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CHAPTER 4
COMPLETING THE ACCOUNTING CYCLE
EYE OPENERS
- The end-of-period spreadsheet (work sheet) illustrates flow of accounting information from the unadjusted trial balance into the ad- justed trial balance and into the financial statements. In doing so, the spreadsheet (work sheet) illustrates the impact of the ad- justments on the financial statements.
- No. The end-of-period spreadsheet (work sheet) is a device used by the accountant to facilitate the preparation of statements.
- A net income of $240,350 ($915,800 – $675,450) would be reported. When the Cre- dit column exceeds the Debit column, net in- come is reported. If the Debit column of the Income Statement columns is more than the Credit column, a net loss is reported.
- a. Current assets are composed of cash and other assets that may reasonably be expected to be realized in cash or sold or consumed in the near future through the normal operations of the business. b. Property, plant, and equipment is com- posed of assets used in the business that are of a permanent or relatively fixed nature.
- Current liabilities are liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets. Liabilities that will not be due for a comparatively long time (usually more than one year) are called long-term liabilities.
- Revenue, expense, and drawing accounts are generally referred to as temporary accounts.
- Closing entries are necessary at the end of an accounting period (1) to transfer the bal- ances in temporary accounts to permanent accounts and (2) to prepare the temporary accounts for use in accumulating data for the following accounting period.
- Adjusting entries bring the accounts up to date, while closing entries reduce the reve- nue, expense, and drawing accounts to zero balances for use in accumulating data for the following accounting period.
- (1) Debit each revenue account for its bal- ance and credit Income Summary for the total revenue.
(2) Credit each expense account for its bal- ance and debit Income Summary for the total expenses. (3) Debit Income Summary for its balance and credit the owner’s capital account. (4) Debit the owner’s capital account for the balance of the drawing account and cre- dit the drawing account.
- The purpose of the post-closing trial balance is to make sure that the ledger is in balance at the beginning of the next period.
- a. The financial statements are the most important output of the accounting cycle. b. Yes, all companies have an accounting cycle that begins with analyzing and journalizing transactions and ends with a post-closing trial balance. However, companies may differ in how they im- plement the steps in the accounting cycle. For example, while most compa- nies use computerized accounting sys- tems, some companies may use manual systems.
- The natural business year is the fiscal year that ends when business activities have reached the lowest point in the annual oper- ating cycle.
- January is more likely to have a lower level of business activity than is December for a department store. Therefore, the additional work to adjust and close the accounts and prepare the financial statements can more easily be performed at the end of January than at the end of December.
- All the companies listed are general mer- chandisers whose busiest time of the year is during the holiday season, which extends through most of December. Traditionally, the lowest point of business activity for general merchandisers will be near the end of Janu- ary and the beginning of February. Thus, these companies have chosen their natural business year for their fiscal years.
PRACTICE EXERCISES
PE 4 – 1A
- Balance Sheet column 5. Balance Sheet column
- Balance Sheet column 6. Balance Sheet column
- Income Statement column 7. Balance Sheet column
- Income Statement column 8. Income Statement column
PE 4 – 1B
- Balance Sheet column 5. Income Statement column
- Income Statement column 6. Income Statement column
- Balance Sheet column 7. Balance Sheet column
- Balance Sheet column 8. Balance Sheet column
PE 4 – 2A
A net income of $47,200 ($233,400 – $186,200) would be reported. When the Cre- dit column exceeds the Debit column, net income is reported. If the Debit column of the Income Statement columns is more than the Credit column, a net loss is reported.
PE 4 – 2B
A net loss of $130,200 ($505,200 – $375,000) would be reported. When the Credit column exceeds the Debit column, a net loss is reported. If the Debit column of the Balance Sheet columns is more than the Credit column, a net income is re- ported.
PE 4 – 5A
Nov. 30 Fees Earned ........................................................ 779, Income Summary........................................... 779, 30 Income Summary ................................................ 467, Wages Expense ............................................. 389, Rent Expense ................................................. 60, Supplies Expense .......................................... 7, Miscellaneous Expense ................................ 11, 30 Income Summary ................................................ 311, Brett Maxim, Capital ...................................... 311, 30 Brett Maxim, Capital ........................................... 50, Brett Maxim, Drawing .................................... 50,
PE 4 – 5B
July 31 Fees Earned ........................................................ 515, Income Summary........................................... 515, 31 Income Summary ................................................ 571, Wages Expense ............................................. 480, Rent Expense ................................................. 75, Supplies Expense .......................................... 12, Miscellaneous Expense ................................ 4, 31 Sherry Kerney, Capital ....................................... 56, Income Summary........................................... 56, 31 Sherry Kerney, Capital ....................................... 20, Sherry Kerney, Drawing ................................ 20,
PE 4 – 6A
The following two steps are missing: (1) assembling and analyzing adjustment data and (2) journalizing and posting the closing entries. The adjustment data should be assembled and analyzed after step (c). The closing entries should be journalized and posted to the ledger after step (g).
