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Objectives
1. Review the seven basic steps of the accounting cycle. After studying this 2. Prepare a work sheet. chapter, you should 3. Prepare financial be statements able to: from a work sheet. 4. Prepare adjusting and closing entries from a work sheet. 5. Explain what is meant by the fiscal year and the natural business year. 6. Analyze and interpret the financial solvency of a business by computing working capital and the current ratio.
Assets are commonly divided into classes and that two of these classes are current assets and property, plant, and equipment.
Thats correct. Cash and other assets that are expected to be converted into cash, sold, or used up usually in less than a year are current assets.
For example?
Well besides cash, theres notes receivable, accounts receivable, supplies, and other prepaid items.
There are some exceptions, but thats basically correct. Assets such So, assets that have a life as office equipment, machinery, over a year are listed under buildings, and land would appear property, plant, and under that heading. equipment.
Liabilities due usually within one year or less and that are to be paid out of current assets are called current liabilities. Accounts payable Wages payable Interest payable Unearned fees
Liabilities not due for more than a year usually are long-term liabilities.
The work sheet is a useful device for understanding the flow of accounting data from the unadjusted trial balance to the financial statements.
Trial Balance
Adjustments
Adjusted TB
Accounts
Dr
Cr
Dr
Cr
Dr
Cr
Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, owners equity, revenues, and expenses.
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.
Trial Balance
Adjustments
Adjusted TB
Accounts
Dr
Cr
Dr
Cr
Dr
Cr
Adjustments are combined with the trial balance. Account balances are now adjusted.
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Trial Balance Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense
2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600
42,600
(a) The Supplies account has a debit of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used during the two-month period.
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Trial Balance Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense
2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600
(a) 1,240
(b) The Prepaid Insurance account has a debit balance of $2,400, which represents prepayment of insurance for 24 months beginning December 1. Thus, the insurance expense for this month is $100 ($2,400 24).
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Trial Balance Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense
2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600
(c) The Unearned Rent account has a credit balance of $360, which represents the receipt of three-months rent beginning with December 1. Thus, the rent revenue for December is $120.
FOR RENT
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Trial Balance Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue
2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600 (c) 120
(d) Wages accrued but not paid at the end of December total $250.
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Trial Balance Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable
2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600
(c) 120
(d)
250
(e) Fees accrued at the end of December, but not recorded, total $500.
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Trial Balance Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable
2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600
(e)
(c) 120
(e) (d) 250 (a) 1,240 500
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Trial Balance Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
2,065 2,220 2,000 2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600
(a) 1,240
42,600 (b) 100 (c) 120 (d) 250 (f) 50 (f) 50
NetSolutions Work Sheet For the Two Months Ended December 31, 2005
Adjustments To make more space, Debit Credit Debit Credit 2,065 lets remove the 2,220 (e) 500 heading.(a) 1,240 2,000 Trial Balance
Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
2,400 20,000 1,800 900 360 25,000 4,000 16,340 4,275 1,600 985 800 455 42,600 (d) 250 (c) 120
(b) 100
(e) 500
(a) 1,240
42,600 (b) 100 (c) 120 (d) 250
(f)
50
(f) 50
31
Debit
Credit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
4,000
16,340 4,275 1,600 985 800 455 42,600
42,600 (b) 100 (c) 120 (d) 250 (f) 50 (f) 2,260 50 2,260
Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine the amounts displayed in the Adjusted Trial Balance.
33
Debit
Credit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
4,000
16,340 4,275 1,600 985 800 455 42,600
42,600 (b) 100 (c) 120 (d) 250 (f) 50 (f) 2,260 50 2,260
34
Debit
Credit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
(c) 120
4,000
16,340 4,275 1,600 985 800 455 42,600 (d) 250 (a) 1,240 42,600 (b) 100 (c) 120 (d) 250 (f) 50 (f) 2,260 50 2,260 (e) 500
4,000
16,840 4,525 1,600 985 2,040 455 100 120 250 50 43,400 50 43,400
Adjusted TB
Income State.
Balance Sheet
Accounts
Dr
Cr
Dr
Cr
Dr
Cr
Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.
Adjusted TB
Income State.
Balance Sheet
Accounts
Dr
Cr
Dr
Cr
Dr
Cr
Asset, liability, owners equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.
To make room on the slides for the Income statement and Balance Sheet columns, the Trial Balance and Adjustments columns have been removed.
