CHAPTER

Accounting for a Service

2 Enterprise
Learning Objectives
2.1 Use of Accounts for Recording
Transactions
Meaning & classification of Accounts
Rules of Debits and Credits
 Sequence & Numbering of Ledger
Accounts
2.2 Recording Transactions in a Journal
2.3 Posting the Journal
2.4 The Trial Balance: Uses & Limitations
2.5 Adjustments of Deferrals & Accruals2-1
2.1 Meaning of an Account
 An individual detail accounting
record of all increases and
Account decreases in a specific asset,
liability, equity, revenue, or
expense item that have
occurred during a specified
period.
 Debit = “Left”
An Account can Account Name/Title
 Credit =Debit
“Right”
/ Dr. Credit / Cr.
be illustrated in a
T-Account form. Left or Debit Right or Credit
It is a tool used Side Side
to analyze
transactions &
has three parts 2-2
2.1 Meaning of an Account
 Accounts are the basic storage units
for accounting data and are used to
accumulate amounts from similar
transactions.
– An accounting system has a separate
account for each asset, each liability, and
each component of owner’s equity,
including revenues and expenses.
– An account title should describe what is
recorded in the account.
– Each element of the Accounting Equation
contains smaller elements called 2-3
 2.1 Meaning of an Account
Tabular
Analysis/Summary Account Form
Cash Cash
+15000 (Debits) (Credits)

-7000 15,000 7,000

+1,200 1,200 1,700
+1,500 1,500 250
-1,700 600 1,300
Balance
-250 8,050
+600
-1,300 2-4
Balance
2.1 Rules of Debits and Credits of
an Account
Debit (Dr.) Credit (Cr.)

An entry on the left An entry on the right

side side
1)An increase in an 1) A decrease in an
asset, asset,
2)A decrease in a 2) An increase in a
liability, liability,
3)A decrease in a 3) An increase in a
owner’s equity owner’s equity item
item
2-5
2.1 Rules of Debits and Credits of
an Account
Owner’s Equity
 Owner’s investments and
revenues increase owner’s
Debit / Dr. Credit / Cr.

equity (credit).
Normal Balance
 Owner’s drawings and
Chapter

expenses decrease owner’s

3-25

equity (debit).
Owner’s Capital Owner’
Owner’s Drawing
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance

Chapter Chapter
3-25 3-23

2-6
2.1 Rules of Debits and Credits of
an Account
Revenue  Purpose of earning
Debit / Dr. Credit / Cr.

revenues is to benefit
Normal Balance the owner(s).
Chapter
3-26
 Effect of debits and
Expense credits on revenue
accounts is the same
Debit / Dr. Credit / Cr.

as their effect on
Normal Balance

Owner’s Capital.
Chapter
3-27

 Expenses have the 2-7

opposite effect:
 2.1 Rules of Debits and Credits of
an Account
Balance Sheet Income Statement
Asset = Liability + Equity Revenue - Expense =

Debit

Credit

2-8
2.1 Rules of Debits and Credits of
an Account
Relationship among the assets, liabilities and
owner’s equity of a business:
Basic Assets = Liabilities + Owner’s Equity
Equati
on
Expand
ed
Basic
Equatio
n
The equation must be in balance after every
transaction. For every Debit there must be
a Credit. 2-9
2.1 Account Balance
The difference between the total debit footing
(sum) and the total credit footing is called the
account balance.
If Debits are greater than Credits, the
account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

2-10
2.1 Account Balance

If Debits are less than Credits, the account

will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000

2-11
2.1 Account Balance
• The normal balance of an account is its
usual balance and is the side (debit or
credit) that increases the account.

2-12
2.1 Classification and Sequence of Ledger
Accounts
Balance sheet accounts
Liabilities
Assets Owner’s
Non- Equity
Curren Curren Non-
Curren
t t Current
t
Assets
Assets
Liabiliti Liabilitie
es s
Receipt/use/sale or Receipt/use/sale or
payment of assets payment of assets
expected to occur expected to occur more
within one year or than one year after the
one operating balance sheet date 2-13
2.1 Classification and Sequence of Ledger Accounts

Balance sheet accounts

Liabilities
Assets Owner’s
Equity
Revenues are Investment
increases in s
owner’s equity
as a result of Drawings
selling services
or products.
Expenses are Revenues
the using up of
assets or
consuming of Expenses
2-14
services to
2.1 Classification and Sequence of Ledger Accounts

• Balance sheet accounts: Permanent

[Real] accounts that remain open,
with nonzero balances, at the end of
the reporting period.
• Income statement accounts:
Temporary [Nominal] accounts that
have a zero balance at the end of the
2-15
2.1 Coding/Numbering of Accounts

