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Chapter Two Part Two

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0% found this document useful (0 votes)

191 views

Chapter Two Part Two

Uploaded by

Welday Gebremichael

We take content rights seriously. If you suspect this is your content, claim it here.

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Chapter 2

Accounting cycle

Financial and Managerial Accounting

8th Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division
PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
Pepperdine University Task Force Image Gallery clip art included in this
electronic presentation is used with the permission of
NVTech Inc. C3 - 1
Chapter 2 YIC
Accounting Principles and Accounting Cycle

Learning Objectives
1. Understanding Accounting principles
2. Explain underlying accounting principles
3. Understand business transaction and Accounting Equation
4. Understand basic terminology of Transaction recording
5. Understand Accounting cycle
• Journal
• Ledger
• Unadjusted trial balance
• Adjustment and completion of worksheet
• Financial statement preparation
• Closing entry
• Post close trial balance

C2
C1 - 2
Each
Each financial
financial statement
statement
item,
item, called
called an
an account,
account, isis
included
included in
in the
the ledger.
ledger.

C3 - 3
AA group
group of of
accounts
accounts forfor aa
business
business entity
entity isis
called
called aa ledger.
ledger.

C3 - 4
A
A list
list of
of the
the
accounts
accounts in in aa ledger
ledger
isis called
called aa chart
chart ofof
accounts.
accounts.

C3 - 5
Introduction to Accounting principles

What is accounting principles?

•Accounting principles are the general rules and guidelines that
companies are required to follow when reporting all accounts
and financial data.

• Aims to regulate and standardize accountancy practices by

providing a framework to ensure companies and organizations are
transparent and honest in their financial reporting.

•Accounting principles serve as a doctrine for accountants theory and

procedures, in doing their accounting systems.

C1 - 6
Cont. …
• The purpose of having - and following - accounting principles is to be
able to communicate economic information in a language that is
acceptable and understandable from one business to another.
• Currently no universally standardized accepted accounting principles,
there are various accounting frameworks which set the standard body.
The most common accounting principle frameworks used are:
 International Financial Reporting Standards (IFRS)
standard setter = International Accounting Standards Board (IASB)
 US Generally Accepted Accounting Principles (US GAAP)
standard setter = Financial Accounting Standard board
 Local financial reporting frameworks.
various national standard-setters

C1 - 7
Generally Accepted Accounting
Principles
The GAAP principles are dividend into two
category:
1.Accounting Concepts: are basic
assumptions or condition upon which science
of accounting is based.
2.Accounting Conventions: Accounting
conventions include those customs and
traditions which are followed up by an
accountant while preparing a financial report

C1 - 8
Principles and Assumptions
of Accounting
Measurement principle (also called Going-concern assumption means
cost principle) means that accounting that accounting information reflects a
information is based on actual cost. presumption the business will
continue operating.
Revenue recognition principle provides
guidance on when a company must Monetary unit assumption means we
recognize revenue. can express transactions in money.

Matching principle (expense Time period assumption presumes

recognition) prescribes that a company that the life of a company can be
must record its expenses incurred to divided into time periods, such as
generate the revenue. months and years.

Full disclosure principle requires a Business entity assumption means

company to report the details behind that a business is accounted for
financial statements that would impact separately from its owner or other
users’ decisions. business entities.
1-9
Difference between US GAAP and IFRS
The primary difference between the
two systems is that GAAP is rules-
based and IFRS is principles-based.
Theoretical framework and
principles of the IFRS leave more
room for interpretation and may
often require lengthy disclosures on
financial statements.

C1 - 10
Business Transaction and Accounting Equation

Definition of Business transaction:

•Business transactions are economic events that should be
recorded because they affect the financial position of the
business enterprise.
•These businesses transactions are the raw materials of
accounting reports, as cotton is a raw material for a textile
factory.
•A transaction can be an exchange between two or more
parties.
•A transaction can also be an event that has the same effect as
an exchange transaction but doesn’t involve an exchange
transaction. Some examples of “non exchange” transactions
are losses from fire, flood; physical wear and tear on
equipment; donation of property and so forth.

C1 - 11
Cont. …

For a given transaction to qualify to be recorded it has:

 To be related to the business enterprise
 To be measurable in terms of money
 To be completed / happened/ action.

C1 - 12
Accounting Equation and Business Transaction

Assets
Assets = Liabilities
Liabilities + Equity
Equity

Liabilities
Assets + Equity

1-13
Assets

Cash
Cash
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Resources
Resources
owned
owned oror
Vehicles controlled
controlled
Vehicles Land
by
by aa Land
company
company
Store
Store Buildings
Buildings
Supplies
Supplies Equipment
Equipment
1-14
Liabilities

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable

1-15
Equity

Contributed
Contributed Retained
Retained
Capital
Capital Earnings
Earnings

Owner’s
Owner’s
claim
claim on
on
assets
assets

Dividends
Dividends
1-16
Expanded Accounting Equation

Assets
Assets
Assets
Assets =
= Liabilities
Liabilities
Liabilities
Liabilities +
+ Equity
Equity
Equity
Equity

Contributed
Contributed _ Dividends _ Expenses
Capital
Capital
Dividends
+ Revenues
Revenues Expenses

Retained Earnings

1-17
Accounting Equation and business Transaction

 The accounting equation serves as the basic foundation

for the accounting systems of all companies.
 All business transactions can be stated in terms of
changes in the elements of the accounting equation.
 From the smallest business, such as the local
convenience store, to the largest business, such as Ford
Motor Company, companies use the accounting
equation. Following are example of Company’s
Accounting Equation.

