4 Completing the

Accounting Cycle
Learning Objectives

1 1. Explain the accounting period assumption.

2. Explain the reasons for adjusting entries and identify

2 major types of adjusting entries.

3 3. Explain the accrual basis of accounting.

4 4. Prepare adjusting entries for deferrals.

3-1
 4 Completing the
Accounting Cycle
Learning Objectives

5 5. Prepare adjusting entries for accruals.

6 6. Describe nature and purpose of adjusted trial balance.

7 7. Prepare an adjusted trial balance.

8 Prepare a worksheet.

3-2
 LEARNING
OBJECTIVE
1 1. Explain the accounting period assumption.

Accountants divide the economic life of a business into

artificial time periods (Time Period Assumption).

.....
Jan. Feb. Mar. Apr. Dec.

Generally a
Alternative Terminology
◆ month, The time period assumption
is also called the
◆ quarter, or periodicity assumption.
◆ year.

3-3 LO 1
 Fiscal and Calendar Years

◆ Monthly and quarterly time periods are called interim

periods.

◆ Most large companies must prepare both quarterly

and annual financial statements.

◆ Fiscal Year = Accounting time period that is one year

in length.

◆ Calendar Year = January 1 to December 31.

3-4 LO 1
 LEARNING
OBJECTIVE
3 3. Explain the accrual basis of accounting.

Accrual- versus Cash-Basis Accounting

Cash-Basis Accounting
◆ Revenues recognized when cash is received.

◆ Expenses recognized when cash is paid.

◆ Cash-basis accounting is not in accordance with

generally accepted accounting principles (GAAP).

3-5
 Accrual- versus Cash-Basis Accounting

Accrual-Basis Accounting
◆ Transactions recorded in the periods in which the
events occur.

◆ Companies recognize revenues when they perform

services (rather than when they receive cash).

◆ Expenses are recognized when incurred (rather than

when paid).

◆ In accordance with generally accepted accounting

principles (GAAP).

3-6
 Accrual Basis vs. Cash Basis
FastForward paid $2,400 for a 24-month insurance
Example: policy beginning December 1, 2009.
Insurance Expense 2009
Jan Feb Mar Apr

$ - $ - $ - $ -
May Jun Jul Aug

$ - $ - $ - $ -
Sep Oct Nov Dec

$ - $ - $ - $ 2,400

On the cash basis the entire $2,400 would be

recognized as insurance expense in 2009. No
insurance expense from this policy would be recognized
in 2010 or 2011, periods covered by the policy.
 Accrual Basis vs. Cash Basis
Insurance Expense 2009
Jan Feb Mar Apr

$ - $ - $ - $ -
May Jun Jul Aug

$ - $ - $ - $ -
On the accrual basis
Sep Oct Nov Dec $100 of insurance
$ - $ - $
Insurance Expense 2010
- $ 100
expense is recognized in
$
Jan
100 $
Feb
100
Mar
$
Apr
100 $ 100
2009, $1,200 in 2010,
May Jun Jul Aug and $1,100 in 2011. The
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec expense is matched with
$ 100 $ 100 $ 100 $ 100

Insurance Expense 2011

the periods benefited by
$
Jan
100 $
Feb
100
Mar
$
Apr
100 $ 100
the insurance coverage.
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ -
Recognizing Revenues &
Expenses
Revenue Recognition Principle

We have delivered the

product to our customer,
so I think we should record
the revenue earned.
Recognizing Revenues & Expenses

Revenue Recognition Principle

Matching Principle
Now that we have
Summary recognized the revenue,
of Expenses let’s see what expenses
Rent $1,000 we incurred to
Gasoline 500
generate that revenue.
Advertisin 2,000
g 3,000
Salaries 450
Utilities ....
and . . . .
 Recognizing Revenues and Expenses

Question
One of the following statements about the accrual basis of
accounting is false? That statement is:
a. Events that change a company’s financial statements are
recorded in the periods in which the events occur.
b. Revenue is recognized in the period in which the performance
obligation is satisfied.
c. The accrual basis of accounting is in accord with generally
accepted accounting principles.
d. Revenue is recorded only when cash is received, and
expenses are recorded only when cash is paid.
3-11
 LEARNING 2. Explain the reasons for adjusting entries
2
OBJECTIVE and identify major types of adjusting entries.

