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BY MABEL LAGE, CPA, MBA. LPF Group LTD. CO. Miami Las Vegas Buenos Aires LPF NOTES Accounting Bank Reconciliation

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  • BY MABEL LAGE, CPA, MBA.

    LPF Group LTD. CO. Miami Las Vegas Buenos Aires

    LPF NOTES

    Accounting Bank

    Reconciliation

  • LPF NOTES An imprint of LPF Group Ltd. Co.

    Coral Gables, FL 33134

    Copyright 2008 by Mabel Lage All rights reserved.

    No part of this work covered by the copyright hereon may be

    reproduced or used in any form or by any means graphic, electronic,

    or mechanical, including photocopying, recording, Web distribution, or in any other

    manner without the written permission of the publisher.

    For permission to use material

    from this book, submit a request to LPF NOTES

    P.O. Box 530232 Henderson, NV 89053

    Printed in the United States

    of America. 9 8

    ISBN: 978-0-9821668-0-2

    ISBN-10: 0-9821668-0-X

  • CONTENTS

    CHAPTER 1 Accounting Fundamentals 1 Assets, Liabilities and Equity 1 Transactions 2 Income and Expenses 6 Double-entry 6 Transaction Types 8 Accounts, Debits and Credits 9 Trial Balance 16 CHAPTER 2 Bank Reconciliation and

    Closing Periods 41

    Closing Periods 41 Adjusting Entries 42 Prepaid Expenses 43 Accrued Expenses 44 Accrued Revenues 46 Unearned Revenues 47 Depreciation 48 Bank Reconciliation 51 Outstanding Checks 52 Deposit-in-Transit 52 Closing Entries 55 Retained Earnings 55 Post-Closing Trial Balance 58 INDEX 85

  • ______CHAPTER 1: Accounting Fundamentals 1

  • CHAPTER 1

    ACCOUNTING FUNDAMENTALS The purpose of bookkeeping and accounting is to provide information regarding the financial affairs of a business. This information is needed primarily by owners, banks and the IRS. Assets, Liabilities and Equity. As starting point let us define what assets, liabilities and equity are.

    Assets: Economic resources that the business owns but dont sell to customers, like money in checking and saving accounts, vehicles, furniture, computers, land, building, equipments, etc.

    Liabilities: Debts the business owes to others. Bills from vendors, credit cards, sales tax and bank loans are examples of liabilities.

    Equity: Also known as Capital or net worth, equity represents the initial investment plus profits earned.

    If you take an imaginary snap shot of the status of a business, there is always a relationship among assets, liabilities and equity that is known as the basic accounting equation. That is:

    Assets = Liabilities + Equity Assets appear on the left side of the equation, while liabilities and equity lie on the right side.

    2 Accounting Bank Reconciliation___________

  • Example A business is opened having $8,000 in its bank account. The money in the bank account comes $5,000 from a loan, which at this moment is a debt for the business, and $3,000 from an owners contribution. In this example

    Assets: $8,000 Liabilities: $5,000 Equity: $3,000

    Applying previous figures to the accounting equation, we have

    Assets = Liabilities + Equity $8,000 = $5,000 + $3,000

    Transactions A business is a living system, so it is assumed to live on and on unless expressly stated otherwise. A transaction is an action taken by someone in the business in order to maintain it alive. The transactions are taken in specific moments (time), so the date is an important characteristic of a transaction. The following are examples of typical transactions.

    1. A bank deposit made on Jan 3. 2. The purchase of equipment on Jan 5. 3. The payment of the rent on Jan 8.

    Also each transaction should be recorded in a way the basic equation continues being true (in balance) after each recording is made.

  • Example Suppose during the month of January, McGuire Computer Services made the following transactions: 1. (Jan 3) Invested $7,000 to open his service business.

    Action: Investment. 2. (Jan 5) Bought supplies (stationeries, pencils, etc.),

    $250. Action: Purchasing. 3. (Jan 6) Bought computers from Newhole Computers

    on account, $2500. Action: Buying. 4. (Jan 10) Receive $3400 for service performed.

    Action: Receiving. 5. (Jan 12) Paid Rent for January, $600. Action:

    Payment. 6. (Jan 18) Paid Car Service, $450. Action: Payment. 7. (Jan 25) Paid Salary for part time help $300. Action:

    Payment. 8. (Jan 28) Paid $1500 to Newhole Computers on

    account. Action: Payment. 9. (Jan 31) Withdrew $800 for personal use. Action:

    Withdrawing. These transactions could be recorded as follows: Transaction 1, January 3. The owner, John McGuire, invested $7000 to open his service business. In this transaction the asset Cash is increased (+), and the capital of the business is also increased by the same amount (+). Assets = Liabilities + Equity Cash J McGuire,

    Capital 1 +7000 = +7000

    Transaction 2, January 5. Bought supplies (stationeries, pencils, etc.), $250. One asset is being substituted by another the business is receiving (+) the asset Supplies and paying out

    ______CHAPTER 1: Accounting Fundamentals 3

  • (-) the asset Cash. Note that the equity of $7000 remains unchanged, and the equation is in balance. Assets = Liabilities + Equity Cash + Supplies J McGuire,

    Capital 7000 7000 2 -250 +250 6750 + 250 = 7000

    Transaction 3, January 6. Bought computers from Newhole Computers on account, $2500. The business is receiving the asset Equipment (+) but is not paying for it with the asset Cash. Instead, it will owe the money to Newhole Computers. Hence, it is liable for this moment to the future, thus creating the liability Accounts Payable (+). Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 6750 250 7000 3 +2500 +2500 6750 + 250 + 2500 = 2500 + 7000

    Transaction 4, January 10. Receive $3400 for service performed. In this transaction, the asset Cash is increased (+), and also the equity is increased (+). Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 6750 250 2500 2500 7000 4 +3400 +3400 10150 + 250 + 2500 = 2500 + 10400

    Transaction 5, January 10. Paid Rent for January, $600. The asset Cash is decreased (-), and also the equity is decreased (-). This transaction is called rent expense.

    Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 10150 250 2500 2500 10400 5 -600 -600 9550 + 250 + 2500 = 2500 + 9800

    4 Accounting Bank Reconciliation___________

  • Transaction 6, January 18. Paid Car Service, $450. The asset Cash is decreased (-), and also the equity is decreased (-). This transaction is called payment of automobile expense.

    Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 9550 250 2500 2500 9800 6 -450 -450 9100 + 250 + 2500 = 2500 + 9350

    Transaction 7, January 25. Paid Salary for part time help $300. In this transaction, the asset Cash is decreased (-), and also the equity is decreased (-). This transaction is called salary expense.

    Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 9100 250 2500 2500 9350 7 -300 -300 8800 + 250 + 2500 = 2500 + 9050

    Transaction 8, January 25. Paid $1500 to Newhole Computers on account. In this transaction, the asset Cash is decreased (-), and also the liability Accounts Payable is decreased (-).

    Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 8800 250 2500 2500 9050 8 -1500 -1500 7300 + 250 + 2500 = 1000 + 9050

    Transaction 9, January 31. Withdraw $800 for personal use. The withdrawal of cash not only reduces the asset Cash (-) but also the Capital (-). Note that it is not an expense; it is a reduction of the amount invested.

    Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 7300 250 2500 2500 9050 9 -800 -800 6500 + 250 + 2500 = 1000 + 8250

    ______CHAPTER 1: Accounting Fundamentals 5

  • Income and Expenses Note that when J. McGuire receives money from the services delivered (income). The income increases Cash and also increases his Capital in the business (see equation).

    When J. McGuire pays the rent (expense), he disburses money to maintain the business. The expense decreases Cash and also decreases Equity.

    Double-entry Note that you must enter the same amount twice for each and every transaction in a way that transactions have always to be in balance. The ins have to be equal the outs. This is called double-entry accounting. A summary of all transactions for the month of January could be shown as follows.

    McGuire Computer Services Month of January

    Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + J McGuire,

    Capital 1 7000 7000 2 -250 +250 6750 + 250 = 7000 3 +2500 +2500 6750 + 250 + 2500 = 2500 + 7000 4 +3400 +3400 10150 + 250 + 2500 = 2500 + 10400 5 -600 -600 9550 + 250 + 2500 = 2500 + 9800 6 -450 -450 9100 + 250 + 2500 = 2500 + 9350 7 -300 -300 8800 + 250 + 2500 = 2500 + 9050 8 -1500 -1500 7300 + 250 + 2500 = 1000 + 9050 9 -800 -800 6500 + 250 + 2500 = 1000 + 8250

    6 Accounting Bank Reconciliation___________

  • In the following chart (Fig. 1.1) are plotted the values in Equity column) (Y-axis) vs. transaction dates (X-axis).

    Fig. 1.1 Plot of Equity vs. Transaction Dates

    Note that some transactions affect the Equity of the business. In chart shown below (Fig. 1.2) are plotted the values in Cash column) (Y-axis) vs. transaction dates (X-axis).

    Fig. 1.2 Plot of Cash vs. Transaction Dates

    ______CHAPTER 1: Accounting Fundamentals 7

  • Cash of the business is affected after some transactions are made, as shown on the previous charts.