C1 - 18
Basic Accounting Records

• All businesses use what is called the double-entry accounting

system to record business transaction.
• This system is based on the accounting equation and requires that
every business transaction be recorded in at least two accounts.
• Account is the basic storage unit for accounting data. It is used to
classify transactions in terms of their effects on specific asset,
liability, capital, revenue and expense items.
• The simplest form of an account is called “T” account. It is so
named because it looks like the capital letter "T".
• “T” account has three parts:
• the account title - used to write the name of the account
• The left (debit) side - a place to record increases or decreases in
the account in monetary terms
• The right (credit) side - a place to record increases or decreases in
the account in monetary terms

C1 - 19
Classification of Accounts

• Accounts may be classified into two major root categories:

Balance Sheet and Income Statement accounts.
A. Balance sheet Account: refer to accounts that appear on
the balance sheet. They include assets, liabilities and
owner's equity accounts. These accounts (except drawing
and income summary accounts) are also called permanent
or real accounts.
i) Assets - include any tangible and intangible items that have
monetary value to and owned by a business and . Assets
are further divided into current and non-current.
o Current assets - include cash and other assets that are
expected to be converted into cash, sold or consumed
within a very short period of time usually one year or less.
Examples include:
• Cash - coins and paper money on hand or deposited at
bank. C1 - 20
Major Account Classifications

Assets
Assets are
are Liabilities
Liabilities are
are debts
debts
resources
resources owned
owned owed
owed toto outsiders
outsiders
by
by the
the business.
business. (creditors).
(creditors).
Cash Accounts
Supplies payable
Building Notes payable
Accounts Wages payable
receivable

C3 - 21
Major Account Classifications
Liabilities
Liabilities are
are often
often identified
identified
Assets are on
on the
the balance
balance sheet
sheet
Liabilities by
by
are titles
titles
debts
Assets are Liabilities are debts
resources owned
resources owned that
that include
include
owed payable
payable
to ..
outsiders
owed to outsiders
by
by the
the business.
business. (creditors).
(creditors).
Cash Accounts
Supplies payable
Building Notes payable
Accounts Wages payable
receivable

C3 - 22
Major Account Classifications
Owners’
Owners’ Revenues
Revenues are are Expenses
Expenses are are the
the
(stockholders’)
(stockholders’) increases
increases inin using
using upup of
of assets
assets
equity
equity isis the
the owner’s
owner’s equity
equity asas or
or consuming
consuming of of
owner’s
owner’s right
right toto aa result
result of
of selling
selling services
services to
to
the
the assets
assets ofof the
the services
services or
or generate
generate revenue.
revenue.
business.
business. products.
products. Rent Expense
Capital Stock
Fees Earned Salary Expense
Retained
Fares Earned Utilities
Earnings
Commission Expense
Dividends
Revenue

C3 - 23
To
To assist
assist you
you in
in learning,
learning,
an
an account
account can
can be
be drawn
drawn
to
to resemble
resemble the
the letter
letter T.
T.

C3 - 24
The
The T-Account
T-Account
Cash

The
The T-account
T-account has
has aa title.
title.
C3 - 25
The
The T-Account
T-Account
Cash
Left side
debit

The
The left
left side
side of
of the
the account
account isis the
the debit
debit side.
side.
C3 - 26
The
The T-Account
T-Account
Cash
Left side Right side
debit credit

The
The right
right side
side of
of the
the account
account isis the
the credit
credit side.
side.
C3 - 27
The
The T-Account
T-Account
Cash
3,750 850
4,300 1,400
2,900 700
2,900

Typical entries
C3 - 28
Balancing
Balancing aa T-Account
T-Account

C3 - 29
Cash
First,
First, foot
foot
the
the debit
debit 3,750 850
side.
side. 4,300 1,400
2,900 700
10,950 2,900

C3 - 30
Cash
3,750 850
4,300
Next,
Next, foot
foot the
the
1,400
2,900
credit
credit side.
side. 700
10,950 2,900
5,850

C3 - 31
Subtract
Subtract total
total credits
credits
Cash from
from total
total debits
debits to
to
obtain
obtain the
the account
account
3,750 balance.
850
balance.
4,300 1,400
2,900 700
5,100 10,950 2,900
5,850

C3 - 32
Transactions and
Balance Sheet Accounts

C3 - 33
Rules of Debit / Credit Balance
Sheet Accounts
Debits Credits
Asset accounts………. Increase (+) Decrease (-)
Liability accounts…… Decrease (-) Increase (+)
Owner’s equity
(capital) accounts…. Decrease (-) Increase (+)

C3 - 34
Balance Sheet Accounts
ASSETS LIABILITIES
Asset Accounts Liability Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (–) (–) (+)

OWNERS’ EQUITY
Stockholders’ Equity
Accounts
Debit for Credit for
decreases increases
(–) (+)

C3 - 35
(A) On
(A) On November
November 1, 1, Chris
Chris Clark
Clark
deposits $25,000
deposits $25,000 inin aa bank
bank account
account
in the
in the name
name of
of NetSolutions
NetSolutions in in
exchange for
exchange for capital
capital stock.
stock.

JOURNAL Page 1
Post.
Date Description Debit Credit
2005 Ref.
1 Nov. 1 Cash 25 000 00
2 Capital Stock 25 000 00
3 Issued capital stock for cash.
4

C3 - 36
(A) On
(A) On November
November 1, 1, Chris
Chris Clark
Clark
deposits $25,000
deposits $25,000 inin aa bank
bank account
account
in the
in the name
name of
of NetSolutions
NetSolutions in in
exchange for
exchange for capital
capital stock.
stock.

Effects of this entry in the Ledger

Cash Capital Stock

Nov. 1 25,000 Nov. 1 25,000

C3 - 37
(B) On
(B) On November
November 5,5,
NetSolutions bought
NetSolutions bought land
land
for $20,000,
for $20,000, paying
paying cash.
cash.

4
5 5 Land 20 000 00
6 Cash 20 000 00
7 Purchased land for building
8 site.
9
10

C3 - 38
(B) On
(B) On November
November 5,5,
NetSolutions bought
NetSolutions bought land
land
for $20,000,
for $20,000, paying
paying cash.
cash.