PE 4 – 6B
The following two steps are missing: (1) posting the transactions to the ledger and (2) the preparation of the financial statements. Transactions should be post- ed to the ledger after step (a). The financial statements should be prepared after step (f).
EXERCISES
Ex. 4 – 4
AARDVARK CONSULTING
Income Statement For the Year Ended November 30, 2010
Fees earned .......................................................................... $ 60, Expenses: Salary expense ................................................................ $ 32, Supplies expense ........................................................... 2, Depreciation expense ..................................................... 900 Miscellaneous expense .................................................. 1, Total expenses .......................................................... 37, Net income ............................................................................ $ 22,
AARDVARK CONSULTING
Statement of Owner ’ s Equity For the Year Ended November 30, 2010
Jan Sullivan, capital, December 1, 2009............................. $ 27, Net income ............................................................................ $ 22, Less withdrawals ................................................................. 2, Increase in owner ’ s equity .................................................. 20, Jan Sullivan, capital, November 30, 2010 .......................... $ 48,
AARDVARK CONSULTING
Balance Sheet November 30, 2010 Assets Liabilities Current assets: Current liabilities: Cash ............................ $ 7,500 Accounts payable ... $3, Accounts receivable .. 18,500 Salaries payable ..... 400 Supplies ..................... 750 Total liabilities ........... $ 3, Total current assets $ 26, Property, plant, and equipment: Office equipment ....... $ 30,500 Owner ’ s Equity Less accum. depr. ..... 5,400 Jan Sullivan, Total property, plant, capital ...................... 48, and equipment...... 25,100 Total liabilities and Total assets .................. $ 51,850 owner ’ s equity ........ $ 51,
3 RIVERS MESSENGER SERVICE
INFINET SERVICES CO.
Ex. 4 – 9
PICASSO SPORTS
Statement of Owner ’ s Equity For the Year Ended June 30, 2010
Margarita Castillo, capital, July 1, 2009 ............................ $237, Net loss for year ................................................................. $ 32, Plus withdrawals ................................................................ 4, Decrease in owner ’ s equity ............................................... 36, Margarita Castillo, capital, June 30, 2010 ........................ $201,
Ex. 4 – 10
a. Current asset: 1, 3, 5, 6
b. Property, plant, and equipment: 2, 4
Ex. 4 – 11
Since current liabilities are usually due within one year, $24,000 ($2,000 × 12 months) would be reported as a current liability on the balance sheet. The re- mainder of $336,000 ($360,000 – $24,000) would be reported as a long-term liabili- ty on the balance sheet.
Ex. 4 – 12
OPTIMUM WEIGHT CO.
Balance Sheet June 30, 2010
Assets Liabilities Current assets: Current liabilities: Cash ............................................. $ 9,375 Accounts payable ............ $8, Accounts receivable ................... 20,780 Salaries payable ............... 3, Supplies ....................................... 520 Unearned fees .................. 2, Prepaid insurance ....................... 4,800 Total liabilities ..................... $ 14, Prepaid rent ................................. 3, Total current assets ................. $ 38, Property, plant, and equipment: Land.............................................. $100, Equipment.................................... $75,000 Owner’s Equity Less accumulated depreciation. 25,975 49,025 Carlos Kiser, capital ........... 173, Total property, plant, and equipment............................... 149,025 Total liabilities and Total assets ..................................... $187,500 owner ’ s equity .................. $187,
Ex. 4 – 13 Concluded
CABANA SERVICES CO.
Balance Sheet August 31, 2010
Assets Liabilities Current assets: Current liabilities: Cash ............................................. $15,840 Accounts payable .............. $20, Accounts receivable ................... 41,250 Wages payable ................... 4, Supplies ....................................... 4,950 Total liabilities ....................... $ 24, Prepaid insurance ....................... 14, Total current assets ................. $ 76, Property, plant, and equipment: Land.............................................. $180,000 Owner ’ s Equity Building ........................................ $470,100 Hector Delgado, capital ........ 515, Less accumulated depreciation. 260,100 210, Equipment.................................... $129, Less accumulated depreciation. 55,440 73, Total property, plant, and equipment ............................. 463,560 Total liabilities and Total assets ..................................... $540,000 owner ’ s equity .................. $540,
Ex. 4 – 14
c. Depreciation Expense — Equipment
g. Fees Earned
j. Supplies Expense
k. Wages Expense
Note: Erin Dowley, Drawing is closed to Erin Dowley, Capital rather than to In- come Summary.
Ex. 4 – 15
The income summary account is used to close the revenue and expense ac- counts, and it aids in detecting and correcting errors. The $432,200 represents expense account balances, and the $572,600 represents revenue account bal- ances that have been closed.
Ex. 4 – 16
a. Income Summary........................................................... 65, Laurie Engan, Capital .............................................. 65, ($258,600 – $193,400).