    Summary How assets, liabilities and equity are affected on the previous example. 1 Asset: Cash Equity

    2 Asset: Cash Asset: Supplies

    3 Asset: Equipment Liabilities: Accounts Payable

    4 Asset: Cash Equity: Income

    5 Asset: Cash Equity: Expense

    6 Asset: Cash Equity: Expense

    7 Asset: Cash Equity :Expense

    8 Asset: Cash Liabilities: Accounts Payable

    9 Asset: Cash Equity: Owners draw

    Transaction Types Depending on which parts of the basic equation (assets, liabilities or equity) are affected when a transaction takes place, there are several transaction types: 1. Transactions affecting only assets.

    Example: Supplies bought with cash Bought supplies (stationeries, pencils, etc.), $250.

    2. Transactions affecting assets and liabilities. Example: Equipment bought on account. Bought computers from Newhole Computers on account, $2500. Example: Payment of a product previously bought on account.

    8 Accounting Bank Reconciliation___________

  • Paid $1500 to Newhole Computers on account.

    3. Transactions affecting assets and equity.

    Example: Income received in cash or on account.

    Performed services for a client and receive cash of $3400.

    Example: An expense paid in cash.

    Paid Salary for part time help, $300.

    4. Transactions affecting liabilities and equity.

    Example: Expenses paid on account.

    Paid Cell phone, $120, with a credit card.

    5. Transactions affecting all, assets, liabilities and equity.

    Example: Purchase of equipment on account with down payment.

    Bought a copier machine, $800, paying cash $200, and $600, on account.

    Accounts, Debits and Credits As it can be seen from the example of McGuire Computer Services, preparing a new balance of the equation

    Assets = Liabilities + Equity

    after each transaction would be awkward . So the concept of accounts, debits and credits surged to help us

    ______CHAPTER 1: Accounting Fundamentals 9

  • recording the information in a more friendly and safety way. Accounts help us organize information by keeping similar transactions together. For example you probably receive several different bills for problems related with your cars. But when you think of the big picture all the bills are related to automobile expenses. So when you pay these bills you record all the transactions in the Automobile Expense Account. In McGuire Computer Services we have introduced the following accounts. Account Name Category

    Cash Asset

    Equipments Asset

    Supplies Asset

    Accounts Payable Liabilities

    J. McGuire Capital Equity

    Owners Withdrawal Equity

    Service Revenue Income (Equity)*

    Rent Expense Expense (Equity)*

    Salaries Expense Expense (Equity)*

    Automobile Expense Expense (Equity)*

    * As it will be seen later, Income and Expense Accounts are temporary accounts that disclose the details of the Equity changes and simplify handling Equity accounts. As there are a lot of Income and Expenses entries each year, taking care of these transactions in only one account (Equity) would be very troublesome and untraceable. Income and Expenses are closed out at the end of the year and transferred to an Equity account.

    10 Accounting Bank Reconciliation___________

  • Besides, in order to record each transaction we also need a convention to help us with the increments and decrements of each account. This convention has been established using the terms Debits and Credits to increase and decrease each of the terms of the equation. This uses the simplest form of the account known as the T account.

    Account Name

    (Debit) Dr Cr (Credit)

    A Debit is an:

    Increase in Assets Accounts.

    Decrease in Liabilities or Equity

    Accounts.

    Increase in Expense Accounts.

    A Credit is an:

    Decrease in Assets Accounts.

    Increase in Liabilities or Equity

    Accounts.

    Increase in Income Accounts. The following tables summarize the rule:

    Assets and Expenses

    Dr Cr + -

    (Increases) (Decreases)

    ______CHAPTER 1: Accounting Fundamentals 11

  • Liabilities, Equi ty and Income

    Dr Cr - +

    (Decreases) (Increases)

    This convention used in conjunction with the basic equation

    Assets = Liabilities + Equity makes true the following identity:

    Debits = Credits This last equation applies to every transaction.

    It is a useful error-checking device because if you try to record a transaction in such a way that the debits do not equal the credits, you know that something is wrong. It is useful now, in the computer age, imagine its effectiveness when the work had to be done with pencil and paper.

    Let us reexamine the transactions that occurred in McGuire Computer Services during the first month of operation. 1. (Jan 3) Invested $7,000 to open his service business.

    2. (Jan 5) Bought supplies (stationeries, pencils etc.) for $250.

    3. (Jan 6) Bought computers from Newhole Computers on account, $2500.

    4. (Jan 10) Received $3400 in service revenues.

    12 Accounting Bank Reconciliation___________

  • 5. (Jan 12) Paid Rent for January, $600.

    6. (Jan 18) Paid Car Service, $450.

    7. (Jan 25) Paid Salary for part time help $300.

    8. (Jan 28) Paid $1500 to Newhole Computers on account.

    9. (Jan 31) Withdrew $800 for personal use. Now we use accounts to record the transactions. Transaction 1, January 3. The owner, John McGuire, invested $7000 to open his service business. Ca sh Cap ital Dr Cr Dr Cr + - - + 1 7000 7000 1 Bal 7000 Bal 7000

    Transaction 2, January 5. Bought supplies (stationeries, pencils, etc.) for $250. Ca sh Sup plies Dr Cr Dr Cr + - + - 7000 250 2 2 250 Bal 6750 Bal 250

    Transaction 3, January 6. Bought computers from Newhole Computers on account, $2500. Equip ment Accounts Payable Dr Cr Dr Cr + - - + 3 2500 2500 3 Bal 2500 Bal 2500

    ______CHAPTER 1: Accounting Fundamentals 13

  • Transaction 4, January 10. Received $3400 in service revenues. The account Service Revenues, an Equity account, is affected. Ca sh Service Revenues Dr Cr Dr Cr + - - + 7000 250 3400 4 4 3400 Bal 3400 10400 250 Bal 10150 Transaction 5, January 10. Paid Rent for January, $600. Ca sh Rent Expense Dr Cr Dr Cr + - + - 7000 250 5 600 3400 600 5 Bal 600 10400 850 Bal 9550 Transaction 6, January 18. Paid Car Service, $450. Ca sh Automobile Expense Dr Cr Dr Cr + - + - 7000 250 6 450 3400 600 Bal 450 450 6 10400 1300 Bal 9100 Transaction 7, January 25. Paid salary for part time help, $300.

    14 Accounting Bank Reconciliation___________

  • Ca sh Salaries Expense Dr Cr Dr Cr + - + - 7000 250 7 300 3400 600 Bal 300 450 300 7 10400 1600 Bal 8800 Transaction 8, January 25. Paid $1500 to Newhole Computers on account. Ca sh Accounts Payable Dr Cr Dr Cr + - - + 7000 250 8 1500 2500 3400 600 Bal 1000 450 300 1500 8 10400 3100 Bal 7300

    Transaction 9, January 31. Withdrew $800 for personal use. Ca sh Owners Withdraw Dr Cr Dr Cr + - + - 7000 250 9 800 3400 600 Bal 800 450 300 1500 800 9 10400 3900 Bal 6500

    ______CHAPTER 1: Accounting Fundamentals 15

  • Note that there are equal debit and credit entries for every transaction. Where only two accounts are affected, the debit and credits amounts are equal. If more than two accounts are affected, the total of the debit entries must equal the total of the credit entries.

    Trial Balance A list of all accounts with their balances listed in a debit or credit column is called a Trial Balance. It is used to prove that debits do indeed equal credits. If they do not, your trial did not work and you have some investigation and adjustments of accounts to do. The trial balance of McGuire Computer Services as of January 31, 2010 can be seen on the following table:

    McGuire Computer Services Trial Balance

    January 31, 2010 Bala nce Account Title Debit Credit

    Cash 6,500

    Equipment 2,500

    Supplies 250

    Accounts Payable 1,000

    J. McGuire, Capital 7,000

    Owners Withdrawal 800

    Service Revenue 3,400

    Automobile Expense 450

    Rent Expense 600

    Salary Expense 300

    Totals 11,400 11,400

    16 Accounting Bank Reconciliation___________

  • Example Let us now examine another example. Jane Peterson started her practice as a design consultant on June 1 of the current year. She named the business Jane Peterson, Designer. During the first month of operation, the business completed the following transactions: 1. (June 1) Peterson transferred $30,000 cash from her

    personal bank account to a business account titled Jane Peterson, Designer.

    2. (June 4) Purchased supplies (5 printer cartridges), $250 cash.

    3. (June 4) Purchased furniture, $2,500, on account.

    4. (June 6) Performed services for a legal firm and received $4,500 cash.

    5. (June 7) Paid $22,000 cash to acquire land for future office site.

    6. (June 10) Performed services for a hotel and received its promise to pay $900 within one week.

    7. (June 14) Paid for the furniture purchased June 4 on account.

    8. (June 17) Received cash on account, $500.

    9. (June 20) Prepared a design for a school on account, $1,000.

    10. (June 28) Received $1,700 cash for designing consulting with Einstein Bagels.

    11. (June 30) Paid secretarys salary, $1,400.

    12. (June 30) Took supply inventory (3 printer cartridges), $150.

    13. (June 30) Paid office rent, $550.