The Need for Adjusting Entries

Adjusting Entries
◆ Ensure that the revenue recognition and expense
recognition principles are followed.

◆ Necessary because the trial balance may not contain

up-to-date and complete data.

◆ Required every time a company prepares financial

statements.

◆ Will include one income statement account and one

balance sheet account.
3-12
 Types of Adjusting Entries

Deferrals Accruals

1. Prepaid Expenses. 1. Accrued Revenues.

Expenses paid in cash before Revenues for services
they are used or consumed. performed but not yet
received in cash or recorded.

2. Unearned Revenues. 2. Accrued Expenses.

Cash received before services Expenses incurred but not yet
are performed. paid in cash or recorded.

3-13
 LEARNING
OBJECTIVE
4 Prepare adjusting entries for deferrals.

Deferrals are expenses or revenues that are recognized

at a date later than the point when cash was originally
exchanged. There are two types:

◆ Prepaid expenses

◆ Unearned revenues

3-14
 Prepaid Expenses

Payment of cash, that is recorded as an asset to show

the service or benefit the company will receive in the
future.

Cash Payment BEFORE Expense Recorded

Prepayments often occur in regard to:

◆ insurance ◆ rent
◆ supplies ◆ equipment
◆ advertising ◆ buildings

3-15
 Prepaid Expenses

◆ Expire either with the passage of time or through use.

◆ Adjusting entry:
► Increase (debit) to an expense account and

► Decrease (credit) to an asset account.

Illustration 3-4

3-16
 Prepaid Insurance
On 12/1/09, FastForward paid $2,400 for insurance for 2-years
(24-months, December 2009 through November 2011).
FastForward recorded the expenditure as Prepaid Insurance
on 12/31/09.
What adjustment is required?

Dec. 31 Insurance Expense 100

Prepaid Insurance 100
To record first month's expired insurance

Prepaid Insurance 637 Insurance Expense 128

Dec. 1 2,400 Dec. 31 100 Dec. 31 100
Bal. 2,300
 Supplies
During 2009, FastForward purchased $9,720 of supplies.
FastForward recorded the expenditures in the asset account,
“Supplies.” On December 31, 2009, a count of the supplies
indicated $8,670 on hand, so $1,050 of supplies were used
during December.
What adjustment is required?

Dec. 31 Supplies Expense 1,050

Supplies 1,050
To record supplies used during 2009
Supplies 126 Supplies Expense 652
Bought 9,720 Dec. 31 1,050 Dec. 31 1,050
Bal. 8,670
 Other Prepaid Expenses
1. Other prepaid expenses, such as Prepaid Rent, are
accounted for exactly as Insurance and Supplies.
2. We should note that some prepaid expenses are both
paid for and fully used up within a single period.
3. For example, a company may pay monthly rent on the
first day of each month. This payment creates a prepaid
expense on the first day of the month that fully expires
by the end of the month.
4. In these special cases, we can record the cash paid with
a debit to the expense account instead of an asset
account.
 Depreciation
Depreciation is the process of allocating the cost
of a plant asset over its useful life in a
systematic and rational manner.

Straight-Line Asset Cost - Salvage Value

Depreciation =
Expense Useful Life
 Depreciation
On December 1, 2009, FastForward purchased equipment
for $26,000 cash. The equipment has an estimated useful
life of four years (48 months) and FastForward expects to sell
the equipment at the end of its life for $8,000 cash.
Let’s record depreciation expense for the month ended
December 31, 2009.

Dec. 2009 $26,000 - $8,000

Depreciation = = $375 per month
Expense 48 months
 Depreciation
On December 1, 2009, FastForward purchased
equipment for $26,000 cash. The equipment has an
estimated useful life of four years (48 months) and
FastForward expects to sell the equipment at the end of its
life for $8,000 cash.
Let’s record depreciation expense for the month ended
December 31, 2009.

