PRINCIPLES OF ACCOUNTING I – STUDENT HANDOUT

CHAPTER TWO

ACCOUNTING FOR A SERVICE ENTERPRISE

1. The Use of Accounts

Accounts are used to summarize increases and decreases in the specific items that appear on the financial statements.

Each item has a separate account. A group of account is referred to as a ledger

2. The Account

A. Classification

The accounts in the general ledger are arranged in the same order that they would appear in the financial statements.

Balance sheet accounts are placed first, followed by the income statement accounts.

The accounts of a given business entity are classified in to the following major categories:

ASSETS

i. Current assets- Cash- Notes receivable- Accounts receivable- Inventory- Prepaid expenses

ii. Non-current assets - Plant assets - Intangible assets- Natural resources

LIABILITIES

a. Current liabilities

- Notes payable- Accounts payable

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- Unearned revenue- Salary payable - Rent payable- Interest payable

b. Non-current liabilities- Mortgage payable- Bonds payable- Long term notes payable

OWNER'S EQUITY

- Capital / capital stock- Retained earnings- Withdrawals / dividends

REVENUE

- Sales/service revenue

EXPENSES

B. The Chart of Accounts

The number and type of accounts in the chart of accounts of a given business will depend upon one or more of the following factors:

The nature of the business and the way it operates. The size of the business entity The amount of detail needed for management to make its decisions; and Rulings of regulatory agencies

In its most elementary form, the account has got three parts:

i. The account title, ii. A place to record increase

iii. A place to record decrease

The elementary form of an account looks like this:

Cash

Increase in cash Decrease in cash

T-account does the following: -

Keeps record of each transaction by account title, Separates the increases and decreases to the account,

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Stores the amounts for future use, and Shows the account balance.

Sequencing and Numbering

To facilitate the record keeping process, the accounts in the general ledger are numbered.

The use of numbers (codes) to identify accounts in business documents is much easier than use of the account titles.

Each business entity will normally devise its own numbering (coding) system. An identification number (code) is assigned to each account.

Numbering should not necessarily be consecutive but successive that allows new accounts to be inserted.

The first digit indicates the major division of the ledger in which the account is placed.

Accounts beginning with: 1 represent assets 2 represent liabilities 3 represent capital and drawing 4 represent revenues 5 represent expenses

The second digit indicates the position of the account within its division. The initial preparation of the ledger based on the chart of accounts is

known as Opening the ledger. A chart of accounts is a listing of the account titles and account numbers being

used by a given business. Insofar as possible, the order of the items in the chart of accounts should agree

with the order of the items in the balance sheet and the income statement.

3. Rules of Debit and Credit

The rules may be classified as Rules applying to the balance sheet accounts, and Rules applying to the income statement accounts.

Left side of any account is the debit side; and the right side of any account is the credit side.

Which side should be used to show the increases/decreases? Debits and credits by themselves do not indicate increases or decreases. We must

refer to a specific account to determine if a debit or a credit represents an increase or a decrease.

Every single financial transaction affects at least two accounts in the general ledger – an account in which a debit is recorded and an account in which the credit is recorded.

The amount recorded in the debit accounts must equal the amount recorded in the credit accounts.

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If one debit account affects more than one credit account, the sum of the credit accounts affected, of course, must equal the amount of the corresponding debit account.

Conversely, if one credit account affects more than one debit account, the sum of the debit accounts must equal the amount of the corresponding credit account.

4. Normal Balances

For any account, the normal situation is for the sum of the increases to be greater or equal to the sum of the decreases to the account. The resulting balance is greater than or equal to zero rather than a negative balance. The positive balance of an account is referred to as its normal balance.

The normal balance of each type of account is always the “increase” side of the account.

An account that normally has a debit balance may occasionally have a credit balance, which indicates a negative amount of the item. This is an indication of an accounting error or of an unusual situation.

5. Summary of the Rules of Debit and Credit and Normal Balances

Accounts

IncreaseSide

Decrease Side

Normal Balance

Balance SheetAccounts

1. Assets Debit Credit Debit2. Liabilities Credit Debit Credit

3.Owner's equity

Capital/capital stock Credit Credit CreditRetained earnings Credit Credit CreditDrawing/dividends Debit Debit Debit

Income Statement Accounts

4. Revenues Credit Debit Credit

5. Expenses Debit Credit Debit

6. Illustrate the application or the rules using Softbyte co.

7. Flow of Information through the Accounting System

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Business Transactions

Occurs

Business Documents

Prepared

Entry recorded in

Journal

Entry posted to

Ledger

8. The Journal

The journal, or book of original entry, is a chronological record, showing for each transaction the debit and credit changes caused in specific ledger accounts.