Effects of this entry in the Ledger

Cash Land
Nov. 1 25,000 Nov. 5 20,000 Nov. 5 20,000

C3 - 39
(C) On
(C) On November
November 10,
10, NetSolutions
NetSolutions
purchased supplies
purchased supplies on
on account
account
for $1,350.
for $1,350.

10
11 10 Supplies 1 350 00
12 Accounts Payable 1 350 00
13 Purchased supplies on account.
14
15
16

C3 - 40
(C) On
(C) On November
November 10,
10, NetSolutions
NetSolutions
purchased supplies
purchased supplies on
on account
account
for $1,350.
for $1,350.

Effects of this entry in the Ledger

Supplies Accounts Payable
Nov. 10 1,350 Nov. 10 1,350

C3 - 41
(F) On
(F) On November
November 30,30, NetSolutions
NetSolutions
paid creditors
paid creditors on
on account,
account, $950.
$950.

30
31 30 Accounts Payable 950 00
32 Cash 950 00
33 Paid creditors on account.
34
35
36

C3 - 42
(F) On
(F) On November
November 30,30, NetSolutions
NetSolutions
paid creditors
paid creditors on
on account,
account, $950.
$950.

Effects of this entry in the Ledger

Cash Accounts Payable
Nov. 1 25,000 Nov. 5 25,000 Nov. 30 950 Nov. 10 1,350
18 7,500 30 3,650
30 950

C3 - 43
Rules of Debit / Credit Income
Statement Accounts
Expense Accounts Revenue Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)

C3 - 44
Income Statement Accounts
Debits Credits
Revenue accounts…… Decrease (-) Increase (+)
Expense accounts…… Increase (+) Decrease (-)

C3 - 45
(D) On
(D) On November
November 18, 18, NetSolutions
NetSolutions
received fees
received fees of
of $7,500
$7,500 from
from
customers for
customers for services
services provided
provided ..

14
15 18 Cash 7 500 00
16 Fees Earned 7 500 00
17 Received fees from customers.
18
19
20

C3 - 46
(D) On
(D) On November
November 18, 18, NetSolutions
NetSolutions
received fees
received fees of
of $7,500
$7,500 from
from
customers for
customers for services
services provided
provided ..

Effects of this entry in the Ledger

Cash Fees Earned
Nov. 1 25,000 Nov. 5 25,000 Nov. 18 7,500
18 7,500

C3 - 47
(E) Throughout
(E) Throughout thethe month,
month, NetSolutions
NetSolutions
incurred the
incurred the following
following expenses:
expenses:
wages, $2,125;
wages, $2,125; rent,
rent, $800;
$800; utilities,
utilities,
$450; and
$450; and miscellaneous,
miscellaneous, $275
$275 ..
18
19 30 Wages Expense 2 125 00
20 Rent Expense 800 00
21 Utilities Expense 450 00
22 Miscellaneous Expense 275 00
23 Cash 3 650 00
24 Paid expenses.

C3 - 48
(E) Throughout
(E) Throughout thethe month,
month, NetSolutions
NetSolutions
incurred the
incurred the following
following expenses:
expenses:
wages, $2,125;
wages, $2,125; rent,
rent, $800;
$800; utilities,
utilities,
$450; and
$450; and miscellaneous,
miscellaneous, $275
$275 ..
Effects of this entry in the Ledger
Cash Wages Expense
Nov. 1 25,000 Nov. 5 25,000 Nov. 30 2,125
18 7,500 30 3,650

Rent Expense Utilities Expense

Nov. 30 800 Nov. 30 450

Miscellaneous Expense
Nov. 30 275

C3 - 49
In
In every
every entry
entry the
the sum
sum ofof
the
the debits
debits always
always equal
equal
the
the sum
sum of
of the
the credits.
credits.

C3 - 50
(G) On
(G) On November
November 30, 30, aa count
count revealed
revealed
that $800
that $800 of
of the
the supplies
supplies inventory
inventory
had been
had been used.
used.

25
26 30 Supplies Expense 800 00
27 Supplies 800 00
28 Supplies used during
29 November.
30
31

C3 - 51
(G) On
(G) On November
November 30, 30, aa count
count revealed
revealed
that $800
that $800 of
of the
the supplies
supplies inventory
inventory
had been
had been used.
used.

Effects of this entry in the Ledger

Supplies Supplies Expense
Nov. 10 1,350 Nov. 30 800 Nov. 30 800

C3 - 52
Double-Entry
Double-Entry Accounting
Accounting
“ Double-entry accounting is based on a simple
concept: each party in a business transaction
will receive something and give something in
return. In bookkeeping terms, what is received
is a debit and what is given is a credit. The T
account is a representation of a scale or
balance.”

Scale or Balance T account

Left Side Right Side

Receive Give
Luca Pacioli DEBIT CREDIT
Developer of
Double-Entry Receive Give
Accounting DEBIT CREDIT
C3 - 53
Payment
Payment of
of
dividends
dividends

C3 - 54
(H) On
(H) On November
November 30,
30, Net
Net Solutions
Solutions paid
paid
dividends of
dividends of $2,000.
$2,000.

JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Nov. 30 Dividends 2 000 00
2 Cash 2 000 00
3 Paid dividends to stockholders.
4

C3 - 55
(H) On
(H) On November
November 30,
30, Chris
Chris Clark
Clark
withdrew $2,000
withdrew $2,000 inin cash
cash from
from
NetSolutions for
NetSolutions for personal
personal use.
use.