    14. (June 30) Withdrew $2,300 for personal use.

    ______CHAPTER 1: Accounting Fundamentals 17

  • Now we record the transactions into accounts.

    Transaction 1, June 1. Peterson transferred $30,000 cash from her personal bank account to a business account titled Jane Peterson, Designer. Ca sh Cap ital 1 30000 30000 1 Bal 30000 Bal 30000

    Transaction 2, June 4. Purchased supplies (5 cartridges), $250 cash. Supplies (printer cartridges) is an asset account. Ca sh Supplies (cartridges) 30000 250 2 2 250 Bal 29750 Bal 250 Transaction 3, June 4. Purchased furniture, $2,500, on account. Furni ture Accounts Payable 3 2500 2500 3 Bal 2500 Bal 2500 Transaction 4, June 6. Performed services for legal firm and received $4,500 cash. Ca sh Service Revenues 30000 250 4500 4 4 4500 Bal 4500 34500 250 Bal 34250

    18 Accounting Bank Reconciliation___________

  • Transaction 5, June 7. Paid $22,000 cash to acquire land for future office site. The account Land, an asset, is affected. Ca sh La nd 30000 250 5 22000 4500 22000 5 Bal 22000 34500 22250 Bal 12250 Transaction 6, June 10. Performed services for a hotel and received its promise to pay $900 within one week. Accounts Receivable, an asset account, is affected. Accounts Receivable Service Revenues 6 900 4500 Bal 900 900 6 Bal 5400

    Transaction 7, June 14. Paid $2500 for the furniture purchased June 4 on account.

    Ca sh Accounts Payable 30000 250 7 2500 2500 4500 22000 Bal 0 2500 7 34500 24750 Bal 9750

    Transaction 8, June 17. Received cash from the hotel on account, $500. Ca sh Accounts Receivable 30000 250 900 500 8 4500 22000 Bal 400 8 500 2500 35000 24750 Bal 10250

    ______CHAPTER 1: Accounting Fundamentals 19

  • Transaction 9, June 20. Prepared a design for a school on account, $1,000. Accounts Receivable Service Revenues 900 500 4500 9 1000 900 1900 500 1000 9 Bal 1400 Bal 6400

    Transaction 10, June 28. Received $1700 cash for consulting with Einstein Bagels. Ca sh Service Revenue 30000 250 4500 4500 22000 900 500 2500 1000 10 1700 1700 10 36700 24750 Bal 8100 Bal 11950

    Transaction 11, June 30. Paid secretarys salary, $1400. Ca sh Salaries Expense 30000 250 11 1400 4500 22000 Bal 1400 500 2500 1700 1400 11 36700 26150 Bal 10550 Transaction 12. June 30. Took supply inventory (3 printer cartridges), $150. Two cartridges are gone. This is recorded as an expense. An adjusting entry is made to reduce inventory balance.

    20 Accounting Bank Reconciliation___________

  • Supplies (cartridges) Supplies Expense 12 250 100 100 Bal 150 Bal 100 6 Note: Adjusting entries will be studied in the following chapter. Transaction 13. June 30. Paid office rent, $550. Ca sh Rent Expense 30000 250 13 550 4500 22000 Bal 550 500 2500 1700 1400 550 13 36700 26700 Bal 10000 Transaction 14. June 30. Withdrew $2,300 for personal use. Ca sh Owners Withdrawal 30000 250 14 2300 4500 22000 Bal 2300 500 2500 1700 1400 550 2300 14 36700 29000 Bal 7700 The trial balance of Jane Peterson, Designer as of June 30, 2010 can be seen on the following table:

    ______CHAPTER 1: Accounting Fundamentals 21

  • Jane Peterson, Designer Trial Balance June 30, 2010

    Bala nce

    Account Title Debit Credit

    Cash 7,700

    Accounts Receivable 1,400

    Furniture 2,500

    Supplies (cartridges) 150

    Accounts Payable

    J. Peterson, Capital 30,000

    Owners Withdrawal 2,300

    Service Revenue 8,100

    Rent Expense 550

    Supplies (cartridges) Expense 100

    Salary Expense 1,400

    Totals 38,100 38,100

    Solved Problems

    1.1 Fill the blanks: 1. Money owed to an outsider is a(n) ________.

    2. The accounting equation is ____________ = liabilities + __________.

    3. To purchase on account is to create a _______.

    4. The difference between assets and liabilities is ____________.

    5. An investment in the business increases _______ and __________.

    22 Accounting Bank Reconciliation___________

  • 6. __________ is the interest of the owners in a business.

    7. Income increases assets and also _________.

    8. A withdrawal of cash reduces ___________ and equity.

    9. Items owned by a business are known as ______.

    10. The left side of the account is known as the ________ side, while the right side is the ______ side.

    11. Increases in expense accounts are __________.

    12. Increases in asset accounts are _________.

    13. Increases in liabilities accounts are __________.

    14. Increases in revenue accounts are _________.

    15. The list showing the balance of each account at the end of the period is known as the _________.

    Answers: 1 liability; 2 assets, equity; 3 liability; 4 equity; 5 assets, equity; 6 Equity; 7 equity; 8 assets; 9 assets; 10 debit, credit; 11 debits; 12 debits; 13 credits; 14 credits; 15 trial balance.

    1.2 Place a check mark in the appropriate column. Debit Credit

    A Cash is increased B Rent expense is increased C Money withdrawal D Fees earned is increased E Capital is increased F Equipment is increased G Cash is decreased Answers: A Debit; B Debit; C Debit; D Credit; E Credit; F Debit; G Credit.

    ______CHAPTER 1: Accounting Fundamentals 23

  • 1.3 For each transaction below, indicate the account to be debited and the account to be credited by placing the letter which corresponding the account.

    Account Title

    A Cash

    B Accounts Receivable

    C Equipment

    D Supplies

    E Accounts Payable

    F Capital

    G Owners Withdrawal

    H Service Revenue

    I Rent Expense

    J Salary Expense

    K Supplies Expense

    Transaction Debit Credit

    1 Paid rent for month

    2 Bought equipment on account

    3 Received cash for services

    4 Paid salaries

    5 Invested cash in the business

    6 Bought supplies on account

    7 Paid balance on equipment

    8 Received service revenue on account

    9 Supplies inventory showed one-fourth used during the month

    10 Withdrew cash for personal use

    24 Accounting Bank Reconciliation___________

  • Solution 1.3 Transaction Debit Credit 1 Paid rent for month I A 2 Bought equipment on account C E 3 Received cash for services A H 4 Paid salaries J A 5 Invested cash in the business A F 6 Bought supplies on account D E 7 Paid balance on equipment E A 8 Received service revenue on account B H 9 Supplies inventory showed one-

    fourth used during the month K D

    10 Withdrew cash for personal use G A 1.4 The summary of financial data of the Corpus Christy Band Co. for November is presented below in transaction form. 1. Began operations by depositing $19,000 in a business

    bank account. 2. Purchased musical equipment for $8,000, paying $3,500

    in cash with the balance on account. 3. Purchased supplies for cash, $600 4. Cash income received for musical engagement, $4,000. 5. Paid salaries for the month, $1,600. 6. Paid general expenses, $700. 7. Paid $1,500 on account (see transaction 2). 8. Owner withdrew $2000 for personal use. Record the transactions and running balances below.

    Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + Corpus Christy

    Band, Capital 1 = 2 = 3 = 4 =

    ______CHAPTER 1: Accounting Fundamentals 25

  • 5 = 6 = 7 = 8 =

    Solution 1.4 Assets = Liabilities + Equity Cash + Supplies + Equipment Accounts

    Payable + Corpus Christy

    Band, Capital 1 19000 = 19000 2 -3500 +8000 +4500 15500 + 8000 = 4500 + 19000 3 -600 +600 14900 + 600 + 8000 = 4500 + 19000 4 +4000 +4000 18900 + 600 + 8000 = 4500 + 23000 5 -1600 -1600 17300 + 600 + 8000 = 4500 + 21400 6 -700 -700 16600 + 600 + 8000 = 4500 + 20700 7 -1500 -1500 15100 + 600 + 8000 = 3000 + 20700 8 -2000 -2000 13100 + 600 + 8000 = 3000 + 18700

    1.5 William Bronson opened his accounting firm, which he operates as proprietorship. The name of the business is William Bronson, CPA. The entity experienced the following events during the organizing phase of the business and its first month of operation. 1. (Aug 3) Deposited $40,000 cash in a new business cash

    account titled William Bronson, CPA 2. (Aug 4) Paid $400 cash for letterhead stationary for the

    new office. 3. (Aug 6) Purchased office furniture. Bronson paid $6,000

    cash. 4. (Aug 17) Finished tax hearing on behalf of a client and

    submitted a bill for accounting services, $5,500 receiving completed cash.

    5. (Aug 25) Paid office rent, $950.

    26 Accounting Bank Reconciliation___________

  • 6. (Aug 31) Withdrew $2,500 cash from the business for personal use.

    a) Record the transactions in the affected T accounts. b) Make the trial balance of the business on August 31. Transaction 1, Aug 3. Ca sh W. Bronson Capital Bal Bal Transaction 2, Aug 4. Ca sh Sup plies Bal Bal Transaction 3, Aug 6. Ca sh Furn iture Bal Bal Transaction 4, Aug 17. Ca sh Service Revenue Bal Bal

    Transaction 5, Aug 25.