Income Statement
Balance Sheet
38
Account Title
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Debit
Credit
Debit
Credit
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
2,065 2,720 760 2,300 20,000 1,800 900 240 25,000 4,000 16,840 4,525 1,600 985 2,040 455 100 120 250 50 43,400 50 43,400
Now, lets extend the balances from the Adjusted Trial Balance column.
40
Income Statement Debit Credit Balance Sheet Debit Credit
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
4,000
16,840 4,525 1,600 985 2,040 455 100 120 250 50 43,400 50 43,400 50 4,525 1,600 985 2,040 455 100 120 16,840
4,000
250 50
42
Income Statement Debit Credit Balance Sheet Debit Credit
Debit
Credit
Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation
4,000
16,840 4,525 1,600 985 2,040 455 100 120 250 50 43,400 50 43,400 50 9,755 16,960 4,525 1,600 985 2,040 455 100 120 16,840
4,000
The difference between the Income Statement column totals is the net income (or net loss) for the period.
The difference between the Balance Sheet column totals is also the income (or net loss) for the period.
Income Statement
Balance Sheet
Net Income
Net Income
NetSolutions Income Statement For Two Months Ended December 31, 2005
Fees earned Rent revenue Total revenues Expenses: Wages expense Supplies expense Rent expense Utilities expense Insurance expense Depreciation expense Miscellaneous expense Total expenses Net income
$16,840 120
$16,960 $ 4,525 2,040 1,600 985 100 50 455 9,755 $ 7,205
Every amount on this income statement was taken from the Income Statement column of the work sheet.
NetSolutions Statement of Owners Equity For the Two Months Ended December 31, 2005 Chris Clark, Capital, November 1, 2005 Investment on November 1, 2005 Net income for November and December $ $25,000 7,205 $32,205 4,000 0
Less withdrawals Increase in owners equity 28,205 From the from the Chris Clark, Capital, December 31, 2005Either $28,205
Balance Sheet income debit column of statement or the the work sheet. work sheet.
NetSolutions Balance Sheet December 31, 2005 Assets Liabilities Current assets: Current liabilities: Cash $ 2,065 Accounts payable Accounts receivable 2,720 Wages payable Supplies 760 Unearned rent Prepaid insurance 2,300 Total liabilities Total current assets $ 7,845 Property, plant, and equipment: Land $20,000 Office equip. $1,800 Less accum. depreciation 50 1,750 Owners Equity Total property, plant Chris Clark, Capital and equipment 21,750 Total liabilities and Total assets $29,595 owners equity
of Owners Equity
28,205 $29,595
3
4
OWNERS CAPITAL
Drawings are transferred to Owners Capital
The Summary Net Income Income or Net Loss is transferred to Owners account does not appearCapital on the financial statements.
OWNERS CAPITAL
Rent Revenue
Bal. 120
Depreciation Expense Bal. Bal. 50 Utilities Expense 985 Supplies Expense Bal. Bal. 2,040 Insurance Expense 100 Chris Clark, Drawing Miscellaneous Expense Bal. 455 Bal. 4,000 Chris Clark, Capital Bal. 25,000
Note: The balances shown are adjusted balances before closing. The following sequence demonstrates the closing process.
Rent Revenue
120 Bal. 120
Depreciation Expense Bal. Bal. 50 Utilities Expense 985 Supplies Expense Bal. Bal. 2,040 Insurance Expense 100 Chris Clark, Drawing Miscellaneous Expense Bal. 455 Bal. 4,000 Chris Clark, Capital Bal. 25,000
Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.
Rent Revenue
120 Bal. 120
985
2,040
Supplies Expense Bal. Bal. 2,040 100 Insurance Expense 100 455
Debit Income Summary for the total expenses and credit each expense account for its balance.
Rent Revenue
120 Bal. 120
985
2,040
Supplies Expense Bal. Bal. 2,040 100 Insurance Expense 100 455
Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account.
Rent Revenue
120 Bal. 120
7,205
985
2,040
Supplies Expense Bal. Bal. 2,040 100 Insurance Expense 100 455
Debit the capital account for the balance of the drawing account, and credit drawing for the same amount.
Rent Revenue
120 Bal. 120 120
985 985
2,040 2,040
Close Revenues
Close Expenses Close Income Summary Close Drawing
100 100
455 445
After the closing entries are posted, all of the temporary accounts have zero balances.
5.6
Chapter 4
The End