Effects of this entry in the Ledger

Cash Dividends
Nov. 1 25,000 Nov. 5 25,000 Nov. 30 2,000
18 7,500 30 3,650
30 950
30 2,000

C3 - 56
Normal Balances of Accounts
Increase
(Normal Balances) Decreases

Balance sheet accounts:

Asset Debit Credit
Liability Credit Debit
Owners’ (Stockholders’) Equity:
Capital Stock Credit Debit
Retained Earnings Credit Debit
Income statement accounts:
Revenue Credit Debit
Expense Debit Credit
Dividend accounts:
Dividends Debit Credit

C3 - 57
Flow
Flow of
of Business
Business Transactions
Transactions
Transaction Transaction Document
1 authorized 2 takes place 3 prepared

Entry recorded Entry posted to

4 in journal 5 ledger

C3 - 58
System
System to
to Analyze
Analyze Transactions
Transactions
1. Determine whether an asset, a liability,
owner’s equity, revenue, or expense account
is affected by the transaction.
2. For each account affected by the transaction,
determine whether the account increases or
decreases.
3. Determine whether each increase or decrease
should be recorded as a debit or a credit.

C3 - 59
Journalizing
and Posting

C3 - 60
Dec. 11 NetSolutions
Dec. NetSolutions paid
paid aa premium
premium ofof
$2,400 for
$2,400 for aa comprehensive
comprehensive insurance
insurance
policy covering
policy covering two
two years.
years.

JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

C3 - 61
JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Dec. 1 2 400 00 2 400 00

C3 - 62
JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Prepaid Insurance ACCOUNT NO. 15

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Dec. 1 2 2 400 00 2 400 00

C3 - 63
JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Cash ACCOUNT NO. 11

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Nov. 30 2 2 000 00 5 900 00
Dec. 1 2 400 00 3 500 00

C3 - 64
JOURNAL Page 2
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 1 Prepaid Insurance 15 2 400 00
2 Cash 11 2 400 00
3 Paid premium on two-year
4 policy.

ACCOUNT Cash ACCOUNT NO. 11

Balance
Post.
Date Item Ref. Debit Credit Debit Credit
2005
Nov. 30 2 2 000 00 5 900 00
Dec. 1 2 2 400 00 3 500 00

C3 - 65
Dec. 11 NetSolutions
Dec. NetSolutions paid
paid rent
rent for
for December,
December,
$800.
$800.

14 1 Rent Expense 52 800 00

15 Unearned Rent 11 800 00
16 Paid rent for December.
17

C3 - 66
Dec. 11 NetSolutions
Dec. NetSolutions receives
receives $360
$360 for
for three
three
month’s rent
month’s rent for
for land
land beginning
beginning
December 1.
December 1.

14 1 Cash 11 360 00
15 Unearned Rent 23 360 00
16 Received advanced payment
17 For three months’ rent of land.

C3 - 67
Dec. 44 NetSolutions
Dec. NetSolutions purchased
purchased office
office
equipment on
equipment on account
account from
from Executive
Executive
Supply Co.
Supply Co. for
for $1,800.
$1,800.

18 4 Office Equipment 18 1 800 00

19 Accounts Payable 21 1 800 00
20 Purchased office equipment on
21 account.

C3 - 68
Dec. 66 NetSolutions
Dec. NetSolutions paid
paid $180
$180 for
for aa
newspaper advertisement.
newspaper advertisement.

21 6 Miscellaneous Expense 59 180 00

22 Cash 11 180 00
23 Paid for newspaper ad.
24

C3 - 69
Dec. 11
Dec. 11 NetSolutions
NetSolutions paid
paid creditors
creditors $400.
$400.

24 11 Accounts Payable 21 400 00

25 Cash 11 400 00
26 Paid creditors on account.
27

C3 - 70
Dec. 13
Dec. 13 NetSolutions
NetSolutions paid
paid aa receptionist
receptionist and
and
part-time assistant
part-time assistant $950
$950 for
for two
two
weeks’ wages.
weeks’ wages.

JOURNAL Page 3
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 13 Wages Expense 51 950 00
2 Cash 11 950 00
3 Paid two week’s wages.
4

C3 - 71
Dec. 16
Dec. 16 NetSolutions
NetSolutions received
received $3,100
$3,100 from
from
fees earned
fees earned for
for the
the first
first half
half of
of
December.
December.

5 16 Cash 11 3 100 00
6 Fees Earned 41 3 100 00
7 Received fees from customers.
8

C3 - 72
Dec. 16
Dec. 16 Fees
Fees earned
earned on on account
account totaled
totaled
$1,750 for
$1,750 for the
the first
first half
half of
of
December.
December.

9 16 Accounts Receivable 12 1 750 00

10 Fees Earned 41 1 750 00
11 Received fees from customers.
12

C3 - 73
Dec. 20
Dec. 20 NetSolutions
NetSolutions paid
paid $900
$900 to
to Executive
Executive
Supply Co.
Supply Co. on
on the
the $1,800
$1,800 debt
debt owed
owed
from the
from the December
December 44 transaction.
transaction.

13 20 Accounts Payable 21 900 00

14 Cash 11 900 00
15 Paid part of amount owed to
16 Executive Supply Co.

C3 - 74
Dec. 21
Dec. 21 NetSolutions
NetSolutions received
received $650
$650 from
from
customers in
customers in payment
payment ofof their
their
accounts.
accounts.

18 21 Cash 11 650 00
19 Accounts Receivable 12 650 00
20 Received cash from customer
21 on account.

C3 - 75
Dec. 23
Dec. 23 NetSolutions
NetSolutions paid
paid $1,450
$1,450 for
for
supplies.
supplies.

22 23 Supplies 14 1 450 00
23 Cash 11 1 450 00
24 Purchased supplies.
25

C3 - 76
Dec. 27
Dec. 27 NetSolutions
NetSolutions paid
paid the
the receptionist
receptionist
and part-time
and part-time assistant
assistant $1,200
$1,200 for
for
two weeks’
two weeks’ wages.
wages.

27 27 Wages Expense 51 1 200 00

28 Cash 11 1 200 00
29 Paid two weeks’ wages.
30

C3 - 77
Dec. 31
Dec. 31 NetSolutions
NetSolutions paidpaid its
its $310
$310 telephone
telephone
bill for
bill for the
the month.
month.

