module 2- completing the accounting cycle discussion

8/10/2019 Module 2- Completing the Accounting Cycle Discussion

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MODULE 2Completing the

Accounting Cycle


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COVERAGE:

1. Accounting Cycle

2. Work Sheet

3. Financial Statements

4. Adjusting and Closing Entries


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1. Accounting Cycle


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The accounting process that begins with

analyzing and journalizing transactionsand ends with summarizing and reporting

these transactions is called the

account ing cyc le.

The most important output of this cycle is

the financial statements.


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Seven Basic Steps of the

Accounting Cycle1. Transactions are analyzed and recorded in the journal.

2. Transactions are posted to the ledger.

3. A trial balance is prepared, adjustment data areassembled, and an optional work sheet is completed.

4. Financial statements are prepared.

5. Adjusting entries are journalized and posted.6. Closing entries are journalized and posted.

7. A post-closing trial balance is prepared.


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2. Work Sheet


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The work sheet is a useful device

for understanding the flow of

accounting data from theunadjusted trial balance to the

financial statements.


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The 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, owners

equity, revenues, and expenses.


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Adjustments are entered here. Two

possibilities:

1. DeferralsExisting balances arechanged.

2. AccrualsNew information is

entered.

Trial Balance



The Work Sheet
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The Work Sheet

Adjustments are combined with

the trial balance. Account

balances are now adjusted.

Trial Balance




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Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800

Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600

Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600

Account Title Debit Credit Debit Credit Debit Credit

Adjusted

Trial Balance Adjustments Trial Balance

NetSolutions

Work Sheet

For the Two Months Ended December 31, 2005

The Unadjusted

Trial Balance

1

2

3

4

5

6

78

9

10

11

12

13

1415

16

17

18

19

20

21

22


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(a) The Suppliesaccount has a debit of

$2,000. A count of supplies at the end of

the period reveals that $760 is on hand.Therefore, $1,240 in supplies was used

during the two-month period.


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Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800


Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455

42,600 42,600


Adjusted


NetSolutions

Work Sheet


1

2

3

4

5

6

78

9

10

11

12

13

1415

16

17

18

19

20

21

22

(a) 1,240

(a) 1,240


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(b) The Prepaid I nsurance account has a

debit balance of $2,400, which

represents prepayment of insurance for24 months beginning December 1.

Thus, the insurance expense for this

month is $100 ($2,40024).


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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400Land 20,000Office Equipment 1,800


Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455

42,600 42,600


Adjusted


NetSolutions

Work Sheet


1

2

3

4

5

6

78

9

10

11

12

13

1415

16

17

18

19

20

21

22

Insurance Expense (b) 100

Accounts are added as needed.

(b) 100


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(c) The Unearned Rent account has a credit

balance of $360, which represents the

receipt of three-months rent beginningwith December 1. Thus, the rent revenue

for December is $120.

FORRENT

N S l i


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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800



42,600 42,600


Adjusted


NetSolutions

Work Sheet


1

2

3

4

5

6

78

9

10

11

12

13

1415

16

17

18

19

20

21

22


(c) 120

Rent Revenue (c) 120


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(d) Wages accrued but not paid at

the end of December total $250.

N tS l ti


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Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600


42,600 42,600


Adjusted


NetSolutions

Work Sheet


1

2

3

4

5

6

78

9

10

11

12

13

1415

16

17

18

19

20

21

22


Rent Revenue (c) 120Wages Payable (d) 250

(d) 250


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(e) Fees accrued at the end of

December, but not recorded, total$500.

N tS l ti


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Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275 (d) 250Rent Expense 1,600


42,600 42,600


Adjusted


NetSolutions

Work Sheet


1

2

3

4

5

6

78

9

10

11

12

13

1415

16

17

18

19

20

21

22



Wages Payable (d) 250

(e) 500

(e) 500


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(f) Depreciation of the office

equipment is $50 for December.