    ______CHAPTER 1: Accounting Fundamentals 27

  • Ca sh Rent Expense Bal Bal Transaction 6, Aug 31. Ca sh Owners Withdrawal Bal Bal

    b) Trial Balance

    William Bronson, CPA Trial Balance

    August 31, 2010 Bala nce Account Title Debit Credit Cash Furniture Supplies F. Turner, Capital Owners Withdrawal Service Revenue Rent Expense Totals Solution 1.5 Transaction 1, Aug 3. Ca sh W. Bronson Capital 40000 40000 Bal 40000 Bal 40000

    28 Accounting Bank Reconciliation___________

  • Transaction 2, Aug 4. Ca sh Sup plies 40000 400 400 Bal 39600 Bal 400 Transaction 3, Aug 6.

    Ca sh Furn iture 40000 400 6000 6000 Bal 6000 40000 6400 Bal 33600 Transaction 4, Aug 17. Ca sh Service Revenue 40000 400 5500 5500 6000 Bal 5500 45500 6400 Bal 39100 Transaction 5, Aug 25. Ca sh Rent Expense 40000 400 950 5500 6000 Bal 950 950 45500 7350 Bal 38150 Transaction 6, Aug 31. Ca sh Owners Withdrawal 40000 400 2500 5500 6000 Bal 2500 950 2500 45500 9850 Bal 35650

    ______CHAPTER 1: Accounting Fundamentals 29

  • William Bronson, CPA Trial Balance

    August 31, 2010 Bala nce Account Title Debit Credit Cash 35,650 Furniture 6,000 Supplies 400 F. Turner, Capital 40,000 Owners Withdrawal 2,500 Service Revenue 5,500 Rent Expense 950 Totals 45,500 45,500 1.6 a) Post the following entries for the Sunlight Cleaning Company to the affected T accounts. b) Make the trial balance of the Sunlight Cleaning Company as of March 31. March 3 Invested $12,000 cash in the business. March 5 Paid $2,500 for office furniture. March 10 Bought equipment costing $8,000, on account. March 25 Received $3,500 as cleaning income. March 31 Paid one-fourth of the amount owed on the

    equipment. a) Posting entries March 3 Bal Bal March 5 Bal

    30 Accounting Bank Reconciliation___________

  • March 10 Bal Bal March 25 Bal Bal March 31 Bal Bal c) Trial balance.

    Sunlight Cleaning Company Trial Balance

    March 31, 2010 Bala nce Account Title Debit Credit Totals

    ______CHAPTER 1: Accounting Fundamentals 31

  • Solution 1.6

    a) Posting entries March 3 Ca sh Owners Capital 12000 12000 Bal 12000 Bal 12000 March 5 Ca sh Furn iture 12000 2500 2500 12000 2500 Bal 2500 Bal 9500 March 10 Equi pment Accounts Payable 8000 8000 Bal 8000 Bal 8000 March 25 Ca sh Service Revenue 12000 2500 3500 3500 Bal 3500 15500 2500 Bal 13000 March 31 Ca sh Accounts Payable 12000 2500 2000 8000 3500 2000 Bal 6000 15500 4500 Bal 11000

    32 Accounting Bank Reconciliation___________

  • d) Trial Balance

    Sunlight Cleaning Company Trial Balance

    March 31, 2010 Bala nce Account Title Debit Credit Cash 11,000 Furniture 2,500 Equipment 8,000 Accounts Payable 6,000 Owners Capital 12,000 Service Revenue 3,500 Totals 21,500 21,500 1.7 The trial balance of Frank Turner, Home Remodeling, as of March 31, is the following:

    Frank Turner, Home Remodeling Trial Balance

    March 31, 2010 Bala nce Account Title Debit Credit Cash 3,100 Accounts Receivable 8,500 Supplies 600 Accounts Payable Vehicles (Truck) 15,700 Accounts Payable 4,000 F. Turner, Capital 23,900 Totals 27,900 27,900 During April, Turner completed the following transactions: 1. (Apr 4) Turner collected $3,600 from a client on account. 2. (Apr 8) Performed home remodeling services for a client

    on account, $6,900. 3. (Apr 10) Paid gas for the truck, $85 cash.

    ______CHAPTER 1: Accounting Fundamentals 33

  • 4. (Apr 13) Paid on account, $1,200. 5. (Apr 18) Purchased supplies on account, $200. 6. (Apr 20) Withdrew $1,500 for personal use. 7. (Apr 22) Received cash of $6,500 for remodeling work

    just completed. 8. (Apr 25) Paid gas for the truck, $90 cash. 9. (Apr 30) Paid office rent, $750. 10. (Apr 30) Paid employee salary, $1,700. a) Record the transactions in the affected T Accounts. b) Make the trial balance of the business as of April 30. a) Transactions to accounts Apr 4 Turner collected $3,600 from a client on account. Bal Bal Apr 8 Performed home remodeling services for a client on account, $6,900. Bal Bal Apr 10 Paid gas for the truck, $85 cash. Bal Bal

    34 Accounting Bank Reconciliation___________

  • Apr 13 Paid on account, $1,200. Bal Bal Apr 18 Purchased supplies on account, $200. Bal Bal Apr 20 Withdrew $1,500 for personal use. Bal Bal Apr 22 Received cash of $6,500 for remodeling work just completed Bal Bal

    ______CHAPTER 1: Accounting Fundamentals 35

  • Apr 25 Paid gas for the truck, $90 cash. Bal Bal Apr 30 Paid office rent, $750. Bal Bal Apr 30 Paid employee salary, $1,700.

    Bal b) Trial balance.

    Frank Turner, Home Remodeling Trial Balance April 30, 2010

    36 Accounting Bank Reconciliation___________

  • Bala nce Account Title Debit Credit Totals Solution 1.7 Now we record the transactions into accounts, taking the initial balance of each account from the previous month trial balance. So, we have Apr 4 Turner collected $3,600 from a client on account. Ca sh Accounts Receivable 3100 8500 3600 3600 Bal 4900 Bal 6700 Apr 8 Performed home remodeling services for a client on account, $6,900. Accounts Receivable Service Revenues 8500 3600 6900 6900 Bal 6900 15400 3600 Bal 11800

    ______CHAPTER 1: Accounting Fundamentals 37

  • Apr 10 Paid gas for the truck, $85 cash. Ca sh Automob ile Expense 3100 85 85 3600 Bal 85 6700 85 Bal 6615 Apr 13 Paid on account, $1,200. Ca sh Accounts Payable 3100 85 1200 4000 3600 1200 Bal 2800 3700 1285 Bal 2515 Apr 18 Purchased supplies on account, $200. Sup plies Accounts Payable 600 1200 4000 200 200 Bal 800 1200 4200 Bal 3000 Apr 20 Withdrew $1,500 for personal use. Ca sh Owners Withdrawal 3100 85 1500 3600 1200 Bal 1500 1500 6700 2785 Bal 3915

    38 Accounting Bank Reconciliation___________

  • Apr 22 Received cash of $6,500 for remodeling work just completed. Ca sh Service Revenue 3100 85 6900 3600 1200 6500 6500 1500 Bal 13400 13200 2785 Bal 10415 Apr 25 Paid gas for the truck, $90 cash. Ca sh Automob ile Expense 3100 85 85 3600 1200 90 6500 1500 Bal 175 90 13200 2875 Bal 10325 Apr 30 Paid office rent, $750. Ca sh Rent Expense 3100 85 750 3600 1200 Bal 750 6500 1500 90 750 13200 3625 Bal 9575

    ______CHAPTER 1: Accounting Fundamentals 39

  • Apr 30 Paid employee salary, $1,700. Ca sh Salary Expense 3100 85 1700 3600 1200 Bal 1700 6500 1500 90 750 1700 13200 5325 Bal 7875

    The trial balance of Frank Turner, Home Remodeling as of April 30, 2010 can be seen on the following table:

    Frank Turner, Home Remodeling Trial Balance April 30, 2010

    Bala nce Account Title Debit Credit Cash 7,875 Accounts Receivable 11,800 Supplies 800 Vehicles 15,700 Accounts Payable 3,000 F. Turner, Capital 23,900 Owners Withdrawal 1,500 Service Revenues 13,400 Automobile Expense 175 Rent Expense 750 Salaries Expense 1,700 Totals 40,300 40,300

    40 Accounting Bank Reconciliation___________

  • CHAPTER 2

    BANK RECONCILIATION AND CLOSING PERIODS

    Closing Periods

    Regularly banks send monthly statements to entities that have checking accounts with them. In these statements are reflected all the ins and outs of the business money. Periodical expenses (rent, telephone, utilities, etc.) have also to be paid in monthly basis. So it is a common practice to take a monthly period as a proper time to check the business status. Prior to checking the business performance it is necessary to adjust certain transactions and check the status reported by the bank with the one reported by our computer system.