31 31 Utilities Expense 54 310 00

32 Cash 11 310 00
33 Paid telephone bill.
34

C3 - 78
Dec. 31
Dec. 31 NetSolutions
NetSolutions paidpaid its
its $225
$225 electric
electric
bill for
bill for the
the month.
month.

JOURNAL Page 4
Post.
Date Description Debit Credit
2005 Ref.
1 Dec. 31 Utilities Expense 54 225 00
2 Cash 11 225 00
3 Paid utility bill.
4

C3 - 79
Dec. 31
Dec. 31 NetSolutions
NetSolutions received
received $2,870
$2,870 from
from
fees earned
fees earned for
for the
the second
second half
half of
of
December.
December.

5 31 Cash 11 2 870 00
6 Fees Earned 41 2 870 00
7 Received fees from customers.
8

C3 - 80
Dec. 31
Dec. 31 NetSolutions
NetSolutions earned
earned $1,120
$1,120 on
on
account for
account for the
the second
second half
half of
of
December.
December.

9 31 Accounts Receivable 12 1 120 00

10 Fees Earned 41 1 120 00
11 Recorded fees earned on
12 account.

C3 - 81
Dec. 31
Dec. 31 NetSolutions
NetSolutions paid
paid dividends
dividends of
of
$2,000 to
$2,000 to stockholders.
stockholders.

14 31 Dividends 33 2 000 00
15 Cash 11 2 000 00
16 Paid dividends to stockholders.
17

C3 - 82
Trial Balance

C3 - 83
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Capital Stock 25 000 00
Dividends
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00

C3 - 84
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance Balance 2 400 00
Land Sheet 20 000 00
Office Equipment 1 800 00
Accounts Payable Items 900 00
Unearned Rent 360 00
Capital Stock 25 000 00
Dividends 4 000 00
Fees Earned 16 340 00
Wages Expense 4 275 00
Rent Expense 1 600 00
Utilities Expense 985 00
Supplies Expense 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00

C3 - 85
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Capital Stock 25 000 00
Dividends 4 000 00
Fees Earned Statement 16 340 00
Wages Expense 4 275 00
Rent Expense
of 1 600 00
Utilities Expense Retained 985 00
Supplies Expense Earnings 800 00
Miscellaneous Expense 455 00
Item 42 600 00 42 600 00

C3 - 86
NetSolutions
Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 220 00
Supplies 2 000 00
Prepaid Insurance 2 400 00
Land 20 000 00
Office Equipment 1 800 00
Accounts Payable 900 00
Unearned Rent 360 00
Capital Stock 25 000 00
Dividends 4 000 00
Fees Earned 16 340 00
Wages Expense Income 4 275 00
Rent Expense 1 600 00
Utilities Expense
Statement 985 00
Supplies Expense Items 800 00
Miscellaneous Expense 455 00
42 600 00 42 600 00

C3 - 87
Chapter F3 Power Notes
The Matching Concept and the Adjusting Process

Learning Objectives
1. The Matching Concept
2. Nature of the Adjusting Process
3. Recording Adjusting Entries
4. Summary of Adjustment Process
5. Financial Analysis and Interpretation

C3 - 88
Chapter F3 Power Notes
The Matching Concept and the Adjusting Process

Slide # Power Note Topics

3 • Reporting Revenue and Expense
6 • The Matching Concept
9 • Trial Balance, Chart of Accounts
20 • Deferrals and Accruals
36 • Summary of Adjustments
41 • Vertical Analysis

Note: To select a topic, type the slide # and press Enter.

C3 - 89
Reporting Revenue and Expense

TWO METHODS

Cash Basis of Accounting

Accrual Basis of Accounting

C3 - 90
Cash Basis of Accounting

 Revenue reported when cash is received

 Expense reported when cash is paid
 Does not properly match revenues and
expenses

C3 - 91
Accrual Basis of Accounting

 Revenue reported when earned

 Expense reported when incurred
 Properly matches revenues and expenses
in determining net income
 Requires adjusting entries at end of period
 It just sounds mean – it really isn’t

C3 - 92
The
The Matching
Matching Concept
Concept
Debits = Credits

Liabilities
Assets Owner’s
Equity

Expenses Revenues

C3 - 93
The
The Matching
Matching Concept
Concept
Debits = Credits

Liabilities
Assets Owner’s
Equity
Net
Income

Expenses Revenues

C3 - 94
The
The Matching
Matching Concept
Concept
Debits = Credits

Liabilities
Assets Owner’s
Equity
Net
Income

Expenses Revenues
matching

Net income is determined by properly

matching expenses and revenues.

C3 - 95
NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
Assets 14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800

C3 - 96
NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
Liabilities 21 Accounts Payable 900
23 Unearned Rent 360

C3 - 97
NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
Stockholders’ 31 Capital Stock 25,000
Equity 33 Dividends 4,000

C3 - 98
NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Capital Stock 25,000
33 Dividends 4,000
Revenue 41 Fees Earned 16,340

C3 - 99
NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Pat King, Capital 25,000
32 Pat King, Drawing 4,000
41 Fees Earned 16,340
51 Wages Expense 4,275
52 Rent Expense 1,600
Expenses 54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
42,600 42,600

C3 - 100
NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Capital Stock 25,000
33 Dividends 4,000
41 Fees Earned 16,340
51 Wages Expense 4,275
52 Rent Expense 1,600
54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
42,600 42,600

C3 - 101
NetSolutions
Expanded Chart of Accounts

Balance Sheet Income Statement

1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable 42 Rent Revenue
14 Supplies
5. Expenses
15 Prepaid Insurance
51 Wages Expense
17 Land
52 Rent Expense
18 Office Equipment
53 Depreciation Expense
19 Accumulated Depreciation
54 Utilities Expense
2. Liabilities 55 Supplies Expense
21 Accounts Payable 56 Insurance Expense
22 Wages Payable 59 Miscellaneous Expense
23 Unearned Rent
3. Stockholders’ Equity
31 Capital Stock
32 Retained Earnings
33 Dividends

