Journalize transactions.

Post entries to the ledger accounts.

Prepare trial balance.

Make end-of-year

adjustments.

Prepare adjusted trial balance.

Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared.

Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared.

Effects of the Adjusting Entries

1

End of Chapter 4

2

Chapter

5THE ACCOUNTING CYCLE: Adjusted Trial Balance

3

JJ's Lawn Care Service Adjusted Trial Balance

May 31, 2003

Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accumulated depr.: tools & eq. 50$ Truck 15,000 Accumulated depr.: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Dividends 200 Sales revenue 750 Gasoline expense 50 Depr. exp.: tools & eq. 50 Depr. exp.: truck 250 Total 22,200$ 22,200$

This is the Adjusted Trial

Balance for JJ’s.

This is the Adjusted Trial

Balance for JJ’s.

Now, let’s prepare the

financial statements for JJ’s Lawn Care Service for May.

Now, let’s prepare the

financial statements for JJ’s Lawn Care Service for May.

4

JJ's Lawn Care ServiceIncome Statement

For the month ending May 31, 2003

Sales revenue 750$ Operating expenses: Gasoline expense 50$ Depr. exp.: tools & eq. 50 Depr. exp.: truck 250 350 Net income 400$

Net income also appears on the Statement of Owner’s Equity.

Net income also appears on the Statement of Owner’s Equity. 5

•Business Earnings

•Dividends

•Business Losses

This statement summarizes the increases and decreases in Retained Earnings during

the period.

Statement of Retained Earnings

6

Now, let’s prepare the Balance Sheet.7

JJ's Lawn Care ServiceBalance SheetMay 31, 2003

AssetsCash 3,925$ Accounts receivable 75 Tools & equipment 2,650$ Less: Accum. depr.: tools & eq. 50 2,600 Truck 15,000$ Less: Accum. depr.: truck 250 14,750 Total assets 21,350$

Liabilities & Stockholders' EquityLiabilities:Notes payable 13,000$ Accounts payable 150 Total liabilities 13,150$ Stockholders' equity:Capital stock 8,000$ Retained earnings 200 Total stockholders' equity 8,200 Total liabilities & stockholders' equity 21,350$

Next, let’s prepare the

Statement of Cash Flows

for JJ’s Lawn Care Service

for May.

Next, let’s prepare the

Statement of Cash Flows

for JJ’s Lawn Care Service

for May.

8

JJ's Lawn Care ServiceStatement of Cash Flows

For the Month Ended May 31, 2003Cash flows from operating activities: Cash received from revenue transactions 750$ Cash paid for expenses (50) Net cash provided by operating activities 700$ Cash flows from investing activities: Purchase of lawn mower (2,500)$ Purchase of truck (2,000) Collection for sale of repair parts 75 Payment for repair parts (150) Net cash used by investing activities (4,575) Cash flows from financing activities: Investment by owners 8,000$ Dividends (200) Net cash provided by financing activities 7,800 Increase in cash for month 3,925$ Cash balance, May 1, 2003 - Cash balance, May 31, 2003 3,925$

9

Notes to the Financial Statements

Examples of Items Disclosed

Lawsuits pending

Scheduled plant closings

Governmental investigations

Significant events occurring after the balance sheet date

Specific customers that account for a large portion of revenue

Unusual transactions and related party transactions

Examples of Items Disclosed

Lawsuits pending

Scheduled plant closings

Governmental investigations

Significant events occurring after the balance sheet date

Specific customers that account for a large portion of revenue

Unusual transactions and related party transactions

Drafting Notes to the Financial Statements

10

Adjusted Trial Balance of “Net Solution”

11

NetSolutions’ Adjusted Trial Balance for

December 31, 2005

12

NetSolutionsAdjusted Trial Balance

December 31, 2005

Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Capital Stock 25 000 00Dividends 4 000 00Fees Earned 16 840 00Rent Revenue 120 00Wages Expense 4 525 00Rent Expense 1 600 00Utilities Expense 985 00

Continued 13

NetSolutionsTrial Balance

December 31, 2005

Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Utilities Expense 985 00Supplies Expense 2 040 00Insurance Expense 100 00Miscellaneous Expense 455 00

43 400 00 43 400 00

14

Work Sheet

15

The Work SheetThe Work Sheet

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, stockholders’ equity, revenues, and expenses.

Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, stockholders’ equity, revenues, and expenses.

16

Adjustments are entered here. Two possibilities:

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

Adjustments are entered here. Two possibilities:

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

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

The Work SheetThe Work Sheet

17

The Work SheetThe Work Sheet

Adjustments are combined with the trial balance. Account balances are now adjusted.

Adjustments are combined with the trial balance. Account balances are now adjusted.

Trial Balance

Accounts Dr Cr Dr Cr Dr Cr

Adjustments Adjusted TB

18

Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

The Unadjusted Trial BalanceThe Unadjusted Trial BalanceThe Unadjusted Trial BalanceThe Unadjusted Trial Balance

123456789

10111213141516171819202122

19

(a) The (a) The SuppliesSupplies account has a debit of account has a debit of $2,000. A count of supplies at the end of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used Therefore, $1,240 in supplies was used during the two-month period.during the two-month period.