NetSolutions


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Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800

Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600


42,600 42,600


Adjusted


NetSolutions

Work Sheet


1

2

3

4

5

6

7

8

9

10

11

12

13

1415

16

17

18

19

20

2122




Depreciation Expense (f) 50Accum. Depreciation (f) 50

NetSolutions


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Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800

Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600


42,600 42,600


Adjusted


NetSolutions

Work Sheet


1

2

3

4

5

6

7

8

9

10

11

12

13

1415

16

17

18

19

20

2122




Depreciation Expense (f) 50Accum. Depreciation (f) 50

To make more space,

lets remove theheading.

Adjusted

31


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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) 120Chris Clark, Capital 25,000

Chris Clark, Drawing 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


Adjusted


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

1718

19

20

21

22

23

2425

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

2,260 2,260

Summed

and

ruled

31


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Next, the unadjusted Trial

Balance columns and the

Adjustments columns arecombined to determine the

amounts displayed in the

Adjusted Trial Balance.

Adjusted

33


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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) 120Chris Clark, Capital 25,000Chris Clark, Drawing 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


Adjusted


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

1718

19

20

21

22

23

2425

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

2,260 2,260

33

Adjusted

34


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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 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 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


Adjusted


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

1718

19

20

21

22

23

2425

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

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

34


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Revenue and expense balances in

the Adjusted Trial Balance column

are extended to the Income

Statement column.

Adjusted TB


Income State. Balance Sheet

The Work Sheet


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Asset, liability, owners equity, and

drawing balances in the Adjusted

Trial Balance column are extended

to the Balance Sheet column.

Adjusted TB


Income State. Balance Sheet

The Work Sheet


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To make room on the slides for

the Income statement and

Balance Sheet columns, the Trial

Balance and Adjustments

columns have been removed.

Adjusted

38


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Cash 2,065Accounts Receivable 2,720Supplies 760

Prepaid Insurance 2,300Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 240Chris Clark, Capital 25,000Chris Clark, Drawing 4,000

Fees Earned 16,840Wages Expense 4,525Rent Expense 1,600Utilities Expense 985Supplies Expense 2,040Miscellaneous Expense 455


Trial Balance Income Statement Balance Sheet

1

2

3

45

6

7

8

9

10

1112

13

14

15

16

17

18

19

20

21

22

23

24

25

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

43,400 43,400

38


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Now, lets extend the balances

from the Adjusted Trial Balance

column.

Adjusted

40


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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 240Chris Clark, Capital 25,000 25,000

Chris Clark, Drawing 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


j


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

2425

Insurance Expense 100 100Rent Revenue 120 120Wages Payable 250 250Depreciation Expense 50 50Accum. Depreciation 50 50 43,400 43,400

40


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These fourcolumns are

summed.

Adjusted

42


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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 240Chris Clark, Capital 25,000 25,000

Chris Clark, Drawing 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


j


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

2425

Insurance Expense 100 100Rent Revenue 120 120Wages Payable 250 250Depreciation Expense 50 50Accum. Depreciation 50 50 43,400 43,400 9,755 16,960 33,645 26,440

42


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The difference between the

Income Statement column

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


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The difference between the

Balance Sheet column totals is

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


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

7,205 7,20516,960 16,960 33,645 33,645

Income Statement Balance Sheet

Net Income Net Income


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3. Financial Statements

NetSolutions


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NetSolutions

Income Statement

For Two Months Ended December 31, 2005

Fees earned $16,840Rent revenue 120Total revenues $16,960

Expenses: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

Income Statement column of the work sheet.


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NetSolutions

Statement of Owners Equity


Chris Clark, Capital, November 1, 2005 $ 0

Investment on November 1, 2005 $25,000

Net income for November and December 7,205

$32,205Less withdrawals 4,000

Increase in owners equity 28,205

Chris Clark, Capital, December 31, 2005 $28,205

Either from the

income

statement or thework sheet.

From the

Balance Sheet

debit column ofthe work sheet.