C3 - 102
NetSolutions
Expanded Chart of Accounts

Balance Sheet Income Statement

C3 - 103
NetSolutions
Expanded Chart of Accounts

Balance Sheet Income Statement

C3 - 104
NetSolutions
Expanded Chart of Accounts

Balance Sheet Income Statement

C3 - 105
NetSolutions
Expanded Chart of Accounts

Balance Sheet Income Statement

C3 - 106
Adjustments
Adjustments –– Deferrals
Deferrals and
and Accruals
Accruals

Revenues Current Period Future Period

Deferrals Cash Received Revenue Recorded

C3 - 107
Adjustments
Adjustments –– Deferrals
Deferrals and
and Accruals
Accruals

Revenues Current Period Future Period

Deferrals Cash Received Revenue Recorded

Accruals Revenue Recorded Cash Received

C3 - 108
Adjustments
Adjustments –– Deferrals
Deferrals and
and Accruals
Accruals

Revenues Current Period Future Period

Deferrals Cash Received Revenue Recorded

Accruals Revenue Recorded Cash Received

Expenses
Current Period Future Period
Deferrals Cash Paid Expense Recorded

C3 - 109
Adjustments
Adjustments –– Deferrals
Deferrals and
and Accruals
Accruals

Revenues Current Period Future Period

Deferrals Cash Received Revenue Recorded

Accruals Revenue Recorded Cash Received

Expenses
Current Period Future Period
Deferrals Cash Paid Expense Recorded

Accruals Expense Recorded Cash Paid

C3 - 110
Adjustments
Adjustments –– Deferred
Deferred Expense
Expense
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Example P1 – Purchase initially recorded as an asset.

Adjustment A1 – Record
Cash insurance used for
P1..... 2,400 December, $100.

Prepaid Insurance
Assets
P1..... 2,400

Insurance Expense
Expenses

C3 - 111
Adjustments
Adjustments –– Deferred
Deferred Expense
Expense
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Example P1 – Purchase initially recorded as an asset.

Adjustment A1 – Record
Cash insurance used for
P1..... 2,400 December, $100.

Prepaid Insurance
Assets
P1..... 2,400 A1..... 100
A1
Insurance Expense A1

A1.....100 Expenses

C3 - 112
Adjustments – Deferred Expense
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Example P2 – Purchase initially recorded as an expense.

Adjustment A2 – Record
Cash insurance unused as of
P2..... 2,400 December 31.

Prepaid Insurance
Assets

Insurance Expense
P2..... 2,400 Expenses

C3 - 113
Adjustments – Deferred Expense
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Example P2 – Purchase initially recorded as an expense.

Adjustment A2 – Record
Cash insurance unused as of
P2..... 2,400 December 31.

Prepaid Insurance
Assets
A2..... 2,300
A2
A2
Insurance Expense
P2..... 2,400 A2.....2,300 Expenses

C3 - 114
Adjustments – Deferred Revenue
On December 1, NetSolutions received cash of $360 for
three months’ rent beginning December 1.
Example S1 – Sale initially recorded as a liability.

Adjustment A3 – Record rent

Cash
earned for December.
S1..... 360

Unearned Rent
Liabilities
S1..... 360

Rent Revenue
Revenues

C3 - 115
Adjustments – Deferred Revenue
On December 1, NetSolutions received cash of $360 for
three months’ rent beginning December 1.
Example S1 – Sale initially recorded as a liability.

Adjustment A3 – Record rent

Cash
earned for December.
S1..... 360

Unearned Rent
Liabilities
A3..... 120 S1..... 360
A3
A3
Rent Revenue
A3.....120 Revenues

C3 - 116
Adjustments – Deferred Revenue
On December 1, NetSolutions received cash of $360 for
three months’ rent beginning December 1.
Example S2 – Sale initially recorded as revenue.

Adjustment A4 – Record rent

Cash
unearned as of December 31.
S2..... 360

Unearned Rent Liabilities

Rent Revenue
S2.....360 Revenues

C3 - 117
Adjustments – Deferred Revenue
On December 1, NetSolutions received cash of $360 for
three months’ rent beginning December 1.
Example S2 – Sale initially recorded as revenue.

Adjustment A4 – Record rent

Cash
unearned as of December 31.
S2..... 360

Unearned Rent Liabilities

A4..... 240
A4
A4
Rent Revenue
A4..... 240 S2.....360 Revenues

C3 - 118
Adjustments – Accrued Expense

NetSolutions received employee services for the last two

days of December amounting to $250, to be paid later.
Adjustment A5 – Record accrued wages of $250.

Wages Payable Liabilities

Wages Expense
Bal.....4,275 Expenses

C3 - 119
Adjustments – Accrued Expense

NetSolutions received employee services for the last two

days of December amounting to $250, to be paid later.
Adjustment A5 – Record accrued wages of $250.

Wages Payable Liabilities

A5..... 250

A5
Wages Expense A5
Bal.....4,275 Expenses
A5.....250

C3 - 120
Adjustments – Accrued Revenue

As of December 31, NetSolutions provided 25 hours of

services at $20 per hour to be billed next month.
Adjustment A6 – Record accrued fees earned of $500.

Accounts Receivable Assets

Bal.....2,220

Fees Earned
Bal....16,340 Revenues

C3 - 121
Adjustments – Accrued Revenue

As of December 31, NetSolutions provided 25 hours of

services at $20 per hour to be billed next month.
Adjustment A6 – Record accrued fees earned of $500.