An account code/number is a tool or method used to

identify the classification and location of an account in the
ledger. Different set of digits could be used. For instance:
Asset accounts : 111 through
199
Liability accounts : 211 through
299
Owner’s Equity accounts : 311 through
399
Revenue accounts : 411 through
499
Expense accounts : 511 through
2-16
599
2.1 Coding/Numbering of Accounts

Cash-111 1 1 1

1st
digit 2nd
digit 3rd digit
Asset Current 1st
asset position
A/c
112 Receivable- 1 1 2

1st
digit 2nd digit 3rd digit
Asset Current
asset
2nd
position

2-17
2.1 Chart of Accounts
 In a manual accounting system, each account
is kept on a separate page or card, which are
placed together in a book or file called the
general ledger. In computerized systems,
the group of accounts is also called the
general ledger, or simply the ledger.
 A chart of accounts is a table of contents for
the ledger. It lists the account titles and the
numbers that have been assigned to them. It
usually lists the accounts in the order in which
they appear in the ledger (the order in which
they appear in the financial statements).
2-18
2.1 Chart of Accounts

Accounts and account numbers arranged in

sequence in which they are presented in the
financial statements.

2-19
2.1 Steps in the Recording Process: The
Accounting Cycle

1.
1. Analyze
Analyze business
business transactions
transactions

9.
9. Prepare
Prepare aa post-closing
post-closing 2.
2. Journalize
Journalize the
the
trial
trial balance
balance transactions
transactions

8.
8. Journalize
Journalize and
and post
post 3.
3. Post
Post to
to ledger
ledger accounts
accounts
closing
closing entries
entries

7.
7. Prepare
Prepare financial
financial 4.
4. Prepare
Prepare aa trial
trial balance
balance
statements
statements

6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial 5.
5. Journalize
Journalize and
and post
post
balance
balance adjusting
adjusting entries
entries

2-20
2.1 Steps in the Recording
Process
•Flow of data in the Accounting System
Source
Document

Journal

Ledger

Financial
Statements

2-21
2.2 Recording transactions in
the Journal
The Journal
 Book of original entry.
 Transactions recorded in chronological order.
 Contributions to the recording process:
1. Discloses the complete effects of a
transaction.
2. Provides a chronological record of
transactions.
3. Helps to prevent or locate errors because the
debit and credit amounts can be easily
compared.
4. Permanent record of an entire transaction 2-22
2.2 Recording transactions in
the Journal
• Journal entry
− An individual record in a journal
− Shows the effects of transactions in terms of debits
& credits
− Each journal entry reflects equal debits and credits
•Journalizing
− The process of recording business transactions in
a journal.
− Standardized Format & Steps

2-23
2.2 Recording transactions in
the Journal
• System to Analyze Transactions
1. What Accounts Affected: Determine whether
an asset, a liability, owner’s equity, revenue,
or expense account is affected by the
transaction.
2. How the Accounts Affected: Nature of
Changes (Effect): For each account affected
by the transaction, determine whether the
account increases or decreases.
3. Debits & Credits: Determine whether each
2-24
2.2 Rules of Double-Entry
Accounting
Double-entry system follows two rules:
► Each transaction must affect at least two
accounts to keep the basic accounting
equation in balance.
 Assets = Liabilities + Owner’s
Equity
► Total debits must equal total credits.
 For every transaction:
– one or more accounts must be debited, or
entered on the left side of a T account.
– one or more accounts must be credited, 2-25
or
entered on the right side of a T account.
2.2 Recording transactions in
the Journal
• Advantages of Journal
Ensure that all effects of a business
transaction are recorded
Have in one place a complete information
about a recorded transaction
Easily identify recording errors, and
Have an historical record of transactions.
2-26
2.2 Recording transactions in
the Journal
 Types of Journal
• General journal - a two-column form used
to record any kind of business transaction.

• Special journal - a journal designed to

record frequently occurring identical
transactions like sales, purchases, cash
collections, cash payments.
 Journalizing
– Each entry in the general journal includes
date, accounts, amounts, and an
explanation. 2-27
2.2 Recording transactions in
the Journal
Journalizing - Entering transaction data
in the journal.
Illustration: On September 1, Ray Neal invested
$15,000 cash in the business, and Softbyte
purchased computer equipment for $7,000 cash.

General Journal
Date Account Title Ref . Debit Credit
Sept. 1 Cash 15,000
Owner’s, Capital 15,000

Equipment 7,000
Cash 7,000
2-28
2.3 Posting the Journal

The Ledger
 General Ledger contains the entire group of
accounts maintained by a company.