Dr. Cr.
Dec. 31 Depreciation Expense 375
Accumulated Depreciation - Equipment 375
To record monthly equipment depreciation

Accumulated depreciation is
a contra asset account.
 Depreciation
Dr. Cr.
Dec. 31 Depreciation Expense 375
Accumulated Depreciation - Equipment 375
To record monthly equipment depreciation

Equipment Depreciation Expense

1/1 26,000 12/31 375

Accumulated Depreciation
12/31 375
 Depreciation

FastForward
Partial Balance Sheet
At December 31, 2009
Equipment is
Assets $ shown net of
Cash
. accumulated
Equipment $ 26,000 depreciation.
Less: accumulated deprec. (375) 25,625
.
.
Total Assets
 Prepaid Expenses

Summary of the accounting for prepaid expenses.

3-25
 Unearned Revenues

Receipt of cash that is recorded as a liability because

the service has not been performed.

Cash Receipt BEFORE Revenue Recorded

Unearned revenues often occur in regard to:

◆ Rent ◆ Magazine subscriptions

◆ Airline tickets ◆ Customer deposits

3-26
 Unearned Revenues

◆ Adjusting entry is made to record the revenue for

services performed during the period and to show the
liability that remains at the end of the period.

◆ Results in a decrease (debit) to a liability account

and an increase (credit) to a revenue account.
Illustration 3-10

3-27
 Unearned (Deferred)
Revenues
On December 26, 2009, FastForward agrees to
provide consulting services to a client for a fixed fee
of $3,000 for 60 days. On this date, the client pays
the entire consulting fee in advance. FastForward
makes the following entry:

Dr. Cr.
Dec. 26 Cash 3,000
Unearned Revenue 3,000
Consulting fees received in advance

Unearned Revenue
Dec. 26 3,000
 UNEARNED (DEFERRED)
REVENUES
On December 31, earns some of the 5-days of consulting
fees. Each day that passes results in consulting fees of
$50 ($3,000 ÷ 60).

Dr. Cr.
Dec. 31 Unearned Revenue 250
Consulting Revenue 250
To recognize 5-days of consulting fees.

Unearned Revenue Consulting Revenue

Dec 31 250 Dec 26 3,000 Dec. 31 250
Bal 2,750
 Unearned Revenues

Summary of the accounting for unearned revenues.

Illustration 3-12

3-30
 LEARNING
OBJECTIVE
5 Prepare adjusting entries for accruals.

Accruals are made to record

◆ Revenues for services performed but not yet

recorded at the statement date.

◆ Expenses incurred but not yet paid or recorded at

the statement date.

3-31 LO 3
 Accrued Revenues

Revenues for services performed but not yet received

in cash or recorded.

Revenue Recorded BEFORE Cash Receipt

Accrued revenues often occur in regard to:

◆ Rent
◆ Interest
◆ Services

3-32
 Accrued Revenues

◆ Adjusting entry shows the receivable that exists and

records the revenues for services performed.

◆ Adjusting entry:
► Increases (debits) an asset account and
► Increases (credits) a revenue account.
Illustration 3-13

3-33
 ACCRUED SERVICE REVENUES

On December 12, 2009, FastForward agrees to render

consulting services under a 30-day fixed fee contract for
$2,700 ($90 per day). All services are to be completed by
January 10, 2010, when the client will pay in full.

Dr. Cr.
Dec. 31 Accounts Receivable 1,800
Consulting Revenue 1,800
To accrue revenue (20-days @ $90 per day)

Accounts Receivable Consulting Revenue

Other receivables Other revenues
1,900 Receipts 1,900 6,050
Dec. 31 1,800 Dec. 31 1,800
Bal. 1,800 Bal . 7,850
 Future Receipt of
Service Revenues
On January 10, 2010, FastForward completed its
obligation under the consulting contract. The client was
billed $2,700 and FastForward received $2,700 in cash

Dr. Cr.
Jan 10 Cash 2,700
Accounts Receivable 1,800
Consulting Revenue 900
T o re c o rd c o m ple t io n o f c o nt ra c t a nd c a s h c o lle c t io n

Revenue in January
10 days @ $90 = $900
 Accrued Revenues

Summary of the accounting for accrued revenues.

3-36
 Accrued Expenses

Expenses incurred but not yet paid in cash or recorded.

Expense Recorded BEFORE Cash Payment

Accrued expenses often occur in regard to:

◆ Rent ◆ Taxes
◆ Interest ◆ Salaries

3-37
 Accrued Expenses

◆ Adjusting entry records the obligation and recognizes

the expense.