Accounts Receivable Assets

Bal.....2,220
A6..... 500
A6
Fees Earned
A6
Bal....16,340 Revenues
A6.....500

C3 - 122
Summary of Adjustments

Buying Side

Deferred
Expenses

Assets

A1 A2

Expenses

Rearranging
the Debits

C3 - 123
Summary of Adjustments

Buying Side Selling Side

Deferred Deferred
Expenses Revenues

Assets Liabilities

A1 A2 A3 A4

Expenses Revenues

Rearranging Rearranging
the Debits the Credits

C3 - 124
Summary of Adjustments

Buying Side Selling Side

Accrued
Expenses

Liabilities

Expenses

Adding a New
Transaction

C3 - 125
Summary of Adjustments

Buying Side Selling Side

Accrued Accrued
Expenses Revenues

Liabilities Assets

A5 A6

Expenses Revenues

Adding a New Adding a New

Transaction Transaction

C3 - 126
Summary of Adjustments

Buying Side Selling Side

Deferred Accrued Deferred Accrued

Expenses Expenses Revenues Revenues

Assets Liabilities Liabilities Assets

A1 A2 A5 A3 A4 A6

Expenses Expenses Revenues Revenues

Rearranging Adding a New Rearranging Adding a New

the Debits Transaction the Credits Transaction

C3 - 127
Financial
Financial Analysis
Analysis and
and Interpretation
Interpretation
Objective: Use vertical analysis to compare financial
statement items with each other and with industry averages.

Comparative Income Statements

For the Years Ended December 31, 2003 and 2002
2003 2002
Amount Percent Amount Percent
Fees earned $ 187,500100.0% $ 150,000100.0%
Operating expenses:
Wages expense $ 60,00032.0% $ 45,00030.0%
Rent expense 15,0008.0
Vertical Analysis:

Wages expense $ 60,000

= 32.0%
Fees earned $ 187,500

C3 - 128
The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Prepared from general ledger.

Accounts are listed in order: A, L, OE, R, E

C4 -
The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments are entered here. Two possibilities:

1. Deferrals – Existing balances are changed.
2. Accruals – New information is entered.

C4 -
The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments are combined with the trial balance.

Account balances are now adjusted.

C4 -
NetSolutions - Work Sheet - Two Months Ended 12/31/02
Trial Balance Adjustments Adj. Trial Balance
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,220 (e) 500 2,720
14 Supplies 2,000 (a) 1,240 760
15 Prepaid Insurance 2,400 (b) 100 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 0 (f) 50 50
21 Accounts Payable 900 900
22 Wages Payable 0 (d) 250 250
23 Unearned Rent 360 (c) 120 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,340 (e) 500 16,840
42 Rent Revenue 0 (c) 120 120
51 Wages Expense 4,275 (d) 250 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 0 (f) 50 50
54 Utilities Expense 985 985
55 Supplies Expense 800 (a) 1,240 2,040
56Insurance Expense 0 (b) 100 100
59 Misc. Expense 455 455
42,600 42,600 2,260 2,260 43,400 43,400

C4 -
NetSolutions - Work Sheet - Two Months Ended 12/31/02
Adj. Trial Balance Income Statement Balance Sheet
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,720 2,720
14 Supplies 760 760
15 Prepaid Insurance 2,300 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 50 50
21 Accounts Payable 900 900
22 Wages Payable 250 250
23 Unearned Rent 240 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,840 16,840
42 Rent Revenue 120 120
51 Wages Expense 4,525 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 50 50
54 Utilities Expense 985 985
55 Supplies Expense 2,040 2,040
56Insurance Expense 100 100
59 Misc. Expense 455 455
43,400 43,400 9,755 16,960 43,645 16,440
Net Income 7,205 7,205
16,960 16,960 43,645 43,645
C4 -
NetSolutions - Work Sheet - Two Months Ended 12/31/02
Adj. Trial Balance Income Statement Balance Sheet
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,720 2,720
14 Supplies 760 760
15 Prepaid Insurance 2,300 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 50 50
21 Accounts Payable 900 900
22 Wages Payable 250 250
23 Unearned Rent 240 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,840 16,840
42 Rent Revenue 120 120
51 Wages Expense 4,525 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 50 50
54 Utilities Expense 985 985
55 Supplies Expense 2,040 2,040
56Insurance Expense 100 100
59 Misc. Expense 455 455
43,400 43,400 9,755 16,960 43,645 16,440
Net Income 7,205 7,205
16,960 16,960 43,645 43,645
C4 -
NetSolutions - Work Sheet - Two Months Ended 12/31/02
Adj. Trial Balance Income Statement Balance Sheet
Account Debit Credit Debit Credit Debit Credit
11 Cash 2,065 2,065
12Accounts Receivable 2,720 2,720
14 Supplies 760 760
15 Prepaid Insurance 2,300 2,300
17 Land 20,000 20,000
18 Office Equipment 1,800 1,800
19Accumulated Depr. 50 50
21 Accounts Payable 900 900
22 Wages Payable 250 250
23 Unearned Rent 240 240
31Chris Clark, Capital 25,000 25,000
32Chris Clark, Drawing 4,000 4,000
41 Fees Earned 16,840 16,840
42 Rent Income 120 120
51 Wages Expense 4,525 4,525
52 Rent Expense 1,600 1,600
53Depreciation Expense 50 50
54 Utilities Expense 985 985
55 Supplies Expense 2,040 2,040
56Insurance Expense 100 100
59 Misc. Expense 455 455
43,400 43,400 9,755 16,960 43,645 16,440
Net Income 7,205 7,205
16,960 16,960 43,645 43,645
C4 -
NetSolutions
Income Statement
For Two Months Ended December 31, 2002

Fees earned $16,840

Rent revenue 120
Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205

C4 -
NetSolutions
Statement of Owner’s Equity
For Two Months Ended December 31, 2002