2-29
2.3 Posting the Journal
 Meaning
• A group of accounts for a business entity.
• Reference book of the accounting system
• Used to classify and summarize transactions and
prepare data for financial statements
 Posting [Classification]
− is the process of assigning all the transactions to
appropriate categories, or accounts
− the process transferring monetary amounts of
debit and credit entries from the general journal to
the accounts in the ledger.
− Posting is necessary to classify and group similar
business transactions in terms of their effects on
specific asset, liability, capital, revenue and
2-30
expense items.
2.3 Posting the Journal

 While the general journal is used to record

the details of each transaction, the general
ledger is used to update each account.
 The ledger account form is a form of the
account that contains three/four columns for
dollar amounts.
– The Item column is rarely used because
explanations already appear in the
journal.
– The Post. Ref. column is used to note the
journal page on which the original entry
for the transaction is found. 2-31
2.3 Posting the Journal

Standard Form of Account

2-32
2.3 Posting the Journal
 Types of Ledger
1. General ledger
• Controlling account
• Contains all financial statement accounts
2. Subsidiary ledger
• Contains accounts showing details of
general ledger

A=L+OE
A=A1+A2+…+A3; L=L1+L2+…+L3
A1= A/R= ar1+ar2+…+ar3; 2-33
L1=A/P=ap1+ap2+…+ap3
2.3 Posting the Journal
General Ledger

Accounts Receivable
750

ABC Co. XYZ Co. LMN Co.

150 200 400

Subsidiary Ledger
2-34
2.3 Posting the Journal

2-35
2.3 Posting the Journal
• Posting-Transferring transactions from the journal to
the ledger.
– The steps in the posting process are:
1. In the ledger, locate the debit account named
in the journal entry.
2. Enter the date of the transaction in the ledger
and, in the Post. Ref. column, the journal page
number of the entry.
3. Enter the amount of the debit in the Debit
column of the ledger account.
4. Calculate the account balance and enter it in
the appropriate Balance column.
5. In the Post. Ref. column of the journal, enter
the account number to which the amount 2-36 has
been posted.
 Steps

Postin
g–
process
of
transferri
ng
amounts
from the
journal to
the 2-37
The Recording Process
Illustrated
Follow these
steps:
1. Determine what
type of account
is involved.
2. Determine what
items increased
or decreased
and by how
much.
3. Translate the
increases and
decreases into
debits and 2-38
credits.
Purchase of office
equipment

2-39
Receipt of cash for future
service

2-40
Payment of monthly
rent

2-41
Payment for
insurance

2-42
Purchase of supplies on
credit

2-43
Hiring of
employees

2-44
Withdrawal of cash by
owner

2-45
Payment of
salaries

2-46
Receipt of cash for services
performed

2-47
Summary Journalizing and
Posting

2-48
2-49
2-50
Prepare a trial balance.

2-51
2.4 The Trial Balance
• Meaning: List of all accounts and their balances at a
given point of time
• Uses
– Prove the mathematical equality of debits and credits
in the ledger after posting
– Errors that are discovered through the TB:
• Posting unequal debit and credit amounts for an
entry;
• Posting a debit entry as a credit or vice versa;
• Arithmetic mistakes in balancing accounts;
• Clerical errors in copying account balances into the
trial balance;
• Listing a debit balance in the credit column of the trial
balance or vice versa; and
• Errors in determining the debit and credit totals of 2-52
the
2.4 The Trial Balance

Limitations of a Trial Balance

Trial balance may balance even when:
1. A transaction is not journalized.
2. A correct journal entry is not posted.
3. A journal entry is posted twice.
4. Incorrect accounts are used in journalizing or
posting.
5. Offsetting errors are made in recording the
amount of a transaction.
2-53
2.4 The Trial Balance
• Procedures to locate errors - As a matter
of fact, there is no one best way of locating
errors. However, the following procedures,
done sequentially, may save considerable
time and effort in locating errors.
i. Recalculate the debit and credit totals of the
trial balance.
ii. Compare amounts listed on the trial balance
with the related account balances in the ledger.
iii. Recalculate account balances in the ledger.
iv. Check accuracy of posting from the journal to
the ledger.
v. Check the equality of dollar amounts of debit 2-54
and credit entries in the journal.
2.4 The Trial Balance
• Troubleshooting Errors: The difference between
the total debit and total credit balances may
indicate the nature and location of the error, thus,
avoid the need for sequentially performing all the
aforementioned procedures. For example,
• A difference of 10; 100; 1000; etc, indicates addition
error. In this case, you need to perform procedures
(i) and (iii) to discover the error.
• A difference divisible evenly by 2 indicates posting
to the ledger a debit entry or listing on the trial
balance a debit balance as credit or vice versa or
omission of a debit or credit entry posting to the
ledger or a debit or credit balance of an account on
the trial balance. In such cases, you need to perform
2-55
procedures (ii) and (iv).
2.4 The Trial Balance

• A difference divisible evenly by 9 indicates

slide or transposition error.
• Slide error refers to error in placing
decimal point, for example, writing 22.50
as 2.25 or 225.
• While transposition error refers
misplacement of digits, for example,
writing 225 as 252 or 522.
• Such errors may happen in any step in the
accounting process, thus, you need to
perform all the procedures needed to locate
an error without discrimination. 2-56
2.4 The Trial Balance