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NetSolutions

Balance Sheet

December 31, 2005Assets Liabilities

Current assets: Current liabilities:Cash $ 2,065 Accounts payable $900

Accounts receivable 2,720 Wages payable 250

Supplies 760 Unearned rent 240

Prepaid insurance 2,300 Total liabilities $ 1,390

Total current assets $ 7,845Property, plant, and

equipment:

Land $20,000

Office equip. $1,800

Less accum.depreciation 50 1,750 Owners Equity

Total property, plant Chris Clark, Capital 28,205

and equipment 21,750 Total liabilities and

Total assets $29,595 owners equity $29,595

From the

Statement

of Owners

Equity


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Assets are commonly divided into classes

and that two of these classes are current

assets and property, plant, and equipment.


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Thats correct. Cash and other

assets that are expected to be

converted into cash, sold, orused up usually in less than a

year are current assets.


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So, assets that have a life

over a year are listed under

property, plant, and

equipment.

There are some exceptions, but

thats basically correct. Assets such

as office equipment, machinery,buildings, and land would appear

under that heading.


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Liabilities due usually within one

year or less and that are to be paid

out of current assets are called

current liabilities.

Accounts payable

Wages payable

Interest payable

Unearned fees


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Liabilities not due for

more than a year usuallyare long-term liabilities.

Mortgage note

payable

Mortgage payable

Bond payable


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4. Adjusting and Closing Entries


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Adjusting and Closing Entries

Adjusting entries are recorded

in the journal at the end of the

accounting period.


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If a work sheet has been

prepared, the data for

these entries are in the

Adjustments columns.


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OWNERS CAPITAL

The Closing Process

Income Summary

1

Revenues are

transferred to

Income Summary

2

Expenses are

transferred to

Income Summary

3Net Income or Net Loss istransferred to Owners Capital

4

Drawings are transferred to

Owners Capital


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OWNERS CAPITAL

Income Summary

1

Revenues are

transferred to

Income Summary

2

Expenses are

transferred to

Income Summary

3Net Income or Net Loss istransferred to Owners Capital

4

Drawings are transferred to

Owners Capital

The I ncome Summary

account does not appear on

the financial statements.


Th Cl i P


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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Chris Clark, Capital

Bal. 25,000

Chris Clark, Drawing

Bal. 4,000

Income Summary

Note: Thebalances shown

are adjusted

balances before

closing. The

following

sequence

demonstrates the

closing process.

The Closing Process

Th Cl i P


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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600



Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120


Bal. 25,000


Bal. 4,000

Income Summary

Debit each revenue

account for the

amount of its

balance, and credit

I ncome Summary

for the total

revenue.

16,840

120

16,960

The Closing Process

Th Cl i P


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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600



Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Debit I ncomeSummaryfor thetotal expenses and

credit each expenseaccount for its

balance.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

The Closing Process

Th Cl i P


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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600



Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Debit I ncome

Summaryfor the

amount of its

balance (in this

case, the net

income) and credit

the capital account.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

7,205

The Closing Process

Th Cl i P


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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600



Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Debit the capital

account for the

balance of the

drawing account,

and credit drawing

for the same

amount.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

7,205

4,000

4,000

The Closing Process

R i f th Cl i P


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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600



Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100


Bal. 455


Bal. 25,000


Bal. 4,000

Income Summary

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,480

120

16,9609,775

445

100

2,040

985

50

1,600

4,525

7,205

7,205

4,000

4,000

Close Revenues

Close Expenses

Close Income Summary

Close Drawing

16,840

120

16,960

4,525

1,600

50

985

2,040

100

455

9,775

7,205

7,205

4,000

4,000

Review of the Closing Process


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After the closing entries

are posted, all of the

temporary accounts havezero balances.


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Post-closing Trial Balance

NetSolutionsPost-Closing Trial Balance

December 31, 2005

Cash 2 065 00Accounts Receivable 2 720 00

Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 28 205 00

29 645 00 29 645 00


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The End

MODULE 2
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module 2- completing the accounting cycle discussion

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