Chris Clark, capital, November 1, 2002 $ 0

Investment on November 1, 2002 $25,000
Net income for November and December 7,205
$32,205
Less withdrawals 4,000
Increase in owner’s equity 28,205
Chris Clark, capital, December 31, 2002 $28,205

C4 -
NetSolutions
Balance Sheet
December 31, 2002

ASSETS
Current assets:
Cash $ 2,065
Accounts receivable 2,720
Supplies 760
Prepaid insurance 2,300
Total current assets $ 7,845
Property, plant, and
equipment:
Land $20,000
Office equipment 1,800
Less accum. depr. (50)
Total property, plant,
and equipment $21,750
Total assets $29,595

C4 -
NetSolutions
Balance Sheet
December 31, 2002

LIABILITIES
Current liabilities:
Accounts payable $ 900
Wages payable 250
Unearned rent 240
Total liabilities $ 1,390
OWNER’S EQUITY
Chris Clark, capital 28,205
Total liabilities and
owner’s equity $29,595

C4 -
The Closing Process

Wages Expense Fees Earned

Bal. Income Summary Bal.
4,525 16,840
Rent Expense Rent Revenue
Bal.
1,600 Bal.
120
Depreciation Expense
Bal.
50
Utilities Expense Note: The balances
Bal. Chris Clark, Capital shown are adjusted
985 balances before closing.
Bal.
Supplies Expense The following sequence
25,000
Bal. demonstrates the closing
2,040 process.
Insurance Expense
Bal.
100 Chris Clark, Drawing
Miscellaneous Expense
Bal.
Bal. 4,000
455
C4 -
The Closing Process

Wages Expense Fees Earned

Bal. Income Summary 16,840 Bal.
4,525 16,840
Rent Expense 16,960 Rent Revenue
Bal. Total
1,600 120 Bal.
Revenues 120
Depreciation Expense
Bal.
50
Utilities Expense
Close Revenues
Bal. Chris Clark, Capital
985
Bal.
Supplies Expense
25,000
Bal.
2,040
Insurance Expense
Bal.
100 Chris Clark, Drawing
Miscellaneous Expense
Bal. Bal.
455 4,000

C4 -
The Closing Process

Wages Expense Fees Earned

Bal. Income Summary 16,840 Bal.
4,525
4,525 16,840
Rent Expense 9,755 16,960 Rent Revenue
Bal. 1,600 Total Total
1,600 120 Bal.
Expenses Revenues 120
Depreciation Expense
Bal.
50
50
Utilities Expense
Close Revenues
Bal. Chris Clark, Capital
985
985
Bal. Close Expenses
Supplies Expense
25,000
Bal. 2,040
2,040
Insurance Expense
Bal. 100
100 Chris Clark, Drawing
Miscellaneous Expense
Bal. Bal.
455 4,000
455

C4 -
The Closing Process

Wages Expense Fees Earned

Bal. Income Summary 16,840 Bal.
4,525
4,525 16,840
Rent Expense 9,755 16,960 Rent Income
Bal. 1,600
1,600 7,205 120 Bal.
Depreciation Expense 120
Bal. Closed
50
50
Utilities Expense
Close Revenues
Bal. Chris Clark, Capital
985
985
Bal. Close Expenses
Supplies Expense
25,000
7,205
Bal. 2,040
2,040 Net Income Close Income Summary
Insurance Expense
Bal. 100
100 Chris Clark, Drawing
Miscellaneous Expense
Bal. Bal.
455 4,000
455

C4 -
The Closing Process

Wages Expense Fees Earned

Bal. Income Summary 16,840 Bal.
4,525
4,525 16,840
Rent Expense 9,755 16,960 Rent Income
Bal.
1,600 7,205 120 Bal.
1,600
Depreciation Expense 120
Bal. Closed
50
50
Utilities Expense
Close Revenues
Bal. Chris Clark, Capital
985
985
4,000 Bal. Close Expenses
Supplies Expense
25,000
7,205
Bal. Drawing
2,040 Close Income Summary
2,040 Net Income
Insurance Expense
Bal. 100 Close Drawing
100 Chris Clark, Drawing
Miscellaneous Expense Bal. 4,000
Bal. 455 4,000
455 Closed
C4 -
The Closing Process

Wages Expense Fees Earned

Income Summary
Rent Expense Rent Income

Depreciation Expense

Utilities Expense
Chris Clark, Capital
4,000 Bal. Drawing
Supplies Expense
25,000
7,205 Net Income
Bal.
Insurance Expense
28,205 All temporary accounts
Chris Clark, Drawing now have zero balances
Miscellaneous Expense and are ready for the
next accounting period.

C4 -
NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
Assets 14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
22 Wages Payable 250
23 Unearned Rent 240
31 Chris Clark, Capital 28,205
29,645 29,645

C4 -
NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
Liabilities 22 Wages Payable 250
23 Unearned Rent 240
31 Chris Clark, Capital 28,205
29,645 29,645

C4 -
NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
22 Wages Payable 250
Owner’s 23 Unearned Rent 240
31 Chris Clark, Capital 28,205
Equity 29,645 29,645

C4 -
Manual Accounting Cycle

1. Transactions are analyzed

and recorded in journal.
Documents Journal

C4 -
Manual Accounting Cycle

1. Transactions are analyzed

and recorded in journal.
Documents Journal

2. Transactions are posted

from journal to ledger.
Journal Ledger

C4 -
Manual Accounting Cycle

1. Transactions are analyzed

and recorded in journal.
Documents Journal

2. Transactions are posted

from journal to ledger.
Journal Ledger
3. Trial balance is prepared,
adjustment data is organized,
work sheet is completed.
Work Sheet

C4 -
Manual Accounting Cycle

1. Transactions are analyzed

and recorded in journal.
Documents Journal

2. Transactions are posted

from journal to ledger.
Journal Ledger
3. Trial balance is prepared,
adjustment data is organized,
work sheet is completed.
Work Sheet