◆ Adjusting entry:
► Increase (debit) an expense account and
► Increase (credit) a liability account.
Illustration 3-16

3-38
 ACCRUED SALARIES EXPENSES

FastForward’s employee earns $70 per day and is paid

every two weeks on Friday. Year-end, 12/31/09, falls on a
Wednesday. The last payday of 2009, is Friday, 12/26/09.
From 12/26 until year-end is three working days. The
employee has earned salaries of $210 for Monday through
Wednesday. They will not be paid until the next Friday.

Last pay Next pay

date date
12/26/09 1/9/10

12/31/09 Record adjusting

Year end journal entry.
 ACCRUED SALARIES EXPENSES

FastForward’s employee earns $70 per day and is paid

every two weeks on Friday. Year-end, 12/31/09, the
employee has earned salaries of $210.

Dr. Cr.
Dec. 31 Salaries Expense 210
Salaries Payable 210
To accrue 3 days' salary (3 x $70)
Salaries Expense Salaries Payable
Dec.12 700 Dec. 31 210
Dec.26 700
Dec. 31 210
Bal. 1,610
 Future Payment of
Accrued Expenses
On January 9, 2010, FastForward will pay the payroll for
the two weeks from December 26, 2009 through January
9, 2010. Here is the journal entry for the payroll:

Dr. Cr.
Jan 9 Salaries Payable (3 days @ $70) 210
Salaries Expense (7 days @ $70) 490
Cash (10 days @ $70) 700
P a id t wo - we e k s a la ry
 ACCRUED INTEREST EXPENSE
FastForward borrowed $6,000 from First National Bank on
December 1, 2009. The note bears interest at the annual
rate of 6% and is due to be repaid in one year. Let’s accrue
interest for the month ended 12/31/09.
Dr. Cr.
Dec. 31 Interest Expense 30
Interest Payable 30
To accrue interest ($6,000 × 6% × 30/360)

Interest Expense Interest Payable

Dec. 31 30 Dec. 31 30
 Summary of Basic Relationships
Illustration 3-22

3-43
 LEARNING Describe the nature and purpose of an
6
OBJECTIVE adjusted trial balance.

Adjusted Trial Balance

◆ Prepared after all adjusting entries are journalized and
posted.

◆ Purpose is to prove the equality of debit balances and

credit balances in the ledger.

◆ Is the primary basis for the preparation of financial

statements.

3-44 LO 4
 FastForward - Trial Balance - December 31, 2009
Unadjusted Adjusted
Trial Balance Adjustments Adjusted Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable
Salaries payable
6,200
-
First, the
Unearned revenue
C. Taylor, Capital
3,000
30,000
initial
C. Taylor Withdrawals
Consulting revenue
200
5,800 unadjusted
Rental revenue 300 amounts are
Depr. expense -
Salaries expense 1,400 added to the
Insurance expense -
Rent expense 1,000 worksheet.
Supplies expense -
Utilities expense 230
Totals 45,300 45,300
 FastForward - Trial Balance - December 31, 2009
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Accum. depr. - Equip. - c 375
Accounts payable 6,200
Salaries payable - e 210 Next,
Unearned revenue 3,000 d 250
C. Taylor, Capital 30,000 FastForward’s
C. Taylor, Withdrawals
Consulting revenue
200
5,800 d 250
adjustments
f 1,800 are added.
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals $45,300 $45,300 $3,785 $3,785
 FastForward - Trial Balance - December 31, 2009
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350 4,350
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned revenue 3,000 d 250 2,750
C. Taylor, Capital 30,000 - 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 Finally, the 1,610
Insurance expense - a 100 totals are 100
Rent expense 1,000 1,000
determined.
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals $45,300 $45,300 $3,785 $3,785 $47,685 $47,685
 LEARNING
OBJECTIVE
8 Prepare a worksheet.

Worksheet
◆ Multiple-column form used in preparing financial
statements.

◆ Not a permanent accounting record.

◆ May be a computerized worksheet using an electronic

spreadsheet program such as Excel.

◆ Prepared using a five step process.

◆ Use of worksheet is optional.