Correction of Errors
Error Correction
Procedure
1. Journal entry is incorrect Draw a line
through the error
but not posted.and insert correct title or
amount.
2. Journal entry is correct Draw a line
through the
but posted incorrectly. posted error and
post correctly.
3. Journal entry is incorrect Journalize and post
2-57
 2.5 Adjustments
• Definition: Journal entries that are required at
the end of the period in order to produce correct
balances for the financial statements
• This is the process used to deal with the
disconnect between transaction timing and
actual cash flows
• Adjusting entries:
1.Measure properly the period’s income on the
income statement:
• Assign revenues to the period in which they
are earned
• Assign expenses to the period in which they
are incurred 2-58
2.Update the asset and liability accounts
2.5 Adjustments
Rationale (WHY)
– Product of accrual basis of accounting, i.e.
recording revenues when earned and
expenses when incurred instead of cash
basis of accounting
– Periodicity assumption: business life is
divisible into equal intervals of time called
accounting periods for reporting purpose
AP1 AP2 AP3 APn
Business Life

2-59
2.5 Adjustments
• Accrual-basis accounting records the effect
of every business transaction as it occurs,
regardless of when the cash is received or
paid.
• Cash-basis accounting records transactions
only when cash receipts and cash payments
Accrua Records revenues when they are
occur. earned/performed
l Basis Records expenses when they are
incurred/used
Records cash receipts as
Cash
revenue
Basis Records cash payments as
expenses
2-60
2.5 Adjustments
• There are two main types of adjusting
entries:
– Prepaid (deferrals) – cash is paid or
received before the related expense or
revenue is recorded
– Accruals – record the expense or revenue
before the related cash is paid or received
• These types can be divided into five
categories:

2-61
2.5 Adjustments
I. Accruals [Recording New Data]
1. Accrued Expenses: Expenses incurred but not yet
paid (Use precedes payment)
 Liability/Expense Adjustment
 Expense xxx
Liability xxx
2. Accrued Revenues: Revenues earned but not yet
collected (Performance precedes collection)
 Asset/Revenue Adjustment
 Asset (e.g. A/R) xxx
Revenue xxx

2-62
 2.5 Adjustments
II. Deferrals [Adjusting Existing Data]
1. Prepaid Expenses: Advance payments (Expenses
paid in advance but not yet incurred/Payment
precedes incurrence)
 Asset / Expense Adjustment
 Asset xxx Expense xxx
Cash xxx Asset
Asset xxx Expire/Used Expense

2. Unearned Revenues: Advance collections

(Revenues collected in advance but not yet
earned/Collection precedes earning)
 Liability/Revenue Adjustment
Liability
 Cash Perform/Settlement
xxx UnearnedRevenue
R. xxx 2-63
Unearned R. xxx Revenue
TYPES OF ADJUSTING ENTRIES

Deferrals:
1. Prepaid expenses: Expenses paid in
cash and recorded as assets before they are
used or consumed.
2. Unearned revenues: Cash received
before service are performed.
Accruals:
1. Accrued revenues: Revenues for
services performed but not yet received in
cash or recorded.
2. Accrued expenses: Expenses incurred
but not yet paid in cash or recorded.
2.5 Adjustments
Prepaid Insurance Example
• Insurance policies are usually PAID for in advance
• On May 1, 2016, HEC purchases an annual
insurance policy for $3,600; the journal entry
would
Prepaidbe:
Insurance 3,600
Cash 3,600

• After one month has passed, the adjusting entry

onInsurance
May 31, 2016 is:
Expense 300
Prepaid Insurance 300

2-65
2.5 Adjustments
Total Correct
Correct asset
accounted expense
amount,
for, amount,
$3,300
$3,600 $300

Supplies Example
• On May 2, 2016, HEC purchases supplies for
$1,500 cash
• Supplies
The journal entry would be: 1,500
Cash 1,500

• On May 31, 2016, a physical count of the supplies

indicated that $1,000 remained; the adjusting
entry would reduce the Supplies asset by $500:
Supplies Expense 500
2-66
Supplies 500
 2.5 Adjustments

Correct
Correct asset Total
expense
amount, accounted
amount,
$1,000 for, $1,500
$500