A brief explanation may also be included for each transaction. The unit of organization for the journal is the transaction. By making use of both a journal and a ledger, we can achieve several advantages,

which are not possible if transactions are recorded directly in ledger account:

9. The two – column journal

The following form represents a typical two-column general journal:

10. The Benefits of Using Journals

It discloses in one place the complete effect of a transaction.

It provides a chronological order of transactions in the life of the business.

It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

11. Steps in Journalizing a Transaction

i. Analyze the transaction:

a. Determine the type of account being affected by the transaction.b. Determine the direction of the effect - is it increase or decrease?c. Associate the direction of the effect with the rules of debits and

credits.

ii. Entering the transaction information in a journal:

Date Description P/R Debit Credit 1991May 1 Cash

Sales To record cash sales

xxxxxxxxxxxx

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a. Record the date- this specific step involves the recording of the date of the year, the month, and the specific day in which the transaction has occurred.

b. Record the debit- this step involves entering the title of the account to be debited along with the related amount.

c. Record the credit- this step involves entering the title of the account to be credited along with the related amount.

d. Write an explanation (optional)- this involves writing a brief explanation pertaining to the transaction.

Remarks:

A space is left between journal entries to separate between individual entries.

The column entitled post ref. (which stands for posting reference) is left blank at the time the journal entry is made.

12. Posting

Refers to the process of transcribing the debits and credits in each journal entry to the appropriate general ledger account.

T-accounts are simplified representation of actual general ledger accounts. Three standard formats of a ledger account are widely used:

Two-column ledger account Three-column ledger account Four-column ledger account

Date Explanation P/R Debit Date Explanation P/R Credit

A two-column ledger account

Date Explanation P/R Debit CreditBalance

Debit Credit

A four-column ledger account

Date Explanation P/R Debit Credit Balance

A three-column ledger account

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13. Steps In Posting

Posting involves the following steps:

i. Locate in the ledger the account named in the debited portion of the general journal entry.

ii. Record the date of the transaction in that account in the ledger.

iii. Record the general journal reference (GJ) and page number in the posting reference column of the account debited in the general ledger.

iv. Enter the Birr amount of the debit from the journal into the debit column of that particular account in the ledger.

v. Determine the balance in the account.vi. Enter the account number of the ledger account debited in the

posting reference column of the journal on the line of the debit portion of the transaction.

vii. Repeat the steps above for the credit portion of the journal entry.

Account title: Cash A/c No. 1110

Date Explanation P/R Debit CreditBalance

Debit Credit1991May 1 GJ001

xxxxxxxx

14. The Trial Balance

What is a trial balance??????

A two-column schedule that lists the titles and debit and credit balances of all the accounts in the order in which they appear in the ledger.

Why do we have to prepare a trial-balance.

ABC Co.General Ledger

Page 001Date Description P/R Debit Credit 1991May 1 Cash

Sales To record cash sales

110 xxxxxxxxxxxx

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Justifying reasons for preparation of the trial balance

To make an interim mechanical check of the equality of the debits and credits in the general ledger.

To portray all general ledger account balances on one concise record so that preparation of financial statements will be more convenient.

The steps in preparing a trial balance:

1. Determine the balance of each account in the ledger2. List the accounts with balances other than zero, with the debit

balance in left-hand column and the credit balances in the right hand column.3. Add the debit balances4. Add the credit balances5. Compare the sum of the debit balances with the sum of the credit

balances.

15. Uses of the Trial Balance

The agreement of the debit and credit totals of the trial balance gives assurance that:

1. Equal debits and credits have been recorded for all transactions.2. The debit or credit balance of each account has been correctly computed.3. The addition of the account balances in the trial balance has been correctly

performed.

When the trial balance does not balance, this situation indicates that one or more errors have been made. The errors may have been:

1. In journalizing the transactions,2. In posting to the ledger,3. In determining the account balances,4. In copying the account balances to the trial balances, or 5. In adding the columns of the trial balance.

16. Limitations of the Trial Balance

The trial balance, however, is not a complete proof of accuracy. It proves only the equality of debits and credits. Numerous errors may exist even though the trial balance columns agree. For example, the trial balance may balance even when

1. A transaction is not journalized,2. A correct journal entry is not posted,

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3. A journal entry is posted twice,4. Incorrect accounts are used in journalizing or posting, or5. Offsetting errors are made in recording the amount of a transaction

17. Locating Errors

The lack of balance in the trial balance may be the result of a single error or a combination of several errors.