4-48
 FastForward
Work Sheet
For Month Ended December 31, 2009
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable
Salaries payable
6,200
-
First, enter the
Unearned consulting revenue
C. Taylor, Capital
3,000
30,000
unadjusted
C. Taylor, Withdrawals
Consulting revenue
200
5,800
amounts to the
Rental revenue 300
worksheet.
Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300
 FastForward
Work Sheet
For Month Ended December 31, 2009
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Accum. depr. - Equip. - c 375
Accounts payable 6,200 Next, enter
Salaries payable - e 210
Unearned consulting revenue 3,000 d 250
the
C. Taylor, Capital 30,000 adjustments.
C. Taylor, Withdrawals 200
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals 45,300 45,300 3,785 3,785
 FastForward
Prepare Work Sheet
adjusted trial For Month Ended December 31, 2009
Unadjusted Adjusted
balance. Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350 4,350
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned consulting revenue 3,000 d 250 2,750
C. Taylor, Capital 30,000 - 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685
 Sort adjusted trial balance
FastForward
Work Sheet
amounts to financial statements.
For Month Ended December 31, 2007
Adjusted Income Balance Sheet &
Trial Balance Statement Statement of Equity
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350 4,350
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned consulting revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
 Total statement columns,FastForward
compute income or loss, and
Work Sheet
For balance columns.
Month Ended December 31, 2007
Adjusted Income Balance Sheet &
Trial Balance Statement Statement of Equity
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 4,350 4,350
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned consulting revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 200 200
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
Net income 3,785 3,785
8,150 8,150 43,320 43,320
 Prepare the Financial Statements
FastForward
Income Statement
For the Month Ended December 31, 2009 Prepare the Income
Revenues:
Consulting revenue $ 7,850
Statement.
Rental revenue 300
Total revenues 8,150
Operating expenses: A work sheet
Depr. expense - Equip. $ 375
Salaries expense 1,610 does not
Insurance expense
Rent expense
100
1,000
substitute for
Supplies expense
Utilities expense
1,050
230
financial
Total expenses
Net income
4,365
$ 3,785
statements.
 FastForward
Income Statement
For the Month Ended December 31, 2009
Revenues:
Consulting revenue $ 7,850
Rental revenue 300
Total revenues 8,150
Operating expenses: Prepare the Statement
Depr. expense - Equip. $ 375
Salaries expense 1,610 of Owner’s Equity.
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Total expenses 4,365 FastForward
Net income $ 3,785 Statement of Owner's Equity
For the Month Ended December 31, 2009

C. Taylor, Capital 12/1/09 $ -0-

Investment by owner 30,000
Add: Net income $ 3,785 33,785
Total 33,785
Less: Withdrawal by owner 200
C. Taylor, Capital 12/31/09 $ 33,585
 FastForward
Statement of Owner's Equity
For the Month Ended December 31, 2009
Prepare the
C. Taylor, Capital 12/1/09
Investment by owner 30,000
$ -0-
Balance Sheet.
Add: Net income $ 3,785 33,785
Total 33,785 FastForward
Less: Withdrawal by owner 200 Balance Sheet
C. Taylor, Capital 12/31/09 $ 33,585 December 31, 2009
Assets
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment $ 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,745
Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned consulting revenues 2,750
Total liabilities $ 9,160
Owner's Equity
[Link], Capital 33,585
Total liabilities and equity $ 42,745
 LEARNING Prepare closing entries and a post-
OBJECTIVE
9
closing trial balance.

At the end of the accounting period, the company makes

the accounts ready for the next period.

4-57
 Preparing Closing Entries

Closing entries formally recognize in the ledger the transfer of

◆ net income (or net loss) and
◆ owner’s drawings

to owner’s capital.

Companies generally journalize and post closing entries only at

the end of the annual accounting period.
Closing entries produce a zero balance in each temporary
account.

4-58
 RECORDING CLOSING ENTRIES
Close Revenue accounts to
Income Summary.
Let’s see how
the closing
Close Expense accounts to
Income Summary. process works!

Close Income Summary

account to Owner’s Capital.

Close Withdrawals to
Owner’s Capital.