Amortization of Property, Plant, and

Equipment, and Intangible Assets
• Property, plant, and equipment (PPE) are identifiable
tangible capital assets (land, buildings, furniture,
vehicles, machinery, and equipment)
• Amortization (depreciation) defined:
– The process of allocating the cost of property, plant,
and equipment (PPE) to an expense account over 2-67its

estimated useful life

2.5 Adjustments
• On May 3, 2016, HEC purchases furniture for
$45,000 with an expected life of 5 years
• The journal entry, to record the purchase:
Furniture 45,000
Cash 45,000
• A portion of the furniture’s cost is transferred from
the asset account to Amortization Expense each
period the asset is used; after one month, the May
31, 2016 entry is:
Depreciation/Amortization Expense – 750
Furniture
Accumulated 750
Depreciation/Amortization – Furniture
45,000 ÷ 5 years = $9,000 per year. $9,000 ÷ 12 months =
$750 per month.
• Accumulated Amortization – Furniture is known 2-68
as a
2.5 Adjustments
• A contra account has:
– a companion account
– a normal balance opposite that of the
companion account
• Accumulated Amortization is a contra
account to property, plant, and equipment
assets
• Used to show the cumulative sum of all
amortization expense from the date of
acquiring the asset
• It has a normal credit balance
2-69
2.5 Adjustments
Unearned Revenue Example
• HEC receives a cash advance of $3,000 on May 20,
2016 from a customer for a 30 day project
• The journal entry is:

• During the last 10 days of the month—May 21

through May 31—HEC will have earned one-third (10
days divided by April’s total 30 days) of the $3,000,
or $1,000

2-70
2.5 Adjustments

Correct liability Total Correct revenue

amount, accounted amount,
$2,000 for, $3,000 $1,000

2-71
2.5 Adjustments
Accrued Revenue Example
• HEC is hired on May 15 to provide monthly
services for $3,000 per month, with the first
payment to be received on June 15. Service
is provided from May 15 to May 30.
• The adjusting entry on May 30 to record two
weeks of revenue is:

• Adjusting for accrued revenues illustrates the

concept of revenue recognition 2-72
2.5 Adjustments
Accrued Expense Example: Salaries
Expense
• HEC pays its two employees a bi-monthly salary
of $4,000 in total on the 15th and on the last day
of the month
• The employees are paid on May 15, but May 30
is a Saturday: thus employees will receive their
pay cheques on Monday, June 1
• Match the salaries expense to the period with a
journal entry on May 30 to make the accrual:

2-73
2.5 Adjustments

2-74
ADJUSTMENTS
ACCOUNTING FOR UNEARNED REVENUES

Reason for Accounts Before Adjusting

Examples Adjustment Adjustment Entry

Rent, magazine Unearned Revenues Liabilities overstated. Dr. Liabilities

subscriptions, recorded in liability Revenues understated. Cr. Revenues
customer accounts are now
deposits for recognized as
future service. revenue for services
performed.
ADJUSTMENTS

ACCOUNTING FOR ACCRUED REVENUES

Reason for Accounts Before Adjusting

Examples Adjustment Adjustment Entry

Interest, rent, Services Assets understated. Dr. Assets

services performed performed but not Revenues Cr. Revenues
but not collected. yet received in understated.
cash or recorded.
.6 The Work Sheet

Worksheet
 A multiple-column form that may be used
in the adjustment process and in preparing
financial statements.
 Manual or computer spreadsheet.
 A working tool, not a permanent
accounting record.
 Neither a journal nor a part of the general
ledger. 2-77
.6 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Prepared
Prepared from
from thethe general
general ledger.
ledger.
Accounts
Accounts areare listed
listed in
in the
the following
following
order:
order: assets,
assets, liabilities,
liabilities, owner’s
owner’s
equity,
equity, revenues,
revenues, andand expenses.
expenses.

2-78
.6 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments
Adjustments areare entered
entered here.
here. Two
Two
possibilities:
possibilities:
1.
1. Deferrals
Deferrals –– Existing
Existing balances
balances are
are
changed.
changed.
2.
2.Accruals
Accruals –– New
New information
information isis
entered.
entered.
2-79
.6 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

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

2-80
2.7 Closing Entries
• Purpose
– Journal entries that update the owner’s
equity account
– Transfer/close the balance of nominal
accounts to owner’s equity account
– Reduce the balance of nominal accounts
to zero
• Steps
– Close revenue accounts to income
summary account
– Close expense accounts to income 2-81
summary account
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 The
The Unadjusted
Unadjusted
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000 Trial
Trial Balance
Balance
11
Fees Earned 16,340
12
Wages Expense 4,275
13
Rent Expense 1,600
14
Utilities Expense 985
15
16
Supplies Expense 800
17
Miscellaneous Expense 455
18
42,600 42,600
19
20
21 2-82
22
Adjustments
(a) The Supplies account 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
(b) during the two-month
The Prepaid period.
Insurance account has a debit balance
of $2,400, which represents prepayment of insurance
for 24 months beginning December 1. Thus, the
insurance expense for this month is $100 ($2,400 ÷
24). Unearned Rent account has a credit balance of
(c) The
$360, which represents the receipt of three-months’
rent beginning with December 1. Thus, the rent
revenue for December is $120.
(d) Wages accrued but not paid at the end of December
total $250.
(e) Fees accrued at the end of December, but not
recorded, total $500.
(f) Depreciation of the office equipment is $50 for 2-83
December.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360
9 Chris Clark, Capital 25,000
10 Chris Clark, Drawing 4,000
11
Fees Earned 16,340
12
Wages Expense 4,275
13
Rent Expense 1,600
14
Utilities Expense 985
15
16
Supplies Expense 800 (a) 1,240
17
Miscellaneous Expense 455
18
42,600 42,600
19 Insurance Expense (b) 100
20
21 4-84
22 Accounts are added as needed.
 Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10
Chris Clark, Drawing 4,000
11
Fees Earned 16,340 (e) 500
12
Wages Expense 4,275 (d) 250
13
Rent Expense 1,600
14
Utilities Expense 985
15
16
Supplies Expense 800 (a) 1,240
17
Miscellaneous Expense 455
18
42,600 42,600
Insurance Expense (b) 100
19
Rent Revenue (c) 120
20
21
Wages Payable (d) 250
Depreciation Expense (f) 50
22
Accum. Depreciation
Summed
Summed (f) 50
23
24 and
and 2,260 2,260
4-85
25
ruled
ruled
Next, the unadjusted Trial Balance
columns and the Adjustments
columns are combined to determine
the amounts displayed in the
Adjusted Trial Balance.