What is the most efficient approach to locating the error (or errors)? There is no single technique, which will give the best results every time, but the

following procedures, done in sequence, will often save considerable time and effort in locating errors.

Procedures to locate errors:i. Prove the addition of the trial balance columns by adding the

columns in the opposite direction from that previously followed.ii. Determine the exact amount at which the schedule is out of

balance. This amount may provide a clue to discover errors such as: Interchange of debits and credits Transposition of numbers Slides Amounts omitted

iii. Compare the amounts in the trial balance with the balances in the ledger,

iv. Recompute the balance of each ledger account,v. Trace all postings from the journal to the ledger.

18. Adjustments

The basic elements of the accounting model are never precisely measured on the financial statements of a business enterprise.

Only after completing all the business transactions over the entire life of a business entity, can the exact amount of assets, revenues, expenses, and net income be determined.

For example, assume a building with a cost of Br.2,400,000 whose expected life is 40 years. But 25 years later the building no longer serves its original purpose.

The depreciation expense is calculated as 2,400,000/40 = Br. 600,000

However, the actual yearly expense turned out to be 2,400,000/25 = Br. 960,000.

The precise amount of the yearly expense can be determined only after the useful life of the building has passed.

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However, decision makers such as managers and investors can't wait for the business to conclude its operations before they evaluate its financial progress.

Instead, they expect a business to provide financial reports periodically. To provide timely information in financial statements, accountants break the life

of business entities into time frames. At the end of each time frame, accountants prepare financial statements.

These time frames are referred to as Accounting periods and are typically a year, a quarter, or a month in length.

The breaking of the entire of an entity's life into time schemes is justified by the periodicity assumption.

The primary accounting period used by most businesses is one year, for which they prepare annual financial statements.

One major advantage of recognizing the life of the business as a series of regular, successive accounting periods is comparability.

Businesses also prepare interim financial statements/reports based on one-month or three-month accounting periods.

19. Need for Adjustments

At the end of an accounting period, however, preparing financial statements does present some problems as well.

At the end of an accounting period, after all transactions are recorded, several of the accounts in company’s ledger typically do not reflect proper end-of-period balances for presentation in the financial statements.

This occurs even though all transactions were recorded correctly. The balances are incorrect for statement purposes, not through error.

The types of transactions recorded so far are external transactions. Internal economic events have not yet been recorded. Consider for example, a company has bought, on Oct. 1 of the current year, for

Br. 1,200, a 12-month insurance policy.

On the date of purchase the policy may be recorded as a prepaid insurance (asset).

But three months later, on December 31, only 9 months of insurance coverage remain, while three months insurance expense has been incurred.

The financial statements prepared at the end of the accounting period must reflect the shifts in asset and expense values. The financial statement must show the following:

1. All assets owned. 3. All revenue earned 2. All liabilities owed. 4. All expenses incurred.

To meet this objective, some of the accounts must be adjusted. The adjustment is accomplished by means of a general journal entry called an

adjusting entry.

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Adjusting entire do not involve second parties, and are called internal transactions.

To this effect the prepaid insurance (asset) account has to be reduced to Br. 900 and an insurance expense (expense) account has to be raised by Br. 300.

20. Accrual-Basis versus Cash-Basis Accounting

There are two widely used basis of Accounting: The accrual basis of accounting and the cash basis.

The accrual basis An accountant recognizes the impact of a business event as it occurs. When the business performs a service, makes a sale, or incurs an expense,

the accountant enters the transaction into the books, whether or not cash has been received or paid.

The cash-basis of Accounting: The accountant does not record until cash is received or paid. In this basis of accounting, revenue is recognized when cash is received

and expenses are recognized when cash is paid out. GAAP requires that a business use the accrual-basis. Why does GAAP require that businesses use the accrual basis? What advantage

does the accrual-basis accounting offer? The advantage of accrual-basis over the cash basis is that the former will give

more complete information than the later does. This difference is important because the more complete the data; the better-equipped decision makers are to reach conclusions about the firm’s financial health and future prospects.

The Accrual basis is based on two concepts: The revenue recognition principle and the matching principle.

21. Revenue Recognition Principle

The revenue principle tells accountants about two things:

(1) Timing: When to record revenue.

