEET Cash 24,800 Accounts receivable 2,250

Adjustments Dr. Cr.

Adjusted Trial Balance Dr. Cr.

Income Statement Dr. Cr. Dr.

Balance Sheet Cr.

950 400 51,800

Part One The Basic Structure of Accounting

$3,875 Difference = $3,525

$49,400 Difference = $3,525

Total liabilities and shareholders equity =

Trial Balance Account Title Dr. Cr.

Adjusted Trial Balance Dr. Cr.

Income Statement Dr. Cr. Dr.

Balance Sheet Cr.

950 400 51,800

Income Statement Dr. Cr. Dr.

Balance Sheet Cr.

950 400 51,800

$7,400 3,875 $3,525

Mid-Chapter Summary Problem

for Your Review

172,000 3,000 $1,174,000

Part One The Basic Structure of Accounting

Solution to Review Problem

Trial Balance Account Title

Adjustments Debit Credit

Income Statement Credit

Balance Sheet Debit

(e) 12,000 (a) 4,000

172,000 3,000 1,174,000 1,174,000

Chapter Four Completing the Accounting Cycle

Completing the Accounting Cycle

Preparing the Financial Statements

Recording the Adjusting Entries

Closing the Accounts

Air Canada www.aircanada.ca

Part One The Basic Structure of Accounting

Income Statement Dr. Cr. Dr.

Balance Sheet Cr.

950 400 51,800

Chapter Four Completing the Accounting Cycle

Income Statement Dr. Cr. Dr.

Balance Sheet Cr.

950 400 51,800

45,875 3,525 49,400

Part One The Basic Structure of Accounting