2-86
 Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Chris Clark, Capital 25,000
10
Chris Clark, Drawing 4,000
11
Fees Earned 16,340 (e) 500
12
Wages Expense 4,275 (d) 250
13
Rent Expense 1,600
14
Utilities Expense 985
15
16
Supplies Expense 800 (a) 1,240
17
Miscellaneous Expense 455
18
42,600 42,600
Insurance Expense (b) 100
19
Rent Revenue (c) 120
20
21
Wages Payable (d) 250
22
Depreciation Expense (f) 50
23
Accum. Depreciation (f) 50
24 2,260 2,260
25 2-87
 Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,220 (e) 500 2,720
3 Supplies 2,000 (a) 1,240 760
4 Prepaid Insurance 2,400 (b) 100 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 360 (c) 120 240
9 Chris Clark, Capital 25,000 25,000
10
Chris Clark, Drawing 4,000 4,000
11
Fees Earned 16,340 (e) 500 16,840
12
Wages Expense 4,275 (d) 250 4,525
13
Rent Expense 1,600 1,600
14
Utilities Expense 985 985
15
16
Supplies Expense 800 (a) 1,240 2,040
17
Miscellaneous Expense 455 455
18
42,600 42,600
Insurance Expense (b) 100 100
19
Rent Revenue (c) 120 120
20
21
Wages Payable (d) 250 250
22
Depreciation Expense (f) 50 50
23
Accum. Depreciation (f) 50 50
24 2,260 2,260 43,400 43,400
25 2-88
 The Work Sheet

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

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

2-89
 The Work Sheet

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

Asset,
Asset, liability,
liability, owner’s
owner’s equity,
equity, and
and
drawing
drawing balances
balances inin the
theAdjusted
Adjusted
Trial
Trial Balance
Balance column
column areare extended
extended
to
to the
the Balance
Balance Sheet
Sheet column.
column.

2-90
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 240 240
9 Chris Clark, Capital 25,000 25,000
10
Chris Clark, Drawing 4,000 4,000
11
Fees Earned 16,840 16,840
12
Wages Expense 4,525 4,525
13
Rent Expense 1,600 1,600
14
Utilities Expense 985 985
15
16
Supplies Expense 2,040 2,040
17
Miscellaneous Expense 455 455
18
Insurance Expense 100 100
19
20
Rent Revenue 120 120
21
Wages Payable 250 250
22
Depreciation Expense 50 50
23 Accum. Depreciation 50 50
24 43,400 43,400
25 2-91
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 240 240
9 Chris Clark, Capital 25,000 25,000
10
Chris Clark, Drawing 4,000 4,000
11
Fees Earned 16,840 16,840
12
Wages Expense 4,525 4,525
13
Rent Expense 1,600 1,600
14
Utilities Expense 985 985
15
16
Supplies Expense 2,040 2,040
17
Miscellaneous Expense 455 455
18
Insurance Expense 100 100
19
20
Rent Revenue 120 120
21
Wages Payable 250 250
22
Depreciation Expense 50 50
23 Accum. Depreciation 50 50
24 43,400 43,400 9,755 16,960 33,645 26,440
25 2-92
 The
The difference
difference between
between the
the
Income
Income Statement
Statement column
column
totals
totals isis the
the net
net income
income (or
(or net
net
loss)
loss) for
for the
the period.
period.