(a) The (a) The SuppliesSupplies account has a debit of account has a debit of $2,000. A count of supplies at the end of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used Therefore, $1,240 in supplies was used during the two-month period.during the two-month period.

20

Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

123456789

10111213141516171819202122

(a) 1,240

(a) 1,240

21

(b)(b) The The Prepaid Insurance Prepaid Insurance account has a account has a debit balance of $2,400, which debit balance of $2,400, which represents prepayment of insurance for represents prepayment of insurance for 24 months beginning December 1. 24 months beginning December 1. Thus, the insurance expense for this Thus, the insurance expense for this month is $100 ($2,400 ÷ 24).month is $100 ($2,400 ÷ 24).

(b)(b) The The Prepaid Insurance Prepaid Insurance account has a account has a debit balance of $2,400, which debit balance of $2,400, which represents prepayment of insurance for represents prepayment of insurance for 24 months beginning December 1. 24 months beginning December 1. Thus, the insurance expense for this Thus, the insurance expense for this month is $100 ($2,400 ÷ 24).month is $100 ($2,400 ÷ 24).

22

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

123456789

10111213141516171819202122

Insurance Expense (b) 100

Accounts are added as needed.

(b) 100

23

(c) The (c) The Unearned Rent Unearned Rent account has a credit account has a credit balance of $360, which represents the balance of $360, which represents the receipt of three-months’ rent beginning receipt of three-months’ rent beginning with December 1. Thus, the rent revenue with December 1. Thus, the rent revenue for December is $120.for December is $120.

(c) The (c) The Unearned Rent Unearned Rent account has a credit account has a credit balance of $360, which represents the balance of $360, which represents the receipt of three-months’ rent beginning receipt of three-months’ rent beginning with December 1. Thus, the rent revenue with December 1. Thus, the rent revenue for December is $120.for December is $120.

FOR REN

T24

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

123456789

10111213141516171819202122

Insurance Expense (b) 100

(c) 120

Rent Revenue (c) 120

25

(d) Wages accrued but not paid at (d) Wages accrued but not paid at the end of December total $250.the end of December total $250.

(d) Wages accrued but not paid at (d) Wages accrued but not paid at the end of December total $250.the end of December total $250.

26

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

123456789

10111213141516171819202122

Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

(d) 250

27

(e) Fees accrued at the end of (e) Fees accrued at the end of December, but not recorded, December, but not recorded, total $500.total $500.

(e) Fees accrued at the end of (e) Fees accrued at the end of December, but not recorded, December, but not recorded, total $500.total $500.

28

Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Capital Stock 25,000Dividends 4,000Fees Earned 16,340Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

123456789

10111213141516171819202122

Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250

(e) 500

(e) 500

29

(f) Depreciation of the office (f) Depreciation of the office equipment is $50 for December.equipment is $50 for December.

(f) Depreciation of the office (f) Depreciation of the office equipment is $50 for December.equipment is $50 for December.

30

Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Capital Stock 25,000Dividends 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

123456789

10111213141516171819202122

Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250Depreciation Expense (f) 50Accum. Depreciation (f) 50

31

Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Capital Stock 25,000Dividends 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

NetSolutionsWork Sheet

For the Two Months Ended December 31, 2005

123456789

10111213141516171819202122

Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

To make more space, let’s remove the

heading.

To make more space, let’s remove the

heading.

32

Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Capital Stock 25,000Dividends 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

123456789

10111213141516171819202122232425

Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

2,260 2,260Summed Summed

and and ruledruled

Summed Summed and and

ruledruled 33

Next, the unadjusted Trial Balance columns and the Adjustments columns are

combined to determine the amounts displayed in the Adjusted Trial Balance.

Next, the unadjusted Trial Balance columns and the Adjustments columns are

combined to determine the amounts displayed in the Adjusted Trial Balance.

34

Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Capital Stock 25,000Dividends 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

123456789

10111213141516171819202122232425

Insurance Expense (b) 100 Rent Revenue (c) 120 Wages Payable (d) 250 Depreciation Expense (f) 50 Accum. Depreciation (f) 50

2,260 2,260

35

Cash 2,065 2,065Accounts Receivable 2,220 (e) 500 2,720Supplies 2,000 (a) 1,240 760Prepaid Insurance 2,400 (b) 100 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 360 (c) 120 240Capital Stock 25,000 25,000Dividends 4,000 4,000Fees Earned 16,340 (e) 500 16,840Wages Expense 4,275 (d) 250 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 800 (a) 1,240 2,040Miscellaneous Expense 455 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Adjustments Trial Balance

123456789

10111213141516171819202122232425

Insurance Expense (b) 100 100 Rent Revenue (c) 120 120 Wages Payable (d) 250 250 Depreciation Expense (f) 50 50 Accum. Depreciation (f) 50 50

2,260 2,260 43,400 43,400

36

Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.

Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.

Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Income State.

Balance Sheet

The Work SheetThe Work Sheet

37

Asset, liability, and stockholders’ equity balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

Asset, liability, and stockholders’ equity balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Income State.

Balance Sheet

The Work SheetThe Work Sheet

38

To make room on the slides for the Income statement and

Balance Sheet columns, the Trial Balance and Adjustments columns have been removed.

To make room on the slides for the Income statement and

Balance Sheet columns, the Trial Balance and Adjustments columns have been removed.

39

Cash 2,065Accounts Receivable 2,720Supplies 760Prepaid Insurance 2,300Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 240Capital Stock 25,000Dividends 4,000Fees Earned 16,840Wages Expense 4,525Rent Expense 1,600Utilities Expense 985Supplies Expense 2,040Miscellaneous Expense 455

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Income Statement Balance Sheet

123456789

10111213141516171819202122232425

Insurance Expense 100 Rent Revenue 120 Wages Payable 250 Depreciation Expense 50 Accum. Depreciation 50

43,400 43,400

40

Now, let’s extend the balances from the Adjusted Trial

Balance column.

Now, let’s extend the balances from the Adjusted Trial

Balance column.

41

Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Capital Stock 25,000 25,000Dividends 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Income Statement Balance Sheet

123456789

10111213141516171819202122232425

Insurance Expense 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50

43,400 43,400

42

These four columns are

summed.

These four columns are

summed.

43

Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Capital Stock 25,000 25,000Dividends 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455

Account Title Debit Credit Debit Credit Debit Credit

Adjusted Trial Balance Income Statement Balance Sheet

123456789

10111213141516171819202122232425

Insurance Expense 100 100 Rent Revenue 120 120 Wages Payable 250 250 Depreciation Expense 50 50 Accum. Depreciation 50 50

43,400 43,400 9,755 16,960 33,645 26,440

44

The difference between the Income Statement column

totals is the net income (or net loss) for the period.

The difference between the Income Statement column

totals is the net income (or net loss) for the period.

45

The difference between the Balance Sheet column totals

is also the income (or net loss) for the period.

The difference between the Balance Sheet column totals

is also the income (or net loss) for the period.

46

9,755 16,960 33,645 26,4407,205 7,205

16,960 16,960 33,645 33,645

Income Statement Balance Sheet

Net IncomeNet Income Net IncomeNet Income

47

NetSolutionsIncome Statement

For Two Months Ended December 31, 2005

Fees earned $16,840Rent revenue 120

Total revenues $16,960Expenses:

Wages expense $ 4,525Supplies expense 2,040Rent expense 1,600Utilities expense 985Insurance expense 100Depreciation expense 50Miscellaneous expense 455

Total expenses 9,755Net income $ 7,205

Every amount on this income statement was taken from the Every amount on this income statement was taken from the Income Statement column of the work sheet.Income Statement column of the work sheet.

Every amount on this income statement was taken from the Every amount on this income statement was taken from the Income Statement column of the work sheet.Income Statement column of the work sheet. 48

NetSolutionsRetained Earnings Statement

For the Two Months Ended December 31, 2005

Net income for November and December 7,205Less dividends 4,000Retained earnings, December 31, 2005 $3,205

Either from the Either from the income income

statement or the statement or the work sheet.work sheet.

Either from the Either from the income income

statement or the statement or the work sheet.work sheet.

From the From the Balance Sheet Balance Sheet

debit column of debit column of the work sheet.the work sheet.

From the From the Balance Sheet Balance Sheet

debit column of debit column of the work sheet.the work sheet.

49

NetSolutionsBalance Sheet

December 31, 2005

Assets LiabilitiesCurrent assets: Current liabilities:

Cash $ 2,065 Accounts payable $900Accounts receivable 2,720 Wages payable 250Supplies 760 Unearned rent 240Prepaid insurance 2,300 Total liabilities$ 1,390 Total current assets $ 7,845

Property, plant, and equipment:

Land $20,000Office equip. $1,800Less accum.

depreciation 50 1,750 Capital stock $25,000 Total property, plant Retained earnings 3,205 28,205

and equipment 21,750 Total liabilities and

Total assets $29,595 stockholders’ equity$29,595

Assets LiabilitiesCurrent assets: Current liabilities:

Cash $ 2,065 Accounts payable $900Accounts receivable 2,720 Wages payable 250Supplies 760 Unearned rent 240Prepaid insurance 2,300 Total liabilities$ 1,390 Total current assets $ 7,845

Property, plant, and equipment:

Land $20,000Office equip. $1,800Less accum.

depreciation 50 1,750 Capital stock $25,000 Total property, plant Retained earnings 3,205 28,205

and equipment 21,750 Total liabilities and

Total assets $29,595 stockholders’ equity$29,595

Stockholders’ Equity

From the From the Retained Retained Earnings Earnings StatementStatement

From the From the Retained Retained Earnings Earnings StatementStatement

50

End of Today’s Session

51