    On the other hand, at the end of the year the business has to distribute its profits among partners or stockholders and also but no less important, to report the IRS the net profit or loss of the year.

    For all the above, primarily, it has become a universal practice to take month and year as the typical closing accounting periods.

    Income and expense account balances have also to be closed-out to zero to start the new year with zero balances on each group of accounts.

    In this chapter, the main closing processes will be presented.

    Chapter 2: Bank Reconciliation and Closing Periods 41

  • Adjusting Entries

    It is easier to make period-end entries for some items instead of doing it every day or every week.

    Example Lets go back to the printer cartridge example on Chapter 1: Jane Peterson, Designer purchased supplies (5 printer cartridges) on June 4, $250. When she buys the cartridges, they go into the office supply inventory as an asset. To record this transaction you credit Cash for $250 and debit Supplies (cartridges) for $250. Ca sh Supplies (cartridges) 250 250 Bal 250 At the end of the month, an inventory is taken to determine how many cartridges are left, three printer cartridges, $150. Two cartridges, $100, were retrieved from the office supply cabinet. What is used during the month is recorded as an expense. An adjusting entry is made to reduce the inventory balance. You would make an adjusting entry, at the end of the month as follows: Supplies -cartridges Supplies Expense 250 100 100 Bal 150 Bal 100

    42 Accounting Bank Reconciliation___________

  • Note that an asset that has expired is an expense. The asset account Supplies is going to be the expense account Supplies Expense.

    Several decades ago, all transactions were entered in chronological order in a book called General Journal. In our time just adjusting entries are posted through the General Journal. This entry is made as follows:

    Debit Credit Supplies Expense 100 Supplies (Asset) 100

    Adjusting entries fall into five categories:

    Prepaid expenses

    Accrued expenses

    Accrued revenues

    Unearned revenues

    Depreciation

    In a prepaid adjustment, the cash payment occurs before an expense is recorded while in an accrual adjustment, an expense is recorded before the cash payment.

    Prepaid Expense Prepaid expenses are advance payment of expenses. The printer cartridges that Jane Peterson, Designer bought to have in its office supply cabinet is an example of prepaid expense. Prepaid rent and prepaid insurance are also examples.

    Example Suppose that Neptune Enterprises prepays three-month office rent on September 1, 2010. If the lease specifies a

    Chapter 2: Bank Reconciliation and Closing Periods 43

  • monthly rental of $700, the entry to record the payment is Ca sh Prepaid R ent ($700 x 3) 2100 2100 Bal 2100 On Sep. 30, Prepaid Rent, an asset account, should be decreased for the amount that has been used up. The used-up portion is one-third of the prepayment. Recall that an asset that has expired is an expense. The adjusting entry transfers $2,100/3 months = $700 from the Prepaid Rent to Rent Expense. The adjusting entry is Prepaid Rent Rent Expense 2100 700 700 Bal 1400 Bal 700 The General Journal entry is

    Debit Credit Rent Expense 700 Prepaid Rent (Asset) 700

    Remember

    Prepaid expenses are assets accounts.

    Accrued Expenses The term accrued expense refers to an expense the business has incurred but not yet paid. An accrued expense always creates a liability.

    44 Accounting Bank Reconciliation___________

  • Example Consider an employees salary. Neptune Enterprises salary expense grows as the employee works. Suppose that Neptune Enterprises pays its employee a monthly salary of $1600, half on the 15th and half on the last day of the month. If either payday falls on a weekend, Neptune pays the following Monday. In July, Neptune paid the first half-month salary on Thursday, July 15. Ca sh Salary Expense 800 800 Bal 800 On Saturday July 31, only one salary payment has been made and the balance of salary expense is $800. The second payment of $800 will occur in August, so Neptune Enterprises must accrue salary expense for the second half of July.

    On July 31 the adjusting entry is: Salary Payable Salary Expense 800 800 Bal 800 800 Bal 1600 The General Journal entry is

    Debit Credit Salary Expense 800 Salary Payable (Liability) 800

    Chapter 2: Bank Reconciliation and Closing Periods 45

  • Salary Expense account holds a full month salary, and Salary Payable account shows the liability owed on July 31. On Monday, August 2 when the salary payment is made to the employee, the affected accounts are: Ca sh Salary Payable 800 800 800 Bal 0

    Accrued Revenues Sometimes, business earns revenue before it receives the cash. This is called accrued revenue, which is revenue that has been earned but not yet collected in cash.

    Example Neptune Enterprises is hired on August 15 to perform computer services for Toms Apparels. Under the agreement, Neptune Enterprises will earn $900 monthly for three months. During August, Neptune will earn half month fee, $900/2 = $450, for work from August 16 through August 31. On August 31 the adjusting entry is: Accounts Receivable Service Revenue

    Aug 31 450 Aug 31 450 Bal 450 Bal 450 The General Journal entry is

    Debit Credit Accounts Receivable 450 Service Revenue 450

    46 Accounting Bank Reconciliation___________

  • On September 15, Neptune Enterprises receives a check payment from Toms Apparels for $900. Three accounts are affected when the entry is posted: Ca sh Accounts Receivable

    Sep 15 900 Sep 15 450 450 Bal 0 Service Revenue

    Sep 15 450 450

    Bal 900

    Note that on September 30 it is needed an adjusting entry similar to the one on August 31.

    In October the entries will be equal to the September entries, but in November only the entry on November 15 has to be made.

    Unearned Revenues When a client pays you in advance for the work you will do for him, you owe the client services or products that you have not yet delivered. A liability called unearned revenue is created.

    Example On April 20 Neptune Enterprises signs a contract for one month to perform computer services for Moonlight Paradise. An advance payment, $600, its received.

    The transaction is posted as follows: Ca sh Unearned Revenue

    Apr 20 600 Apr 20 600 Bal 600

    Chapter 2: Bank Reconciliation and Closing Periods 47

  • Remember that the Unearned Revenue account is a liability. On April 30 one-third of the work has been made. The adjusting entry is: Unearned Revenue Service Revenue

    Apr 30 200 600 Apr 30 200 Bal 400 Bal 200 The General Journal entry is

    Debit Credit Unearned Revenue 200 Service Revenue 200

    On May 20, when the work has been completed, the adjusting entry is: Unearned Revenue Service Revenue

    May 20 400 400 200 Bal 0 May 20 400 Bal 600 The General Journal entry is

    Debit Credit Unearned Revenue 400 Service Revenue 400

    Depreciation All of us know that a computer, for example, will last about five years before it has to be replaced. It means that a computer loses all of its value in five years, that is,

    48 Accounting Bank Reconciliation___________

  • at the end of a five year period the value of the computer is $0. This lost of value with aging is called depreciation. Depreciation is a concept used for long term assets, like buildings, equipments, furniture, automobiles, etc.

    Example On July 1, 2010, Neptune Enterprises buys a computer costing $1800. This computer will last five years and will be depreciated using the straight-line method, that is, it will lose $1800/5 = $360 per year, or $360/12 = $30 per month, of its original cost.

    For keeping the original cost of the computer and also maintaining a running total of the depreciation, a new account called Accumulated Depreciation is created. This account is a contra asset (which is the opposite balance of its asset), and it summarizes and accumulates the amount of depreciation over the computers total useful life.

    On December 31, 2010 the computer will lose $30 x 6 months = $180. The adjusting entry is Accum. Depreciation Depreciation Expense

    Dec 31 180 Dec 31 180 Bal 180 Bal 180

    Note that the Depreciation Expense account is also created.

    The General Journal entry is

    Debit Credit Depreciation Expense 180 Accum. Depreciation (Asset) 180

    Chapter 2: Bank Reconciliation and Closing Periods 49

  • The Accumulated Depreciation account will be shown on the asset part of the balance sheet as follows: Equipment 1,800 Less: Accumulated Depreciation 180 Net Equipment 1,620 The IRS uses the Modified Accelerated Cost Recovery System (MACRS) for depreciating assets. This system establishes how long the assets will live. For example, autos, trucks and computers will be depreciated in five years. A Depreciation table is provided that takes more depreciation in the first years than in the later years, differing from the straight-line depreciation, in which the same amount is taken every year.

    Remember

    Adjusting entries are made at the end of a period in order that accounts will reflect the correct balance in the financial statements.

    An Asset that has expired is an Expense. Supplies used during a period

    Supplies Expense

    Prepaid Rent at the end of a period

    Rent Expense

    An Expense not yet paid is a Liability. Salary Expense not yet paid

    Salary Payable

    50 Accounting Bank Reconciliation___________

  • Depreciation is the lost of value of an Asset with aging.

    Accumulated Depreciation is a Contra Asset account that holds the amount of depreciation of the Asset.

    Bank Reconciliation

    Before making the main financial statements, you have to be assured that all transactions already entered have been posted without mistakes.

    However, mistakes are made. For finding these mistakes, you need to have something from which you compare your posted transactions. This checking process called bank reconciliation is mainly applied to any of your banking accounts, or to your credit card accounts. In the coming sections the reconciliation process will be applied to the operating account. Most transactions involving are shown in the operating account statement.

    Bank account statements show the cash balance from the beginning of a month, all the deposits and payments recorded during the month, daily balances, and the ending balance.