The
The difference
difference between
between the
the
Balance
Balance Sheet
Sheet column
column totals
totals isis
also
also the
the income
income (or
(or net
net loss)
loss)
for
for the
the period.
period.
2-93
 Income Statement Balance Sheet

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

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

Net Income Net Income

2-94
 NetSolutions
Income Statement
For Two Months Ended December 31, 2005

Fees earned $16,840

Rent revenue 120
Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205

Every amount on this income statement was taken from the

Income Statement column of the work sheet. 4-95
 NetSolutions
Statement of Owner’s Equity
For the Two Months Ended December 31, 2005

Chris Clark, Capital, November 1, 2005 $ 0

Investment on November 1, 2005 $25,000
Net income for November and December 7,205
$32,205
Less withdrawals 4,000
Increase in owner’s equity 28,205
Chris Clark, Capital, December 31, 2005 $28,205

2-96
 NetSolutions
Balance Sheet
December 31, 2005
Assets
Assets Liabilities
Liabilities
Current
Currentassets:
assets: Current
Currentliabilities:
liabilities:
Cash
Cash $$ 2,065
2,065 Accounts
Accountspayable
payable $900
$900
Accounts
Accountsreceivable
receivable 2,720
2,720 Wages
Wagespayable
payable 250
250
Supplies
Supplies 760
760 Unearned
Unearnedrent rent 240
240
Prepaid
Prepaidinsurance
insurance 2,300
2,300 Total
Totalliabilities
liabilities
$$ 1,390
1,390
Total
Totalcurrent
currentassets
assets $$ 7,845
7,845
Property,
Property,plant,
plant,and
and
equipment:
equipment:
Land
Land $20,000
$20,000
Office
Officeequip.
equip. $1,800
$1,800
Less
Lessaccum.
accum.
depreciation
depreciation 50
50 1,750
1,750 Owner’s
Owner’sEquity
Equity
Total
Totalproperty,
property,plant
plant Chris
ChrisClark,
Clark,Capital
Capital
28,205
28,205
and
andequipment
equipment 21,750
21,750 Total
Totalliabilities
liabilitiesand
and 4-97
Adjusting
Adjusting and
and Closing
Closing Entries
Entries

Adjusting
Adjusting entries
entries are
are recorded
recorded
in
in the
the journal
journal at
at the
the end
end of
of the
the
accounting
accounting period.
period.

2-98
 The
The Closing
Closing Process
Process
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary

3 Net Income or Net Loss is

transferred to Owner’s Capital

OWNER’S CAPITAL

4
Drawings are transferred to
Owner’s Capital
2-99
 Adjusting
Adjusting and
and Closing
Closing Entries
Entries
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary
The
The Income
Income Summary
Summary
account
account does
does not
not appear
appearon
on
the
the financial
financial statements.
statements.
OWNER’S CAPITAL

4
Drawings are transferred to
Owner’s Capital
2-100
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 Income Summary Bal. 16,840

Rent Expense Rent Revenue

Bal. 1,600 Bal. 120
Depreciation Expense
Bal. 50 Note: The
Utilities Expense balances shown
Chris Clark, Capital
Bal. 985 are adjusted
Bal.
Supplies Expense
25,000
balances before
Bal. 2,040 closing. The
Insurance Expense following
Bal.
100 Chris Clark, Drawing sequence
Miscellaneous Expense
Bal. 4,000 demonstrates the
Bal.
455
closing process.
2-101
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 16,960 Rent Revenue
Bal. 1,600 120 Bal. 120
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985 Chris Clark, Capital Debit each revenue
Supplies Expense
Bal. account for the amount
25,000
Bal. 2,040 of its balance, and
Insurance Expense credit Income
Bal. Summary for the total
100 Chris Clark, Drawing
Miscellaneous Expense revenue.
Bal. 4,000
Bal.
455
2-102
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue

Bal. 1,600 1,600
120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit Income
Bal.
Supplies Expense
25,000
Summary for the
Bal. 2,040 2,040
total expenses and
Insurance Expense
Bal.
credit each expense
100
100
Miscellaneous Expense
Chris Clark, Drawing account for its
Bal. 455
Bal. 4,000 balance.
455
2-103
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal.

16,840
Rent Expense 9,775 16,960 Rent Revenue
1,600 7,205
Bal. 1,600 120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit Income
Supplies Expense
Bal. 25,000
7,205
Summary for the
Bal. 2,040 2,040 amount of its balance
Insurance Expense (in this case, the net
Bal.
100
100
Chris Clark, Drawing income) and credit
Miscellaneous Expense
Bal. 4,000 the capital account.
Bal. 455
455
2-104
 The
The Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue

Bal. 1,600 1,600 7,205
120 Bal.
Depreciation Expense 120
Bal. 50 50
Utilities Expense
Bal. 985 985 Chris Clark, Capital Debit the capital
Supplies Expense
4,000 Bal. 25,000
7,205
account for the
Bal. 2,040 2,040
balance of the
Insurance Expense
Bal. 100
drawing account,
100
Miscellaneous Expense
Chris Clark, Drawing and credit drawing
Bal. 4,000 4,000
Bal. 455 for the same
455
2-105
 Review
Review of
of the
the Closing
Closing Process
Process
Wages Expense Fees Earned