The general principle guiding when to record revenue says to record revenue once it has been earned.

It is not necessarily recorded in the accounting period in which the cash collection representing the revenue is made.

In most cases, revenue is earned when the business has delivered a complete good or service to the customer. The business has done everything required by the agreement, including transferring the item to the customer.

(2) The amount of revenue to record.

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The general principle guiding the amount of revenue to record says to record revenue equal to the cash value of the goods or the services transferred to the customer.

Example:

Assume a supermarket sells an item to a credit account customer on Dec. 28. The revenue representing the sale of that item is recognized on that date – not when the

customer pays for item, which may be in January or February.

22. Matching Principle

The matching principle is the basis for recording expenses. The matching principle directs accountants:

(1) To identify all expenses incurred during the accounting period, (2) To measure the expenses, and (3) To match the expenses against the revenues earned during the same span of

time.

23. Types of Adjusting Entries

There are two broad classifications of adjusting entries:

1. Deferrals - includes goods and services collected or paid for in advance of benefits given or received.

Deferrals require adjustments of external transactions previously entered in the general journal and posted to the ledger accounts.

Typical examples include prepaid expenses, unearned revenues, and depreciation.

2. Accrual - includes revenue already earned and expenses already incurred for which no transaction has yet been recorded.

Typical examples of accruals include salaries and interest.

NB: Every adjusting entry affects both the income statement accounts and the balance sheet accounts.

24. Illustrations

A. Deferrals as Assets/Liabilities

i. Prepaid Insurance

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ABC Co. purchased an insurance policy for Br. 6,000 on Oct. 1, 2002 to cover one-year period.

Oct. 1 Prepaid Insurance-------------- 6,000 Cash--------------------------------- 6,000

At the end of Dec., the adjusting entry required is:

Dec. 31 Insurance Expense---------------1500 Prepaid Insurance----------------- 1500

ii. Prepaid Rent

On Nov. 1, rent at Br. 150 per month for 3 months was paid in advance by ABC business.

Nov. 1. Prepaid Rent ---------------------- 450 Cash --------------------------------- 450

At the end of November, the adjusting entry required is:

Nov. 30. Rent Expense ------------------- 150 Prepaid Rent -----------------------150

iii. Office Supplies

On Nov. 8, ABC business paid cash of Br. 386 for office supplies.

Nov. 8, Supplies -------------------------- 386 Cash ------------------------------ 386

At the end of November, supplies on hand were counted and only supplies costing Br. 133 remained. Thus, the adjusting entry required would be:

Nov. 30. Supplies Expense -------------253 Supplies ------------------253

iv. Unearned revenues

On Nov. 1, ABC business has received cash of Br. 600 in advance of the actual services.

Nov. 1. Cash ------------------------------ 600 Unearned service revenue ---- 600

At the end of Nov., the adjusting entry required is:

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Nov. 30, Unearned service revenue-------- 100Service revenue ------------------- 100

B. Deferrals as Expenses/Revenues

Consider the previous examples with an alternative treatment.

i. Prepaid Insurance

Oct. 1 Insurance Expense------------- 6,000 Cash -------------------------- 6,0000

Dec. 31 Prepaid Insurance ------------- 4,500 Insurance Expense ------------- 4,500

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ii. Prepaid Rent

Nov. 1 Rent Expense------------- 450Cash -------------------- 450

Nov. 30 Prepaid Rent ------------- 300 Rent Expense------------- 300

iii. Supplies

Nov. 8 Supplies Expense------------386 Cash -------------------------- 386

Nov. 30 Supplies -------------------------- 133 Supplies Expense ------------------133

iv. Unearned Revenue

Nov. 1. Cash ---------------------- 600 Service revenue -----600

Nov. 30. Service revenue--------------------- 100Unearned Service Revenue ----------100

C. Depreciation

Accountants systematically spread the cost of each plant asset, except land, over the years of its useful life.

This process of allocating the cost of plant assets to expense accounts is called Depreciation.

Depreciation expense is the amount of plant asset’s cost assigned as an expense to a particular accounting period.

The concept underlying accounting for plant assets and depreciation expense is an extreme case of prepaid expenses.

The major difference between prepaid expenses and plant assets is the length of time it takes for the asset to loose its usefulness.

Prepaid expenses usually expire with in a year, where as most plant assets remain useful for a number of years.

Assume that ABC purchase computing equipment for Br. 7,000 on Jan. 1, 2002. The depreciation expense is calculated at 1000 per annum.