Laurie Engan, Capital .................................................... 25, Laurie Engan, Drawing ............................................ 25,
b. $340,200 ($300,000 + $65,200 – $25,000)
Ex. 4 – 17
July 31 Fees Earned ........................................................ 215, Income Summary........................................... 215, 31 Income Summary ................................................ 251, Wages Expense ............................................. 190, Rent Expense ................................................. 45, Supplies Expense .......................................... 11, Miscellaneous Expense ................................ 5, 31 John O’Neil , Capital ............................................ 36, Income Summary........................................... 36, 31 John O’Neil, Capital ............................................ 30, John O’Neil, Drawing .................................... 30,
Appendix Ex. 4 – 21
- i
- a
- g
- d
- c
- f
- j
- e
- h
- b
Appendix Ex. 4 – 22
A B C D E 1 HOMELAND SECURITY SERVICES CO. 2 End-of-Period Spreadsheet (Work Sheet) 3 For the Year Ended October 31, 2010 (^4) Unadjusted Trial Balance (^) Adjustments
Adjusted 5 Trial Balance 6 Account Title Debit Credit Debit Credit Debit Credit 7 Cash 6 6 8 Accounts Receivable 40 (a) 4 44 9 Supplies 4 (b) 3 1 10 Prepaid Insurance 6 (c) 5 1 11 Land 50 50 12 Equipment 20 20 13 Accum. Depr. — Equipment 2 (d) 2 4 14 Accounts Payable 18 18 15 Wages Payable 0 (e) 2 2 16 Gloria Millard, Capital 85 85 17 Gloria Millard, Drawing 4 4 18 Fees Earned 45 (a) 4 49 19 Wages Expense 10 (e) 2 12 20 Rent Expense 6 6 21 Insurance Expense 0 (c) 5 5 22 Utilities Expense 3 3 23 Depreciation Expense 0 (d) 2 2 24 Supplies Expense 0 (b) 3 3 25 Miscellaneous Expense 1 ___ __ __ 1 ___ 26 Totals 150 150 16 16 158 158
Appendix Ex. 4 – 24
HOMELAND SECURITY SERVICES CO.
Income Statement For the Year Ended October 31, 2010
Fees earned ........................................................................ $ Expenses: Wages expense ........................................................... $ Rent expense ............................................................... 6 Insurance expense ...................................................... 5 Utilities expense .......................................................... 3 Supplies expense ........................................................ 3 Depreciation expense ................................................. 2 Miscellaneous expense .............................................. 1 Total expenses ........................................................ 32 Net income .......................................................................... $
HOMELAND SECURITY SERVICES CO. Statement of Owner ’ s Equity For the Year Ended October 31, 2010
Gloria Millard, capital, November 1, 2009 ........................ $ Net income for the year ..................................................... $ Less withdrawals ............................................................... 4 Increase in owner ’ s equity ................................................ 13 Gloria Millard, capital, October 31, 2010 .......................... $
HOMELAND SECURITY SERVICES CO. Balance Sheet October 31, 2010 Assets Liabilities Current assets: Current liabilities: Cash .............................. $ 6 Accounts payable ......... $ Accounts receivable .... 44 Wages payable.............. 2 Supplies ........................ 1 Total liabilities................... $ 20 Prepaid insurance ........ 1 Total current assets .. $ 52 Property, plant, and equipment: Land............................... $ 50 Equipment..................... $ Less accum. depr. ........ 4 16 Owner’s E quity Total property, plant, Gloria Millard, capital ... 98 and equipment...... 66 Total liabilities and Total assets ...................... $118 owner ’ s equity ........... $
- Ex. 4 –
- a. Income statement: 5, 8,
- b. Balance sheet: 1, 2, 3, 4, 6, 7,
- Ex. 4 –
- a. Asset: 2, 5, 6,
- b. Liability: 1, 9,
- c. Revenue: 3,
- d. Expense: 4, 8,
- Ex. 4 – - For the Year Ended September 30, Income Statement
- Fees earned $425,
- Salaries expense $213, Expenses:
- Rent expense 60,
- Utilities expense 23,
- Depreciation expense 8,
- Supplies expense 2,
- Insurance expense 1,
- Miscellaneous expense 3,
- Net income $112,
- Ex. 4 – - For the Year Ended January 31, Income Statement
- Service revenue $233,
- Wages expense $184, Expenses:
- Rent expense 49,
- Utilities expense 18,
- Depreciation expense 12,
- Insurance expense 6,
- Supplies expense 2,
- Miscellaneous expense 4,
- Net loss $ 44,
- Appendix Ex. 4 –
- Oct. 31 Accounts Receivable - Fees Earned
- 31 Supplies Expense Accrued fees.
- 31 Insurance Expense Supplies used ($4 – $1).
- 31 Depreciation Expense Insurance expired.
- Accumulated Depreciation — Equipment
- 31 Wages Expense Equipment depreciation.
- Appendix Ex. 4 – Accrued wages.
- Oct. 31 Fees Earned - Income Summary...........................................
- 31 Income Summary
- Wages Expense
- Rent Expense
- Insurance Expense
- Utilities Expense
- Supplies Expense
- Depreciation Expense
- Miscellaneous Expense
- 31 Income Summary
- 31 Gloria Millard, Capital