Bal. 4,525 4,525

4,525 Income Summary 16,480 Bal. 16,840
16,840
Rent Expense 9,775 16,960
16,960 Rent Revenue
Bal. 1,600 1,600
1,600 7,205
120 Bal.
120 120
Depreciation Expense
Bal. 50 50
50
Utilities Expense
Close Revenues
Bal. 985 985
985 Chris Clark, Capital
4,000
4,000 Bal. Close Expenses
Supplies Expense
7,205
25,000
7,205
Bal. 2,040 2,040
2,040 Close Income Summary
Insurance Expense
Bal. 100
100 Close Drawing
100 Chris Clark, Drawing
Miscellaneous Expense
Bal. 4,000 4,000
Bal. 455
445
455
2-106
 Post-closing Trial
Post-closing Trial Balance
Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 720 00
Supplies 760 00
Prepaid Insurance 2 300 00
Land 20 000 00
Office Equipment 1 800 00
Accumulated Depreciation 50 00
Accounts Payable 900 00
Wages Payable 250 00
Unearned Rent 240 00
Chris Clark, Capital 28 205 00
29 645 00 29 645 00
4-107
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond, Inc. on March 31, 2017, includes these selected
accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance Br 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment
Br5,000
Unearned Service Revenue
9,200
An analysis of the accounts shows the following.
1. Insurance expires at the rate of Br100 per month.
2. Supplies on hand total Br800.
3. The equipment depreciates Br200 a month.
4. During March, services were performed for Br4,000 of the unearned
service revenue reported.
Prepare the adjusting entries for the month of March.
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond, Inc. on March 31, 2017, includes these selected
accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance Br 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment
Br5,000
Unearned Service Revenue
9,200
Prepare the adjusting entries for the month of March.
1. Insurance expires at the rate of Br100 per month.
Insurance Expense 100
SOLUTION
Prepaid Insurance 100
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond, Inc. on March 31, 2017, includes these selected
accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance Br 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment
Br5,000
Unearned Service Revenue
9,200
Prepare the adjusting entries for the month of March.
2. Supplies on hand total Br800.
Supplies Expense
SOLUTION 2,000
Supplies 2,000
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond, Inc. on March 31, 2017, includes these selected
accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance Br 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment
Br5,000
Unearned Service Revenue
9,200
Prepare the adjusting entries for the month of March.
3. The equipment depreciates Br200 a month.
Depreciation Expense
SOLUTION 200
Accumulated Depreciation 200
DO IT! 2 Adjusting Entries for Deferrals

The ledger of Hammond, Inc. on March 31, 2017, includes these selected
accounts before adjusting entries are prepared.
Debit Credit
Prepaid Insurance Br 3,600
Supplies 2,800
Equipment 25,000
Accumulated Depreciation—Equipment
Br5,000
Unearned Service Revenue
9,200
Prepare the adjusting entries for the month of March.
4. During March, services were performed for Br4,000 of the unearned
service revenue reported.
Unearned Service Revenue 4,000
SOLUTION
Service Revenue 4,000
DO IT! 3 Adjusting Entries for Accruals

Micro Computer Services Inc. began operations on August 1, 2017.

At the end of August 2017, management attempted to prepare
monthly financial statements. The following information relates to
August.
1. At August 31, the company owed its employees Br800 in
salaries that will be paid on September 1.
2. On August 1, the company borrowed Br30,000 from a bank on
a 15-year mortgage. The annual interest rate is 10%.
3. Revenue for services performed but unrecorded for August
totaled Br1,100.
Prepare the adjusting entries needed at August 31, 2017.
DO IT! 3 Adjusting Entries for Accruals

Micro Computer Services Inc. began operations on August 1, 2017.

At the end of August 2017, management attempted to prepare
monthly financial statements. Prepare the adjusting entries needed
at August 31, 2017.
1. At August 31, the company owed its employees Br800 in
salaries that will be paid on September 1.

SOLUTION

Salaries and Wages Expense 800

Salaries and Wages Payable 800
DO IT! 3 Adjusting Entries for Accruals

Micro Computer Services Inc. began operations on August 1, 2017.

At the end of August 2017, management attempted to prepare
monthly financial statements. Prepare the adjusting entries needed
at August 31, 2017.
2. On August 1, the company borrowed Br30,000 from a bank on
a 15-year mortgage. The annual interest rate is 10%.

SOLUTION

Interest Expense 250

Interest Payable 250
DO IT! 3 Adjusting Entries for Accruals

Micro Computer Services Inc. began operations on August 1, 2017.

At the end of August 2017, management attempted to prepare
monthly financial statements. Prepare the adjusting entries needed
at August 31, 2017.
3. Revenue for services performed but unrecorded for August
totaled Br1,100.

SOLUTION

Accounts Receivable 1,100

Service Revenue 1,100