    Because you deposit, pay and withdraw money from a bank, you can compare or reconcile your records to

    Chapter 2: Bank Reconciliation and Closing Periods 51

  • theirs. Once you have done this, you can be assured that your current check register balance is correct.

    The first thing to do is the account reconciliation of the checking account. This is a process by which you compare the business cash, shown in your computer accounting system, with the bank cash balance as of a given monthly period to detect any discrepancies.

    Note: You dont have to wait until the end of the month to reconcile your accounts. You can open your bank account statement through the Internet at any moment and print a copy of it. At the end of the month, when you receive a mail statement from your bank of credit card supplier, you have only to search for the ending balance and check again your figures with the statement.

    Outstanding Checks When you check your bank statement at the end of the month, or check your bank account through the Internet every day to find out what your cash balance is, you have to take account of what is called outstanding checks. You may have written checks or have made Internet payments that the bank has not yet received. What happens when those checks or payments hit the bank? You must have enough deposits to cover them.

    Deposit-in-Transit When you make deposits on the last day of the month, the bank records your deposits on the following month bank statement. However, you record those deposits in your computer accounting system in the current month, but the bank doesnt record them in the same month, the bank records those deposits in the following month. Those deposits have been called deposits-in-transit.

    52 Accounting Bank Reconciliation___________

  • Example During July 2010, Sunrise Auto Repairs made the following bank deposits and payments:

    Deposits

    Date Description Amount 7/8/10 Bank Deposit 780 7/15/10 Bank Deposit 850 7/23/10 Bank Deposit 650 7/31/10 Bank Deposit 320 Total Deposits 2,600

    Payments

    Check No. Date Description Amount 1025 7/5/10 Supplies 40 1026 7/16/10 Supplies 150 1027 7/26/10 Mechanic Work 425 1028 7/26/10 Supplies 310 INT710-31 7/30/10 Cable (Internet

    Payment) 240

    Total Paymt. 1,165 Sunrise Auto Repairs received the bank statement from Hamilton Industrial Bank that records the following transactions during July 2010:

    Hamilton Industrial Bank Bank Account ending 0987 Sunrise Auto Repairs

    July 31, 2010

    Beginning Balance 565 Deposits 2,280 Withdrawals 190 Ending Balance 2,655

    Chapter 2: Bank Reconciliation and Closing Periods 53

  • Deposits

    Date Description Amount 7/8/10 Deposit 780 7/15/10 Deposit 850 7/23/10 Deposit 650 Total Deposits 2,280

    Withdrawals Check No. Date Amount 1025 7/5/10 40 1026 7/16/10 150 Total Paymt. 190

    The bank account statement of Sunrise Auto Repairs reflects an amount of $2,655 on July 31.

    However, two payments have been made on July 26 for $735 and an Internet payment on July 30 for $240. These payments are not recorded yet on the bank balance. These are outstanding checks.

    On the other hand, a deposit of $320 has been made on July 31. The bank does not record this deposit until August 1. This is a deposit-in-transit.

    The actual operating cash balance has to be calculated as follows:

    1. For the deposits-in-transit, you must add the deposit amount to the bank statement balance for reconciling your books with the bank statement.

    2. In the case of check payments, you may have written the checks during the current month but they are not cashed until the following month or later. Therefore, you must subtract the total of those checks in order to reconcile your computer system with the bank statement.

    The account reconciliation results can be seen on the following table:

    54 Accounting Bank Reconciliation___________

  • Bank Balance 2,655

    Deposits-in-Transit +320

    Outstanding Checks

    Check 1027 425

    Check 1028 310

    Internet Payments 240

    Total Outstanding Checks -975

    Actual Operating Cash Balance 2,000

    On the account reconciliation for the month of August it would check both, outstanding checks and deposits-in-transit, of as having already been counted in the prior month of July.

    Closing Entries

    The purpose of closing entries is that the new fiscal year starts with zero balances in the revenue and expense accounts, and owners contributions and withdrawals accounts start the new fiscal year also with zero balances. At the end of a fiscal year, for example, December 31, after preparing the Income Statement, Balance Sheet and Owners Equity Statement, a summary account, known as Income Summary, is created. All the revenue accounts are closed-out, and the total amount is credited to the Income Summary account. Each expense account is credited to produce a zero balance, and the total amount for the closed-out accounts is debited to the Income Summary account. Then the Income Summary account balance gives the net income or loss for the year.

    Retained Earnings The Income Summary account will be closed-out the balance to zero. It needs a new equity account, Retained Earnings account, where to transfer the net income for the year. On the other hand, the other equity accounts,

    Chapter 2: Bank Reconciliation and Closing Periods 55

  • Owners Draw and Owners Contribution, will be also closed-out the balances to zero, and their balances will be transfer to the Retained Earnings account. Note: Traditionally, the Retained Earnings account is used for corporations, and the Capita account is used for sole proprietorship for of business.

    However, computer accounting programs use the Retained Earnings account for both, sole proprietorship and corporations. In this text, which is computer oriented, the Retained Earnings account will be used.

    The steps followed for closing entries at the end of the fiscal year can be seen in Fig. 2.1.

    Fig. 2.1 Steps for Closing Entries at the end of the

    Year

    56 Accounting Bank Reconciliation___________

  • Example The trial balance of Malcolm Printing as of December 31, 2010 is:

    Malcom Printing Trial Balance

    December 31, 2010 Bala nce Account Title Debit Credit Cash 8,300 Equipment 2,300 Supplies 200 Accounts Payable 400 Malcolm Smith, Capital 9,000 Owners Withdrawal 2200 Owners Contribution 1,700 Fees Revenues 9,100 Rent Expense 4,200 Salaries Expense 2,400 Supplies Expense 600 Totals 20,200 20,200

    The closing entries on December 31 are the followings:

    1. Closing income accounts. Fees Revenue Income Summary Clos 9100 9100 Clos 9100 Bal 0 Bal 9100

    2. Closing expense accounts. Rent Expense Income Summary Clos 4200 4200 Clos 4200 9100 Bal 0 Bal 4900

    Chapter 2: Bank Reconciliation and Closing Periods 57

  • Salaries Expense Income Summary Clos 2400 2400 Clos 2400 4900 Bal 0 Bal 2500

    Supplies Expense Income Summary Clos 600 600 Clos 600 2500 Bal 0 Bal 1900

    3. Closing the Income Summary account. Income Summary Retained Earnings Clos 1900 1900 Clos 1900 Bal 0 Bal 1900

    4. Closing Equity accounts.

    Owners Contribution Retained Earnings Clos 1700 1700 1900 Bal 0 Clos 1700

    Bal 3600 Owners Withdrawal Retained Earnings Clos 2200 2200 Clos 2200 3600 Bal 0 Bal 1400

    Post-Closing Trial Balance After making closing entries, you must make another trial balance, known as post-closing trial balance, to be sure that the accounts are in balance.

    58 Accounting Bank Reconciliation___________

  • Malcom Printing

    Post-Closing Trial Balance December 31, 2010

    Bala nce Account Title Debit Credit Cash 8,300 Equipment 2,300 Supplies 200 Accounts Payable 400 Malcolm Smith, Capital 9,000 Retained Earnings 1,400 Totals 10,800 10,800

    Solved Problems

    2.1 Fill the blanks: 1. A process by which to compare a business cash or credit

    card balance with the bank cash or credit card account statement is called ________________________.

    2. Checks that are sent to vendors but not cleared on the bank statement are called ________________________.

    3. _______________________ are deposits made at the end of the month that do not appear on the bank statement.

    4. An expense paid in advance is known as a ___________ ____________.

    5. An adjusting entry that records the expired amount of prepaid rent would create the ______________________ account.

    6. An accrued salary expense creates a _______________ called salary payable account.

    7. When a client pays in advance for a service not yet performed, a liability called _________________ is created.

    Chapter 2: Bank Reconciliation and Closing Periods 59 ______CHAPTER XX: Accounting Fundamentals YY

  • 8. The income and expense accounts are closed-out at the end of the fiscal year to the _____________________ account.

    9. At the end of the year all income, expenses and owners contributions and withdrawals, are closed into the ____ _____________________ account.

    10. After closing entries, the trial balance showing only asset, liability and equity accounts is called _______________ trial balance.

    Answers: 1 account reconciliation; 2 outstanding checks; 3 deposits-in-transit; 4 prepaid expense; 5 rent expense; 6 liability; 7 unearned revenue; 8 Income Summary; 9 Retained Earnings; 10 post-closing. 2.2 Complete the following cross word puzzle Across 1. Account to keep a running total of the depreciation.

    2. Entries made at the end of a fiscal year to start the new year with zero balance in some account.

    3. Trial balance made after closing entries.

    4. Process to compare cash balance with bank statement.

    Down: 5. Entry made at the end of a period to adjust expense or

    income already recorded.