McGraw-Hill/Irwin Slide 59
 FastForward
Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance
Equipment
2,300
26,000
Using the
Accumulated depreciation-Equip. $ 375 adjusted trial
Accounts payable 6,200
Salaries payable 210
balance, let’s
Unearned consulting revenue 2,750 prepare the
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
closing
Consulting revenue 7,850 entries for
Rental revenue 300
Depreciation expense-Equipment 375
FastForward.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 FastForward
Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close
Unearned consulting revenue 2,750 Revenue
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
accounts to
Consulting revenue 7,850 Income
Rental revenue 300 Summary.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
  Close Revenue Accounts
to Income Summary
Dr. Cr.
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150

Now, let’s look at the ledger accounts after

posting this closing entry.
 Close Revenue Accounts
to Income Summary
Consulting Revenue
7,850 7,850

Income Summary
8,150
Rental Revenue
300 300

-
 FastForward
Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close Expense
Unearned consulting revenue 2,750 accounts to
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200 Income Summary.
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
  Close Expense Accounts
to Income Summary
Dr. Cr.
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Now, let’s look at the ledger accounts after

posting this closing entry.
  Close Expense Accounts
to Income Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Income Summary
Salaries Expense Supplies Expense
4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
 FastForward
Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close Income
Unearned consulting revenue 2,750 Summary to
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200 Owner’s Capital.
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
  Close Income Summary
to Owner’s Capital
Dr. Cr.
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785

Now, let’s look at the ledger accounts after

posting this closing entry.
 Close Income Summary
to Owner’s Capital

C. Taylor, Capital Income Summary

30,000 4,365 8,150
3,785 3,785
-
33,785
 FastForward
Adjusted Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210 Close
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
Withdrawals to
C. Taylor, Withdrawals 200 Owner’s
Consulting revenue 7,850
Rental revenue 300 Capital.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
  Close Withdrawals
to Owner’s Capital
Dr. Cr.
Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200

Now, let’s look at the ledger accounts after

posting this closing entry.
  Close Withdrawals
to Owner’s Capital

C. Taylor,
Withdrawals C. Taylor, Capital
200 200 200 30,000
3,785

- 33,585
 Post-Closing Trial Balance
List of permanent Let’s look at
accounts and their FastForward’s
balances after posting post-closing trial
closing entries. balance.

Total debits and

credits must be equal.
Post-Closing Trial Balance
FastForward
Post-Closing Trial Balance
December 31, 2009
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
[Link], Capital 33,585
Totals $ 43,120 $ 43,120
Steps in the Accounting
Cycle
 Classified Balance Sheet
Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current assets Current liabilities
Noncurrent assets Noncurrent liabilities
Long-term investments Equity
Plant assets
Intangible assets

Current items are those expected to come due (both

collected and owed) within the longer of one year or the
company’s normal operating cycle.
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Current assets are expected to
Notes receivable be sold,
1,500
Investments in stocks and bonds
18,000
collected, or used within one 48,000
year or the
Land held for future expansion
Total investments 67,500
company’s operating cycle.
Plant assets
Equipment $ 33,200
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Plant assets
Long-term investments are
Equipment expected to be held
$ 33,200
for more than one year or170,000
Buildings
the operating
Less accumulated depreciation
203,200
53,000
cycle.
150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Plant assets are tangible long-lived assets used
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
to produce or sell products and services.
Total investments 67,500
Plant assets
Equipment $ 33,200
Buildings 170,000 203,200
Less accumulated depreciation 53,000 150,200
Land 73,200
Intangible assets 10,000
Total assets $ 343,800
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Intangible assets are long-term resources
Plant assets
Equipment $ 33,200
used to produce or sell products
Buildings 170,000 and services
203,200
Less accumulated depreciation 53,000 150,200
Land
and that lack physical form. 73,200
Intangible assets 10,000
Total assets $ 343,800
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Current liabilities are obligations due within the
Total liabilities $ 179,000
longer of one year or the company’s operating
T. Hawk, Capital
EQUITY
164,800
cycle.
Total liabilities and equity $ 343,800
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
Long-term liabilities are obligations not due
EQUITY
within the longer of one year or the company’s
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800
operating cycle.
 Snowboarding Components
Balance Sheet (Partial)
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Equity is the owner’s claim on the assets.

END OF CHAPTER 4