The adjusting entry required is:

Depreciation Expense -----------------------------1,000 Accumulated depreciation – Equipment -----------1,000

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The accumulated depreciation is a contra–asset account to a plant asset account and has credit normal balance.

D. Accruals

i. Accrued Expenses/Liabilities

a. Salary expense/salary payable

Example:

Assume that ABC business pays the weekly salary of employees every Friday. Suppose further that the daily salary of all employees is Br. 1,064 and that the end of August 31,1999 was on Tuesday. The adjusting entry required as of August 31,1999 is:

Aug. 31 Salary expense -------------------------- 2128 Salary payable -------------------------- 2128

(1064 x 2) = 2128

The appropriate entry for Sept. 3 would be recorded as follows:

Sept.3 Salaries payable ---------------- 2128Salary expense --------------- 3192

Cash ----------------------------------- 5320

b. Interest Expense/ Interest Payable

If the accounting period ends before the interest is paid or received, an adjusting entry is required.

Example:

Consider a 12% note payable (Br. 1500) due on March 30,2000. The note was issued on October 1, 1999

The interest expense incurred on this note until Dec. 31, 1999 is calculated according to the following formula:

Interest = principal * rate * time.

Therefore, the interest in this specific case would be,

Interest = 1,500 * 12% per year. * 3/12 year = Br. 45.

The adjusting entry to record the interest expense incurred in October is:

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Dec. 31. Interest expense ----------------- 45Interest payable --------------- 45

The journal entry at the time of payment would be:

March 30. Interest payable ---------------- 45Interest expense-----------------45Notes payable-----------------1500

Cash -------------------------- 1590

ii. Accrued Revenues/Assets

Examples:

MM has performed consultancy services in the month of August 2002. Billing was not made until September 15, 2002.

If this was a 12% note receivable rather that a note payable the adjusting entry would be as follows:

Oct. 31. Interest receivable --------------- 45

Interest income --------------------- 15

25. Worksheet for Financial Statements

Many details are involved in the end-of-period procedures that it is easy to make errors.

If these errors are recorded in the journal and in the ledger accounts, considerable time and effort can be wasted in correcting them.

Both the journal and the ledger are formal, permanent records. One way of avoiding errors in the permanent accounting records and of

simplifying the work to be done at the end of the period is to use a work sheet. Worksheets are extremely important and helpful, but they are not part of

the permanent accounting records of a business.

What is it ?????

It is a columnar sheet of paper on which accountants summarize information needed to make adjusting and closing entries and to prepare financial statements.

26. The worksheet helps in four ways:

It organizes the process of preparing the financial statement.

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It reduces the possibility of introducing errors in that process. It aids in discovering errors that do occur. It provides monthly statement without the formal adjusting and closing

process.

27. Preparing the Worksheet

The heading of the worksheet comprises of:(1) The name of the business(2) The title worksheet, and(3) The period covered.

The body of a ten-column worksheet contains five pairs of money columns, each pair consisting of a debit and a credit column.

The steps involved in preparation of worksheet:

i. Enter the ledger account balances in the trial balance columns. ii. Enter the adjusting entries in the adjustment column.

iii. Compute each account’s adjusted balance and enter the adjusted amounts in the Adjusted trial balance column.

iv. Extend the adjusted amounts to the appropriate columns. v. Compute the Net income or net loss.

28. Illustration on the preparation of worksheet:

The following is the unadjusted trial balance of XYZ Service Company at December 31,19x1, the end of its fiscal year.

XYZ Service CompanyTrial balance

December 31,19x1 Debit Credit Cash Br. 198, 000 Accounts receivable 370,000 Supplies 6,000 Furniture &fixture 100,000 Accumulated depreciation-fur. & fix. 40,000 Building 250,000 Accumulated depreciation-building 130,000 Accounts payable 380,000 Unearned service revenue 45,000 Capital 293,000 Withdrawals 65,000 Service revenues 286,000 Salary expense 172,000 Miscellaneous expense 13,000 ______ TOTAL 1,174,000 1,174,000

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Data needed for the adjusting entries include:

a. Supplies on hand at year end, Br. 2,000b. Depreciation on furniture and fixtures, Br. 20, 000c. Depreciation on building, Br. 10, 000d. Salaries owed but not yet paid, Br. 5,000e. Accrued service revenue, Br. 12,000f. Of the Br. 45,000 balance of unearned service revenue, Br. 32,000 was earned

during 19X1

Dear student, please look at the next page for the work sheet.