    6. Bank deposit made at the end of a month and not recorded on the bank statement.

    7. Expense paid in advance

    8. Check payment not recorded on the bank statement.

    60 Accounting Bank Reconciliation___________

  • 5 7 8 6

    1 - 2 3 - 4 -

    Solution

    5 a 7 8 d p o j 6 r u

    1 a c c u m l a t e d - d e p r e c i a t i o n s e p s t p a t i 2 c l o s i n g i a n s d n g i d t i 3 p o s t - c l o s i n g n i g n 4 a c c o u n t - r e c o n c i l i a t i o n t r a n s i t

    Chapter 2: Bank Reconciliation and Closing Periods 61

  • 2.3 An insurance policy covering one year was purchased on October 1 for $480. The amount was debited to the asset account called Prepaid Insurance. Show the adjusting entry for the three-month period ending December 31: a) Using T-accounts; b) Using General Journal entry. Insurance expense for a month period

    = = per month

    Insurance expense for a three-month period (Oct. Dec.)

    = =

    a) T-accounts Insurance Expense Prepaid Insurance

    Dec 31 Dec 31 Bal Bal b) General Journal

    Debit Credit Insurance Expense Prepaid Insurance (Asset)

    Solution 2.3 Insurance expense for a month period

    = 480 / 12 = 40 per month

    Insurance expense for a three-month period (Oct. Dec.)

    = 40 x 3 = 120

    a) T-accounts Insurance Expense Prepaid Insurance

    Dec 31 120 Dec 31 480 120 Bal 120 Bal 360

    62 Accounting Bank Reconciliation___________

  • b) General Journal

    Debit Credit Insurance Expense 120 Prepaid Insurance (Asset) 120

    2.4 Supplies purchased of $1,200 on March 10 were debited to the asset account Supplies. A count of the supplies on March 31 showed $800 on hand. Make the adjustment entry on March 31: a) Using T-accounts; b) Using a General Journal entry. Amount of supplies used during the month of March

    = =

    a) T-accounts Supplies Expense Sup plies

    Mar 31 Mar 31 Bal Bal b) General Journal

    Debit Credit Supplies Expense Supplies (Asset)

    Solution 2.4 Amount of supplies used during the month of March

    = 1200 - 800 = 400

    Chapter 2: Bank Reconciliation and Closing Periods 63

  • a) T-accounts Supplies Expense Sup plies

    Mar 31 400 Mar 31 1200 400 Bal 400 Bal 800 b) General Journal

    Debit Credit Supplies Expense 400 Supplies (Asset) 400

    2.5 A business pays weekly salaries (5-day week) of $3,000 on Friday. Show the adjusting entry at the end of the period ending on Wednesday using the General Journal.

    Amount of salary payable per day

    = =

    Liability of salary on Wednesday

    = =

    The adjusting entry is

    Debit Credit Salary Expense Salary Payable (Liability)

    Solution 2.5 Amount of salary payable per day

    = 3000/5 days = 600 per day

    Liability of salary on Wednesday

    = 600 x 3 days = 1800

    64 Accounting Bank Reconciliation___________

  • The adjusting entry is

    Debit Credit Salary Expense 1800 Salary Payable (Liability) 1800

    2.6 Salaries paid to employees are $2,100 bi-weekly (5-day week). The payroll period ends on Friday. Show the necessary adjusting entry on September 30 when the next payment will be on Friday, October 5. Use a General Journal entry. Salary payable per day = =

    per day Amount of salary payment on October 5 corresponding to October month

    = =

    Liability of salary on September 30

    = =

    The adjusting entry on September 30 is

    Debit Credit Salary Expense Salary Payable (Liability)

    Solution 2.6 Salary payable per day = 2100/14 days = 150

    per day Amount of salary payment on October 5 corresponding to October month

    = 5 (days) x 150 = 750

    Liability of salary on September 30

    = 2100 - 750 = 1350

    Chapter 2: Bank Reconciliation and Closing Periods 65

  • The adjusting entry on September 30 is

    Debit Credit Salary Expense 1350 Salary Payable (Liability) 1350

    2.7 The amount of the inventory of printer toners on December 31 is $300. The printer toners used during the year are $400. Make the adjusting entry necessary on December 31 using a General Journal entry.

    Debit Credit Supplies (Printer toners) Expense Supplies (Printer toners) (Asset)

    Solution 2.7 The adjusting entry is

    Debit Credit Supplies (Printer toners) Expense 400 Supplies (Printer toners) (Asset) 400

    2.8 Machinery costing $24,000, purchased on May 1, is being depreciated at 10 percent per year. Show the adjusting entry for December 31 using a General Journal entry. Depreciation per year = = per

    year Depreciation per month = = per

    month Depreciation expense for 8 months (May December)

    = =

    66 Accounting Bank Reconciliation___________

  • The adjusting entry on December 31 is

    Debit Credit Depreciation Expense Accumulated Depreciation (Asset)

    Solution 2.8 Depreciation per year = 10% x 12000 = 1200

    per year Depreciation per month = 1200 / 12 = 100 per

    month Depreciation expense for 8 months (May December)

    = 100 x 8 = 800

    The adjusting entry on December 31 is

    Debit Credit Depreciation Expense 800 Accumulated Depreciation (Asset) 800

    2.9 A truck costing $72,000 is being depreciated by the straight-line method over 5 years. The truck was purchased on February 28 and put in use on March 1. Show the adjusting entry on December 31: a) Using T-accounts; b) Using a General Journal entry. Depreciation per year = = per

    year Depreciation per month = = per

    month Depreciation expense for 10 months (March December)

    = =

    Chapter 2: Bank Reconciliation and Closing Periods 67

  • a) Adjusting entry using T-accounts Depreciation Expense Accumulated Depreciation

    Dec 31 Dec 31 Bal Bal b) The adjusting entry through the General Journal on

    December 31 is

    Debit Credit Depreciation Expense Accumulated Depreciation (Asset)

    Solution 2.9 Depreciation per year = 72000 / 5 = 14400

    per year Depreciation per month = 14400 / 12 = 1200 per

    month Depreciation expense for 10 months (March December)

    = 1200 x 10 = 12000

    a) Adjusting entry using T-accounts Depreciation Expense Accumulated Depreciation

    Dec 31 12000 Dec 31 12000 Bal 12000 Bal 12000 b) The adjusting entry through the General Journal on

    December 31 is

    Debit Credit Depreciation Expense 12000 Accumulated Depreciation (Asset) 12000

    68 Accounting Bank Reconciliation___________

  • 2.10 A four-month project for develop an advertising DVD is paid in advance of $8,000 on November 1. The project is due at the end of February. Make the necessary entries using T-accounts on November 1, December 31, and February 28. Monthly project revenue = = per

    month November 1 Ca sh Unearned Rev enue (liability) Nov 1 Nov 1

    Bal December 31 Project revenue after two months (November December)

    = =

    Project Revenue Unearned Rev enue (liability)

    Dec 31 4000 Dec 31 4000 8000 Bal 4000 Bal 4000 February 28 Project revenue two months later (January February)

    = =

    Project Revenue Unearned Rev enue (liability)

    Feb 28 Feb 28 Bal

    Bal

    Chapter 2: Bank Reconciliation and Closing Periods 69

  • Solution 2.10 Monthly project revenue = 8000 / 4

    months = 2000 per month

    November 1 Ca sh Unearned Rev enue (liability) Nov 1 8000 Nov 1 8000

    Bal 8000 December 31 Project revenue after two months (November December)

    = 2000 x 2 = 4000

    Project Revenue Unearned Rev enue (liability)

    Dec 31 4000 Dec 31 4000 8000 Bal 4000 Bal 4000 February 28 Project revenue two months later (January February)

    = 2000 x 2 = 4000

    Project Revenue Unearned Rev enue (liability)

    4000 Feb 28 4000 4000 Feb 28 4000 Bal 0

    Bal 8000 2.11 Do the problem 2.10 when the payment in full is made the day the project is finished o February 28 instead of paying in advance.

    70 Accounting Bank Reconciliation___________

  • November 1

    No transaction is made December 31 Project revenue after two months (November December)

    = =

    Project Revenue Accounts Receivable

    Dec 31 Dec 31 Bal Bal February 28 Project revenue two months later (January February)

    = =

    Ca sh Accounts Receivable Feb 28 Feb 28

    Bal Project Revenue

    Feb 28 Bal

    Solution 2.11 Monthly project revenue = 8000 / 4

    months = 2000 per month

    November 1

    No transaction is made

    Chapter 2: Bank Reconciliation and Closing Periods 71

  • December 31 Project revenue after two months (November December)

    = 2000 x 2 = 4000

    Project Revenue Accounts Receivable

    Dec 31 4000 Dec 31 4000 Bal 4000 Bal 4000 February 28 Project revenue two months later (January February)

    = 2000 x 2 = 4000

    Ca sh Accounts Receivable Feb 28 8000 Feb 28 4000 4000

    Bal 0 Project Revenue

    4000 Feb 28 4000 Bal 8000

    2.12 During April 2010, Aaron Window Repairs made the following bank deposits and check payments:

    Deposits

    Date Description Amount 4/3/10 Bank Deposit 150 4/16/10 Bank Deposit 375 4/21/10 Bank Deposit 240 4/25/10 Transfer from