29. Preparing The Financial Statements

Even though the worksheet shows the amount of net income or net loss for the period, it is still necessary to prepare the financial statements.

The worksheet is not a substitute for the financial statements. This is because the worksheet is only a temporary record that facilitates

the compilation of the data needed to prepare the financial statements, which become part of the permanent accounting records.

The worksheet provides all the necessary data to prepare the balance sheet, the income statement, and the statement of owner’s equity.

Financial statements prepared for XYZ Service Company from the worksheet are as follows:

XYZ Service CompanyIncome statement

For the month ended Dec. 31, 19x1Revenue:

Service revenue Br. 330,000Expenses:

Salary expense Br. 177,000Supplies expense 20,000Depreciation expense- furn.& fixt. 10,000Depreciation expense- building 4,000Miscellaneous 13,000Total expenses 224,000Net income Br. 106,000

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XYZ Service CompanyStatement of owner's equity

For the year ended Dec. 31, 19x1Capital, January, 19x1 Br. 293,000Add: net income 106,000Subtotal 399,000Less: withdrawal 65,000Capital, Dec. 31, 19x1 334,000

XYZ Service CompanyBalance Sheet

As at Dec. 31, 19x1ASSETSCash Br. 198,000A/receivable 382,000Supplies 2,000Furn. & fix. 100,000Less: A/Depr- 60,000 40,000Building 250,000Less: A/depr. 140,000 110,000Total assets Br. 732,000

LIABIL.. & OWNER'S EQUITY LiabilitiesA/payable Br. 380,000Salary payable 5,000Unearned service rev. 13,000 Total liabilities. Br. 398,000 Owner's equityCapital Br. 334,000Total Liab. &OE Br.732, 000

30. Journalizing the adjusting entries:

The adjusting entries required for XYZ Service Company as at Dec. 31, 19x1 are:

Dec. 31. Accounts receivable ----------------------12,000Service revenue ----------------------------12,000

31. Supplies expense-------------------------- 4,000

Supplies------------------------------- 4,000

31. Depreciation expense - building ------- 10,000 Accumulated depreciation - building----- 10,000 31. Depreciation expense- furn.& fix-------20, 000 Accum. Depreciation- furn.& fix--------- 20,000 31. Salary expense ----------------------------5,000 Salary payable-------------------------------- 5,000

31. Unearned service revenue------------- 32,000 Service revenue----------------------------- 32,000

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31. Closing the Accounts

If we were to rely solely on what we have learned thus far to prepare financial statements, our work would be more difficult than it need be. We would have two problems:

(1) At the end of a period the capital account would reflect a beginning-of-period balance while all other balance sheet accounts would reflect period-end balances.

(2) The balances in revenue and expense accounts would not be for the latest accounting period, but rather would be a cumulative balances, starting from when the company first commenced operations.

32. The closing process is, therefore:

(1) the act of transferring the balances in revenue and expense accounts to a clearing account called Income Summary Account and then to owner’s capital, and

(2) the act of transferring the balance in the owner’s drawing account to the owner’s capital account.

33. Thus, the steps in closing the accounts of a proprietorship are as follows:

i. Close revenue accounts: ii. Close Expense accounts:

iii. Close the Income summary account: iv. Close the drawing account:

34. Journalizing Closing entries:

Dec. 31. Service revenue-------------- 330,000 Income summary-----------------330, 000

31. Income summary------------- 224,000Salary expense-------------------- 177,000Supplies expense----------------- 4,000Depreciation exp.- furn.& fix-- 20,000Depreciation exp.- building---- 10,000Miscellaneous expense--------- 13,000

31. Income summary -------------- 106,000 Capital---------------------------- 106,000

31. Capital--------------------------- 65,000 Withdrawals ------------------- 65,000

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35. The Post Closing Trial Balance

The post-closing trial balance is the final check on the accuracy of journalizing and posting the adjusting and closing entries.

This step ensures that the ledger is in balance for the start of the next accounting period.

XYZ CompanyPost closing trial balance

Dec. 31, 19x1 Debit Credit

Cash Br. 198,000 A/receivable 382,000Supplies 2,000 Furniture & fixture 100,000

Accumulated Depreciation 60,000 Building 250,000

Accumulated depreciation 140,000

A/payable 380,000 Salary payable 5,000

Unearned service revenue 13,000 Capital 334,000 Total Br. 932,000 Br. 932,000

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