    Personal account 500

    4/30/10 Bank Deposit 215 Total Deposits 1,480

    72 Accounting Bank Reconciliation___________

  • Check Payments

    Check No. Date Description Amount 621 4/5/10 Rent 400 622 4/11/10 Supplies 275 623 4/13/10 Printer Cartridge 50 624 4/21/10 Truck Repair 580 625 4/28/10 Cell Phone 170 626 4/30/10 Employee Wages 600 Total Paymt. 2,075 The bank statement from High City Bank records the following transactions for Aaron Window Repair during April 2010: Beginning Balance 2,580 Deposits 1,265 Withdrawals 1,305 Ending Balance 2,540 Deposits

    Date Description Amount 4/3/10 Deposit 150 4/17/10 Deposit 375 4/22/10 Deposit 240 4/25/10 Deposit 500 Total Deposits 1,265

    Withdrawals Check No. Date Amount 621 4/12/10 400 622 4/16/10 275 623 4/15/10 50

    Chapter 2: Bank Reconciliation and Closing Periods 73

  • 624 4/27/10 580 Total Withdr. 1,305 Calculate the actual operating cash balance. Actual operating cash balance

    Bank Balance

    Deposits-in-Transit +

    Outstanding Checks

    Check

    Check

    Total Outstanding Checks -

    Actual Operating Cash Balance

    Solution 2.12 Actual operating cash balance

    Bank Balance 2,540

    Deposits-in-Transit +215

    Outstanding Checks

    Check 625 170

    Check 626 600

    Total Outstanding Checks -770

    Actual Operating Cash Balance 1,985

    2.13 A list of the accounts of Harley Consulting on December 31 is presented below.

    74 Accounting Bank Reconciliation___________

  • Cash 5,105 Equipment 5,000 Supplies 925 Accounts Receivable 1,690 Prepaid Insurance 1,865 Accounts Payable 635 Harley, Capital 14,000 Owners Withdrawal 2,325 Owners Contribution Fees Revenues 19,400 Utilities Expense 845 Salaries Expense 16,280

    The year-end adjustments necessary to bring the accounts up to date are as follows: 1. Fees earned on cash but not yet posted $3,275.

    2. Utilities owed but not paid $230.

    3. Salaries owed but not paid $840.

    4. Depreciation for the year $700.

    5. Inventory of supplies at the end of the year $475.

    6. Insurance expense for the year $1,250.

    a) Prepare the adjusting entries using T-accounts.

    b) Make the trial balance before closing the year.

    a) Adjusting Entries 1. Ca sh Fees Revenue

    Dec 31 Dec 31

    Bal Bal

    Chapter 2: Bank Reconciliation and Closing Periods 75

  • 2. Utilities Expense Accounts Payable

    Dec 31 Dec 31

    Bal Bal 3. Salaries Expense Salaries Payable

    Dec 31 Dec 31 Bal

    Bal 4. Depreciatio n Expense Accumulated Depreciation

    Dec 31 Dec 31 Bal Bal 5. Supp lies Supplies Expense

    Dec 31 450 Dec 31 Bal Bal 6. Insurance Expense Prepaid Insurance

    Dec 31 Dec 31 Bal Bal b) Trial balance

    76 Accounting Bank Reconciliation___________

  • Harley Consulting

    Trial Balance December 31, 2010

    Bala nce Account Title Debit Credit Cash Equipment Accumulated Depreciation Supplies Prepaid Insurance Accounts Receivable Accounts Payable Salaries Payable Harley, Capital Owners Withdrawal Fees Revenues Depreciation Expense Insurance Expense Salaries Expense Supplies Expense Utilities Expense Totals

    Solution 2.13 a) Adjusting Entries 1. Ca sh Fees Revenue

    5105 19400 Dec 31 3275 Dec 31 3275

    Bal 8380 Bal 22675

    Chapter 2: Bank Reconciliation and Closing Periods 77

  • 2. Utilities Expense Accounts Payable

    845 635 Dec 31 230 Dec 31 230

    Bal 1075 Bal 865 3. Salaries Expense Salaries Payable

    16280 Dec 31 840 Dec 31 840 Bal 840

    Bal 17120 4. Depreciatio n Expense Accumulated Depreciation

    Dec 31 700 Dec 31 700 Bal 700 Bal 700 5. Supp lies Supplies Expense

    Dec 31 925 450 Dec 31 450 Bal 475 Bal 450 6. Insurance Expense Prepaid Insurance

    Dec 31 475 Dec 31 1865 475 Bal 475 Bal 1390 b) Trial balance

    78 Accounting Bank Reconciliation___________

  • Harley Consulting Trial Balance

    December 31, 2010

    Bala nce Account Title Debit Credit Cash 8,380 Equipment 5,000 Accumulated Depreciation 700 Supplies 475 Prepaid Insurance 1,390 Accounts Receivable 1,690 Accounts Payable 865 Salaries Payable 840 Harley, Capital 14,000 Owners Withdrawal 2,325 Fees Revenues 22,675 Depreciation Expense 700 Insurance Expense 475 Salaries Expense 17,120 Supplies Expense 450 Utilities Expense 1,075 Totals 39,080 39,080

    2.14 Based on the trial balance of Harley Consulting as of December 31 before closing (problem 2.13), prepare General Journal entries to close-out:

    a) Revenue accounts; b) Expense accounts; c) Income Summary account; d) Owners withdrawal account. e) Make the Post-closing trial balance. a)

    Debit Credit Fees Revenues Income Summary

    Chapter 2: Bank Reconciliation and Closing Periods 79

  • b)

    Debit Credit Income Summary Depreciation Expense Insurance Expense Salaries Expense Supplies Expense Utilities Expense

    Balance of Income Summary account

    = - =

    c)

    Debit Credit Income Summary Retained Earnings

    d)

    Debit Credit Retained Earnings Owners Withdrawal

    Balance of Retained Earnings account

    = - =

    e) Post-closing trial balance

    80 Accounting Bank Reconciliation___________

  • Harley Consulting Post-Closing Trial Balance

    December 31, 2010

    Bala nce Account Title Debit Credit Cash Accounts Receivable Equipment Accumulated Depreciation Supplies Prepaid Insurance Accounts Payable Salaries Payable Harley, Capital Retained Earnings Totals

    Solution 2.14 a)

    Debit Credit Fees Revenues 22675 Income Summary 22675

    b)

    Debit Credit Income Summary 19820 Depreciation Expense 700 Insurance Expense 475 Salaries Expense 17120 Supplies Expense 450 Utilities Expense 1075

    Balance of Income Summary account

    = 22675 - 19820 = 2855

    Chapter 2: Bank Reconciliation and Closing Periods 81

  • c)

    Debit Credit Income Summary 2855 Retained Earnings 2855

    d)

    Debit Credit Retained Earnings 2325 Owners Withdrawal 2325

    Balance of Retained Earnings account

    = 2855 - 2325 = 530

    e) Post-closing trial balance

    Harley Consulting Post-Closing Trial Balance

    December 31, 2010

    Bala nce Account Title Debit Credit Cash 8,380 Accounts Receivable 1,690 Equipment 5,000 Accumulated Depreciation 700 Supplies 475 Prepaid Insurance 1,390 Accounts Payable 865 Salaries Payable 840 Harley, Capital 14,000 Retained Earnings 530 Totals 16,935 16,935

    82 Accounting Bank Reconciliation___________

  • Notes

    Chapter 2: Bank Reconciliation and Closing Periods 83

  • Notes

    84 Accounting Bank Reconciliation___________

  • INDEX

    Account 9 Depreciation 48-50

    Account reconciliation 51-55 Double-entry accounting 6

    Accounting, Double-entry 6 Accounting equation 1 Equipment 2, 50

    Accounts payable 5, 15 Equity 1

    Accounts receivable 19 Expense account 10

    Accrued expenses 43, 44 Expenses 6

    Accrued revenue 43, 46 Accumulated depreciation 49, 50, 51 General Journal 43

    Adjusting entries 42-51 Assets 1 Income 6

    Automobile expenses 10 Income summary account 55

    Investment 3 Bank deposit 2 Bank statement 51, 53 Liabilities 1

    Buying 3 Outstanding checks 52, 54 Capital 3, 6 Owner's contribution 56

    Cash 3 Owner's withdrawal 56

    Cash withdrawal 5 Check, Outstanding 52, 54 Payment 2, 3

    Check payment 54 Post-closing trial balance 58

    Closed-out account 55 Prepaid insurance 43

    Closing entries 55 Prepaid rent 43

    Closing periods 41 Purchase 2

    Contra-asset 49, 51 Credits 9-12 Receiving 3

    Reconciliation, Account 51-55 Debits 9-12 Rent 2

    Deposits-in-transit 52, 54 Rent expense 4, 44

    ______INDEX 85

  • Retained earnings 55 Transactions 2

    Revenue 3 Transaction types 8-9

    Trial balance 16-17 Salary 44 Trial balance, Post-closing 58-59

    Salary expense 5, 44-46 Salary payable 45 Unearned revenues 43, 47-

    48 Supplies 3, 4 Withdrawal, Owner's 56 T-accounts 11 Withdrawing 3

    86 Accounting Bank Reconciliation________